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Christopher Clay
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Born in rural West Virginia; I left the state for college. I studied accounting and finance. After a time doing tax returns and various other accounting work I realized that I had a gift for understanding business. My first stock recommendation from college went up 1,200%+ when a $7 stock... More
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Worldview Investing
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Worldview Investing
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Worldview Investing: A Foundational Approach to Earning Above Average Returns
  • Stocks for the American Consumer 0 comments
    Mar 15, 2011 9:02 PM | about stocks: AAPL, SAM
    There is a lot of gloom and doom out there today. However, these are solid companies, with strong growth, which are underpriced.   
     
    I first checked out these companies because of their products.   I have to admit they offer some wonderful innovative products.   I’m going to talk about two companies – Apple and the Boston Beer Company.
       
    Let’s start with beer. I love beer and when I say that I mean real beer! Not some watered down, tasteless beer, like Budweiser, Miller, or Coors, which all are virtually the same. I’m talking about beer made with style and passion - beer in which you can taste a region, culture, or idea.  
     
    For example, the Boston Beer (NYSE:SAM) companies Old Fezziwig Ale™, which has an extra hoppy taste, with a blend of Christmas spices, perfect for the cold winter months. I also like their Summer Ale, with a hint of lemon and a refreshing flavor for drinking while grilling out in the summer heat. While Samuel Adams is the core of the Boston Beer company’s beer brands, they make an award winning Latitude 48, Cherry Wheat Ale, or an Irish Red with sweet roasted hints of caramel and toffee. Cheers!
     
    Drinking aside, for our first wedding anniversary (that is your “paper wedding anniversary” for you guys who might not know) my wife bought me my first share of the Boston Beer company and I’ve been buying it ever since. The stock was around $42 dollars per share back then and it has more than doubled since that time, which their growth numbers justify. As fast as this company is growing, it’s still undervalued.  I’ve looked at 10-years of financial data, market and industry research, conducted serious amounts of taste testing, and done over 120 calculations to estimate valuation and growth for this company. Even with a major recession, the Boston Beer Company has marched onwards.   If the economy continues to recover, the government gets employment up, and the Fed keeps interest rates low, the American consumer will come back stronger and stronger. At this time, Boston Beer (SAM) is a Best Buy in my alternative portfolio at WorldviewInvesting.com.

    Let us dive into the fundamentals on The Boston Beer Company.  They are audited by Ernst and Young with a clean/unqualified opinion which is always a good start.  The are an easy to understand company with a simple consumer product that has been made for hundreds of years across the globe.  Competitively, they are a small player with a competitive advantage of taste and passion, making them nimble and quick responsponders to change, and making it difficult to switch.  They keep their products fresh in many ways but most importantly by increasing their control over the manufacturing process and offering various changing seasonal beverages.  Competitive advantage is their highest risk area.  Larger players like Miller, Coors, and Budwieser stay focused on mass market/mass produced products for now.  Management is very passionate, currently increasing insider ownship of the stock (most specifically there CFO) and Jim Koch the founder is as passionate a leader as they come. 

    Across the line from equity, EPS, sales, and free cash flow (with an exception) the company has been seeing stronger and stronger fundamental growth reaching into the double digits.  Recently they have been expanding their production capacity which is something we like to see but has dinged cash flow recently.  My growth projections come in at 26.7%.  Industry insiders and analysts are a little more aggressive with the mean estimate coming in at 27.4%.  As always I choose the most conservative estimate to reduce risk.  Valuation over the years has fluctuated my valuation range comes in at a high of 54.8 to a low of 30.2 as always I use the most conservative number in my PE calculations.  Today Earnings per share are at $2.21.  Applying the growth and valuation numbers out over a 10 year period give a future stock price os $561.55.  My personal discount rate/required ROI on any investment is 16% bringing the current valuation down to $147.66.  I think this stock is on the lower risk side as it is an easy to understand and read industry and have a required margin of safety for investment consideration of 17%.  I think this stock is a buy at anything priced under $122.56. 
     
    A second recommendation is Apple (NASDAQ:AAPL). Again I have my wife to thank.   Apple is an embodiment of pure American consumerism.   Absolutely entertaining, unique, well made, technological devices to make life more enjoyable is what Apple delivers. My wonderful wife and I were given an iPod Touch for Christmas to share. Well there wasn’t much sharing. After I hooked it up to our Wi-Fi access, my wife was hooked. She jams to music streamed over the internet as she cleans, plays Karaoke with the kids singing into the embedded microphone and recording their duets, plays video games, watches her favorite TV shows, streams HD movies, checks her email, reads articles, reads books, keeps her Facebook account updated, and probably balances the bank accounts, all from a tiny little pocket device.   I have yet to meet an iPhone user who isn’t as hooked to their iPhone as my wife is to her iPod.   She loves it so much that I’m getting her an iPad for our next wedding anniversary. I had briefly thought about trying out one of the new tablet PC’s coming out from various other device manufactures like Dell or Motorola.   Then Apple announced the iPad two, priced competitively, lighter, smaller, faster, with great battery life, and hundreds of already developed applications. I’m sticking with Apple.
     
    I’m a new mover into Apple. My analysis places Apple within my own buy window, but the market is catching up.   I currently have a 34% spread between price and value. My required margin of safety for this stock is on the high end of 3.0 (i.e. 30%). When Apple falls below my required margin of safety for this particular stock, I’ll be placing it on my hold list. In other words, there is a small and shrinking (4%) window to get in on a great stock with great potential. 

    The 4% window is arrived at by taking into account Apple's fundamental operations.  First, they have a clean Ernst and Young audit which is a requirement for my portfolio's.  They make a relatively simple to understand consumer gizmo although complex on the insides which they leverage through there iOS operating system and through being unique, innovative and often first moving.  Steve Jobs is one of the true visionaries of the information age.  However, there are certain concerns associated with Apple without Steve and those are legimate from Worldview Investings research it seems he has been doing a great job at building the next decades woth of innovators.  However, on the save side we have increased are needed margin of safety to 30% (i.e. risk rating of 3.0).

    Breaking down the last 10 years of financials shows us a picture of EXTRAORDINARY growth across equity, sales, EPS and cash flow all well into the double digits.  For a simple example over the last 10 years Apple's sales have gone from $25 million to over $14 billion!  Sales growth for the last five years has averaged 47%.  When I do a blended growth analysis my growth estimates come out to over 40%.   Industry insiders are more skeptical then me on this one and as always I take the most conservative number in this case their 16.4%.   Apple's PE has been all over the place my analysis places the PE range between 70.56 and 33.48 and I always take the lowest number for estimating future value.  Current earnings per share of $15.41 with a 16.4% growth rate and target valuation of 33.48 give us a 10 year projected stock valuation of $2,023.79 discounted back to the present value with my required rate of return of 16% gives us a current valuation of $532.16 subtract out our needed margin of safety and I say that Apple is a buy priced under $372.51.
     
    I looked at a lot of investments in the technology sector, including companies like Google, NVidia, and Microsoft to name a few that didn’t make my list. It turns out I just need to look in my wife’s pocket for the winning idea. 
     
    If you think the American consumer is rising from the ashes of the economic downturn of 2008, these investments will make masterful additions to any portfolio. At the end of the day though, even if the American consumer tumbles, these companies will survive and thrive in a new world. I continue to add to my position in these stocks when opportunities present themselves. Meanwhile, I keep my eyes on their numbers and listen to their management. 
     
    DISCLAIMER: Worldview Investing bases recommendations and forecasts on techniques, information and sources believed to be reliable in the past and cannot guarantee future accuracy and results. Worldview Investing is not liable for any investment decision you make, or action you take based upon information within this website, in email communications or other forms of information communication. Worldview Investing follows a strict Disclosure Policy and Privacy Policy to insure the HIGHEST levels of integrity.
    DISCLOSURE: Long SAM and AAPL. Read our Disclosure Policy and Trading Policy.


    Disclosure: I am long AAPL, SAM.
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