A 'Value-Able' Education: A Look Back And Updated Approach

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Includes: BLK, CVS, DG, GIS, LEG, MET, PKG, THO, ULTA, WGO, WM
by: The Value Seeker
Summary

I take a look back on my stock picks over the past year to evaluate the returns.

The stock market downturn in late 2018 presented plenty of buying opportunities.

I will introduce new valuation methods that I use for evaluating stock candidates.

What a crazy market we have seen lately. As covered in great detail here on SA, October to December saw a tremendous dip in most securities, culminating on December 24th, followed by an 8-week rise in the S&P 500. Many investors lost faith in the markets during the downturn but for those who have a long-term mindset, it created tremendous value opportunities. I purchased a good amount of stocks at a discount during this time which I will briefly discuss below.

It has been a while since I published an article on Seeking Alpha due to life situations, but that hasn't stopped my research and some buys. I recently switched jobs which now requires a lot of my attention, so I have been working on streamlining my approach to researching value stocks. I have also been reevaluating my approach to identifying discounted prices.

With the market on such a rise over the past 8 weeks and the market overall near all-time highs, some might wonder if there are any values left out there. I believe there is if you look hard enough and are patient.

Before I go into my new stock purchases and new methodologies, I wanted to provide a recap and summary of my past recommendations to see how one would have fared if they purchased the stocks discussed in my prior articles.

Look Back On Last Year

Last year, I published research articles on 7 different stocks and presented the intrinsic and discounted prices based on the discounted cash flow model of valuation. I thought it would be a good exercise to see how these recommendations have fared since then. While a short time frame of less than one year is not an ideal length of time to judge a value investment, it shows what can be accomplished by looking for values in a market that is relatively pricey. My timeframe for my investments is 10 or more years. Even so, there have been some very impressive results even in this short time.

For this look back, I took the closing price of each stock on the day following the article being published and then the price as of the close of business on February 15th. I include the percentage change since the purchase date.

Stock

Symbol

Company

Name

Date Article was Published Next Trading Day Price Close Date Price % change
(CVS) CVS 5/18/18 5/21/18 $65.50 2/15/19 $69.53 6.15%
(THO) Thor Industries 5/23/18 5/24/18 $95.08 2/15/19 $68.51 -27.94%
(WGO)

Winnebago

5/23/18 5/24/18 $36.80 2/15/19 $31.82 -13.53%
(DG) Dollar General 5/31/18 6/1/18 $89.26 2/15/19 $119.00 33.32%
(MET) MetLife 6/12/18 6/13/18 $47.00 2/15/19 $44.86 -4.55%
(ULTA) Ulta Beauty 6/18/18 6/19/18 $246.26 2/15/19 $306.36 24.41%
(WM) Waste Management 7/9/18 7/10/18 $83.41 2/15/19 $99.06 18.76%

Prices quoted from Yahoo Finance.

As you can see from the chart, there were 4 stocks that increased in value and 3 that have decreased in the time since the articles were published. Again, while a timeframe of less than a year is not an adequate gauge of the future potential and value, overall, the portfolio (if all were purchased in equal amounts) would have gained 5.23%.

CVS: This was my first recommended stock, and at the time, I mentioned that while it was at a slight discount to fair value, I would hold off until a margin of safety was established. Even so, the price did fluctuate in the $60s and went as high as $80.80 in November of last year before returning down to the high $60s now. Total gain was 6.15%.

THO & WGO: Thor and Winnebago were my two most disappointing choices so far. The concerns about the economy and the RV market inventories sent these stocks even lower than at the time of the article. While the financial situation of these companies may have changed, the stocks are still (and maybe even more so) trading at a discount. Total loss of 27.94% and 13.53% respectively.

DG: Dollar General has been the best performer, up over 33%. A steady business model and low price point for their products have caught the attention of the market. Dollar General and similar "dollar stores' tend to do well in recessions and are a quick stop when you need just a few items.

MET: MetLife has seen a lot of ups and downs in price over the past few months, which I have taken advantage of and bought more on the dips. Total loss was 4.55%, but they just came off of a great quarter and their cost-cutting activities, as well as future interest rate increases, should push the price upward.

ULTA: Ulta Beauty is my biggest regret not purchasing. I got caught thinking about the demise of retail and that the stock might continue down. I shouldn't have second-guessed myself because ULTA has continued to perform admirably and is up 24.41%. While there are some concerns about ULTA's growth rate slowing, they are still a very well-run company with a loyal customer base that should continue to do well even in the difficult retail environment.

WM: Waste Management continues to chug along, with a nice steady increase in price throughout the months. I am starting to view this company similar to a utility, slow and steady, and wide-moat company. Total gain is 18.76%.

Additional Stocks Purchased

The downturn in the stock market in Q4 last year led to some temporary discounts in prices that I was able to take advantage and add to my portfolio. Some of the purchases I bought include: General Mills (GIS) on 1/2/19 and have a 16.66% gain so far, Blackrock (BLK) on 12/13/18, up almost 11%, Leggett & Platt (LEG) on 1/9/19, up 18.60%, and Packaging Corp. (PKG) up nearly 13%.

These returns, of course, are nice, but I am not looking to sell any time soon. It does reinforce the value investing mindset of seeking out discounted pricing and taking advantage of the market fluctuations to buy a solid company at a discount.

New Methods of Valuation

My journey in value investing has been full of research, reading articles from other great authors here on Seeking Alpha, as well as reading books from some of the great value investors out there. During this time, I have refined my valuation methods to have multiple frames of reference. These multiple approaches allow me to be more confident in my research and my choices when deciding to buy a stock.

My original method, which I still use, is the discounted cash flow (DCF) model. It takes the future expected earnings at a certain growth rate and discounts them back to today's pricing. Additionally, I add a margin of safety calculation to ensure that I am purchasing at a significant discount to fair value. My goal is to purchase a stock at least 25% under fair value. This allows me some wiggle room in case of unexpected news or challenges to the business.

My second model I use is a mean reversion calculation. Taking the historical P/E ratio average over the past 12 years and comparing the result to the current P/E ratio gives a percentage under/overvaluation compared to the historical ratios for the company. I am a big believer of reversion to the mean and that a company will continue to be priced at a particular multiple over time. When that multiple is temporarily lower, it may be a good time to buy.

My third model I use is to use the historical dividend yield (if the company pays a dividend) to determine the valuation compared to historical norms. The purchases I made in late December and early January were all dividend-paying companies, so this model gave me additional insight and comfort that the stocks were at a discount. Like the DCF model, I look for at least a 25% discount here as well.

Conclusion

As the market continues through 2019, no one can guess what is in store, but by focusing on valuation and looking for companies that are temporarily discounted to fair value, I am confident that there will be opportunities to find great investments.

My takeaway from this look-back process is to trust my instincts, continue refining my methods, and continue looking for those opportunities that present themselves and be ready to hit the buy button when they do!

Going forward, I will be including all three methods in my analysis and will be sharing my thoughts on purchase candidates with the community.

Cheers!

Disclosure: I am/we are long BLK, CVS, GIS, MET, THO, LEG, PKG. 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.