To follow the markets in the media today is to think that buy and hold investing is dead. Talking heads on CNBC are bullish two weeks ago about a particular company, but bearish today. The Wall Street Journal touts positive or negative "price action." An IPO is considered a failure because the stock price is lower a few weeks later, and apparently that is supposed to be a reason to sell. To hear them say it, owning a company for years seems like such an antiquated notion.
Call me old-fashioned then, because I don't believe owning a company for years is a bad thing. However, that company has to have certain characteristics for it to be a candidate for a long term holding. It has to have what Warren Buffett calls a moat, or competitive advantages that are hard for its competition to duplicate. The best way to think of this is to take a hypothetical billion dollars. With that amount of money, would you be able to create a realistic competitor to a company like Whole Foods (WFM), for example?
Management is also important. Their interests should be aligned with shareholders and they should be talented and trustworthy. Management needs to be focused on the long term. Ideally, the company is growing in a sustainable fashion. Alternatively, as is the case in my first pick below, the company is smartly streamlining and making itself easier to manage. Finally, valuation is very important. A cheap stock price provides a margin of safety, helps to cover up mistakes in analysis or changes to the company or economy, and allows for attractive and sometimes exponential returns.
Most of the five companies below are controversial. Because of that, their stocks are cheap. Buying them while they are out of favor is what will allow investors to capture attractive gains over the next few years. With buy and hold, being a contrarian pays, as does having an iron will and ignoring the day to day stock prices.
Bank of America (NYSE:BAC): Bank of America has been a whipping boy for years. Unduly blamed for the housing crisis, but rightfully pilloried for former CEO Ken Lewis's acquisitions, the reality of this bank no longer fits the narrative. CEO Brian Moynihan has done a tremendous job righting the ship. He has been aggressive selling off non-core assets, has cut costs to better right-size the company, and has made it a focus to hit Basel III requirements long before they are necessary. Despite this, Bank of America is cheap. It trades at just 0.4 times book and 0.67 times tangible book. Yes, there will continue to be reserve, loan put-back, and litigation risks until the housing crisis subsides. Regulatory rules will crimp their profits, but the worst case scenario and then some is already baked into the stock price.
Biglari Holdings (NYSE:BH-OLD): This is another controversial company. Investors ran for the hills after CEO Sardar Biglari introduced a pay package that some saw as too rich. Biglari's personality and focused investing style has also turned some people off. He's currently in a protracted battle with Cracker Barrel (NASDAQ:CBRL), with much of the company's cash tied up in the investment. The Steak 'n Shake restaurants are performing superbly and are in the beginning stages of what could be dramatic growth through a revised franchising system. Biglari has been patient with the roll-out, ensuring that it's done in a sustainable way. Shares are significantly undervalued even before taking into account the potential from new franchises as well as investment gains.
Berkshire Hathaway (NYSE:BRK.B): Berkshire is historically cheap. Shares have hovered slightly above the 1.1 times book price that Warren Buffett has said he'd be willing to buy back shares. You shouldn't consider that a floor for the stock price, necessarily, but you should seriously ask yourself why the greatest investor of all time feels that his company is as cheap as ever. Concerns about Buffett's age, a soft insurance market, and large exposure to the residential real estate markets have helped to punish Berkshire shares for some time. Now is a unique opportunity to buy a diversified behemoth for a fraction of its true worth.
J.C. Penney (NYSE:JCP): No company exemplifies more the euphoria of the markets one day, and the undue pessimism the next. After new CEO Ron Johnson's presentation in January that laid out the future of J.C. Penney, shares were double what they currently trade at. Most recently they've been hurt by the departure of Johnson's handpicked marketing chief, Michael Francis. But the turnaround plan will be a three year process, and shoppers won't see major changes in the stores until this fall. Behind the scenes, major progress has been made. The company's cost cutting this year alone will be equal to at least 120% of the company's 2011 operating income. Once the new brands are in stores and analysts and customers see the progress, shares won't be nearly as cheap as now.
Valeant Pharmaceutical (VRX): This generic drug maker has quietly become one of the largest companies in Canada. CEO Michael Pearson has been on an acquisition spree since taking over the company in 2008 (including buying a huge amount of shares for himself). The company focuses their buys on niche products, often private companies, in geographical locations where they feel they have a competitive advantage. Unlike competitors, Valeant doesn't overpay and nearly all acquisitions are immediately accretive to earnings. EPS will be upwards of $5 this year, and more next. This stock is a deal trading under $50 and it promises more growth in the future.