One of the interesting things about the investing world is the general disconnect that tends to happen in comparison to your everyday experiences. When you go to the grocery you're looking for items on sale. When you go to pump gas, you're not rooting for the price to increase by 10% before your finish pumping. When you buy a house or a rental property you negotiate for a lower price.
All of these things make perfect sense: in each situation you're a buyer. And as a buyer, it's lower prices, not higher ones that benefit you. This allows your "buying buck" to go further.
Yet when a lot of people get to the investing world, something changes. This view gets distorted. A great deal of people are still buyers in this circumstance. Either through biweekly paycheck deductions going into a retirement account or adding "outside" capital or by reinvesting dividends or on your behalf when a company you own buys back stock. There are numerous ways to be a "net buyer." Yet often they "root" for the exact opposite - higher prices instead of lower ones - of what they would do when they go about their everyday lives.
Personally, it's lower prices rather than higher prices that get me interested. As Warren Buffett would have it: "the dumbest reason in the world to buy a stock is because it's going up." Especially with dividend-paying companies, lower prices equate to a higher starting yield and a potentially lower valuation. With that in mind, I thought it might be interesting to go searching for some quality firms with much lower share prices in the last year.
Naturally the energy space (think say BP (NYSE:BP), Conoco (NYSE:COP) or Royal Dutch Shell (NYSE:RDS.B)) is full of these types of examples. Then again, the perceived dividend safety and ongoing profitability are more in question for these securities. So let's look outside of that arena. Here are eight firms outside of energy companies with share prices that are 15%+ lower in the last 12 months.
Kohl's (NYSE:KSS) - 42% lower
Union Pacific (NYSE:UNP) - 25% lower
Franklin Resources (NYSE:BEN) - 23% lower
Archer Daniels Midland (NYSE:ADM) - 23% lower
CSX (NASDAQ:CSX) - 22% lower
American Express (NYSE:AXP) - 20% lower
Norfolk Southern (NYSE:NSC) - 19% lower
Eaton Vance (NYSE:EV) - 16% lower
The measuring period was from mid-April of 2015 through mid-April of 2016. Immediately you might notice a common theme among the companies mentioned above: all have had short-term "issues." Yet that's not necessarily the important part in my view. A better question relates to whether or not the lower price is justified with respect to the long-term.
Take something like Kohl's, which has certainly been tested as of late. Shares have gone from the high-$70's to the low-$40's - representing the 40%+ lower price you saw highlighted above. And indeed, the earnings of the company fell last year - from around $4.30 to closer to $3.50 (although on an adjusted basis it's closer to $4). The share price is 40%+ lower and the earnings of the company are down 6% to 20% depending upon how you look at it.
When you see something like that, you can attribute it to a couple of things. Naturally the lower earnings play a large part. Buy you also have to think about valuation. When shares were in the $70's this represented an earnings multiple of around 17 or 18, as compared to a historical average over the last decade closer to 13 or 14.
So part of the large share price decline would be within the realm of expectations. It doesn't have to occur on a set schedule, but it's not surprising to see a security trade at a valuation more in-line with its historical average. Still, the current share price is even lower than this, leading to the question: "If instead of 40%+ worse off, is Kohl's now say 25% worse than it had been?"
In the short-term it's easy to make that argument. In the longer-term, should the business keep plodding along, that's much less certain. Indeed, it's often temporary hiccups that lead to long-term opportunities.
Moreover, even if the business is truly that much worse off (over the long-term) the lower share price still presents a lower investment bar. With a share price near $75, the dividend yield would have been about 2.4%. With a price closer to $43, and an increased per share dividend payment, the "current" yield is around 4.7%. The yield is nearly twice as high as it was, and in turn the future growth and lower valuation means that moving forward slower growth could still provide reasonable results.
Among the other securities, the same type of theme persists. With railroads you have share prices that are down 19% to 25% in the last year. And to be sure, there are concerns related to shipping volumes and general industry dynamics. The short-term profits could indeed to subdued (although it's important to keep in mind that stagnant or even declining profits isn't exactly an irregular circumstance from time to time). For a long-term partner that likely isn't the most crucial focus. Instead, the long-term owner is apt to think about whether or not the business will still be churning out profits in the decades to come, the aggregate payouts received over a business cycle and that sort of thing.
The same idea holds with the asset managers mentioned above. Negativity in the way of declining assets under management and cheaper alternatives are certainly a concern. And if it is your view that this will continue for the long-term, then you likely would not be interested in partnering with these types of companies. Yet it's important to keep the long-term in mind, it's not enough to see short-term troubles and automatically panic.
Take Franklin Resources whose earnings were basically cut in half during the most recent recession. The share price followed suit going from the mid-$40's to the mid-teens. A lot of people saw this as a tragedy, others an opportunity. Years later it turned out to be an opportunity. Now of course this doesn't have to hold the next time around, but opportunities are often born out of lower rather than higher prices.
In short, the above eight companies have a couple of things in common. Each company has a demonstrated track record of generating substantial profits and each security is trading hands materially lower today as compared to where it was a year ago. To be sure this action has occurred as a result of concerns. There are always reasons to be concerned. Yet the more important part is figuring out if the issues happen to be temporary blips in otherwise solid companies. If this is the case, lower prices could easily spell opportunity.
Disclosure: I am/we are long COP, BP, RDS.B.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.