Five Great Companies to Buy at a Drop 12 comments
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Since I managed to cause such a stir with my first 5 choices (mental note, never criticize Apple (AAPL) in public!), here are a few more. Again, I do love all of these companies (and have owned just about all of them at some point in the past 5 years). They have strong, valuable businesses, and I am not saying for a minute that one shouldn't own them in your portfolio for the long-term. Simply, in my humble opinion, they are CURRENTLY priced at an evaluation that is not warranted, or at least, not warranted in this current Market environment.
As always, I welcome your comment….
1) Fluor (FLR)
Fluor offers great exposure to some large Oil and Gas projects and is a terrific way to play the growing demand for Infrastructure. In addition, its Power division is going to see some significant contracts all over the world. So, why is this one expensive? The reason mostly has to with its high multiple, huge run-up over the past few years and the fact that I think there is increasing competition in this space.
The company is expected to grow its earnings in the 14 to 18% space over the next few years (estimates seem to vary a fair amount). I think this one may have gotten ahead of itself, based on its current evaluation of a mid 20's time multiple of 2008 earnings.
Not grossly overvalued, but I would look for it at 18 to 20x earnings, so more in the $60 to $65 value.
2) Jacobs Engineering (JEC)
Trades at a little (but not much) better evaluation than Fluor, at around 23x 2008 Earnings. With similar upside to Fluor, and in a somewhat similar space to FLR, this one also deserves a good, but not this good, evaluation.
Look for this in the low 60's as well
3) Qualcomm (QCOM)
I used to love this stock, having watched it split 3 or 4 times in one calendar year. It went from being a handset manufacturer (remember the QCP-1900?) to developing and now licensing all of the CDMA technology used by carriers such as Verizon (VZ), Sprint (S)/Alltel and Bell up in Canada.
I think that this one has the possibility to severely let down investors over the next few years. Having worked at a CDMA carrier for 7 years in a past life, I have a lot of insight into this space. CDMA is a technology that likely has had its day, with many CDMA carriers debating joining the hated GSM side, to benefit from lower cost devices, better roaming and better leverage to handset manufacturers. There definitely will not be any significant new CDMA carriers added in any major markets anytime soon.
This one is trading at an incredible multiple, as it if was still in growth mode. While I understand that their business model is quite lucrative (royalties for each CDMA handset), it might show some signs of peaking sooner than the market is giving it credit for.
Still, it is a great company. Instead of the 24x multiple that it is going for now, look for a serious multiple contraction over the next 12 months, and try to pick this one up at a 16-18x current year multiple (mid to upper 30s)
4) Costco (COST)
Ok, before you take my head off for this one, I do love Costco, am a member, and it has a good "moat" around its business. See, I said it.
It should be a good defensive investment, so I can see why people are flocking to Costco during these downtimes (people still need 4 gallon jars of pickles!). However, after a while, a good bargain is no longer a good bargain if it becomes too expensive.
It is down from its ridiculous high of over $75, so now my case for over-evaluation is not quite as strong as it once was. It's now trading at about 21x 2008 earnings.
I would still look for it to take a bit more of a hit. Depending on where you live, high gas prices might negate some of the value for shopping at a Costco, if you live too far away from one.
I would watch for this to drop down to 16 to 17x current year earnings, then jump on it. This would mean a drop down to the lower to mid 50's. Will it ever get there? Probably not.
5) Coca-Cola (KO) / Colgate (CL) / Proctor and Gamble (PG)
I can just hear the remarks now…..how can you call these 3 staples overvalued? Everyone has grown up with these companies, and our grandkids will probably use their products. Buffett's head must be spinning, right?
Let me say that these 3 companies are incredible long-term holds. In a normal market environment, they are also probably good value here, but, are they good value in a market where we may see multiple contraction (due to inflation)? If inflation truly does kick in, can they raise prices fast enough to keep their margins up? Will items such as more expensive plastics/chemicals (Dupont (DD)/Dow (DOW) raising prices), transportation, labour and food (sugar in Coke's case, various for PG) costs be easy to pass along to a strapped consumer? Will we start to see a movement towards generics?
Current evaluations are:
- KO = 16.5 x 2008 Projected Earnings
- CL = 17.8 x 2008 Projected Earnings
- PG = 18.3 x 2008 earnings (due out shortly
Again, I know that I will hear arguments about their great dividend growth records, their respective incredible cash flows, how their exposure to a weakening US dollar will help and likely about the "moats" around their respective businesses. All of that is true, but you'll likely see a lower entry point before this downturn is done. Look for a 10 to 15% correction for all of these from this spot before dipping in too many toes.
Ok….let the target practice begin!!
Stock Position: Long. Members of my immediate family have KO and PG in their Retirement accounts. I have no position in either of them.
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This article has 12 comments:
And, in CL's case, they have minimal impact from commodity inflation(see today's excellent quarterly report). If you do your homework property you'll see that CL's p/e rises during hard times, as money managers et al seek safe haven and recession-immune stocks like this are in great demand. Add to that the fact that CL is one of the best of the global growth plays around, having already established over more than a couple of decades a 40% worldwide market share(vs. just planning to do so, like many global wannabes).
And, their products are healthful(unlike Coke) and emerging citizens around the globe can easily afford upgrading to their oral health care brand, as the "per use" price is miniscule(a couple of bottles of Coke cost more than a tube of toothpaste).
Colgate is THE recession play that investors should be going into now, at currently depressed prices (stock was $82 last autumn). Going to $100 within 2 years ($4.50 x22 p/e).
PaulMars -- In terms of CL, it isn't a bad buy, if you are assuming that normal market conditions are present (by normal, I mean that we are entering into a normal downturn). There are a lot of ifs in their short-term potential growth (by that, I mean rising potential costs), and I don't believe that those are accounted for in their evaluation. I'm not saying that it should fall by 40%, but a 10-15% drop would put it more inline with expectations. They do have a great growth path internationally, and are ever expanding their market share (points that I don't disagree with you on). I just believe that you can find similar growth patterns for a lower price....
Experienced -- I wouldn't be so quick to dismiss LTE. You sound like you are in the Wireless space, so i am sure that you are aware that Verizon has formally announced their plans for LTE. I suspect that others will follow (I am a Sales Director for a company that sells to all major North American carriers, and I know that all of them have begun testing). As for WiMax, it may have some play in the Rural areas, but I don't suspect that it will ever be a large challenger.
My point wasn't that the company was going to roll over and die. Their business model is a strong one....my point was that I believe that there were serious challenges to its technology and this wasn't being factored into the stock price.
Your view points are well taken, though. I would still give it a superior Multiple to the general S&P at 18x or so times current earnings (even in a down market).
Again, thanks for taking the time to read, and to comment!
However, many still will go to W-CDMA, and Qualcomm will not be going away anytime soon. The point of the article was questioning its evaluation in the face of competition, and market uncertainty. At a lower multiple, Qualcomm is a fabulous company.
Cheers and thanks for reading!
en.wikipedia.org/wiki/...
Carrier Adoption:
Most carriers supporting GSM or HSPA networks can be expected to upgrade their networks to LTE at some stage. However several networks that don't use these standards are also upgrading to LTE.
Alltel, Verizon, the newly formed China Telecom/Unicom and Japan's KDDI have announced they have chosen LTE as their 4G network technology. This is significant, because these are CDMA carriers and are switching networking technologies to match what will likely be the 4G standard worldwide. [16] They have chosen to take the natural GSM evolution path as opposed to the 3GPP2 CDMA evolution path UMB.
Verizon Wireless plans to begin LTE trials in 2008, choosing the standard over the natural evolution path for the CDMA2000 family, Ultra Mobile Broadband (UMB).[17]
AT&T Mobility has stated that they intend on upgrading to LTE as their 4G technology, but will introduce HSUPA and HSPA+ as bridge standards. [18]
T-Mobile, Vodafone, France Télécom, Telia Sonera and Telecom Italia Mobile have also announced or talked publicly about their commitment to LTE
Bell Canada plans to start LTE deployment in 2009-2010
==================
One would think with these types of comments publicly by the major carriers in the world, investors might be a bit more spooked...
Most GSM carriers, and many CDMA carriers will actually be moving to LTE when it is available, as my comments show.
You may have missed the point of my article entirely, though. We can argue for days as to where this market might go in 3-5 years. No one will ever win that argument. My point wasn't to challenge their technology, or their business model. My point was their EVALUATION at this stage of the game. Should a company that has serious threats to its revenue stream be trading at such a multiple (in a time when companies are facing serious Multiple contraction due to the threat of inflation)?
Finally, I don't get a cent for my time. I'm just a Do it Yourself investor, who wants to share his opinion. For the record, I've averaged 13% since 1998, even factoring in the last two bear markets. I've built a net worth that I can easily retire from, even at the age of 36. I have been featured in the Associated Press, and as of next week, Canadian Business and the Globe and Mail. But, all of our opinions count on here, so I appreciate yours....
Larry
The points you make regarding cost-input inflation and the ability to take pricing can be applied to the entire universe of consumer products and packaged food/beverage companies. Recent earnings reports from WWY, PEP, KFT, CL and others appear to demonstrate that the consumer companies are navigating cost-input inflation waters effectively, and are taking sufficient pricing to remain quite profitable.
As for multiple contraction, Coca-Cola, for example -- if the stock traded down 15% from the current quotation -- would be trading at a multiple of slightly over 12x FY09 consensus. Twelve times forward earnings would be less a "gift" and more of a "miracle" for it to collapse to a multiple not seen since the Second World War. "Black Swan" event indeed.
A broad market decline could see these companies visit valuation lows not seen in generations, but if it ever were to occur, investors should not expect them to remain there long -- and as such, be nimble ( with liquidity at the ready ) on any such "catastrophic" decline.
If CDMA will go away, then why would Nokia signed a 15 years agreement with QCOM? We are talking 15 years. I guess Nokia doesn't think CDMA is going away any time soon.
After their last agreement, Nokia decided that it wanted to fight QCOM in court for the past 2-3 years. Look where it got them. They even try to get the Europeans Court to ban QCOM. Look at what happen.
CDMA and GSM are competing technologies. GSM is the mostly accepted standard in Europe, whereas CDMA is mostly accepted everywhere else, expecially in Asia, because of its advance technology over GSM.
Guess whose chip the IPhone uses? How about the Google phone that is coming out soon, Guess what chip they will be using?
You bet cha, QCOM's
I live here in San Diego and even have students that work for QCOM. Been owning it for over 5 years and will continue to do so. As a matter of fact it is my biggest holding.