How many times have you missed the boat on a stock headed for the moon because it seemed like it was over priced at the time. The first most painful time that it happened to me was almost thirty years ago in the early 80's when I took an investment class at one of the big brokerage firms. I remember the instructor said:
The stock market has historically headed upward and will continue to do so. There will be short term drops which should be considered buying opportunities, but the market will continue upward with population growth. Right now one of the best buys is Exxon (NYSE:XOM) at $8 a share. Oil is a limited resource and it will continue to grow in value as consumption grows in the future. It is simply supply and demand. Here is the Dow Jones Industrial Average since 1930:I had $5,000 to invest and decided to go to my broker at another firm to get a second opinion. He told me that Exxon was about to drop and was not a good investment because it was too expensive. There were a lot of technical reasons why he considered it a "loser". He knew of some stock ( I don't even remember what it was) that was a great deal at the time. Exxon did begin to fall and I would have lost a large percent of my investment in the short term. However the other stock fell too. My broker called and said I better sell it, so I did. As hindsight has shown us Exxon recovered and is now selling for $86.44 after numerous splits. Sometimes long term macro economic common sense beats some analyst's bursts of short term "genius".
Apple (NASDAQ:AAPL) is another investment that many people missed out on because of the price. At this time Apple products are so popular, but some people remember that ten years ago it was a stock that analysts considered overvalued at $20 a share. Here is a typical remark made in December 2001 by a very smart long term investor:
Fact is the stock market always improves in the long run, hence why short term investing is bad. I invested when it was in the mid $50s - fact is I am in it for the long haul and so I am not too concerned about the $20 prices now. However, I am bitter against those who do short term investing because the reason that Apple is so low is not due to Apple not having the goods, its due to what I think of as consumer investors jumping at every forecast, only in for the short term, they sold off and lessened the value of my long term investment.I only hope that this investor held on to those Apple shares that he bought at $50 each. When a stock drops from $50 to $20 most people are terrified. They sell on bad news without considering the big picture. Even the best analyst might not foresee the future stock price being worth $600 a share. And even if a professional analyst has a PHD in economics (which most don't) they still make mistakes. Big ones.
Dillard's (NYSE:DDS) is a stock that has bewildered analysts and investors for years. Back in 2008 many people were even calling for the resignation of the CEO William Dillard II. The company was losing a lot of money and many people thought it would fail. Here is an excerpt from an article where the author said Dillard's would not make it to 2009:
Dillard's is a retail operator that really is in trouble. It has 318 stores, which makes it a relatively small operation in a world dominated by outfits like Sears (NASDAQ:SHLD) which has more than 3000 locations. Dillard's stock is at $3.75, down from a 52-week high of $23.11. S&P dropped the company's credit rating recently and said, "The rating change reflects our belief that the company will be more challenged than previously expected by the current weak economic environment in the U.S., and that credit metrics will deteriorate more than we had originally projected." In October, the firm's sales dropped more than 9% to $406 million. Dillard's points to its revolving credit facility with JP Morgan as its lifeline. In the last quarter, the company lost $38 million. It made $45 million in debt services payments and has long-term debt of $807 million. In other words, no dry powder. It recently cut staff.Again the analysts were way off. They failed to look at the big picture. When the share price was $3.75, the market cap did not even cover the cost of the inventory in each store. They also did not take into consideration that Dillard's, unlike many mall anchors, owns its buildings. And they did not take the time to go into stores and look at the products that were flying off the racks when that article was written, even though the country was in a severe economic downturn. A lot of investors don't take the time to look at the future potential of a company. But on Friday the stock closed at $63.04 just three years later.
Sirius XM (NASDAQ:SIRI) is my personal favorite as many of you already know. I love the internet which is even better at preserving old articles than if they were carved in stone. Motley Fool writter Rick Munarriz who is currently quite bullish on Sirius wrote this back in 2008:
It's not easy for me to give Sirius XM the "scary stock" treatment because I've been a satellite radio subscriber for four years. I love the product. However, I'm also a realist -- I can separate the service from the stock.
It's pretty grim when Goldman Sachs analyst Mark Wienkes lowers his price target to $0.25 a share, as he did this week. A quarter? Are you kidding me? Jukebox money for a share of the premiere satellite radio provider? Wienkes has been one of the more vocal critics of Sirius XM since the drawn-out merger process. I may have disagreed with him in the past, but there's no sidestepping the obvious: He nailed it this time.
He nailed it? Short term yes he did. But as we all know only three years later the stock is selling for almost ten times that amount. And the ironic thing is Rick missed his own hint in the first paragraph: "I love the product". So many investors fail to consider the product. That is the case in all of the stocks above. The sale of their products equals the earnings coming in. And if it is a unique "sought after product" the consumers will not be deterred by analysts that don't know what they are talking about. They will continue to demand the goods.
We see what these stocks have done in the past, but what will they do now? All of these stocks are at or near their 52 week highs. The risk of a short term drop is always there. But just the way that Exxon dropped from $8, and then recovered, these stocks will continue onward and upward. It helps to look at the trailing twelve months (NYSE:TTM) of price to earnings (P/E) ratios for each of the companies. However the ttm only considers what the company has done in the past. To get a peek at the future we need to also look at the forward (1 year) P/E (according to Yahoo finance):
|Stock||P/E TTM||Forward P/E|
Even though the Dillard's P/E for this year is higher than last year, the company is planning to continue share buybacks which will bring this number down. This is because the company buys shares and retires them, so there is a smaller number of shares to earnings. And there is a very good chance that Sirius will also do a buyback which will bring their forward P/E of 20.55 even lower. Considering that each of the companies should continue to produce superior products that are in high demand (which translates into great earnings), I think they all will continue upward this year. There will always be dips from profit taking. How many Apple investors sold when their $20 shares went to $200. And there will be economic downturns and short term corrections. Some companies will ultimately fail.
When I was in graduate school I was extremely lucky to do an independent study with Dr. Brian J. L. Berry. He is the Dean of Economic, Political, and Policy Science at UTD, and has written over 550 books and professional articles. During that 6 month period I did research that proves (since the 1600's) the U.S. economy and later the stock market goes up directly with population growth. Currently the population is expected to grow through at least one more generation. Berry's simple explanation of this was a comparison of two farms. One has one child. The other has ten children. Obviously the farm with ten kids will outperform the other one. There are more workers. So I believe we can bank on the fact that the stock market will continue upward for at least another generation. With this in mind, everything is currently undervalued. It is simply supply and demand.