Value Lessons and a Xerox Spin-Off

02/08/2017 9:00 am EST

Focus: STOCKS

Charles Mizrahi

Editor, Park Avenue Investment Club and Inevitable Wealth Portfolio

Over the years, I've found that if investors just stay away from a few bad mistakes, profits will soon find them, asserts value investing expert Charles Mizrahi, editor of Hidden Values Alert.

Unlike the New Year's resolutions that many find so hard to keep after only a few weeks, like exercising every day or shedding a few pounds, these mistakes are very easy to avoid.

The trick is to write them down and keep them handy whenever you make a trade. And then make sure you avoid them!

1. Buying stocks at high valuations:

An old Wall Street adage says that a stock bought right is half sold. If you pay too high a price for the stock of a great company, you most probably will not make much money at best, and lose at worst. If you avoid buying stocks trading at nosebleed valuations, you'll be well ahead of the game.

2. Buying financially weak companies

No matter how attractive a company's earnings are or demand for its product, it won't be in business long if it can't pay the rent. Companies with weak balance sheets are disasters waiting to happen.

When they fall short on cash, they are forced to take on debt or dilute shares, and that only spells trouble for shareholders. Stick with companies that have rock-solid balance sheets. Investing is tough enough; don't make it harder by buying companies that could go belly-up.

3. Give in to your emotions:

If there is one thing that all great investors have, it's the proper temperament. If you're the type of investor who gets too emotional when markets plunge or soar, my suggestion to you is to stick your money in a money market.

As sure as the sun will rise in the east, stock prices will gyrate over the short term. If you can't deal with that, investing in stocks or anything else that fluctuates is not for you. Avoid making trades based on emotions; instead, stick to the facts and your analysis.

I highly recommend you commit to avoiding these three places, and make sure never to make the mistake of going there.

Just avoiding these three areas will most likely prevent you from losing money, and the probability is high that you'll be able to increase your net worth year after year.

Our latest Prime Time selection for our model portfolio is Conduent, Inc. (CNDT). On January 4, 2017, Xerox (XRX) completed the separation of Conduent, which was the business services side of Xerox.

Conduent offers customer care, transportation services, health care and digital payments. XRX will still focus on digital print and technology services. Here's my view on the stock:

. High recurring revenue:

Close to 90% of revenues are recurring revenues from contracts. The company's annual contract renewal rate is 86%. This stream of revenue adds stability to cash flow and provides transparent visibility of margins.

Average contract lengths are about three years for the commercial sector and five years for the public sector. Over the past few years, annual and recurring revenue have been in the 85% range.

. First in class:

CNDT is the world's largest provider of diversified business process services. Clients rely on them to operate core parts of their business, which incurs high switching costs. More than $6.6 billion in revenue is driven by long-term annuity contracts.

. Margin expansion:

Compared to its peers, CNDT trails in terms of margins. It currently has an EBITDA margin of a little less than 10%, compared to 16% for its peers.

Management is focused on cutting expenses and focusing on high margin business. We see margins expanding over the next few years.

Subscribe to Charles Mizrahi's Hidden Values Alert here.

Related Articles on STOCKS

Keyword Image
How to Value Roku
15 hours ago

Roku (ROKU) makes those small streaming players that connect to your TV; it has seen its stock rise ...