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Christian graduated from university with a master degree in business administration, majoring in accounting, tax accounting and organization. After graduating he joined the transaction services department at a Big4 company working on mergers & acquisition deals in Frankfurt, London and... More
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  • Strong Buy Johnson & Johnson With 30% Upside

    Johnson & Johnson (NYSE:JNJ) is a major drug manufacturer servicing the health care field worldwide. JNJ is well known for producing, distributing and selling products in segments such as baby care, skin care, oral care and wound care.

    I am particularly attracted to its strong product portfolio and quality. Brands such as Listerine, Tylenol, Carefree, Splenda and the Johnson baby care range are respected and successful products worldwide. This translates into pricing power and to a wide moat that makes market entries of competing firms very difficult and very costly indeed - a core investing requirement of Warren Buffett.

    I have added JNJ stock at $64 to the portfolios of my European income-oriented, risk-averse clients such as retirees who desire little volatility and appreciate the defensiveness of the drug business. Given the relatively stable cash flow stream originating from the portfolio, the dividend should be fairly secure.

    JNJ is an S&P 500 company with a market capitalization of $186 billion and sales of $65 billion annually. JNJ's innovative strength is reflected in its high gross margin of over 68%. Operating and net profit margins are impressive as well: They stand at 20% and 16% respectively.

    Currently, the stock trades at only 12.2x forward earnings which equals an earnings yield of 8.2% for a company with a strong balance sheet and strong product portfolio. In addition, investors who buy this defensive industry play get to enjoy a 3.6% dividend yield.

    Average analysts EPS estimates for 2013 stand at $5.52 per share with the high end at $5.74 per share. To derive at the intrinsic value I use the concept of underlying earnings which I estimate to be around $5.25 per share for 2013. Applying a multiple of 17x recurring earnings for this highly profitable company yields an intrinsic value of $89.25 per share representing over 30% upside from current quotes.

    I do not believe this stock is suited for contrarians. Chartists might argue that the run-up and break of the upper bound of the short-term trend canal is a buy signal, which is correct. However, given the massive increase in volume that propelled the stock upwards, the stock is currently overbought and might fall back below its resistance level at $66.20. Investors who are in for the long-term should profit both from a reliable dividend and capital gains until the stock reaches or overshoots our intrinsic value of $89.25.

    Disclosure: I am long JNJ.

    Tags: JNJ, long-ideas
    Jul 13 10:18 PM | Link | Comment!
  • Investors Weekly Wrap-up - AAPL, FB And BRK.A

    Every weekend I am going to give a short overview of interesting articles that I came across during the corresponding week. Qualifying articles should deal with stocks of interest, contribute to education and give the investor a thorough overview of the current market situation. I hope that readers can utilize these resources to improve their own investment style and make better investment decisions.

    This week's edition is centered on Apple (NASDAQ:AAPL) a stock that I just recently bought (and the only growth stock). AAPL attracts a lot of attention due to its innovation strength and is currently riding a wave of success. I have come around a few articles and resources specifically for the curious AAPL investor. I wished I had been John Buckingham (see Article 3):

    AAPL

    1) If you dont know whether you hold on to or sell your Apple stock, maybe the author can convince you that Apple is still a bargain at $580. I particularly like how the Mr. Rotblut draws a line to the anchoring bias about which I have written on my Instablog.

    2) If you want don't want to pay around $600 for AAPL, but rather own them in an ETF you will find an ETF list here.

    3) If you think $580 is cheap for AAPL, ask John Buckingham if he agrees: A fund manager who bought AAPL shares in 1998 and 2002 for $7 a share pocketing a gazillion paper gain. Investors can see that a long-term approach to investing does pay off.

    4) Can top that? Ask NYU finance professor Aswath Damodaran who bought AAPL at $5 in 1997 and has recently sold out.

    Berkshire Hathaway

    5) The oracle of Omaha released numbers for its insurance holding Berkshire Hathaway (NYSE:BRK.A). Net income attributable to Berkshire shareholders more than doubled to $3.25 billion, or $1,966 per share, from $1.51 billion, or $917 per share, last year due to lower catastrophy losses. AIG's (NYSE:AIG) also profited from lower claims in this area in Q1. First-quarter operating profit rose to $2.67 billion, or $1,615 per Class A share missing estimates by about 9%.

    Facebook

    6) If you are up for Facebook (NASDAQ:FB) and want to buy into the mania, The Economist has quite a portfolio of articles that could peak your interest. In my latest article about FB I have advised strongly against buying into the social media company.

    Others

    7) The legend Jeremy Grantham, chief investment strategist GMO, likes to speak the truth. He usually doesn't hold back in giving market participants the truth about themselves. Even though the letter is dated February, it still offers an interesting wrap-up about markets and capital market expectations.

    Disclosure: I am long AIG, AAPL.

    Tags: AIG, BRK.A, FB, AAPL, long-ideas
    May 08 8:27 AM | Link | Comment!
  • Why YOU Are The Biggest Obstacle To Your Investment Success

    Modern portfolio theory assumes the individual to be rational when making investment decisions. At all times, the investor is able to digest all relevant information and immediately comes to the same conclusion as other investors in the interpretation of such information. As a result, this set of new information is instantly reflected in security prices and characterizes the essence of modern portfolio theory: market efficiency.

    On the other hand, the psychological predisposition of an individual contradicts his rational decision making capabilities. A wide range of cognitive and emotional biases are very likely to lead to irrational investment actions. It is striking, and speaks to the limitations of group thinking or herding, that at times of volatility irrational decision making is reflected by the collective. If markets are truly efficient, why would stocks fluctuate to the extent that they sometimes do? And how about periods of extreme volatility? Behavioral biases are the reason why most investors defeat themselves by buying in a boom and selling in a bear market. Why is it so difficult for the average investor to position himself more intelligently?

    Why does the investor insist to want to buy Facebook or LinkedIn (NYSE:LNKD) or any other trend stock at an extreme and almost ludicrous valuation but would never want to buy AIG (NYSE:AIG), Bank of America (NYSE:BAC), Citigroup (NYSE:C) or Research in Motion (RIMM) at steep discount from a conservative book valuation?

    The reason for this is simply your psychological makeup. The overwhelming majority of investors make emotional rather than rational, reflected decisions. This behavior leads to significant mispricings of securities that we see in varying degrees of quantity. There are a variety of biases that are probably profoundly contradicting your investment success:

    Overconfidence bias: You think, you know it all. For a variety of reasons, you think you can interpret information better than others or have more/better information.

    Confirmation bias: You are selectively looking for confirming and ignoring contradicting evidence.

    Conservatism bias: You are hooked to your old forecasts when new information would merit a re-evaluation of your prior forecasts.

    Regret aversion bias: You are submitting to the majority opinion and do what everybody else does...such as buying Facebook. You follow the herd, because as part of the herd you can fail silently.

    Control bias: You assume you have more control over your investment outcomes as you really do.

    Availability bias: Depending on how e.g. investor presentations are structured and presented you give more credit to the most recent (i.e. positive) information.

    Loss aversion: You hold a loser for too long or sell a winner too soon, leading to high portfolio turnover, high transaction costs and higher taxes. Loss aversion also implies risk-seeking behavior.

    How can you mitigate these effects and be more successful in investing?

    The first step is to simply raise awareness about your imperfections. The more you can emotionally detach yourself from your investments and their outcomes, the more likely you will succeed. It is one of life`s great ironies that the one who is willing to take calculated risks and make a loss is the one who gains in the end. The investor who is getting shaky when his position is down 10% will probably not last for very long. Secondly, it materially improved my own investment performance over the years when I started to think of booms and busts as a pendulum that swings from fear to euphoria.

    Thirdly, you have a concrete tool at your disposal that helps mitigating those biases and making your investments work for you: Checklists. Some time ago, I developed a checklist of all the characteristics a suitable investment for me should have. A couple of points of my checklist are listed below:

    1. Is the stock hated, neglected, misunderstood and ripped apart in the mainstream media?

    2. Let us be constructive: Are problems overblown, concentration of bad news?

    3. Does a credible business model exist and for how long?

    4. Does the company have an influence on the industry? Market share, history?

    5. Good earnings and book value growth record?

    6. Reputation of the company under normalized conditions?

    7. Does management under-promise and over-deliver?

    8. High insider ownership? Excessive management compensation?

    9. Did I do my homework, did I read the necessary documents 10K, 10Q, SEC filings, did I seek contradicting evidence, do I understand what I am dealing with and what I am doing?

    Only after I answer all questions with YES I am entering into an investment.

    Mitigating those biases is not as hard as it seems as long as you follow a structural approach to invest intelligently, on both an intellectual and emotional level.

    Disclosure: I am long AIG.

    Tags: AIG, BBRY, BAC, C, LNKD, long-ideas
    Apr 21 1:11 PM | Link | 1 Comment
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