If you've read Peter Lynch's book "One Up On Wall Street" you might have recognized the article title's terminology. In baseball parlance a double is sometimes called a two-bagger. In investing jargon it's more along the lines of "I invested X now I have 2X." I won't take much of your time and I'll keep the horn-tooting to a minimum, but recently Walgreen (WAG) happened to be my first investment that doubled in value. For those long-time investors out there you're likely saying "so what?" For the newbie investors perhaps this offers a bit of encouragement. In either case, I would imagine that the majority of my audience might suggest "that's great, now what?"
As I previously chronicled, I purchased shares of Walgreen on July 13th of 2012 at a per share cost basis of $30.26. Presently - with a closing price of $59.42 and aggregated dividends of $1.415 a share - I could sell the shares for 2 times my original investment (prior to expenses). Here's what that investment would look like using the company's website.
Now it should be noted that I would have actually preferred for WAG's stock price to languish rather than double. And the rationale is relatively straightforward: a lower price indicates that a certain amount of capital could have bought a larger ownership claim with a higher yield in precisely the same underlying business and dividend growth prospects. Yet here we are anyway - first world problems, I suppose.
So today, sitting with a nice little two-bagger in 15 months, I should just cash out and be on my way, right? Possibly, but I believe that's a dangerous way to think, much less invest. Focusing on price alone greatly ignores the process of outlining an intelligent investing framework. It's always important to underscore one's investment goals and progressions.
In March of this year I detailed why I originally made an investment in WAG; namely - a strong payout history, its close proximity to population drivers, a focus on its prescription business and an aging baby boom generation. At the time it seemed to me that a company who had paid a dividend for nearly 80 years would do just fine by offering close-by and legal drugs to an ever increasing population that demands them. I then went on to suggest that my thesis still holds, the current income stream was more than practical and the valuation was well within reason. Today, to some extent or another, those motivations to hold a WAG ownership claim still exist. Yet instead of working through the process again, I would simply like to show you what I mean by utilizing F.A.S.T. Graphs.
Here we see that Walgreen held a premium valuation for the better part of the last decade before falling into a more "normal" range since the recession. Additionally, you might have noted that the price has effectively rocketed from its summer of 2012 lows. Indeed, at first glance it appears that WAG has gotten a bit ahead of itself. Yet I would like to make two points.
While the current P/E ratio around 20 does seem a touch high in recent times, this company has traded in this range before. The 15-year "normal" P/E had been around 26 while the 10-year "normal" P/E was closer to today's 20 mark. Granted I make no such predictions for the future (and would advocate that it would be imprudent to do so) but it's not as though shares of WAG are trading at 50 times earnings. Even moderate growth coupled with P/E compression can still produce reasonable performance results. Secondly, just because you might not buy today does not mean that you can't hold.
If I go back to my original purchase point, I saw what I perceived to be a wonderful company offering a 3.6% dividend yield that I felt could grow at a robust pace moving forward. What do I have now? Well, it's a 4.2% yield on cost that is still expected to grow at a robust pace. You can debate the relevance of this metric (I have before) but if the valuation of the company went up, down or sideways these facts would still hold - no matter how you look at it I received 3.6% of my nominal capital back in the first year and expect to get 4.2% of that capital back in the next fiscal year. Better yet, this income stream occurs regardless of what happens with the stock price. In essence, I'm treating this investment like a 10-year CD.
Yet only when we see quick price appreciation does the mention of "taking profits off the table" emerge. It's always important to realize that the underlying business is there no matter what the price is doing. In the case of WAG, I'm more concerned about a growing and sustainable dividend stream than I am with focusing on when to sell my profitable partnership.
Incidentally, I don't want to automatically discount the recent price run just because I happen to focus on the income portion rather than capital appreciation. For those investors chiefly concerned with selling at a higher price, I would still caution that a quick double of one's capital does not automatically indicate a sell decision. For instance, take a look at the Estimated Earnings and Return Calculator provided by F.A.S.T. Graphs below.
Now it's important to remember that this is just a calculator - whatever goes in (analysts' consensus estimates in this case) comes out. In addition, I am highly confident that shares of WAG will trade at a lower price, valuation or both sometime in the future. Yet I can think of worse things in the world than 10% annual compound growth rates despite P/E compression. Taken to an extreme, even if the analysts are twice as bullish with their growth estimates as they ought to be this would still indicate a 6% yearly gain.
Basically I am suggesting that WAG still might be reasonable despite its quick run-up. In fact, it's sensible to assume that this could hold for other investments as well. I'm not certain if WAG is overvalued, but I do believe that it is a solid company; or in Charlie Munger's words:
"If you buy something because it's undervalued, then you have to think about selling it when it approaches your calculation of its intrinsic value. That's hard to do. But if you buy a few great companies, then you can sit on your ass. That's a good thing."
I can tell you that I'm a lot better at the latter than I am the former. As long as the business is intact and your thesis remains on solid ground, it's not irrational to continue partnering with a now doubled investment. The more time you spend with great companies the more likely it is that you'll reach your goals.
So what would I do with a quick - not to mention my first - two-bagger? That's easy: absolutely nothing. I personally prefer to build a collection of wonderful partnerships that appear poised to consistently increase my passive purchasing power over time. How about you?