Will Mr. Market present a new all-time high? Should we join the party? We maintain the TSX as the mo...
05/21/2004 12:00 am EST
"As Al Frank used to say, 'Value will out'," says John Buckingham, editor of The Prudent Speculator, the top-performing newsletter for the past 20 years. "But be patient; bargains are becoming more plentiful." Here are some of our latest ideas.
"The first thing we do when we talk about The Prudent Speculator, is to pay homage to Al Frank who founded this newsletter in 1977 and, as he would say, went to ‘stock market heaven’ in 2002. Al was really one of the greatest investors of our time. Certainly one of the greatest value investors. His value strategy, which we carry on in our managed accounts, the Al Frank Fund, and in The Prudent Speculator , is one that has actually delivered real returns–some 22% a year for the past two decades. We are value managers. It doesn't mean we don't want our stocks to grow or our companies to have growth characteristics, but most stocks have value and growth characteristics associated with them. Value historically has outperformed growth and value is determined by low price-to-book value. And when you compare small cap and large cap you will see small-company stocks do better than large-company stocks.
"We hold our stocks on average for 6.3 years. If you are 65 years old today, you have 18 years left (18 years average to live) and most people didn't budget for 18 more years. Their financial planners didn't tell them to have more in equities because the conventional wisdom is that the older you get, the more you want a fixed income, but I would argue that anybody in this room since nobody is over 85 can be a long-term investor and our approach can work for you. I would argue that you should still be a long-term investor no matter what your age is and these statistics back that up.
"I would also mention diversification. We are not right all the time, there's a surprise! The key to successful investing is to buy a broad basket of undervalued stocks. Ideally 17 industries is the minimum you would want to have and I kind of think you would want to have, perhaps even more. You will want to buy over time as well. I talked to a gentleman earlier today about starting a managed account with us. He said, ‘I am a little nervous about the market.’ I said, ‘Well that's okay, we are not going in invest all your money tomorrow anyways. We are going to invest slowly. So we might invest a third of the money today, and then a few weeks from now a little bit more and then later, a little bit more.’ So we do like to invest over time.
"While I can imagine that the patience of many investors is starting to be tested. It can be difficult to stay the course when the market is in one of its inevitable downtrends, but the nice thing about the simple fundamental analysis that we perform is that it allows us to have confidence that the valuations of the stocks we own are still attractive. In the fullness of time, investors will recognize the value inherent in our companies, industry conditions will improve and/or the overall market will recover.
"A couple of weeks ago, digital audio and video software and services provider, Roxio (ROXI NASDAQ), beat estimates for full year 2004 ended March, and gave notice that analyst expectations were a bit too low for the current year. The company is best known for its DVD burning software and online music download site, Napster. After a stint as the poster-child for intellectual property theft, the latter has gone through a few ownership changes, has restructured to execute a fully legitimate business model, and is set to capitalize on both its strong brand and growing interest in downloadable music. We tweaked our fundamental goal price up just a bit on the news to $8. Excellent prospects notwithstanding, ROXI shares still trade close to our buy limit of $3.90, below which we would add shares to portfolios lacking the outstanding next-generation entertainment play.
"Video game publisher THQ (THQI NASDAQ) reported fiscal 2004 (ended March) earnings that impressed investors and raised our view of the company's long-term prospects. Fiscal 2004 revenue grew 37% to a record $641 million. The growth was driven by its lucrative franchises, which include Finding Nemo, SpongeBob SquarePants , and WWE (wrestling) franchises. With two more high-profile portable player launches expected this year in addition to a slew of faster, more colorful, and powerful mobile phones, the portable and wireless spaces should begin to offer an even stronger multi-platform base for which to develop games. THQ foresees many more sore thumbs ahead, as it increased guidance for 2005. Despite a decent gain since the announcement, THQ shares still trade at just 1.1 times sales and 1.7 times tangible book. We raised our fundamental and long-term goal prices on cash-rich THQ two dollars each to $38 and $42 after the results, and we are buyers up to $21.12.
"As the latest addition to our group of recommended pharmaceutical names, Wyeth (WYE NYSE) shares currently suffer under the weight of several issues. First, it is in the midst of settling the claims due to the diet drug fen-phen. It has also seen a severe decline in sales of its estrogen replacement therapies following a research program that found that estrogen replacement therapy can have serious side effects. Finally, there have been issues with limited supplies of blockbuster rheumatoid arthritis treatment Enbrel and childhood disease vaccine Prevnar. These issues will to varying degrees be drags on the stock for some time to come. Still, we are inclined to believe that none are company killers, and so it hard to argue with Wyeth's current valuations, at 15 times earnings and a yield of 2.4%. We are thus buyers of WYE shares up to $39.53."
" E.I. DuPont de Nemours & Co. (DD NYSE) exemplifies a classic example of a cyclical stock whose valuation has yet to catch up with the economic outlook. Founded in 1802, DuPont bills itself as a ‘science’ company. Beginning with explosives, the company has since evolved to offer a diverse range of products in the food and nutrition, healthcare, apparel, safety and security, construction, electronics, and transportation industries. As a result of the sale of $4.2 billion in assets, DuPont's was able to pay down its debt by 40%. The company currently maintains an AA- debt rating from S&P. DuPont turned in great first quarter 2004 earnings results, as revenues grew 15% year-over-year to $8.1 billion, while earnings jumped 57% before special items. That momentum gives us good reason to qualify the company's stock as undervalued. Further, DuPont's venerable balance sheet adds broad downside protection to any hiccups along the way. With a fundamental goal price of $71 and a long-term goal of $87, we are buyers of DD shares up to $43.37."
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