I’ve recently spent a lot of time reading about value investing. In particular, since around September 2016 I’ve read the following:
- The Intelligent Investor by Benjamin Graham
- Security Analysis by Benjamin Graham and David L. Dodd
- Common Stocks and Uncommon Profits and Other Writings by Philip A. Fisher
I read all of these books cover to cover (and oh boy was Security Analysis an exhilarating read!)…
On top of that, and in general – I’ve been doing a lot of side research on the topic browsing the web and seeing what some of the more modern value investors have to say. I figured that at this point, I’ve done enough information gathering, and the only real way for me to try and apply my knowledge at this point is to get my hands dirty. Below, I’ll provide for you my analysis of four stocks that I’ve chosen to invest in starting this month.
I admit that my stock analysis will likely seem very rudimentary at this point – but you’ve gotta start somewhere. I’ve definitely skipped out on a lot of the more in-depth balance sheet analysis suggested by Security Analysis, as well as the more qualitative aspects of the research (such as looking into management heavily, looking into what competitors say about the companies, etc.). Most of my holdings are in long-term bonds as per Benjamin Graham’s suggestion for part-time investors… but some of it now it dispersed among:
#1 Pick – Corning, Inc. (GLV)
The way I arrived at this stock was first by applying a bunch of filters. The filters were as follows:
- Market Cap > 300M; Provides assurance that you’re dealing with a fairly well-established company.
- 29.01B
- Sector: Technology; Provides assurance that I’m dealing with stocks where I understand the industry.
- IPO Date More That 10 Years Ago; Provides assurance that you’re dealing with a fairly well-established company.
- Earnings Per Share (EPS) Growth Over Past 5 Years > 0% and < 25%; Shows that earnings have been increasing over the past 5 years, but not at any incredible rate (25% limit taken from Peter Lynch, although I did not adopt his lower 20% limit)
- 12.7%
- Sales Growth Over Past 5 Years > 0%; Shows (at the most basic level) that the company is expanding
- 3.5%
- Dividend Yield > 2%; Dividends are always good to have, especially if they’re reliable.
- 2.01%
- Quick Ratio > 1; Shows that the company has enough cash to cover it’s current liabilities
- 3.00
- Current Ratio > 1.5; Shows that the company has enough assets (including cash) to cover it’s current liabilities and then some.
- 3.60
- Price / Earnings (P/E) < 20; Ratio under 20 is a good gauge to see whether the price is justified by the earnings, or whether there’s some other reason that people are investing in the stock. This ratio is found throughout the Benjamin Graham books.
- 8.46
- Price / Free Cash Flow (P/FCF) < 40; Good gauge to see if a companies valuation is primarily based upon it’s free cash flow.
- 31.16
- Debt / Equity < 40%; Shows that the company is in decent standing, that it could cover it’s liabilities easily.
- 25%
Beyond this, I looked at the EPS & Dividend summaries for the past 10 years:
From 2007 to 2016, their earnings were: 1.34, 3.32, 1.28, 2.25, 1.78, 1.09, 1.34, 1.73, 1, 3.23
From 2007 to 2016, their dividends were: 0.1, 0.2, 0.2, 0.2, 0.25, 0.33, 0.39, 0.4, 0.36, 0.54
There were two interruptions in their dividends – one in March/June 2007 and one in December 2015; so that’s somewhat of a red flag for value investors. Other red flags were that the P/FCF was somewhat high from what I’ve read; and it looks like they haven’t had any major buys from any of the super-investors lately. Over the past 5 years, their P/E ratio has averaged 15.32 (with a max at an over-hyped 64.12 in early 2016!) – so it seems they’re somewhat depressed at the moment.
I also noticed (although it was not a filter that I applied) that the PEG ratio for this stock was 0.90, which is quite good if I’m understanding correctly (in that the price is increasing at a rate that’s less than the rate at which earnings have been growing lately).
During my stock research, I immediately recognized the name Corning as being the makers of “Gorilla Glass”, which is used on a large variety of phones including my three past phones (and likely my next one!). Not to mention that Apple is also investing money into Corning for glass and has used their glass in their iPhones and iPads. Looking at their list of products, it sounds like they’ve got offerings in ceramics, optical fiber, cable; hardware & equipment, emissions control technology, LCD glass, and life sciences products.
I don’t anticipate smart phones, tablets, or glass for monitors / TVs becoming obsolete in the near future; as these are all things that are heavily used. Not only that, but Corning also has a very dominant position in most all of the fields where it produces…
#2 Pick – Qualcomm (QCOM)
Similarly with this stock, I started off first by applying a bunch of filters. The filters were as follows:
- Market Cap > 300M; Provides assurance that you’re dealing with a fairly well-established company.
- 84.08B
- Sector: Technology; Provides assurance that I’m dealing with stocks where I understand the industry.
- IPO Date More That 10 Years Ago; Provides assurance that you’re dealing with a fairly well-established company.
- Earnings Per Share (EPS) Growth Over Past 5 Years > 0% and < 25%; Shows that earnings have been increasing over the past 5 years, but not at any incredible rate (25% limit taken from Peter Lynch, although I did not adopt his lower 20% limit)
- 7.10%
- Sales Growth Over Past 5 Years > 0%; Shows (at the most basic level) that the company is expanding
- 9.50%
- Dividend Yield > 2%; Dividends are always good to have, especially if they’re reliable.
- 4.05%
- Quick Ratio > 1; Shows that the company has enough cash to cover it’s current liabilities
- 1.5
- Current Ratio > 1.5; Shows that the company has enough assets (including cash) to cover it’s current liabilities and then some.
- 1.7
- Price / Earnings (P/E) < 20; Ratio under 20 is a good gauge to see whether the price is justified by the earnings, or whether there’s some other reason that people are investing in the stock. This ratio is found throughout the Benjamin Graham books.
- 18.71
- Price / Free Cash Flow (P/FCF) < 40; Good gauge to see if a companies valuation is primarily based upon it’s free cash flow.
- 34.30
- Debt / Equity < 40%; Shows that the company is in decent standing, that it could cover it’s liabilities easily.
- 38%
Beyond this, I looked at the EPS & Dividend summaries for the past 10 years:
From 2007 to 2016, their earnings were: 1.95, 1.9, 0.95, 1.96, 2.52, 3.51, 3.91, 4.65, 3.22, 3.81
From 2007 to 2016, their dividends were: 0.52, 0.6, 0.66, 0.72, 0.81, 0.93, 1.2, 1.54, 1.8, 2.02, 1.06
There hasn’t been an interruption in dividends in the past 10 years, even when their earnings did dip into the negatives briefly March 2009. Other red flags were that the Debt/Equity was somewhat high from what I’ve read (from Peter Lynch), and the P/FCF was somewhat high from what I’ve read, and over the past 5 years, their P/E ratio has averaged 17.31 (with a max at 20.39) – so it seems they’re somewhat above average at the moment actually. Perhaps this the reason behind this above average P/E is some of the major buys by institutional investors lately, even by the notable Seth Klarman (author of the notable “Margin of Safety” book) who purchased it at a price of $57.34 (which is higher than the price that I obtained it at!). That being said, another one of the (somewhat) troublesome things about Qualcomm is also that their graphs don’t seem to display much sense of “reliability” or predictability; so I’m taking somewhat of a bigger leap of faith with Qualcomm here… but as I said, I’m trying to get my hands dirty!!!
During my stock research, I also immediately recognized Qualcomm as a manufacturer of the processors/chipsets on a large number of mobile devices. Once again here, all three of my last three phones used Qualcomm Snapdragon processors – it seems that Qualcomm is basically the Intel of the mobile world, and it sounds like that’s where most of it’s revenue comes from. It sounds like patent licensing is also a source of profit for the company. They seem to like to leverage their patents a lot actually… which can be a good thing, as they’ve got some weight against competitors (which there are many).
I don’t anticipate smart phones, tablets, or “Internet of Things” devices becoming obsolete in the near future; as these are all things that are heavily used…
#3 Pick – Berkshire Hathaway (BRK.B)
This was honestly one of those “blindly follow”, minimally-researched types of investment. With Warren Buffet being one of the most successful investors of today, I figure that unless he starts making some major slip-ups, I should be at least getting performance on-par with an index fund by investing in this stock.
#4 Pick – Apple (AAPL)
Similarly, this was one of those “blindly follow”, minimally-researched types of investment. Warren Buffet is investing in Apple, amongst others. Lately with my pro-privacy campaigns I found that it was fitting to invest in a company that is fairly pro-privacy when it comes to their products (at least compared to Google, Microsoft, Facebook, etc…). From an analytical standpoint, Apple does have some appealing attributes to a value investor, but they don’t meet many common criteria like it has a PEG > 1 (but so does Qualcomm…), a high Debt/Equity ratio (73%), a high Price to Book ratio (5.76), a fairly low Current Ratio (1.40) although that’s balanced out by the fact that it’s mostly (if not all?) cash as their Quick Ratio is also 1.40…
There are also some other pretty big “elephants in the room” when it comes to Apple, such as the fact that they are a minority when it comes to both smart phones and computers. I’ll be interested in seeing what the future holds for Apple. Hopefully Warren’s investing abilities haven’t deteriorated too much in his old age…
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