The Best Investments Are Easy To Find. Assuming You’re Looking.

June 21, 2013
This is what money looks like.

This is what money looks like.

 

When’s the last time you bought a 900-to-1500 ft2 diatomaceous earth filtration unit? Alright, that question was kind of specific. So when was the last time you bought a diatomaceous earth filtration unit of any size?

We’ve talked before about the Barbra Streisand investing strategy, in which you buy the stocks of products you use. (Ms. Streisand bought Starbucks stock because “we go to Starbucks every day.”) Taken to its logical extension, this would result in an economy that consisted solely of consumer products, which is impossible. A vibrant economy, or even a moribund one, contains plenty of goods and services that facilitate the delivery of your marked-up coffee and your social networking sites. You never think twice about those background goods, but would have great difficulty living without them. So…wouldn’t it make tons of sense to at least examine the stocks of the companies that make them? Especially since relatively few people are already doing it?

Unless you live in Houston, and even then, you’ve probably never heard of Schlumberger. Even its name sounds hopelessly square, like a 1950’s-era retail store. (“Ladies, come to Schlumberger’s for wash-and-wear clothes in all the latest space-age fabrics! You’ll love the selection, and your husband will love our prices! Dial KLondike 5-1239 for business hours. Now accepting charge cards.”)

Except Schlumberger a) was founded in France (it’s pronounced shlum-ber-zhay’) and 2) is light-years removed from that. It’s the world’s largest oilfield services company. What does that mean?

Well, say you have a claim (or “prospect”, to use the appropriate jargon) on a patch of seafloor in the Gulf of Mexico. Underneath it are millions of cubic yards of hydrocarbons, ready to be converted into petroleum and related fluids. You have a vessel that can contain the oil, or proto-oil, but how do you get it through vertical miles of ocean and into your hold?

With a subsea landing string/electrohydraulic operating system, that’s how. Basically a telescoping tube that collects your paydirt and sends it up. But you also want it to verify that it’s properly installed, given that you can’t exactly slap on some scuba gear and determine so for yourself. And it’d be nice if you could shut it off automatically in an emergency, preferably without getting your fingers wet.

These ain’t cheap, as you can imagine. Nor are directional drilling motors, nor flexible cement that seals your well off from the rest of the ocean and keeps the fish from getting dirty. Schlumberger is just one company that does all of the above and much else, and the next time you complain about how much you’re paying at the gas pump you should think about the tens of billions of dollars in capital investment it takes to fill up your precious fruity Prius.

The point is that there’s a vast sea of hidden value out there – the bottom of the iceberg, to introduce yet another tired and oceanic-themed analogy. Enormous corporations that provide vital services and products, and that no one outside of the industry gives a second thought to. Schlumberger pulled in $42 billion in revenue in 2012, and that number’s gone up every year. Its profit margins are huge, especially given what a capital-intensive industry it’s in. Despite the best efforts of solar and wind advocates, there’s no escaping the truth that oil provides denser and more easily obtainable energy than just about any substance short of uranium. In other words, demand for Schlumberger’s customers’ products (and by extension, Schlumberger’s products themselves) won’t be reducing anytime soon. There are other oilfield services companies, but Schlumberger is the largest.

Do you now how many individual investors own Schlumberger? Fewer than 10,000. At $73 a share it isn’t cheap in absolute terms, but that’s down from its 2008 apogee. Price/earnings ratio is 18, on the high end for the industry but not insurmountable. And of course there’s a dividend, currently $1.25 per year. (Like most companies of its size, Schlumberger pays its dividend out quarterly.)

It doesn’t have to be Schlumberger. There are scores of companies that are hiding in plain sight, making hundreds of millions of dollars apiece and comprising significant chunks of the S&P 500 and other indices. AXA. Allianz. Cardinal Health. Or from our last post, McKesson.

Okay, great. But I have no idea how to do this.

Sure you do. Read the chapter on investing in our book. It’s at least as easy to get through as this post is. Pick up our e-book, the obtrusive ad for which you probably ignored and reflexively closed when you logged onto the site just now. Refresh and try it again, because there really is an unglamorous secret to riches. Several secrets, in fact. And you’re not going to find them anywhere that intersects with pop culture and lowest-common-denominator mass media.

Filed Under: Capitalism, Investments Tagged With: , ,

There Are No Other Stocks. Only Apple And Facebook.

December 19, 2012

 

Does this guy look like he had your best interests at heart?

 

At least that’s what you’d think if you only glanced at the financial news, which is why it’s important to remember the wisdom of the old axiom that all news is biased. That doesn’t necessarily mean that said news is distorted or inaccurate. Often, it just means that the very prominence of the story is out of proportion to its importance.

Apple loses 1% in an afternoon, and it’ll lead CNBC’s top-of-the-hour. Facebook announces a new privacy policy, which doesn’t even have anything to do with finances, same thing. One of the 5000 other stocks that trade on the New York Stock Exchange or NASDAQ does something significant, and the arbiters of news don’t care enough to tell you. If Mac-Gray Corporation (a commercial laundry company that puts washers and dryers in apartment buildings) raises its dividend, or Ralcorp (a private-brand food manufacturer) sells itself to ConAgra, it’s difficult to find mention of such.

Folks, this is where the value lies. In the part of the investing iceberg that’s under the surface. You can buy a 100-lot of Apple stock, which will cost $53,390 as of this writing, and eat your fingernails down to the cuticles while being reminded daily of its fluctuations. Do you really want to make an outlay that big to invest in a stock that has plenty of room to fall?

Contrast Apple with Yamana Gold, a Canadian company that mines in Mexico and South America and that has been trading on the NYSE since just a few months after its 2003 founding. The stock reached its all-time zenith of $20 a share last month, from which it’s since lost about 1/7 of its value. Yamana Gold might not be as famous nor as wealthy as Apple – the latter’s market cap is 39 times the former’s – but both companies are NYSE members in good standing, with no pending sanctions. Both are pretty profitable, too. Care to guess which has the higher profit margins?

We wouldn’t ask if we didn’t know the answer. Yamana Gold increased its revenue by almost 45% in 2010, and by a similar amount the following year. Profits have more than kept pace, representing almost a quarter of revenues in the last fiscal year.

At this point, both skeptics and pessimists look for reasons not to invest in such a company. Here are some likely objections, complete with rebuttals.

Yamana Gold makes only one product. Apple is diverse.

Yes, but this isn’t a binary world where you have to invest in one company or the other. You can buy Yamana Gold without respect to what Apple’s doing. This reinforces the point we made in the opening paragraph – stop letting the overexposed news darlings affect your decisions.

Yamana Gold’s doing well just because gold prices are rising.

Maybe, but so what? And are gold prices poised to fall? Bullion and Yamana Gold have indeed moved largely in lockstep for the last 5 years…well, actually the last 4 years. (Like most businesses, Yamana wasn’t profitable from its inception.)

Rationalization is one thing, refusing to see the potential for a good investment is something else. Along with its healthy profit numbers, both static and dynamic, Yamana Gold has also enjoyed a consistent arithmetic increase in its retained earnings – one of the most underappreciated items in a company’s balance sheet. Retained earnings have gone from $400K to $800K to $1.2M in consecutive years.

This from a company that already pays a healthy dividend of 26¢ a share. Remember, profits have to go in one of 2 places – to the shareholders (dividends), or back in the company (retained earnings). From an investor’s standpoint, which is better is largely a function of what your immediate and long-term goals are. Benjamin Graham and Warren Buffett would have you believe that dividends are the greatest invention ever, a cash payment made to you just for being smart enough to invest in a company whose large(r) shareholders insisted on voting themselves such a piece of the action.

From the other perspective, big retained earnings tell you that management is “plowing the profits back into the company”, which can be awful if the company is an unsustainable or wounded loser (see Groupon, Hewlett-Packard), but promising if the company has a history of profitability.

Yamana Gold is trading at close to its all-time high. Isn’t that a red flag?

Yes, but the company is only 8 years old. It’s a lot more likely to be reaching an absolute peak than is, say, U.S. Steel.

So yeah, invest in Yamana Gold. We are.

But Yamana Gold isn’t the focus here. Inconspicuity is. There are hundreds upon hundreds of companies that make suitable investments, hitting at least most of the criteria you want in something you plan to put your money in:

  • Consistent growth
  • Consistent profitability
  • Low price
  • Sustainable business model

There are secondary concerns too (moat, natural competitive advantage, etc.) but those are the main ones. Looking for an unheralded company whose recent history exhibits all those traits takes time, but it can well be worth it. Or you can just hold onto your position in Vanguard’s Institutional Index mutual fund and wonder why your money isn’t showing any significant gains. Your call. We’re not recommending you take unjustifiable risks, merely that you take intelligent ones. Big difference. And if this still seems overwhelming, or too condensed for you to really understand it, get our e-book: The Unglamorous Secret to Riches. It’s essentially this post, expanded and detailed for the neophyte but ambitious investor.

Filed Under: Investments Tagged With: , ,

Profit Off The Clueless. It’s Your Duty

September 14, 2012

 

The French dude in this picture? 27 years old.

 

Ah, les cigarettes. Ils sont magnifiques!

 

 

I think we are inviting God’s judgment on our nation when we shake our fist at Him and say, “We know better than you as to what constitutes a marriage,” and I pray God’s mercy on our generation that has such a prideful, arrogant attitude to think that we have the audacity to define what marriage is about.

(Journalistically abridged version: “Let’s kill all the queers, or at least not serve them.”)

The Chick-Fil-A story came and went, but we’d prefer to take a sober look at its absurdity after a few weeks have passed. People protested, Dan Cathy got assailed, and to the extent that a regional restaurant chain’s management can influence public policy, Chick-Fil-A’s chief operating officer remains committed to the non-marginal belief that marriage is between a man and a woman.

It makes no sense to shun a business because someone said something that hurt your feelings. Your actions either won’t make a difference, or the difference they’ll make will be a negative one.

Take the brief and unspirited Chick-Fil-A protests. What good did they do? That is, what tangible economic benefit did they achieve? How did they make the world a better place?

You could argue that such protests aren’t supposed to provide anyone with an economic benefit, they’re supposed to do the exact opposite to the targeted parties.

But a month later, Dan Cathy is still rich. Say the boycott had worked, to the extent that a few restaurants ended up closing. The company’s franchisees, most of whom have far less money than Mr. Cathy, would have suffered far worse than he. Any affected employees would have suffered even worse. All because a man whom you have no connection with, and who has an extremely modest impact on the crafting of marriage laws, gave his Biblically consistent and majority opinion as to what defines a marriage.

Dan Cathy could have said the Armenian Genocide was The Awesomest Thing Ever and it shouldn’t have made a difference to anybody. The actual business of serving chicken sandwiches isn’t connected to the opinions of the guy in charge.

Legitimate reasons for boycotting Chick-Fil-A:

  • They boil chickens alive.
  • The secret ingredient in the Polynesian sauce is toxoplasmosis.
  • New seasonal pricing – $300 a sandwich.

That’s it. Making a decision based on anything non-galline is part counterproductive, part foolish. And attempting to assess the values of the people in charge is 100% hypocritical. Either that, or every pot smoker who protested Chick-Fil-A must buy exclusively from pro-gay-marriage dealers.

Boycotts temporarily satisfy. (“Delta kept us on the runway for 3 hours. I’m never flying that airline again!”) Three months later, when you need to fly to London and Delta’s prices are hundreds of dollars cheaper than Virgin’s or American’s, your mind will probably change. That being said, almost all of us are guilty of this.

For instance, your humble bloggers refuse to do business with a local Toyota dealership that uses Michael Vick as its spokesman. It’s a 2-person boycott that will have a negligible impact on the dealer’s bottom line. We don’t expect other people to join our passive protest, although we can’t fathom why anyone would patronize a business whose management could have chosen any of 1500 active NFL players to hawk its products yet went with a convicted felon who did to dogs what Josef Mengele did to Jews.

So we established our position. Now, how far should we take it? Should we never buy a Toyota nor a Lexus from anyone anywhere, because how can we do business with a corporation that would grant a dealership to someone who would hire Michael Vick?

That same dealership’s vendors include companies we do business with – a couple of local radio stations, for instance. Should we refuse those companies’ money? If so, what about the radio stations’ vendors; their catering company, for instance? Are 2 degrees of boycott sufficient? How about 3? Where does, or should, it end?

We know a former vegan who quit and reverted to omnivority. Why?

It was too hard. She couldn’t eat beef or pork. Okay, fine. She couldn’t eat chicken. Yes, that’s how herbivority works. She couldn’t eat eggs or fish. The culmination happened when she refused a plate of pasta served with an anchovy sauce. The dish was 1% meat, but that was enough to taint it. At this point her hair had started falling out, and her skin had the pallor of a corpse. (She also smoked cigarettes, reinforcing that her restrictive diet had little connection to health.)

Which brings us to the most profitable company in America, as measured by return on shareholders’ equity. The difference between this company’s assets and its liabilities is $229 million. Which is equivalent to the profit it makes every 10 days.

Almost half the cigarettes sold in the United States come from Philip Morris International. Dividing that into the American Cancer Society’s figures, that means the company kills 217,000 of its own satisfied customers every year. (Of course, that’s a semantic mistake. The 217,000 kill themselves. Philip Morris only sells them the weapons.) That’s to say nothing of the myriads more around the world who die courtesy of Philip Morris cigarettes.

Philip Morris International pays a $3.08 dividend annually. That’s a 3.4% yield, which is excellent. (And remember that the lower that yield is, the higher the stock price is, which is not exactly a bad thing.)

Chick-Fil-A feeds people. A day without lunch is a miserable day indeed. Philip Morris International, even if its CEO were to register as a minister with the Universal Life Church just so he could marry as many homosexual couples as he can find, still sells death. His products have no worthy purpose, and do nothing to better the species nor our surroundings.

They’re also a fantastic buy. Philip Morris International has a diehard customer base, if you will, with hundreds of thousands of budding smokers waiting to take their place once the former check out. For every one who quits, plenty of others never do, taking their brand loyalty to the grave. Refusing to invest in the company that gives said consumers a reason to die is high-mindedness that leaves cash on the table.

Anheuser-Busch, too. Same thing. Last year, an $8 billion profit on $39 billion in revenue. Selling a product that numbs brain cells, impairs judgment and causes far more problems than it solves. Should we take the noble road and not purchase its stock?

Whatever for, if it continues to turn increased profits and pay regular dividends? It only does so because people like to get drunk. Millions of them. Are we going to do our best Carrie Nation, standing outside 1 Busch Place in our finest black bloomers, espousing the moral rectitude of temperance? Doing so wouldn’t convince a soul. As long as smokers and drinkers (and chicken sandwich eaters to a lesser extent, although Chick-Fil-A isn’t publicly traded) want their fix, someone’s going to get a cut of it. Why not you?

If your answer is “because I’m better than that”, good for you. We’ll let you know when your local organic yoga mat workshop does its IPO.

Filed Under: Economy, Investments Tagged With: , , , , ,
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