Smart Investing

 

May 11, 2012

September 6, 2013


Great stock opportunities persist, despite investor fears

Last week I was in Washington, and I happened to read an article in USA Today titled, "Invest in stocks? FORGET ABOUT IT." The article featured interviews with three people who, frankly, should be embarrassed about their proven stupidity over the last few years.

Michael Hoffman, a 66-year-old from Dana Point, Calif., has none of his money in stocks and states proudly, "I'm never going back in." Bart Ruff from Lederach, Pa., says he is not putting any new money into stocks, and is now more conservative. Then there is Arlene Armstrong, 61, from Columbus, Ohio, and her husband, who have slashed their stock investments from 60 percent to 14 percent.

These three are prime examples of why investors in stocks do so poorly — they buy high and sell low. I don't know how these people can be proud of what they did when the stock market has risen around 100 percent. They sold their stocks low based on emotions and are staying out because of fear.

There are many experts, such as Warren Buffett and others, who have been saying stocks are on sale and should be bought, but people refuse to listen to the experts. There's even a term for this kind of thinking: "recency bias." People fear another big downturn because it is so fresh in their minds.

However, it is all emotional because they refuse to look at the facts. If looking back on 2007, when prices based on fundamentals were high, and comparing to the fundamentals now, they would realize what a great buy some stocks are.

The investors above are probably the same type of investors who paid $115.98 per share for a company like Green Mountain Roasters Inc. (GMCR) when it was trading at a 52-week high. At the 52-week high, the price-earnings ratio (PE) was well over 50, compared to the current PE of around 12.6 times current earnings. The forward PE for this company, based on September 2013 earnings, is around 8.3 using a share price of $26.14 and a mean estimate from 10 analysts of $3.10 per share.

This company has had some bad news over the past six months or so, which I think it will be able to work through. The Waterbury, Vt. company has been around since 1981. It produces about 200 varieties of coffee, cocoa and teas in traditional and K-cup packages. Some of the brand names associated with this company include Brulerie St. Denis, Van Houlte and Wolfgang Puck.

Based on earnings released March 24, the company grew its sales 82 percent, well above the industry average of 17 percent for the last 12 months, year over year. This sales growth was reflected in the earnings per share, year over year, for the last 12 months, coming in at 164 percent, while the industry experienced a decline of 21 percent.

Whenever an investor is going to buy a company with some problems and pay a low price, you want to verify that it has a strong balance sheet in case the problem persists for longer than expected. You don't want the company to file bankruptcy because it ran out of money.

Green Mountain is in the industry of food processing, which has an industry average debt-to-equity of 62.6 percent. Green Mountain has debt-to-equity of only 20.5 percent, of which nearly all is long-term debt. The current ratio for the company is a healthy 2.4, much higher than the industry average at 1.5. With low debt and a higher current ratio, this company will have no problem paying its bills going forward. Its cash flow from operations also looked very good over the last six months at $375 million.

The company did a great job with a 20.5 percent return on its equity, compared to the industry ROE of only 11.3 percent. Green Mountain has a net profit margin of 9.5 percent, which is nearly three times the industry average of 3.5 percent. Helping its strong cash flow could be the impregnable accounts receivable turnover of 13.2, versus the industry at 12.0.

Often when you find a company like this, it will have high intangible assets due to many overpriced acquisitions. Green Mountain has a price to tangible book value of only 4.9, well below the frightening 328 times for the industry.

While the company has some problems, this has been reflected in the earnings estimates from the analysts going forward. Ninety days ago, the September 2013 year-end estimate per share was $3.64, which has now dropped 13.5 to the current $3.15 per share. A peg ratio of only 0.34 says the stock appears to be a good buy when compared to the industry average of 1.24.

Investors should not keep their heads in the sand and wait until the market goes up again to invest, like they always have done. Be smart this time and do the research to find some great companies at great values. If you don't want to do the research, find someone who will do it for you; you won't want to miss the next few years of investing.

Have a question or a company you'd like me to take a look at? Email me at brent@wilseyassetmanagement.com.





Wilsey is president of Wilsey Asset Management and can be heard every Saturday at 8 a.m. on KFMB AM760. Information is provided by Reuters.


 

May 11, 2012

September 6, 2013


Tuesday, Sep 2, 2014 7:00 PM
Art Exhibit

Tuesday, Sep 2, 2014 11:30 AM - 1:00 PM
Breakfast Meeting

Tuesday, Sep 2, 2014
Exhibition


Subscribe Today!