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Dustin Allen's  Instablog

Dustin Allen
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Investing, saving and managing money for retirement. I have consumed all the value investing material I can find and try to emulate the best of each. Experience is the best teacher...let's see what we can learn together.
My blog:
Margin of Value
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  • Walgreen Not Out Of The Woods Yet...

    Walgreen (WAG) jumped bout 11% yesterday on the news that it ended its dispute with Express Scripts (ESRX).

    If you remember, Walgreen was a bad news pick based on the price drop after the Express Scripts break-up and Alliance Boots acquisition. Although Walgreen did not show up on the BWB 7 Screen, it has a history of strong financials and desirable intrinsic properties.

    Yesterday's response by Mr. Market was nice to see, but long term Walgreen investors are not out of the woods yet. As reported in the Q3 results,

    Compared to the prior year, the strategic decision to no longer be part of Express Scripts Pharmacy Network as of January 1, 2012 impacted our quarterly results by a net $0.06 per diluted share including cost controls, at a total of $0.15 per diluted share year-to-date.

    Not only prescription transactions were down (10% in June alone), but revenues on same store sales suffered also (down 4.9% vs Q2 2012) because those customers were not in the store to shop while they waited for that prescription to be filled.

    The question to be answered now is, how many of those lost customers will come back to Walgreen for their prescriptions? CVS Caremark (CVS), which benefited from the dispute as an alternate supplier for Express Scripts, expects to retain about 50% of its new customers gained from Walgreen. Customers will return and some will be lost, this is the nature of retail. More importantly, the opportunity for new customers has grown with the return of the Express Scripts subscriber network.

    Revenues will return, but not quickly. I expect the remainder of the year's sales will still be affected by the dispute. Management expected a total loss of $0.21 per share for the year because the loss of the contract. It will be worth watching the Q4 results and seeing what management attributes to the loss. Based on the numbers they have put out thus far, I would expect to see $0.06 or less tied to the Express Scripts contract dispute.

    As for Mr. Market, I expect him to be a little hung-over today. Look for the profit takers to exit and the price to drop a little as details emerge on the settlement. Now that the dispute is over with Express Scripts, the growth potential has returned to the domestic market.

    I still consider Walgreen a long position that will reach its Fair Value price of $45.00 or more based on my ealier evaluation.

    Disclosure: I am long WAG.

    Jul 20 11:11 AM | Link | Comment!
  • Transaction Cost – Going Cold Turkey

    Transaction costs are the bane of investors everywhere. Whether the market is up or having its worst day ever someone makes money; that someone is the Stock Broker.

    Consider the following fees charged by the following firms for trading stocks:

    Brokerage

    Fees/Trade

    Scottrade

    $7.00

    E Trade

    $7.99 - $9.99

    TD Ameritrade

    $9.99

    Charles Schwab

    $8.95

    Fidelity

    $7.95

    Here Comes the Math

    On the surface these fees may not seem like an excessive amount, but looking at it from the perspective of a new or small investor changes things a bit. For example, our new investor (let's call him Mr. Value) has just saved enough to open his first brokerage account…a hard earned, hard to come by $1000. After long hours and study, Mr. Value has found the perfect first pick for his portfolio. Grabbing a "Dow 30" component for around $8.35 a share he makes his purchase. Not wanting to put all his eggs in one basket he opts to go with 75 shares, because he sure of his pick and round numbers are easier for math.

    So, 75 x $8.35 = $626.25 + the 7.00 fee (which is 1.11% of the cost) will total $633.25 or $8.44 a share.

    It'll be another $7.00 to sell those 75 shares. $633.25 + $7.00 = $640.25 or 8.54 a share.

    Just to break even Mr. Value's investment has to grow 2.28%.

    Mr. Value hopes his investments will grow at around 8% a year. The first year he hits that mark, minus the 2.28% fees and 3.24% average inflation leaves him a net of 2.48%. Even if we exclude the sell side since Mr. Value holds long term, he is at 3.64% if things go according to plan.

    How to Beat the 'House' at its Own Game

    Wikipedia defines a stock broker as, "a regulated professional broker who buys and sells shares and other securities through market makers or Agency Only Firms."

    Professionals get paid when their services are utilized. So I suggest the following methods to keep transaction cost at a minimum:

    1. Buy in volume - After first opening a brokerage account it is tempting to start investing right away. I suggest waiting until an adequate cash reserve is built up so that buying in volume dilutes the cost of your purchase and subsequent sale.
    2. Inactivity - Buy and hold will minimize transaction cost. Purchases made with a margin of value are perfect candidates for lifetime holding. Also, this can help reduce possible tax cost, but that is another topic.
    3. Company purchase plans - Some employers still offer direct purchase plan for employees. If you work for a solid company this may be a viable option to get stocks and circumvent the brokerage fee altogether.

    No and Steady Wins the Race

    "Our favorite holding period is forever." - Warren Buffett

    By its nature Value Investing should lend itself to lower transaction fees. Waiting for that fundamentally sound company at a fair price or less may take a while. When that fat pitch presents itself a purchase can be made in volume and held long term to minimize transaction cost and taxable gains.

    It is my goal to go transaction free for one year from today. This commitment locks me into my current portfolio and helps remove the temptation to sell or purchase. I will continue to look for companies that meet my requirements for investment. If I find one worthy of purchase this will be another fail safe to bounce it off of: "Is this company, at this price worth not achieving my no-transaction goal?"

    Jul 12 10:14 PM | Link | Comment!
  • Return Rate Comparison: Stocks Vs. Bonds

    Recently I was asked how I arrived at my 'annual return rate if price reaches FVDCF price' that I quoted in my stock articles on Seeking Alpha.

    Let's start with the Fair Value Discounted Cash Flow (FVDCF) part of this statement:

    This part of the equation is derived from a Discounted Cash Flow Model using owner earnings plus estimated growth rate, discounted by a desired and realistic return rate over a 10 year period.

    The sum of these values are then added to the firm's Equity and divided by shares outstanding to come up with an estimated fair price after expected growth.

    Here is an example using Microsoft (MSFT) that projects a value of $41.46

    (click to enlarge)

    The annual return rate portion of the statement:

    Next, I take the current price and calculate the Combined Annual Growth Rate (OTCPK:CAGR) over a ten-year period to reach the FVDCF price calculated above.

    In this case the CAGR required to reach the estimated price in a ten-year period would be approximately 3% (2.97%).

    If I were to calculate Total Stock Return with dividends, assuming they stayed at the current level, the CAGR would be around 5%.

    Why do I do this?

    First, I aspire to look at investments of a long time period. I have determined that 10 years is my threshold for "long".

    I look at growth and price history, along with future prospects to evaluate if it is reasonable for the security in question to reach the estimated price level.

    Secondly, I take that CAGR number that I have calculated and compare it to bonds and other types of investments I could have over the same time period.

    Would I get a better return with less exposure to risk elsewhere?

    That is the question I try to answer. If the answer is "no" and I have a high level of conviction with my valuation, then I have possibly found my next investment...

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Jun 22 2:07 AM | Link | Comment!
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