My Watchlist – September 28, 2010

I have reviewed issue 5 of Value Line and added companies that have exceptional returns on equity or growth in book value. The list is not perfect and some judgment is required in deciding whether to include a particular stock. As always, I welcome your feedback and comments.

The idea here is to have a dashboard of substantially all the high quality businesses in the U.S. in one place that you can review at least weekly to see what Mr. Market is making available to you.

Here is the updated watchlist.

Stocks Added This Week.

Cisco Systems, Inc. (CSCO)

Nokia Corporation (ADR) (NOK)

Express Scripts, Inc. (ESRX)

Avon Products, Inc. (AVP)

The Estee Lauder Companies Inc. (EL)

Nu Skin Enterprises, Inc. (NUS)

Stocks Moving Within 10% of Their 52 Week Low:

Techne Corporation (TECH)

Paychex, Inc. (PAYX)

If you see a stock that looks interesting, here are some questions that may be useful in determining if it is worth pursuing further:

1. Is it within my circle of competence, i.e. do I understand how the business works and where it will be in five to ten years? Be mindful of overconfidence bias.

2. If yes, spend an hour reading the annual report and recent filings. Read these with a purpose. Try to develop a preliminary investment thesis that you are trying to substantiate or disprove.

3. Calculate EBIT (EBITDA –┬ámaintenance capex)/Enterprise Value to see how cheap it is.

4. Calculate return on tangible capital employed to see how good a business it is.

5. Ask yourself if it is as good or better than your best holding(s). See Opportunity Cost: Buffett & Munger’s Powerful Investing Filter

6. Ask yourself if it meets your hurdle rate, i.e. 15%, 20%, etc. If you don’t know where you’re going, any road will take you there.

7. Ask yourself if it is better than the other stocks available on the list or that you have found elsewhere. All things considered, buy the cheapest asset available.

8. If it passes all these relatively quick tests, it may warrant your research time.

The author of this blog is NOT an investment, trading, legal, or tax advisor, and none of the information available through this blog is intended to provide tax, legal, investment or trading advice. Nothing provided through these posts constitutes a solicitation of the purchase or sale of securities/futures. The data and information presented in this blog entry is believed to be accurate but should not be relied upon by the user for any purpose. Any and all liability for the content or any omissions, including any inaccuracies, errors or misstatements in such data is expressly disclaimed.

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12 thoughts on “My Watchlist – September 28, 2010

  1. Andrew Schneck

    Thanks for posting your watchlist for each ValueLine issue. I like comparing your research to mine (you may remember me from last week).

    I didn’t have CISCO or Nokia- too technical for me. I know enough about them that I cannot have a chance in understanding either of them. I couldn’t explain CISCO, and Nokia competes with Apple, Google, and RIM with smartphones (I don’t like competition like that).

    For companies you didn’t list, I have CVS and Walgreens. Although low margins due to the economics of retail, I like their return on assets (they are a duopoly). I also listed Telefonica S.A., although I am not sure of their future, I just like the fundamentals (if it gets close to what I’d be willing to pay for current earnings, I’ll take a look).

    Express Scripts is my favorite in this issue.

    Keep up the good work, i like a lot of what you have to say.

    Reply
  2. rijk

    interesting web site, don’t understand one column in your spreadsheet, what is this and how do you calculate it?

    Expected Return – 2010 EPS Yield + (10yr EPS CAGR * 60%)

    regards
    rijk

    Reply
    1. rijk

      ok, thanks, makes sense, somehow this expected return approach would indicate that all green marked companies are a screaming buy, which somehow I don’t think is the case…. it looks as if this value indicator is valuing all companies at best case scenario (except for the 60% factor, which is used to reflect a margin of safety??)
      anyway, this spreadsheet still looks like a wonderful starting point to monitor exceptional businesses and hopefully one of these days it will highlight a once in a lifetime buying opportunity
      why are you not using fcf? earning are too easy to manipulate….
      what are the sub categories under column A?
      why do many companies not have an expected return calculated?
      sorry for all the questions, just like to learn….

      some of the medical equipment companies have superb figures and are attractively valued, which one do you like most?
      have you looked at AEA, impressive figures and very cheap, of course, there is an if,…. regulatory headwinds

      regards
      rijk

      Reply
      1. Greg Speicher Post author

        I agree that FCF is the way to go. I’m using earnings for now because it is an easier data point to find.

        I did not understand your question about sub categories.

        Too save time, I am only doing the expected return calculation for companies that are either 1) within 10% of a 52 week low, or 2) have an earnings yield greater than 8%.

        I like JNJ.

        I have not looked at AEA.

        I appreciate the questions and will put together a guide based on your questions and those of others. The list is a simple tool but can be very profitable if it focuses your attention on the best opportunity areas. The trick is to create the systems that will allow you to do it consistently. If you do so, that “once in a lifetime buying opportunity” will one day be there.

        Reply
        1. rijk

          the first column in the spreadsheet has company names, my question is, why are some companies grouped together? at first glance they have nothing to do with eachother…
          regards
          rijk

          Reply
          1. Greg Speicher Post author

            They are grouped according to what issue of Value Line the appear in. This facilitates further research for those who follow Value Line, which I recommend.

    2. rijk

      hi it’s me again, i have another burning question, which dcf tool do you use, i am using the gurufocus tool but there might be better/more transparent ones?
      the gurufocus dcf uses 12% discount as a default, bit steep?
      the gurufocus dcf uses tangible book value, i.e. high intangible balance companies get punished, looks fair?

      regards
      rijk

      Reply
      1. Greg Speicher Post author

        rijk, I do not use a DCF tool. I only use DCFs sparingly with highly stable companies as DCFs have some serious limitations that I have written about. See http://gregspeicher.com/?p=1449.

        When I do use them, I do them myself and generally follow an approach similar to that used by Staley Cates at Lobgleaf: forecast only 5-8 years of FCF and a no-growth terminal multiple. See http://gregspeicher.com/?p=53.

        Reply
        1. rijk

          thanks for all your diligent replies…
          did some dcf scenarios using 8yrs growth at 10%, no terminal growth and 9% discount factor
          results in terms of MOS:
          BCR 6%
          BDX 19%
          BAX 27%
          MDT 30%
          BKE 40%
          GPS 43%
          my initial thoughts after reading the longleaf link was, ok with these strict criteria, you will never ever be able to buy anything, well I was dead wrong, as the very quick and dirty sample (using gurufocus dcf tool) demonstrates…
          regards,
          rijk

          Reply
  3. rijk

    if you don’t use dcf a lot, how do you value/compare different opportunities, what needs to happen for you to act on an opportunity, for example, I see several promising expected return estimates in your spreadsheet (15-20%), when and why would you buy?

    regards
    rijk

    Reply
  4. Greg Speicher Post author

    rijk, the watch list is a starting point. I would not buy a stock just because it was showing an expected return of 15% to 20%. The next question is are the conditions that produced the company’s past success and growth still in place. Where will the company be in 5 to 10 years? This requires reading and thinking about the company. Some of these company’s are outside of my circle of competence so I pass on them. I would buy a stock when 1) I understand that company and have a HIGH level of certainty of how it will develop, 2) I like the management (or at least I don’t think they will do stupid things with capital), and 3) the valuation is compelling. There must also be a margin of safety which I define as having virtually no chance of losing my money even if things don’t work out as I think they will. Hope that helps.

    Reply

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