Value Investing: Dr. Mark Skousen and 3 Oxford Club Analysts Reveal Where the Real “Value” Opportunities Are Today
Wednesday, August 30, 2006: Issue #578
Editor’s Note: Small-cap stocks have had a stellar three-and-a-half-year run. The Russell 2000 is up more than 80% since January 1, 2003. The Dow Jones Industrials, by comparison, are up 33% in the same period. And the performance disparity has many analysts claiming the big-caps are due for some handsome returns.
But so far, that scenario isn’t playing out. In fact, since the market corrected itself in May and June, we have yet to see any one equity class run away from the pack – in the U.S. or overseas. Since August 1, the S&P 500, the S&P Mid-Cap 400, the Russell 2000, the MSCI EAFE Index and the MSCI Emerging Markets Index have all traded within 2% of each other.
Clearly, investors are waiting to see a definitive winner.
Where are the value investing opportunities in the market right now? Today, we put that question to Mark Skousen and three of The Oxford Club’s top analysts. And they’ve found several important opportunities…
Report # 1: Value Investing… a Mosquito In a Nudist Colony
by Mark Skousen, Chairman, Investment U
“Value investing” is the only tried and true formula to beat the market with any consistency.
The idea is to buy solid companies at a discount from their intrinsic value. It is the method Warren Buffett, John Templeton, Eddie Lambert, Bill Miller and a host of other investors and money managers have used over the years to make big money in the market.
There are plenty of value investments out there, and it’s hard to choose these days. But it takes patience, sometimes years waiting for the public to recognize a bargain and start investing after you do.
Hundreds of mutual fund and money managers try to imitate the “value-bargain” method of investing. There are dozens of books out now that try to show you how to do it…
In Phil Town’s Rule #1: The Simple Strategy for Successful Investing in Only 15 Minutes a Week!, it takes Phil 300 pages to show you how to do it. In 15 minutes a week, you’re supposed to figure out how to discover a half-dozen companies among thousands which offer double-digit growth over the next 10 years in Return on Investment Capital (ROIC), sales growth rates, earnings per share (EPS) growth rate, book value growth rate, and free cash flow (FCF).
So much for a “simple formula.” It just can’t be done. No wonder Phil Town offers expensive seminars to show you how.
Or take another popular Buffett-type book: Pat Dorsey’s The Five Rules for Successful Stock Investing: Morningstar’s Guide to Building Wealth and Winning in the Market. He, too, wants you to hold stocks for 30 years or more. To find these needles in a haystack, he offers a five-point checklist:
- Know the company inside and out.
- Find companies that generate consistent above-average profits.
- Buy them at a substantial discount.
- Buy and hold for a long period of time.
- Sell only when #2 and #3 no longer apply.
Such techniques may indeed minimize your losses, but there’s no guarantee you will become a Buffett-like billionaire, either. Listen to this warning from Robert G. Hagstrom, author of the bestseller, The Essential Buffett:
“Despite all this available information, investors find it increasingly difficult to profit. Stock prices skyrocket with little reason, then plummet just as quickly, and people become frightened. There appears to be no rhyme or reason to the market, only folly.”
Where do I see value right now? Microsoft (Nasdaq: MSFT).
Here is a company that has consistently enjoyed profit margins of 28% or better and revenue growth exceeding 16% a year for the past five years, yet the stock has fallen by half since 2000.
With no debt and $31 billion in cash, what’s holding it back? Largely, public apathy and Bill Gates selling his shares to fund his non-profit organization.
But it appears investors are catching on, and the stock is starting to move back up. It’s currently selling for only 15 times next year’s earnings. Talk about cheap.
Happy value investing, AEIOU,
Mark
Report #2: Go Where There’s Room to Grow – Small-Caps With Takeover Appeal
by Louis Basenese, Advisory Panelist, The Oxford Club
Same old story, different year…
If you have been listening to the talking heads recently, they’re awash with theories about why now is finally the time to rotate back into large-cap stocks.
Most cite the fact that for the past several years, small-caps (as measured by the Russell 2000) have significantly outperformed the Dow and S&P 500. Therefore, as any good mathematician would discern, it’s about time for a reversion to the mean.
I wouldn’t be so quick to agree. In fact, market maven Bill Miller of the famed Legg Mason Value Trust is having a hard time finding value in large caps. And he holds the record for outperforming the S&P 500 for 15 straight years.
At last check, his fund was lagging the S&P by 13%, putting his much-chronicled streak in jeopardy. In the end, if someone who is arguably one of the best managers of our time is finding it hard to turn this large-cap theory into profitability, chances are we won’t fair much better.
Instead, I think you will continue to see value in smaller-cap companies, especially those that make good acquisition candidates. Why? They always have more room to grow. Doubling $100 million in revenues is a lot more realistic than trying to double, say, $40 billion.
Additionally, by focusing on potential takeover targets, you almost guarantee you are buying undervalued assets. After all, that’s what typically makes them such attractive targets. How do you find these companies?
The Right Industry, Plus a Discount
Identifying such companies is not an easy task. But I’m convinced you can be successful if you do two things:
- Focus on rapidly consolidating industries (like banking, software and energy, to name a few), as deals tend to have a domino effect on other industry players.
- Try to find the one or two stocks trading at a discount to the industry despite boasting strong earnings growth, increasing market share and promising new products. Such companies tend to be at the top of a potential suitor’s hit list.
If the companies also exhibit heavy insider buying and/or an active stock repurchase program, you can’t get much stronger of a buy signal.
And, of course, the potential rewards here are second to none.
Just this month, for example, shares of TriPath Imaging, Inc. soared 81% in a single day, thanks to a takeover offer. According to data from Thomson Financial, 2006 is on track for a record year for mergers. And based on my analysis, the underlying fundamentals will support a similarly brisk pace for at least another 12 to 18 months. My guess is it might be that long before large caps ever hit the much-anticipated turning point.
So instead of playing the waiting game, my recommendation would be to seek opportunities likely to pay dividends in the short-term.
Good investing,
Lou
Report # 3: The Four Value Markets To Buy Now Using One ETF
Horacio Márquez, Advisory Panelist, The Oxford Club
We are in a period of secular synchronic global growth like the world has never experienced.
The entire world economy is expanding at a very rapid pace. We are seeing Japan coming off of more than a decade of deflation. Europe is starting to restructure its entitlement culture with the accession to the EU of 15 countries mostly with flat taxes, competitive salaries and hungry societies that yearn to compete for manufacturing and other jobs with the “old Europe.” And “Chindia” (China plus India) already adds up to a similar order of magnitude to the U.S. economy and keeps growing at a very rapid pace.
The reasons are many, and we could write a treatise of these very rare phenomena, but the main drivers of this fast global growth are:
- Continued progress in the opening of markets for capital, goods and labor
- The dramatic development – and drop in the cost – of communications, especially the Internet, and in computing and transportation
- The political will of some key areas of the world to become integrated into the global economy
- Easy monetary and fiscal policies in G7 countries, which, despite some tightening, will be supportive of global growth for years to come and will allow the U.S., “old Europe” and Japan to restructure their economies and deal with imbalances and the problems of aging populations
As the major former communist economies become more integrated into the global economy, and if we add to this India and Latin America, we get the picture of a massive change in the global economic landscape that is bringing more wealth, huge productivity gains, economic stability, growth and prosperity to a huge part of the globe, populated by billions of people.
As this is occurring, the BRICs (Brazil, Russia, India and China) stand out as the areas of larger opportunity given their critical mass and large internal markets.
The economic gains from the participation of these economies in the global economy are allowing them to increasingly industrialize, improve the income per capita of their populations, and elevate the standard of living of billions of people, bringing them into the global consumer market, and presenting more global investment opportunities.
The iShares MSCI Emerging Market Index Fund (AMEX: EEM) is one way to capture the growth in these four economies. Nearly a third of its holdings are in the BRICs – 7.8% in Russia, 9.45% in China, and 11.17% in Brazil.
Enjoy and Profit!
Horacio
Report # 4: For Superior Value Investments, Look Far East And Far South
by Alex Green, Investment Director, The Oxford Club
After the shakeout in the market this summer, I, like Horacio, think the best values can be found in emerging markets. That’s the global “blue light special.”
Why? First off, because that’s where the growth is. Countries like China and India are growing much faster than developed markets in Europe and North America.
Second, because that’s where the values are. Emerging market stocks are much cheaper than their first-world contemporaries in terms of earnings, dividends and book value.
And, finally, emerging market stocks are attractive because of a weakening dollar. Many of these countries have their currencies pegged to the greenback. As the dollar declines, it makes their exports more competitively priced in foreign markets.
Add it all up and you’ve got a compelling case for putting money to work in Asia, Eastern Europe and Latin America right now.
Good trading,
Alex
Investment U Crib Sheet
- Alex Green is the Investment Director of The Oxford Club, which, as confirmed by The Hulbert Financial Digest, has produced an 85.4% return in the last five years, compared to the 24.7% gain of the Wilshire 5000 Total Market Index. Alex is the editor of three elite trading services, including the Momentum Alert. Learn more about the Oxford Trading Services.
- Emerging Markets: 180,000 New Investment Opportunities… A Day
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- Warren Buffett Investing: Welcome to the Oracle of Omaha’s “Long, Deep Recession”
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