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Tony Abbate, CFA

 
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  • Procter & Gamble: A BMW Quality Company Selling At A Toyota Price [View article]
    I am in no way implying that P&G will get bought out. However, over the past 25 years the valuation of P&G has averaged the multiple at which similar companies have received buyouts. I am a big believer in 'reversion to the mean'. In the case of P&G, I think it is highly likely.

    As for WAG, I do follow it and own some. It is very cheap. My biggest concern is management. The current management has mismanaged the company. The termination of the Express Scripts contract was a battle of egos. IMO, the latest decision to use shares for currency to establish a stake in Boots is insane. They have done all the wrong things in terms of creating shareholder value. I have a lot more confidence in my P&G position than in WAG.
    Jun 25 01:25 PM | Likes Like |Link to Comment
  • Procter & Gamble: A BMW Quality Company Selling At A Toyota Price [View article]
    I take a longer term view and take a five year average of free cash flow margins when determining a company's intrinsic value. In general company profit margins are at an all-time high. The big risk with owning P&G and many other companies is margin compression. However, I think the low valuation offsets some of this risk.
    Jun 25 10:11 AM | Likes Like |Link to Comment
  • Equities: Now As Cheap As They Were In 1974? [View article]
    No flaws in your thinking. Time will tell which scernario is right.
    Jun 13 10:14 AM | Likes Like |Link to Comment
  • Equities: Now As Cheap As They Were In 1974? [View article]
    Be careful. Stocks are not cheap. They are trading at 15x trailing 12 month EPS - in line with the historical average. IMO, projections are useless to value the market. They tend to be overly optimistic and studies have shown they are no better to value the market or stocks than trailing 12 month earnings. At the bottom of the market in February 2008 stocks sold at 8x earnings. Stocks are nowhere near this level of cheapness.

    Low interest rates do not necessarily make stocks more attractive. In the 1940s, when interest rates where in the 3 percent range, stocks sold at 8x earnings. IMO, you need to look at a longer time period.

    The overall economic backdrop needs to be taken into account when valuing the market. Interest rates are at record lows due to concerns about deflation and poor economic growth prospects. With lower expected growth, it could argued stocks are expensive. The current health of the economy is more akin to Japan and the US in the 1930s and 1940s - deflation. Hence, it could be argued the stock market should sell at a lower valuation.
    Jun 13 07:48 AM | 1 Like Like |Link to Comment
  • The U.S. Economy Sitting On The Threshold Of A New Golden Age, Part 1 [View article]
    Larry,

    VERY WELL SAID...."it's pointless to offer debate, because despite the politeness and pseudo-civility, critical comments are not welcomed nor desired." I could not have said it better without irritating Chuck.

    It is really pointless to debate with Chuck because most of the time he interprets contrary opinion or an attempt for a meaningful debate as a personal attack. Chuck adds meaningful content to the site. However, I get the feeling he wants all the interactions with his followers to be like the watching the Telletubies - a "Group Hug". To me, the type of interaction that Chuck encourages is pointless and superficial.
    Jun 9 07:51 PM | 7 Likes Like |Link to Comment
  • McDonald's Approaching Dollar Menu Prices [View article]
    Sorry about the confusion. I agree it is good to 'stir the pot' a bit. That's part of the fun of investing - learning from each other.
    Jun 9 12:59 PM | 1 Like Like |Link to Comment
  • The U.S. Economy Sitting On The Threshold Of A New Golden Age, Part 1 [View article]
    Chuck,

    I did not call you a fool, but said using 'projected earnings is a fool's game'. Numerous studies have shown that projected earnings are of no use and trailing earnings are just as good or even better. My comment was akin to saying that people are foolish to run up large credit card debts and pay the monthly minimum. That does not make them a fool. It's all semantics.

    All for the data being faulty, I still stand by it when the two reputable organizations of Barrons' and Robert Shiller have the EXACT SAME EPS of 86.95. The problem with operating earnings is that countless companies will take one time charges that are not included in this number. As a result, their earnings look artificially high and their valuations low. I am trying to state facts and not attack you personally.

    There is one problem with our communication in that I am either a horrible communicator or you need to stop taking everything so personally. I'll leave that up to the audience.

    I enjoy being challenged on my articles. It's much better than the 'Great Job' responses I get. When you are challenged, you learn and grow. That is what investing is all about. Evidently you are not interested in constructive criticism or challenges to your ideas.

    Best,

    Tony
    Jun 9 11:33 AM | 7 Likes Like |Link to Comment
  • Debt Deflation, Corporate Efficiency And Stock Prices [View article]
    Nice analysis. The world governments are hard at work trying to buttress the destruction associated with deflation. One stock that should benefit if deflation runs its course is Fairfax Financial. You can buy in on the pink sheets under the ticker symbol FRFHF.
    Jun 9 08:40 AM | Likes Like |Link to Comment
  • McDonald's Approaching Dollar Menu Prices [View article]
    MCD traded at valuation levels in 2002 at 11x free cash flow and in the early 1990s at 13x FCF. These were valuation levels more than 20 percent below the level obtained during the financial crisis of 15x FCF. Stocks can do strange things even in the light of normal economic situation. I don't think we need a financial crisis for it to trade at $78.

    Much of investment succcess over time comes from Warren Buffett's famous quote of "Rule No. 1: Don't Lose Money. Rule No. 2: Don't Forget Rule Number One." I think you will do well over the next decade buying MCD at its current price. However, the stock has significant valuation risk.

    Companies like WMT a year ago and P&G today traded at free cash flow yields of 6 percent of 16.7x free cash flow. My guess is MCD will trade at this level sometime and when it does I will have my 'big bat swinging at the fat pitch that Mr. Market is throwing at me." Based on MCD's latest financial statements, that implies $78. If the business grows over the next year, this $78 may become $80. I hate losing money and at its current valuation, I don't think MCD is on the value menu yet.
    Jun 9 08:22 AM | Likes Like |Link to Comment
  • The U.S. Economy Sitting On The Threshold Of A New Golden Age, Part 1 [View article]
    Chuck,

    Where are you getting your earnings data for the S&P 500 Index?

    Both Barron's and Robert Shiller's site post last 12 month earnings as $86.95 per share. At 15x earnings, this would imply the S&P 500's fair value is 1304.25. This is well below your forecast of almost 1575. I think your data is faulty.
    Jun 8 10:44 PM | 3 Likes Like |Link to Comment
  • McDonald's Approaching Dollar Menu Prices [View article]
    McDonald's is far from "Approaching Dollar Menu Prices". At the depths of the Financial Crisis it sold at an Enterprise Value/Free Cash Flow Ratio of 14.8. In 2003, at the bottom of the recession, and when it was having operational problems, it sold at an EV/FCF ratio of 12.5. On Friday it closed at a ratio of 18.5. There is still a fair amount of downside risk and by my estimation is slightly undervalued. At $78 it would sell at 16.7x FCF, have a 6% free cash flow yield and would be interesting.
    Jun 8 10:35 PM | Likes Like |Link to Comment
  • The U.S. Economy Sitting On The Threshold Of A New Golden Age, Part 1 [View article]
    The market is at its lowest valuation since 1993? How can this be possible? In Feb/March 2009 the market sold at its lowest valuation in the last 30 years.

    Using projected earnings is a fool's game when trying to value the stock market. You need to use cyclically adjusted earnings. Otherwise stock look cheap at tops of the economic cycle (because earnings are high) and expensive at the bottom of the economic cycle (because earnings are low).
    Jun 8 09:47 PM | 6 Likes Like |Link to Comment
  • The U.S. Economy Sitting On The Threshold Of A New Golden Age, Part 1 [View article]
    Chuck,

    I still don't understand your perspective on the difference between valuation and statistics. In my opinion, they are connected at the hip. Ben Graham put this forth in the 1930s with Security Analysis and expanded upon it in the 1949 when he wrote the first edition of The Intelligent Investor.

    My point is that over the long run (10 years or more) there is an inverse correlation between valuation and return. Successful investing requires basic math skills of algebra, understanding psychology and a knowledge of history.

    As for the potential returns from a single stock or stock market, it is a relatively simple equation of:

    Earnings Growth + Dividends + Change in Valuation Assigned to the Company or Stock Market

    This is fairly simple statistics, math, analysis or whatever you want to call it.

    There are many other factors besides productivity that is important in terms of the market and economy. What about the fact that the world and U.S. has record levels of debt? If you study history, it is a potentially dangerous time period. Read the book "This Time is Different" by Reinhart and Rogoff and you will understand we are in a potentially dangerous situation.

    As a result, I think it is potentially reckless and dangerous to put forth the idea that at 15.2 times trailing earnings the stock market is attractively priced. If we go down the path of deflation like Japan or the European Crisis pushes us into recsssion, the market could sell off substantially. In times of crisis, the market could sell at 9 times earnings. In this scenario, the market could drop by 40 percent.

    I think you are way off base in your valuation of the market and potential risks. My apologies if any of the above references were received as a personal attack.

    Regards,

    Tony
    Jun 8 08:41 PM | 8 Likes Like |Link to Comment
  • The U.S. Economy Sitting On The Threshold Of A New Golden Age, Part 1 [View article]
    Chuck,

    Your optimism is probably a wonderful characteristic and you are probably a lot of fun to hang around. However, I think your analysis is short-sighted.

    It does not make sense to analyze valuations since 1993. This is too short a time period to make a valid argument that stocks are attractive. Your article does not analyze the potential risks experienced throughout history. Take a look at the article I wrote below:

    http://seekingalpha.co...

    My article points out that valuations are cut in half during very uncertain time periods. The prudent investor who understands how the current valuation sits in the context of history, will be not be blindsided by the naiveté of optimism if the situation in Europe worsens. The fact is, stocks could fall between 20 and 40 percent if the situation in Europe worsens. I do not think your analysis takes this possibility into account.

    I think stocks will be by far the best available liquid investment over the next 10 years - especially after inflation. However, it could be a very bumpy ride.
    Jun 8 04:12 PM | 3 Likes Like |Link to Comment
  • Stocks Are Not Cheap Or Expensive, But Are Priced Just Right; But They Still Have Significant Risk [View article]
    I have owned it since I started my company three years ago. Their intrinsic value keeps growing. Year over year intrinsic value growth is 8.3%. 5 year annualied growth is 10.0%. 10 year annualized growth is 12.7%. They have one of the most consistent growth records around. Plus they return money to sharholders via dividends and stock buybacks.

    In late February, on the heels of an earnings disappointment, I made it my largest holding - a 5% position and bought it in the $58 to $59 range. At this point it sold at its cheapest valuation ever. I got a scare with the Mexico bribery scandal but held tight. I am very happy to be able to buy a very high quality company at a 25 to 30 percent discount from my intrinsic value estimate. My intrinsic value target is in the $80 range.

    I think it is becoming a momentum play. WMT was the only stock in the S&P 500 Index to post a gain during the Financial Crisis of 2008/2009. There the potential for some big economic problems this year. I think money is flowing into the stock in anticipation of these problems.
    Jun 8 12:06 PM | 1 Like Like |Link to Comment
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