Richard Falcon

Richard Falcon
Contributor since: 2012
Great article for really organising one's thoughts. While I tend to think I follow this investing approach, its all "in my head". Nothing written down.
I like the idea of writing down the stated goals, dividing your portfolio into sub sections based on investment type, and allocating those sub sections a % proportion - which will change over time as I get older. Additionally, writing down a set of criteria in the cold light of day, rather than trying to apply a general rule of thumb in the heat of the excitement of making a purchase, would really help in applying discipline - to avoid buying something you know deep down doesn't really meet your criteria, but also reassurance - when a core company meets the criteria but you are concerned due to the bad news that may be encircling it.
I am glad to see that the companies you were considering for your next purchase were almost identical to what I was evaluating. I, however went for IBM.
I will be sharing this article with friends of mine who are keen to start investing.
Hi Nick,
Just wondering if you could elaborate further on what made you drop Medic X for Omega. I've been thinking about buying some Medic X to boost the yield on my portfolio. Its one of those shares I've been watching for years, but never started a position.
While all UK supermarkets are facing their difficulties, I think Tesco is the best placed to succeed in a turnaround. I wouldn't touch the likes of Morrison's or Sainsbury's. Not that they may not succeed in the future, I just think there are so many better opportunities elsewhere.
I do have enough confidence in Tesco however, and built a position for the long term on its way down at the end of last year. They just have so many more options than their UK competitors.
Nice screen - I found this very useful
I think you need to go back more than 5 years to compare current to historical valuations. The past 5 years has been a period where JNJ has seen historical low valuations.
I wrote the article below on JNJ in 2012 reviewing the valuation case at the time - you can see back then valuations were well below historical norms. In my opinion JNJ is probably appropriately valued right now. Good buy for the long term, but its not standing out right now.
Thanks for the info on UK companies. Interested to hear more about Cranswick. Are you able to speak more about current earnings growth rates as well as valuation in comparison to the historical context? Can do the research myself, but just wondering if you already have this to hand
I am actually going through this debate myself with Starbucks. I'd like to know if you have an opinion on SBUX (purely on a valuation perspective) as the Fast Graph is pretty similar to that of ROST. I am conscious SBUX is overvalued right now, but maybe only a little bit. And I know finding a similar replacement in terms of performance will not be easy.
Enjoy your articles Canadian, they invariably follow my line of thinking and help me with my decisions. All the best
I looked at Wendy's last year, but the fact it couldn't string 3 consecutive years of increasing EPS going back to '96 was enough to put me off. The dividend hasn't been stable historically either. For me, it would be McDonald's every time!
Thanks for the link chowder, another excellent perspective and an area I need to become more familiar with for sure.
This is a timely article for me as it relates to the position I find myself in. I am in the early stages of building a portfolio and it looks like I have a similar watch list to yourself. But I too have been aware I may be overconcentrating in certain stocks, namely tech at what appears excellent value. But I like your line of thought. Its always nice to get some reassurance from reading the decision making process of another SA contributor that you can identify with. Best of luck with your portfolio building!
Hi pmheindl, I am in agreement with you. By including a short piece on market timing, my aim was to cover all aspects one might consider when initiating a position and create an extra discussion point.
To clarify my own personal position, I did own WAG and sold recently, crystalizing a nice profit. I did so not as a trade, but due to personal circumstances at the time. Because I still like WAG, and think its good value, I am looking to re-enter at some point. But I am deciding to wait a while, for the possibility of a modest pullback.
Whether that proves to be the best decision, I am not certain. But I believe our discussion highlights the choices an investor is faced with when deciding to allocate their money to an certain stock after a run up.
All the best,
Thanks pmheindl and dernermit for taking the time to read and to leave some feedback. By showing where the current price was compared to the 30W moving average, I was trying to show when the WAG price gets between 20-30% above the moving average, as it is now, then the price quickly reverts to the mean. It will do this either by pulling back, or by trading sideways for a while.
That means the price is unlikely to move too much higher from here in the short-term, with the possibility that it may pull back some. Therefore, waiting a couple of months may provide a better entry point.
Time will tell, but I hope you found aspects of the article useful. Thanks again for taking the time to comment.
Interesting summary on the mathematical history of phi. This is something I'd like to read into more. Following your articles closely Avi. I started a long position in silver last spring and over that time I have come to fully agree with you that silver cannot be predicted based on "fundamentals". Always look forward to your latest views on the subject.
I like this idea, a neat way to time topping up on positions
Short term - no, long term - yes!
Couldn't disagree more!
Hi Sneaker, I'm glad you found the graphs useful. As the yields are also at historically high levels, and both PG and CL have very long track records of increasing their payments, I can only see the PE ratios closing back in on their means. Of course, this may take a number of years - it took 10 years for their PE ratios to go from peak to trough, so I believe there is plenty of time to pick these shares up at decent valuations. Peak value has probably passed, but that can be said about most shares after the collapse of 2008/09.
CHD has also gone on my watchlist now. Had never looked at it before writing this article and am always happy to find another company that fits my potential investment criteria.
Thanks for reading and taking the time to comment!
Yes, perhaps in the construction sector. However, in the BRXX fund there are companies from the telecommunications, utilities, financials, transportation, real estate etc..... sectors. All these companies would benefit from the infrastructure investment. How much they will benefit directly, I have no idea, but indirectly, once the investment has been made, it will surely be easier for them to do business in the future. The stat in the article saying only 6% of roads in Brazil are paved is shocking to me. It shows how far Brazil still needs to go, so ultimately, an investment along the theme of its infrastructure could well be a very long term play.
Good question. This is why I prefer BRXX.
BRXX pays a decent dividend too. The yield on the index is approx 4.2%.
I agree Gateway that one shouldnt expect rapid growth in JNJ as a business. But there is the possibility of higher growth in the share price purely due to the fact the shares are trading at such a low P/E to history. So long as earnings keep coming in with modest growth, the share price should catch up. How long this will take to realise we will have to wait and see!
Hi MexCom, thanks for reading and the constructive feedback! I will take that on board for a future article hopefully.
Long term earnings growth like JNJ acheives is not easy to come by and deserves to be priced at a premium if anything. Picking it up at historically low valuations is the easiest way of ensuring outperformance.
Dividend Garden, just to add, the TTM EPS of $3.14 is due to recent litigation/product liability costs. These are classed as non-recurring events and are excluded from the EPS figure for 2011 of $5.00 per share. Thats the reason for the discrepancy in the payout ratio between sources.
Thanks Ashraf, glad you liked it!
Hi Luigi,
No, the forecasted returns do not assume dividend reinvestment, but they include the total dividends received in the total return.
Thanks for reading and taking the time to comment!
Thanks for reading!
All that data comes from, or is derived from, The 2012 dividend forecast comes from a forecasted 5 year dividend average CAGR of 6.3% based on a 2011 figure of $2.25 per share. As its a forecasted figure its mainly for illustrative purposes.
Valueline has the 2011 payout ratio as 44% and a forecasted 2012 ratio of 47%.
I have noticed that depending on where you source your data, figures can vary. In that case, for me, consistency is the key. I have always used valueline as it was what I was introduced to first and have found it particularly easy to use, especially for an amateur, individual investor.
I gather you are not a big fan of Microsoft!
I have a few questions/comments:
"Microsoft has yet to recover and repair its image from Apple's devastating "I'm a Mac - I'm a PC" campaign that ran between 2006 and 2009"
In what way are you measuring this? I recently wrote an article reviewing MSFTs past performance going back nearly 2 decades:
I don't see where MSFT have taken this hit, let alone them not having recovered.
"This halo effect translates into 40% gross margins for Apple..."
Comparing operating margins between Apple and Microsoft with data from Valueline, Apple had a margin as low as 2.9% in 2002 and it has grown over time to a current margin of 37%. MSFT have maintained an operating margin of approx 40% or higher every year over that time.
“Technology investors, however, are all too familiar with the fact that Microsoft's financials have grown little over the past decade. The stock market pricing mechanism discounts future growth. As such, Microsoft shares have done nothing but pay dividends for the past ten years.”
Again, referring back to the data I displayed in my article, MSFTs net cash provided by operations has grown significantly, and it has been in an extremely strong financial position for the past 2 decades. Microsoft’s share price hasn’t done nothing due to a poor business model, it has gone nowhere due to huge overvaluation in the early 2000s, to significant undervaluation today. Meanwhile, the business has been ticking over at steady consistent rate, growing earnings and cashflows by a compound annual growth rate of approx. 20%.
There are many statements of ”fact” in here that are simply not borne out by the evidence.
I think both companies are of excellent quality. It needn’t always come down to one or the other. Both are worthy of consideration, provided we have a fair reflection of their performance and qualities.
Yes, the analysis is simple, but I don't think its naive.
The way I pick a stock is by examining its history. If it grows year on year at a decent rate, I have confidence that they will be able to maintain that trend going forward. To the extent they will be able to maintain trend, I don't know. But the data suggests compound average growth across a range of parameters has been good going back 17 years, and similar to that going back 5 years. That means short term past performance has been measuring up against historical performance. But I will keep monitoring this on a regular basis.
Growth could slow from here, due to economic climate, competitors, unpopular products etc. But I don't see a lot of that in the data. I have been read it all the time on comment threads across the web for the past couple of years, but to me, the data still says MSFT is performing strongly.
I think investing can be simple. I don't know a lot about MSFT products. There are people on here who are much, much more knowledgeable, and I enjoy reading their thoughts on these technical details. But I don't think you need to know every aspect of MSFTs business to be able to identify it as a good business. You can identify any good business across a range of sectors by examining their results in terms of performance, their finances, and their valuation. Past results do not guarantee future performance, but they sure do give us reassurance that a company knows what its doing. There are a lot of professional people analyzing MSFTs future and making predictions, which is great. I don't know enough to add any value to that conversation. What I can comment on is what has happened in the past, and invest my money in a proven company.
sorry outcastsearcher, I thought I had replied directly to your comment. But I added a brand new comment instead. My response is a couple comments below!
Perhaps the Net Cash/Debt graph is misleading. At the end of 2011, MSFT had a cash pile of $9.6B. It also had $40B in current assests described as short-term investments, which it lists alongside cash on its balance sheet. It has long-term debt obligations of $12B. This will be re-paid, obviously, in the long term. On top of this it generated $25B in operating cashflow in 2011. Therefore, the repayment of this debt is not a problem at all for MSFT. It is well covered. If the long term debt continues to grow and grow, outpacing cashflows, one would have to reconsider. But right now its not an issue.
I don’t know why it has taken out the debt, but there are plenty of advantages in taking out debt at the low interest rates available right now. What I am saying, is that I trust MSFT to manage this effectively based on the general trends of the business parameters I displayed in the graphs. Historically they have done a good job, I don’t see anything to suggest they wont in the future.
For the PE numbers that I am throwing around, I am just trying to show investors have paid a range of 51x to under 10x earnings over the past 17 years. The average over this time is about 27x. Earnings growth, on average, has been pretty consistent, so as long as that remains, and the PE reverts to nearer the mean, those predictions are just examples of what would happen if MSFTs valuation climbed back to a historical average. Of course it may not, and predictions should be revised year on year. But anyone can make their own prediction based on their perceived growth estimations for MSFT and future PE prediticions.
Thanks for reading and taking the time to comment!
Yes, the analysis is backward looking. I don’t know how Microsoft will fare as it shifts from PCs to tablets. I am just displaying the data from the past 17 years and taking reassurance that as a company, MSFT will be able to adapt and succeed as it has the last 17 years. It is possible MSFT will fail going forward, but signs will emerge if this proves to be the case, so we just keep monitoring its performance. BTW, 17 years is just the length of time I have access to data for. I get the data from Valueline, free for MSFT from their website, and MSFTs annual reports.
Please take from it what it is. Everyone will have their own opinions on whether MSFT will be a good investment or not, and as you say, there are plenty of analysts making predictions about MSFTs future performance and their products. I hope this would just be a starting point for one’s own research before they make an investment decision.
Its my personal view that there is negligible risk in MSFT. Even if the business slows, I think the financials and valuation right now seem good. And if MSFT slows and stutters in the medium term, hopefully you will be insulated by the low valuation risk and the growing dividend. The future projections were just to show the potential upside if valuations revert to a historical mean. But, perhaps they won’t, or at least to the extent of a PE of 22.
Thanks for reading and taking the time to comment!
I agree Hooridian. I also track interest expense but didnt include it in the article as it was already verging on being too long. But the amount MSFT paid on interest expense in 2011 was under $0.3B.
MSFT have absolutely no problem financing that debt when you look at their growing cashflows and cash piles.
Thanks for reading and commenting, hope you found the info informative and useful!