Well, the stock market goes down, then back up again. That’s normal.
One thing that I’ve realized during my 30 years in the investment world is that I can and will be wrong. That is pretty hard on the ego, but it’s a reality. What’s important to know is why one was wrong and either learn from it or deal with it.
Currently, we have the situation of “deal with it.” Why? Because there is nothing to be learned here other than patience. You see, about a year ago, I lowered my forward price-to-earnings multiple to 16.5 from 20. The reason: At 20, I was using a 20-year average that was made up of almost 50 percent of the Internet boom in the 1990s, which was not the norm. By using a 40-year average, I came up with a more conservative average forward PE of 16.5.
The downside is that it will cause me to sell companies early when the markets go into an overvalued mode, which could last for months and also not allow me to pay as much for companies as I would have before.
The upside is I’m a little more conservative, and while I may miss some of the high side, the bottoms will be less of a drop.
Please notice: I said “less of a drop.” I always want to point out that when investing, one will have short-term portfolio declines that could last weeks or months, and that these drops should be expected and not feared. But downturns can create some great buying opportunities for the smart investor. So, while I’ve experienced this many times before, I will remain patient. And if I’m sitting on 25 percent cash in my portfolios, I will be in no rush to invest that extra cash.
One company I liked a couple of years ago was Seagate Technology (Nasdaq: STX). I remember seeing it about $15 a share in late 2010; the fundamentals looked good and the target sell price showed a nice potential gain going forward.
You may be asking, is it time to sell this company, hold it or buy it? This is why I go over all the numbers of the companies in my portfolio weekly -- so I don’t miss a sell or sell blindly because the stock is up 50 or 100 percent.
Seagate is one of those companies I would have been glad to look at every week and say “no sell this week” as the forward earnings per share keep increasing to the currently level of $5.88. Based on June 2015 EPS estimate of $5.88, this would yield a target sell price of $97.02, more than double the current price. I don’t think the company will hit $97 in June 2015. It could, but it would be unlikely.
But what if the possibility is that the company trades at 12 times earnings come June 2015? The stock price would be $78.56, which would be nearly a 76 percent gain. I hope you would not be disappointed with that type of gain.
What could derail Seagate from getting you a 76 percent gain in about two years? Many things. This is why one doesn’t go out and invest their entire retirement on Seagate; rather, I always recommend a 6 percent allocation to about 15 different companies knowing that some will meet my expectations, some will exceed my expectations and that the reality of life is that some will disappoint me.
Some other highlights that I liked include the 3.7 percent dividend. The company needs only 28 percent of its earnings to pay that dividend, so I think that will remain pretty safe -- maybe even grow a little bit more from the current 54 cents per year.
I also liked the price to cash flow of 4.6, which is well below the industry average of 7.3. Price to sales also looked attractive at 1.01, compared with the industry at 1.50. The company has an attractive profit margin of 12.8 percent, nearly a third higher than the industry average of 9.8. Return on equity for this company is very high -- at 52.5 percent versus the industry at 19.9 percent. This tells me that Seagate is generating a lot of cash and earnings off a low equity base.
The company produces storage products for everything from PCs to digital media systems. Part of the concern about why the company may not trade at a higher multiple of earnings is the worry that PCs & notebooks will be gone in the future, leaving Seagate with no one to buy its products. While this may be a possibility, I can you tell that Seagate has spent $1.1 billion dollars on research and development. This may not be a guarantee it will develop something else that will be a hit in the market, but it should make you aware that the company could have the next best storage device being built in its labs tomorrow. This is where an investor should be looking at the risk-to-reward ratio.
What I didn’t like about the company is that its debt level is on the high side, at 79.2 --three times the industry average of 23.8. While this wouldn’t prevent me from investing in the company now, you can bet that if this company were in my portfolio, I would be watching the numbers every week and closely reviewing the financial statements for hints that could be good or bad for the company’s future. I would also be watching the inventory, which had a turnover rate of only 11.8 -- below the industry average of 16.5. If the company gets a bloated inventory, that would mean it would have to cut prices, which would hurt profit margins and earnings per share.
So, if you’re sitting on more than 25 or 30 percent in cash, maybe Seagate is a company that might fit into your portfolio.
Have a question or a company you'd like me to take a look at? Email me at email@example.com.
Wilsey is president of Wilsey Asset Management and can be heard at 8 a.m. every Saturday on KFMB AM760. Information is provided by Reuters.