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Kendall J. Anderson, CFA
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Kendall J. Anderson, CFA is the founder and President of Anderson Griggs Investments. Anderson Griggs manages equity only and balanced separate accounts from Rock Hill, South Carolina. Kendall was recognized by Money Manager Review as the number 1 large cap growth manager for 2004. His... More
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  • Normal Volatility Of The 30 Dow Companies: Has It Created Another Opportunity To Buy American Express?  0 comments
    Feb 6, 2013 10:26 AM | about stocks: AXP

    Eavesdropping

    I know it is not polite to eavesdrop on other peoples' conversations, but, sometimes, I just can't help myself. Once a week or so I get an urge to have my breakfast at lunch, so I take a short trip to our local Bob Evans where the cook knows how to prepare a couple of over medium eggs to my liking. One day, as I sat waiting patiently on my eggs, a couple sat down in the booth directly across from me. Normally, I would not pay much attention to them, letting them have their lunch in peace. But I faintly heard the word "investment". Of course after hearing that, I just had to listen in.

    They looked like a nice couple, about my age. I made the assumption that they were married for a long time and were either recently retired or soon to be. The husband was explaining to his wife this wonderful investment opportunity that he had made or was about to make. When you eavesdrop you don't always hear all the conversation. This was true with me that day; however, I did hear the words real estate, loans, and something about having to keep the investment for a long time. More importantly, I heard the wife clearly say, "as long as it has nothing to do with stocks".

    Being an analyst I should know better than to make an assumption without a basis; but, in my mind, I just knew this couple did the same thing millions of other couples have done over the past few years. In 2008 or 2009 the pain of price declines was so great that they chose to sell their common stock holdings, creating a huge loss and swearing that they will never, ever, invest in stocks again. These memories are turning normal, intelligent people into very unintelligent investors.

    Price volatility has been with us forever. This includes price changes on common stocks, bonds, real estate, gold, interest rates and just about every other asset owned by investors. An intelligent investor can learn to embrace the opportunities the public markets provide. The greatest of which is the ability to instantly buy or sell an investments at a known price. In a non-public market, the total cost of an investment or the net proceeds from the sale of an investment is not fully known until the transaction closes.

    Dow Jones Industrials

    To emphasize the fact that volatility creates opportunity, we are going to take a closer look at the price change of the 30 companies that are included in the Dow Jones Industrial Average during 2012. Most of you will know these 30 companies by name. Each of them have a major influence on their industries and are widely held by both individual and institutional investors.

    For full disclosure, I personally own shares of American Express, Cisco Systems, Walt Disney, JP Morgan, 3M, United Technologies and Exxon Mobil. In addition, I have owned every one of these companies at one time or another throughout the years (and will probably own a number of them again in the future, as long as the price is right).

     

     

    Company Ticker 12/31/2012 Closing Price 52 Week High Price 52 Week Low Price % Difference from Low to High
    Alcoa AA $8.68 $10.76 $8.02 34.16%
    Amer Express AXP $57.48 $61.05 $47.17 29.43%
    Boeing Co BA $75.36 $77.27 $67.24 14.92%
    Bank of Amer BAC $11.61 $11.61 $5.56 108.81%
    Caterpillar Inc CAT $89.61 $116.20 $79.64 45.91%
    Cisco Systems CSCO $19.65 $21.19 $15.12 40.15%
    Chevron Corp CVX $108.14 $117.96 $96.41 22.35%
    Du Pont (Ei) DD $44.98 $53.80 $41.95 28.25%
    Disney Walt DIS $49.79 $52.97 $37.50 41.25%
    Genl Electric GE $20.99 $23.12 $17.91 29.09%
    Home Depot HD $61.85% $65.07 $42.04 54.78%
    Hewlett Packard HPQ $14.25 $29.89 $11.71 155.25%
    Intl Bus Mach IBM $191.55 $211.00 $179.16 17.77%
    Intel Corp INTC $20.62 $29.18 $19.36 50.72%
    Johnson & Johnson JNJ $70.10 $72.52 $61.78 17.38%
    JP Morgan Chase JPM $43.97 $46.27 $31.00 49.26%
    Coca Cola Co KO $36.25 $40.56 $33.50 21.07%
    McDonalds Corp MCD $88.21 $101.74 $84.05 21.05%
    3M Co MMM $92.85 $95.37 $81.73 16.69%
    Merck & Co MRK $40.94 $47.96 $37.18 28.99%
    Microsoft MSFT $26.71 $32.85 $25.96 26.54%
    Pfizer Inc PFE $25.08 $26.04 $20.95 24.30%
    Procter & Gamble PG $67.89 $70.76 $59.27 19.39%
    AT&T Inc T $33.71 $38.34 $29.16 31.48%
    Travelers Cos TRV $71.82 $74.33 $56.87 30.70%
    Unitedhealth Gp UNH $54.24 $60.26 $50.35 19.68%
    Utd Techs Corp UTX $82.01 $86.89 $70.88 22.59%
    Verizon Comm VZ $43.27 $47.26 $36.80 28.42%
    Wal-Mart Stores WMT $68.23 $77.15 $57.36 34.50%
    Exxon Mobil Crp XOM $86.55 $93.48 $77.60 20.46%
            Avg % Change 36.18%
            Without

    BAC & HPQ

    29.33%

    Source: Zack's Research

    A 30% change in market value is scary for all of us. We would not be human if we did not immediately think of losing 30% of our lifetime savings within a year. In fact, when it is upfront and personal, this thought of loss overtakes all thoughts of gain, which by the way could also be 30%.

    Before you panic, I want you to take a deep breath and think about your past investment experience. I am sure a few of you can recall the 30% declines in the value of your portfolio at the turn of the century and again just a few years ago. But what many people fail to realize, is that 30% swings in market price for any individual common stock has been close to the average for the past 200 years. This normal volatility is only memorable to us when the overall market declines. There have only been a handful of times that the markets declined by 30% or more in any given year. In addition, over this same couple hundred years the market average has produced positive returns around 9% annually, far more than the average return on government bonds, real estate, gold, or just about any other investment an average person can own.

    Knowing that volatility is ever present, an intelligent investor can simply wait until the price is low enough before purchasing. Marty Whitman, the legendary superinvestor, is famous for his "safe and cheap" approach to investing. My application of this "safe and cheap" approach is to buy quality at a low price, increasing our probability of preserving capital and earning a respectable long-term rate of return.

    A Simple Quantitative Review of American Express Company

    Of course, the key is to understand when a price is low! Even with three decades of experience valuing companies I can assure you it is not easy. In fact, it is fraught with errors, and since things change the valuation process never ends. I thought I would share with you a simple quantitative review of one of our holdings, American Express Company (NYSE:AXP) using share price and earnings.

    Year High Price Low Price % Difference EPS P/E High P/E Low
    2002 44.9 26.5 69.45% 2.01 22.34 13.18
    2003 49.1 30.9 58.89% 2.31 21.26 13.38
    2004 57.1 47.3 20.72% 2.74 20.84 17.26
    2005 59.5 46.6 27.68% 2.30 25.87 20.26
    2006 62.5 49.7 25.75% 2.82 22.16 17.62
    2007 65.9 50.4 30.75% 3.29 20.03 15.32
    2008 52.6 16.5 318.79% 2.33 22.58 7.08
    2009 42.3 9.7 436.08% 1.54 27.47 6.30
    2010 49.2 36.6 34.42% 3.35 14.43 10.73
    2011 53.8 41.3 30.27% 4.08 13.19 10.12
    2012 61.4 47.4 29.54% 4.40 13.95 10.77

    Source: Value Line Publishing

    I know you may be thinking this is just a bunch of numbers so I wanted to highlight a couple of things for you. First is the % difference column. After the tech bubble burst, the market continued to decline for a couple years. American Express was not immune to this decline which is reflected in the 2002 -2003 volatility. Again, in the financial crisis of 2008 - 2009, the world questioned whether any financial company would survive, including American Express. Excluding these periods, the average volatility of American Express's share price was 28.45%, or just about the historical average of all companies.

    We originally purchased American Express in March of 2011 at an average price of $43.6532 per share, or 12.80 times trailing twelve month earnings of $3.41. At the time of purchase we did not know what the future held for this company. However, we did know that from 2002 through 2010 the only time shares of American Express could be purchased at a lower price relative to earnings was during a crisis and its aftermath. We also knew that every one of those years investors were willing to pay a much higher price relative to earnings than when we purchased the shares.

    Currently American Express is valued at 13.5 times trailing earnings and just 12.41 times forward estimates. Normal market volatility may just be giving us another opportunity to buy an ownership interest in one of America's great corporations and the right price.

    There is far more to analyzing a company than this simple quantitative study. My purpose was emphasizing that common stocks average volatility is 30% year in and year out, and that the known volatility of prices allows an intelligent investor to pick and choose both the time and price of purchase. And finally, without some method of valuation, you can never claim to "buy cheap".

    Until next time,

    Kendall J. Anderson, CFA

    Anderson Griggs & Company, Inc., doing business as Anderson Griggs Investments, is a registered investment adviser. Anderson Griggs only conducts business in states and locations where it is properly registered or meets state requirement for advisors. This commentary is for informational purposes only and is not an offer of investment advice. We will only render advice after we deliver our Form ADV Part 2 to a client in an authorized jurisdiction and receive a properly executed Investment Supervisory Services Agreement. Any reference to performance is historical in nature and no assumption about future performance should be made based on the past performance of any Anderson Griggs' Investment Objectives, individual account, individual security or index. Upon request, Anderson Griggs Investments will provide to you a list of all trade recommendations made by us for the immediately preceding 12 months. The authors of publications are expressing general opinions and commentary. They are not attempting to provide legal, accounting, or specific advice to any individual concerning their personal situation. Anderson Griggs Investments' office is located at 113 E. Main St., Suite 310, Rock Hill, SC 29730. The local phone number is 803-324-5044 and nationally can be reached via its toll-free number 800-254-0874.

    Disclosure: I am long AXP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Stocks: AXP
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