Evaluating a Company

[EagleTed]

If you fail to plan, you plan to fail.
One of the easiest, and therefore riskiest, ways of evaluating a company is to take it's cash flow and discount by a reasonable percentage to get it's fair market value. For instance, Pepsi generated $3.7 Billion in free cash flow last year, if you discount it at 6% you get a market value of $61 Billion. It's Market Cap is $69 Billion (@$39/share), so it only has to fall slightly below $36 a share to be "reasonably" priced. If you discount at a higher percentage, then it's per share price has to be even lower.

With a strong company like Pepsi this method works reasonably well. It's earnings are fairly consistant, it has a huge "economic moat" (inflation and recession proof), and it is an easy company to understand with few quick sand pits in it's accounting. With other companies the discount method is very risky.

For example, if you had used this method to calculate Intel's (INTC) market value during the bubble, you may have paid an extremely high price (although I haven't ran it's numbers, in fact, it may have never been in "reasonable price" territory).

Ben Graham's method of evaluating companies takes a different route. He was more concerned with assets vs. liabilities to find the net worth of a company vs. it's Market Cap. He would buy virtually any company selling at a huge difference in the two figures. He spent little time thinking about a company's future or it's competition. Investors today using his method would be limited to companies in or near bankruptcy or so out of favor with Wall Street that it could take many years for them to regain trust or a fair market value.

The above was a simplified summation of two methods used by "Value" investors. There are others, including Buffet's which is a combination of both.

Step One: competitive advantage
"So," you says, "Ted, that's pretty simple, so how come all of us ain't millionaires? What you wrote was good if you're doing a 8th Grade school project, but how about us adults who invest real hard earned dollars?"

Glad you asked. Step one to evaluating any company, IMO, is to think about it's long term future prospects. Does it have a competitive advantage which will last, or one that virtually any company can overcome with mimimum investment?

A perfect company would be one that controls 100% of a market which is growing and will continue to grow forever above the rate of inflation without interference from government or other unnatural forces. Sadly, we live in an imperfect world. So we're left with companies which we want to invest in with competitive advantages that make it unprofitable for other companies to edge them out.

Example: Microsoft (MSFT). Here's a company that controls 80 percent or more of it's two biggest markets, PC Operating System, and PC Office Software. What competitive advantage does it have over IBM, SUN, Red Hat, and it's other competitors, and will that advantage last?

Virtually everyone knows how to use Windows and Office. Virtually everyone is a creatures of habit. And virtually every company using Microsoft software would incur a high cost to change software, including training their employees. The cost of change outweighs the benefits, therefore, change is not made. It is Microsoft chief competitive advantage, and as long as they keep churning out adequate, even subpar products that competitive advantage won't change.

The greatest threat to Microsoft is not competitors but government action. As long as they play the political game, there is little threat from that direction.

Does that make Microsoft a good investment?

Not necessarily. And we're only beginning Step One, so stay tuned.

[EagleTed]

Some companies use the government to give themselves a competitive advantage. For instance: Disney wants public transportation to bypass competitor.
Such things as Licenses, Exclusive Contracts, Regulatory Advantages, and other government actions limit competition and give the competitive advantage to certain businesses. These advantages are real, but hard to quantify even as an effort should be made to quantify them when evaluating a company's worth.


Getting back to Step One.
Branding is one method which companies use to gain competitive advantage. On items which are bought daily or weekly, it is a huge competitive advantage. However, you can't assume just because it is a well advertised and strong brand name that it has a strong competitive advantage. Items which aren't purchased regularly, such as automobiles, may have strong branding, but little competitive advantage. Other items which are bought infrequently still can enjoy a very good competitive advantage. An example of that would be WD-40. Most consumers only buy a can when they need some, but the can stays in their garage for months or even years, always with that bright logo on it, so when they need some more they'll pay a few cents more for a brand they know will do the job.

Drugs enjoy a huge competitive advantage, if they are the best or their companies can get enough doctors to prescribe their products. They are protected by patents and the high cost of R&D. That is the reason drug stocks rise and fall with news from the FDA.

Insurance companies can enjoy a huge competitive advantage especially in the home insurance. Consumers are loath to switch insurance companies if they are satisfied that their company will be around in case they are needed.

Generally today there is only one newspaper in most towns and cities. They enjoy a virtual monopoly on advertisement dollars at least in the print medium. As long as those papers print items of local interest such as beauty pagents and obituaries they are secure in their monopoly. It would be extremely hard to start a new newspaper against a well liked or even adequate local paper.

In short, anything that has become a habit or close to a habit has a competitive advantage over any new comers. Anything where the cost of change outweighs the benefits has a huge advantage.

If it takes a genius to run a company, we're not interested in it. Because sooner or later some idiotic fool will be in charge and only a company with a huge economic moat can survive that. Having great management is a plus, but it can't be counted on for the long haul.

[EagleTed]

Step Two: conservatively financed

"Finally", you say, "you've bored me to death on Step One, it's about time we moved on." I'd like to say that Step Two is review Step One, but sadly, it's time to move on.

We want a company with real earning, real profits, and a long history of earnings. Sure, if we're lucky we'll catch a MSFT when it goes public and get rich quick. But the odds of that happening are extremely low. If we're an insider and know the prospects for a brand new company maybe we'll take the risks of riding on the rocket ship. Most of us aren't insiders, don't know much about a new company, therefore, we stay away from the fool's game of betting on the unknown long shots.

Buffett says rule one of investing is not lose money, rule two is repeat rule one. But we all know all common stocks have an inherent risk of capital loss, at least in the short term. So how do we increase our "margin of safety" and minimize the risks?

There's only one way that works for me. You have to read the annual and quarterly reports with a fine tooth comb. You have to research, on your own, all aspects of a companies financial well being.

We want a company that is conservatively financied. That is, little debt with a large free cash flow (earnings minus capital spending). And we want a company with a long history of good earnings.


Okay, let's look at the books of a company who's products I really like (a good way to start your search for investment opportunities is find out who makes the products you use and like). Strum Ruger & Co. (RGR). It has no long term debt, no short term debt, with it's only long term liability being lease agreements and other contracts amounting to a very small percentage of it's assets. It's total liabilities (short term and long term) equal 40 million dollars versis it's asset value of over 200 million dollars.
It passes the test of being a conservatively financed company.

Does it have any "hidden" liabilities or assets which are real but can't be quantified on paper. Surely if the left has it's way, RGR and other gun manufacturers will be put into bankruptcy because of gun lawsuits and regulatory policies. This alone may deter someone from investing in RGR, just because of the real possibility of political whims. If on the other hand, you reject this possibility, RGR passes the "margin of safety" you should demand from your investments.

One method of measuring probabilities (which still requires a SWAG) is to estimate the possibility of bankruptcy due to lawsuits multiplied by the expected price when that happens, then divide by the number of years you think it would take for the event to take place times amount you expect the price to be if the even doesn't take place. If it equals more that .20, it may be a risk worth taking.

Does RGR have any "hidden assets"? Any patents, trademarks, copywrites, or undervalued property which can be added to the asset side of our equation?

It's possible they may have patent protection on some of their weapons which their competitors cannot duplicate, but I doubt it. They do own property in Connecticutt and elsewhere that is on the books at it's purchase price while real estate values have soared. If you know the location and surrounding areas, you could add some value to it's assets. Most of us will have to accept the values that are on the books.

Passing the conservatively financed portion of our evaluation process still doesn't make RGR a good investment.

We'll have to continue...

[EagleTed]

Here's a good source for learning to read and understand annual reports: about.com
It behooves us to learn the accounting "tricks" used to make a company's books look better than they actually are. To start with always look toward the back of your annual report for the Independent Auditors' Report certification. If it doesn't say:



In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of...

Or words to that effect, run don't walk away from the company and never look back. But as we've all learned, just having an auditor sign off on the books isn't enough to protect us. We have to read the footnotes carefully. If Enron investors had taken the time to read the annual reports they would have learned how risky Enron's finances were, even if they wouldn't have known the full effect of Enron's troubles.

Goodwill is listed plainly on all balance sheets. Normally it is the difference between the amount a company pays for another company it buys out and the tangible book value of the company they bought. In our assessment of a company's true market value, we can allow some reasonable amount of goodwill if the future prospects for the businesses bought makes sense. On the other hand, companies with a huge amount of goodwill listed as assets have nothing tangible backing it up. Thus, companies like JDS Uniphase (JDSU), which wrote off $60 Billion of goodwill last year were obviously overvalued on their books by that same amount. A small amount of goodwill, say less than 10% of a company's assets may be acceptable, or we may chose to ignore all goodwill listed and leave it out of the asset side of our equation.

I can't overemphasize this. Goodwill is no good.





Stock Options should concern us in our evaluation of a company.
More and more companies are starting to be more open with the stock option information, some like Coca-cola (KO) have started to report stock options as expenses which will make it easier to see how they effect the companies' earnings. Returning to Sturm Ruger & Co (RGR), we learn from it's annual report that stock options, if fully exercised, would have changed it's earning per share by 1%. We can live with that. So, once again RGR shows us they are fairly well managed. Still, it would be premature to make it a candidate for our investments.

Pension Plans: does the company have an overfunded pension plan, which companies like GE show as profits (another accounting trick), or underfunded, which is a potential liability or drag on future profits?

We learn from RGR's annual report that their pension plan is neither highly overfunded or underfunded. So we have disregard it in our evaluation.

Inventory should be kept in line with sales. As sales increase or decrease we want our company to increase or decrease inventory by a like manner. This is especially true in the high tech sector, as six month old computers and such are outdated, hard to sell, and become virtually worthless.

Inventory continued Another company whose products I like is McCormick & Co (MKC), the spice people. Amazingly, while their sales have gone from $1.4 Billion in '92 to $2.4 Billion in '01, their Inventory has actually went down by $10 Million. Obviously, they're getting more efficient in inventory management. While we can't expect that to continue, it is a sign of good management. Which brings us to...

[EagleTed]

Step Three: Profits, profits, and more profits

We demand profits from the companies we invest in, no if, ands, buts about it. But not trumped up profits using accounting gimmicks, we want the real thing. One measure of real profits is Free Cash Flow, that is earnings from operations minus capital expenditures (CapEx). And we really want that cash flow to be increasing, if not every quarter, certainly over a number of years. This last part may preclude us from investing in some really good companies, such as RGR which has flat earnings and cash flow over the last ten years.

If earnings growth is our goal, we may be satisfied with RGR because of it's great dividend and we're satisfied with it's "margin of safety", but only to add diversity to our portfolio. And as long as we can buy RGR at a bargain price.

But let's get back to McCormick. Can an old company like McCormick with a 78 year history of paying dividends actually be a growth company?

[stay tuned, we'll find out...]


quote:
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"Those who invalidate reason, ought seriously to consider, "whether they argue against reason, with or without reason; if with reason, then they establish the principle, that they are laboring to dethrone;" but if they argue without reason, (which, in order to be consistent with themselves, they must do,) they are out of the reach of rational conviction, nor do they deserve a rational argument."
---Col. Ethan Allen
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By all means establish a profit margin for companies you are interested in, and stick to it. The average profit rate after taxes for S&P 500 companies is a little under 5% of sales, so a minimum profit rate of 5% might be a good number to use. Much more than that and a company will attract more competition, much less than that and a company doesn't have the earnings power to survive rough economic times or even cover basic things such as interest payments on their short term and long term borrowings.

For example, Enron in it's best year had sales of 100 Billion and a profit of $200 Million, that's a profit rate of 0.2%. And while even that small profit rate turned out to be a lie, obviously, that small profit rate would stop someone who demands high profits from their investments from speculating on Enron's stock price.

Of course, Enron wouldn't have gotten this far in our evaluation process. We would have culled it fairly early. With a paper profit of $200 Million and CapEx of $2 Billion it had negative Free Cash Flow, something we as wise investors don't allow.

Follow Ethan Allen's advice, use reason and rational thought before you invest.

[EagleTed]

How about our new friend McCormick (MKC) does it pass the profitibility test? It's net margain has grown from 5.5% in '97 to 6.1% in '01 with '99 being the low point in between at a still acceptable 5.1%.
However, we won't ignore other companies such as Wal-Mart just because their net profits is in the 3% range. A steady 3% is better than a company whose net profit jumps around between 0% and 6%. Remember Step One: We want companies with a competitive advantage, we'll settle for a lower profit rate if we have to.

ROE Return on Equity is another method of measuring profits, and has become pretty much the standard. However, this method has it's own pitfalls. A highly leveraged company will have a higher ROE than if it isn't in debt up to it's eyeballs.

ROE continued As an example, let's examine Sara Lee Corp. (SLE). Sara Lee makes Sara Lee frozen and baked goods, Hillshire Farms and Jimmy Dean sausage, Ball Park hot dogs, Hanes hosiery and clothing, Playtex intimate apparel, L'eggs hosiery, and Kiwi leather-care products. If you want brands, Sara Lee has them. It's ROE last year was 68.5% compared to the S&P 500's average of 17%. Whoa, you say, Sara Lee is doing 4 times better than the average!
Well, hang on to your horses, 'cus in the past ten years Sara Lee's stockholder equity has gone down from $3 Billion to $900 Million. How could this happen? Remember Long Term and Short Term Debt counts against Assets to equal Equity. Sara Lee has been borrowing heavily.

So in some ways, ROA Return on Assets is a better means of judging a company. Using this method Sara Lee shows 7.1% ROA vesus the S&P's 5.1%. Respectable, but not the blow out the ROE shows.

So we conclude this section of our evaluation process by reviewing what we've learned. First, we demand profits from our companies. Second, we are willing to thouroughly examine it's books for hidden accounting gimmicks to make sure the profits are real. And lastly, we have the means to measure those profits.

We measure our investments against the S&P 500. We want above average companies with above average earnings and above average potential for future earnings.

Now the hard part begins...

[EagleTed]

Step Four: do we understand the business?

Perhaps this should be step one. But, somewhere down the line, reading the books, thinking about the company's competitive advantage, etc., we should have answered this question to ourselves.

In order to take some of the guesswork out of our evaluation process, we have to understand what a company does, how it does it, and how it makes money off it's goods and/or services. If we don't understand it's core business, and we can't understand why people would actually pay money for it's goods and/or services, we are either out of our area of expertise, or the company is too complicated to understand. GE may be one of those companies. It's a huge diversified company which produces so many different products and services only someone spending an enormous amount of time watching it could possibly keep up with all the events happening inside and outside of the company and their effect on it's profits.

It's diversity may be it's strength as it is unusual for all of it's different sections to be hurt at the same time. But that diversity also makes it extemely hard to know all the nuts and bolts that composes it. As a part of a large portfolio with numourous investments, GE could make up a portion, perhaps as much as 10%. However, in a focused portfolio of 15 or less companies, GE wouldn't make my list.

Summarize a company in your mind, or better yet, write it down. Explain to yourself in a paragraph or two what a company does, how it makes money, and what it's competitive advantage is.

As an example, take our friend MKC. It sells spices to resturants, grocery and retail stores. It's competitive advantage is it's long history, it's well known and liked brand, and it's large market share giving it economy of scale.

See, that wasn't too bad.

Being a complicated company doesn't preclude any company from consideration, but it means we investors have to either know the subject matter (such as high tech), or spend the time to learn everything we need to know about the business it's in. We don't have to know how a computer works exactly to invest in a high tech company, but we do have to know if that high tech company has a huge competitive edge through R&D, patents, etc.

We don't have to know how a Pentium chip works to see if Intel (INTC) is a good investment or not. We just have to judge whether or not it will retain it's competitive edge or not (another case of economy of scale).

An economist once said, "It's better to be roughly right than perfectly wrong." That applies to our understanding of a company but applies more to the next step...

[EagleTed]

Step Five: the hard, cold math

Memorize the following, and I'll get back to you in a few daze, LOL.
pv = fv / ( (1 + i) n)
n = log ( fv / pv ) / log (1 + i)
fv = pv * (1 + i) n
i = ( fv / pv ) ( 1 / n ) - 1

where
pv = present value
fv = future value
n = number of periods
i = interest rate

------------------------------

Nomenclature
Vn = value at time n
Vo = value at time zero
n = number of years
i = interest rate as a decimal
a = payment made at the end of a regular interval, e.g. an annuity
t = number of interest periods between payments when interest
period and payment period differ
nt = total number of interest periods

Single payment – discounting.

Payment made at point n and discounted back to point 0

Final (future) value of
a single payment (compounding)

V20 = $60 x (1.09)20
V20 = $60 x 5.60
V20 = $336.26
Stock is worth $60 now. If it increases in value by 9% annually,
what’s its estimated value in 20 years?
Vn = V0 x (1+i)n

Present value of a single
payment in the future (discounting)


If a stock is expected to be worth $120 in 10 years, and you want
to earn 5% interest, what’s it worth to you now?
V0 = $120 x (1/(1.05)10)
V0 = $120 x 0.6139
V0 = $73.67

V0 = Vn x (1/(1+i)n)


Rate earned

A stock is worth $320 today and is expected
to be worth $600 in 10 years. If I want to earn 6% on my
investment should I sell it now or in 10 years?

i = (600/320)1/10-1
i = 1.88 0.1 –1
i = 1.065 –1
i = 0.065 or 6.5%

6.5% > 6% so sell in 10 years, not today

(1+i)n = Vn/V0
i = (Vn/V0)1/n -1

Source: www.fnr.purdue.edu/fi/hoover/ (http://www.fnr.purdue.edu/fi/hoover/) courses/407/CIFormulas.ppt

[EagleTed]

Not to fret there are dozens of sites on the web which will do the math for you:
http://www.moneychimp.com/articles/finworks/fmvaluation.htm
http://www.quicken.com/investments/seceval/?p=HSY&cmetric=intrinsic
http://www.focusinvestor.com/DiscountedCashFlow.xls (Excel File)
It's important, however, that you don't use the numbers that quicken.com, for one, assumes. Find out the cash flow for yourself, and make a reasonable (conservative) estimate of future growth.

How do you make a conservative estimate of future growth? Well, that's where the art comes into this whole thing. You could take the cashflow growth for years 8, 9, and 10 years ago average them, and compare that to the average growth rate of 1, 2, and 3 years ago. Extrapolate whether the growth rate is increasing or decreasing and project that new growth for the next ten years. Or, you could take the average of the whole ten years and project it, or decrease or increase it slightly based on your now educated view of the company and whether or not the managers are looking after their shareholders or themselves. A couple of percentage of growth projected out ten years makes a whale of difference in what the company's worth today (the Present Value). Be conservative.

So, what discount rate do we use? Depends on how greedy you are, how much trust you have in your numbers, and what the prevailing rate of interest is. If T-bonds are selling at 5% interest, you know that is the risk free number you start at. Add as much to that as you feel necessary for a good margin of safety. 10% to 15% is not unreasonable.

Okay, I got a number (present value), what do I do with it? That's the real market value for the stock. Buy below that number, and if you figured right, long-term you will be rewarded. Some "Value" investors will not invest in anything which isn't at least 25% below real market value. Ultimately, earnings always control the price of a stock. As Ben Graham said some 60 years ago, "Short term the market is a voting machine, long term it is a weighing machine." If you weighed your investment correctly, long term the market will catch up with you.

(we're not through, just taking a typing break...)

[EagleTed]

Okay, let's review what we've learned by examiming a company that has been in the news: Hershey's (HSY). Hershey Food Corp. has some of the best known and best liked chocolate products in the market. People will be buying Kisses, Almond Joy, and Kit Kats for the forseeable future. Their competitive advantage is their loyal customer base, they sell the sort of products which no convinence store or grocery store can afford to not have on the shelves. Their size and market share give them economies of scale. Any company wishing to make their own Kisses would find a small market share at enormous cost of advertising and promotions. Hershey's could simply lower there prices, take a temporary cut in profits, and ruin the competitor's hope of edging in on the profits. Hershey's passes Step One: competitive advantage.

Step Two: conservatively financed. HSY has a debt/equity of .77 or their debt is 77% of total equity. While that is not great, their cash flow easily handles the interest. So, while HSY doesn't pass the conservatively financed section with two thumbs up, we'll give it a "C" and move on. Note, however, that I have no given HSY a rectal exam, there may be many pitfalls in it's annual report which frankly I haven't examined. Moving on...

How's HSY do with Step Three: profits, profits, and more profits? Actually, not as well as one would hope. It's cash flow, after rising steadily for many years has tanked in the last couple of years. Without a full examination of why this is happening we can only guess that management has screwed up somehow. It may be due to their long labor problems which they recently announced a contract, not coincidentally right before the Hershey Trust announced they were looking for a buyer. At any rate, their profit margin has gone down from 7.8% to 5.1% in five years. Should we guess that this is just temporary?

Step Four: do we understand the business? Yep, no problem there. Branding and selling sugar/chocolate with all those sweet tooths out there is easy to understand.

Step Five: the hard, cold math Quicken.com assumes 9.47% growth, a 15% discount, which gives HSY an intrinsic value of $24.22 per share well below the stock price of $63.73. Even with a discount rate of 10% HSY's intrinsic value is only $37.58. The stock is selling for twice what a value investor would pay for it. Of course, if we "play with the numbers" and assume HSY will soon obtain it's "normal" cash flow of $400 Million, then it's intrinsic value is $71.44. That's a dangerous game.

Or, is that really true? In the next section we'll examine another method of valuating a company, based on what others have paid for comparable companies.

[EagleTed]

Another Method: comparable sales Recently Hershey's (HSY) announced that it had turned down an offer from Wrigley's (WWY) to buy out it's shares for $89 per share, we don't know if that was an all cash deal or stock and cash, but it was valued at the mentioned $89 per share. Which is well above our most optimistic valuation of it's stock. How can that be and is HSY worth $89?
Well, WWY is a well managed, conservatively financed company, it's doubtful that they can't run the numbers as good or better than we can. Perhaps they found where HSY's present management and/or it's trust is sucking cash out of HSY which we didn't find or couldn't find.

At any rate, they obviously thought they could make a good return off their investment or they wouldn't have offered as much as they did (Nestle's offered about 10% less for HSY).

So, is HSY stock truly worth $89, and we're fools for not buying it at $63? Maybe not. We're stuck with their management, regardless of what it's true value is worth. If we are as big as Buffett, we could buy up enough shares maybe to influence the Board. But, with the Hershey Trust maintaining 75% control, even Buffett couldn't change management. Certainly our few shares aren't going to change anything.

In this comparable sale we gain little insight into HSY intrinsic value, raising more questions than we have answers.

Other comparable sales could work to our advantage. If X Company buys out Y Company which is very simular to Z Company which we're interested in, we could gain valuable information as to it's worth.

This works more to our advantage in a bear market than in a bull market when prices are generally inflated anyway. Companies often buy out other companies in bull markets only to be forced to sell them in bear markets when credit tightens up due to reduced cash flow. A case in point is TYCO which bought out CIT in the late nineties for $10 Billion only to sell it a couple of months ago for $6.4 Billion.

That $6.4 Billion today is probably a lot closer to CIT's true value than the $10 Billion was.

[EagleTed]

Yet Another Method: Scuttlebutt

"Did you say 'scuttlebutt', Ted?" Well, don't blame me, Philip Fisher invented the method and named it that.

Philip Fisher is a legendary investor who wrote Common Stocks and Uncommon Profits. In it he spends most of his time writing about the importance of growth in earnings, he is therefore rightly called a "growth" investor.

However, in his search for good companies and research of their future prospects, he found that he could learn a great deal about that company by talking to competitors, customers, suppliers, and employees. He called this "scuttlebutt".

He credits that method for finding Motorola when it was still just another struggling tv manufacturer. Some 50 years later and multi-thousands percentage of profits he's still a shareholder.

A couple of years back I used this method to research Discount Auto Parts. I visited several of their stores, got a feel for their customer satisfaction, and what really convinced me was an employee who told me that he had worked at several parts places and that DAP was the best of them all. It reinforced what they said in their annual report that they had the lowest employee turnover in the parts business. I bought at $5.48 per share and sold a little more than a year later when Advanced Auto Parts bought them out at $14 per share plus stock.

I recommend it in combination with your basic research for any company you aren't familiar with.

[EagleTed]

<A HREF=http://news.morningstar.com/doc/article/0,,88362,00.html?hsection=Comm1>Morningstar lists ten companies it thinks has huge economic moats:</A>

Companies possessing one or more of these traits typically generate high returns on capital and are awarded high price/earnings ratios by the market. <UL>

<LI>Being the lowest-cost producer in the industry
<LI>Having high customer switching costs
<LI>Owning valuable intangible assets such as patents or trademarks
<LI>Benefiting from the network effect[/list]

1. Wal-Mart WMT
2. Berkshire Hathaway BRK.B
3. Coca-Cola KO
4. Anheuser-Busch BUD
5. Wrigley WWY
6. Moody's MCO
7. Paychex PAYX
8. Sysco SYY
9. eBay EBAY
10. Automatic Data Processing ADP


That's their list, perhaps you can think of others..

[EagleTed]

A New 'Nifty Fifty'

CNBC's Jubak has a list of 50 stocks that he says are the best in the world. It reminds me of the Nifty Fifty or the early 70s which everybody had to own, and that would never go down. Or at least that was the theory. The Bear Market of '74-'76 disproved that theory, but the truth is, if you'd had bought them at their '73 peak and held them until '99 you would have enjoyed a annual return of 12.7%, just short of the S&amp;P 500's return of 12.9%. So, anyway, here's his list:

Alcoa AA
American Express Company AXP
American International Group, Inc. AIG
AOL Time Warner Inc. AOL
Applied Materials, Inc. AMAT
Avon Products, Inc. AVP
AXA AXA
Boeing Company BA
BP p.l.c. BP
Caterpillar Inc. CAT
ChevronTexaco Corporation CVX
Cisco Systems, Inc. CSCO
Citigroup Inc. C
Coca-Cola Company KO
Corning Incorporated GLW
Dell Computer Corporation DELL
Duke Energy Corporation DUK
Exxon Mobil Corporation XOM
Fannie Mae FNM
FedEx Corporation FDX
General Electric Company GE
Gillette Company G
Home Depot, Inc. HD
Intel Corporation INTC
International Business Machines Corporation IBM
Johnson &amp; Johnson JNJ
Kellogg Company K
Lear Corporation LEA
Mattel, Inc. MAT
McDonald's Corporation MCD
Merrill Lynch &amp; Co., Inc. MER
Microsoft Corporation Buy MSFT
Nokia Corporation NOK
News Corporation Limited NWS
Nortel Networks Corporation NT
Nucor Corporation Buy NUE
PepsiCo, Inc. Buy PEP
Pfizer Inc Buy PFE
Procter &amp; Gamble Company PG
Royal Ahold N.V. AHO
Schlumberger Limited SLB
Sealed Air Corporation SEE
Southwest Airlines Co. LUV
SYSCO Corporation SYY
Texas Instruments Incorporated TXN
Toyota Motor Corporation TM
Unilever N.V. UN
Wal-Mart Stores, Inc. WMT
Walt Disney Company DIS
Walgreen Co. WAG

<A HREF=http://moneycentral.msn.com/articles/invest/jubak/fifty.asp>Jubak's 50</A>

One cautionary note, while I agree with most of these as some of the best companies on the world, I wouldn't comment on their stocks, at least as a whole. And, this guy once had WorldCom and Enron on his list, and we all know how well they worked out.

[The_Sonarman]

I can agree with him on at least one of his picks. Some couple weeks ago, I had identified Nortel (NT) as a good stock through my own homework, good prospects going into 2005. Bought the Jan 2006 2.5 LEAP Calls.

Then again, I like CME (bought Leaps on them too), and they're up big time since I bought. Already plus cash on that one.

Disclaimer: don't try this at home, folks, etcetera, etcetera, ad. nauseum.

[The_Sonarman]

I just added Intel (INTC).

[EagleTed]

Finding the best investments often means finding great businesses at reasonable prices (a version of GARP I suppose). Interesting article on The Motley Fool:

<A HREF=http://www.fool.co.uk/stockideas/2004/si041124.htm?logvisit=y&source=estmarhln001999&npu=y>Whitney Tilson</A>

<B>The Perfect Business has:</B>
<UL>
<LI>High profitability
<LI>High returns on capital
<LI>An enormous moat
<LI>Profitable reinvestment opportunities
<LI>Future growth
<LI>Good cash flow dynamics
</UL>


Finding the perfect business isn't enough (even if there is such a thing), you've got to invest when Wall Street isn't in the mood. JMO

[EagleTed]

Update on HSY:

It seems I missed the boat with HSY and WWY's offer was very
well thought out. The stock has split and if you'd have bought
at WWY's offer of $89 your stock would be worth over $110 today.

It proves two things: Companies with competitive advantages such
as HSY have a leg up on other companies and their stocks over time
respond to their juicy profits. And secondly, I'm no stock guru (of course,
you already knew that ;)

WWY has since bought KFT's LifeSaver division which include Altoids.
They should do well with it.

[EagleTed]

Update McCormick (MKC):

In December, 2002 it's stock was selling for about $23, today it's selling for $38. It's steady growth in earnings has been rewarded by Wall Street. It's also paid dividends over the last two years, today's dividend yield is 1.73%.

Going forward, imo, it's a long-term "hold" at today's price. I'm not adding shares.