Five Great Businesses Currently on Sale 19 comments
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The best time to buy is when we have a negativity bubble. This great nation of ours is in a deep pessimism. We have not seen consumer sentiment this low for decades (see following chart).
click to enlarge
As a contrarian, I feel like I'm walking into a brothel after spending 10 years in prison. The market has priced in a deep recession, a Socialist Obama White House, every bank going under, and oh, peak oil B.S. But I see a great bull market in stocks ahead for this country for two reasons:
First, stocks are cheap. Many great businesses are selling for single digit PE ratios. The main difference between a great company and a mediocre one is pricing power. It's rare you can find a firm has pricing power since we live in an ultra-competitive world. During a difficult economic time, like now, the firms with pricing power can maintain prices they charge, and sometimes when costs of doing business increase, they can maintain their profit margin by raising prices. Here are some great businesses that are currently on sale:
1. American Express (AXP) -- Despite a bozo as its CEO, Amex has earning power of $3.50 per share. It has pricing power, maintaining discount rates charged to merchants and jacking up interest rates on cardholders to offset any rise in charge-offs. I am not a fan of Ken Chenault as he is consistently guilty of over-promising and under-delivering.
2. Discover Financial (DFS) -- Discount rates on merchants should be going higher for Discover Cards, as it's no longer in the business of signing up merchants. It can let merchant acquirers do the dirty works for them. Discover also can raise interest rates and fees on its customers (merchants and cardholders) to offset any unexpected loan losses due to recession. Its earning power is around $2.50 a share, and it is trading for around 6-7 times earnings.
3. Legg Mason (LM) -- This stock is selling for 8 times normalized earnings of $5 per share. The company manages over $800 billion in assets, comprised stock, bond and money market funds. It collects 50 basis point for all assets under management.
4. UPS (UPS) – A great company, impossible to compete with - yet the stock is selling for only 15 times earnings of $4 per share.
5. Hershey (HSY) – An iconic brand, leading the candy market with a 44% market share, its stock is getting hit with higher sugar prices. As the commodity bubble starts to unwind, Hershey should outperform.
Second, the global market is slowing down. The UK and Spain are in recession. Asian economies, including China, are slowing. The Chinese economy is another big bubble ready to pop. Do you recall in late 80s, when everyone was talking about the Japanese economic miracle, and how we should learn from the Japanese. Well look what happened? The reason is simple. Japan needed the US for its exports. Once the US economy slowed down, the party was over for Japan. The same analogy holds true for China. China's economy is built around exporting goods to the US, so when the US slows down, the Chinese have no place to sell their excess goods.
The main reason that a global slowdown is great news for the US is that we will have less competition for raw resources like oil and metals. Once a global slowdown moves into place, it should take much steam out of the commodity bubble. All the money that has flown out of the US and was invested abroad will come back. More money invested in the US stock market means higher stock prices.
Everyone has played defense for so long, we all forget what it's like to ride a bull market.
Bull markets climb on a wall of worries. We will encounter more bad news, but stocks will go higher and higher. The bull market will end when every bear finally turn bullish, and that's years away.
Disclosure: Long AXP, DFS, LM, UPS and HSY.
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This article has 19 comments:
Jay Fredrickson
i-75south.com
China and India are not free market, they are socialist-like woth some market based economy.
China is absolutely a bubble, I have not met a single person who is not bearish on China.
Most independent studies and analysts come up with crude oil peaking now and global liquids not far behind (crude oil peak dates given here): Matthew Simmons 2005; German based and parliament funded Energy Watch Group 2005, Kenneth Deffeyes 2005, U.S. Army Corps of Engineers 2005, David Cohen 2011, T. Boone Pickens (2005), Samsam Bakhtiari 2005, Tony Eriksen 2008, Rembrandt Kopplear 2008-2010, Fredrik Robelius 2012, Chris Skrebowski by 2011, Sadad Al Husseini, we will pump no higher, Jeffrey Brown (soon), and Stuart Staniford (soon).
According to energy investment banker Matthew Simmons and other independent forecasters, global crude oil production is now declining, from 74 million barrels per day to 60 million barrels per day by 2015. During the same time demand will increase 14%.
This is equivalent to a 33% drop in 7 years. No one can reverse this trend, nor can we conserve our way out of this catastrophe. Because the demand for oil is so high, it will always be higher than production; thus the depletion rate will continue until all recoverable oil is extracted.
Alternatives will not even begin to fill the gap. And most alternatives yield electric power, but we need liquid fuels for tractors/combines, 18 wheel trucks, trains, ships, and mining equipment.
We are facing the collapse of the highways that depend on diesel trucks for maintenance of bridges, cleaning culverts to avoid road washouts, snow plowing, roadbed and surface repair. When the highways fail, so will the power grid, as highways carry the parts, transformers, steel for pylons, and high tension cables, all from far away. With the highways out, there will be no food coming in from “outside,” and without the power grid virtually nothing works, including home heating, pumping of gasoline and diesel, airports, communications, and automated systems.
This is documented in a free 48 page report that can be downloaded, website posted, distributed, and emailed: www.peakoilassociates....
I used to live in NH, but moved to a sustainable place. Anyone interested in relocating to a nice, pretty, sustainable area with a good climate and good soil?
The reason for the slow down is not the U.S. slowdown. It is the higher commodity prices. We always forget that high oil and ore prices hurt everyone, not just the U.S., and China and India are less able to afford it than we are. Plus, labor prices in China have been rising consistently. Higher labor costs, plus higher raw material costs, means less profit, slower growth. Its economics, not the U.S., thats bringing things down this time.
Let's say, every mortgage defaulted, and LM can recover 50 cents on a dollar, I expect the max amount of money Legg can lose is 1 Billion, or one year worth of earning.
Read it here on AmEX
seekingalpha.com/artic...
Infact DFS is my largest investment, also own LM. You forgot about health insurers, I am long UNH.
Also long MCO, CSCO, PM, MKL and AXP is on my watchlist.
I did own FDX for a while but sold out before it dropped because of fuel, I agree getting back into a company like UPS or FDX will be a good move at some point.
Any body that does not get up right this min. and purchase UPS stock at his price is a pure fool. The Company will come back strong in the next two quarters. Just wait and watch!!!!! Buy the end of the year it will hit $80.00.