Wednesday, November 10, 2010
Friday, November 5, 2010
Three stages of stocks
http://www.fool.com/investing/general/2010/11/03/why-we-sold-this-market-darling.aspx?source=ihpdspmra0000001&lidx=6
Why We Sold This Market Darling
By Adam J. Wiederman | More Articles
November 3, 2010 | Comments (20)
Stock returns come in three stages, according to Million Dollar Portfolio associate advisor David Meier:
1. Mispricing. When a company's stock rises to its estimated intrinsic value.
2. Value creation. When a company's intrinsic value rises, along with its stock price, because of strong operating performance.
3. Market darling. When excessive optimism drives a company's stock to a sky-high premium multiple.
The company I'm writing about today is in the "market darling" stage.
Before I share its name with you, explain why selling is a smart move, and list three other market darlings you might want to sell, let me begin with some of the history we Fools have with the company.
What they saw
In October 2008, this restaurant company was dirt cheap. Its stock was down nearly 70% from its 52-week high because of rising food costs. But it was generating a ton of cash, and trading for less than nine times free cash flow.
The economics of the business were outstanding. It cost roughly $900,000 to launch a new franchise, and stores generated an average of $1.7 million in sales each year. With 22% operating margins, the store paid for itself in less than three years.
Even better, the company's visionary founder owned a significant portion of the company -- nearly $35 million worth, meaning his interests were fully aligned with shareholders.
During the third-quarter conference call that year, the company's CFO announced that the company planned to buy back up to $100 million worth of shares. His rationale? "Because they are on sale."
So, following his lead, the Million Dollar Portfolio team bought shares of the company.
As the company's stock dropped over the next few months, the MDP team bought even more shares, bringing their total allocation to 3%.
What they received
During 2009, the company's stock rose drastically. As it rose, the Million Dollar Portfolio team gradually sold blocks of shares to lock in the gains they achieved.
Just more than a month ago, the team closed out its entire position, making for a total gain of 158%.
Today, Chipotle Mexican Grill (NYSE: CMG) is up more than 400% since its IPO in 2006, and it continues to reach new 52-week highs.
True, it's still firing on all cylinders. But at today's price, too-optimistic growth expectations heavily factor into its share price. Here's a rough picture of Chipotle's valuation: Analysts project 20% growth over the next five years, or approximately half of the company's price-to-earnings and price-to-free cash flow ratios.
Though Chipotle is young and growing, these competitors are much cheaper, and they all come with the safety of a dividend:
Company P/E Ratio P/FCF Ratio
McDonald's (NYSE: MCD) 17 21
Yum! Brands (NYSE: YUM) 22 24
Darden Restaurants (NYSE: DRI) 16 13
Chipotle 42 39
Data from Capital IQ, a division of Standard & Poor's.
That's not to say that investors' optimism won't continue to drive up the price of Chipotle in the short term. But this sort of guessing game is a risky investment process. More importantly, when Chipotle's growth slows, the potential downside could be disastrous if you continue to hold.
Plus, co-CEO Steve Ells sold over $12 million of shares in early September, a move that can indicate an overvalued stock.
The crucial takeaways
There are three important lessons to learn from this example:
1. Sell in stages. The Million Dollar Portfolio team sold their stake in Chipotle over several months. They saw shares were getting overvalued, but they realized that there still could be more upside. Partially selling over time ensures that you secure your gains, while still taking advantage of further gains that might come thanks to the market's irrationality.
2. Remain unemotional. The Million Dollar Portfolio team loved (and still love) the company, even as they sold. I've never seen seven guys eat more burritos than these folks did, dismissing the calories as "research." But though you love a company, its business plan, and its products, you have to be able to distance yourself from all that, and the profits you've earned by investing in it.
3. Continue to monitor the company. The Million Dollar Portfolio team made it clear that they're not done watching Chipotle. In fact, if it takes a huge hit at any point, I'm convinced they'll open up a position again -- or at least add it to their watch list. Just because you sell a company, don't let all your research go to waste -- simply continue to keep an eye on it. Often the price will eventually return to your comfort zone.
These lessons are especially important because Chipotle's not the only market darling out there today. Here are a few other companies that might be market darlings, trading near 52-week highs with hefty multiples:
Company Current price 52-week high P/E Ratio P/FCF Ratio
Apple (Nasdaq: AAPL) $310.12 $319.00 20 17
Panera (Nasdaq: PNRA) $91.46 $95.41 27 15
Buffalo Wild Wings (Nasdaq: BWLD) $48.71 $52.99 24 54
Data from Capital IQ.
I think it's just a matter of time before investors get nervous with these companies (and their products) as well.
Lastly, it's important to have a sounding board for both buying and selling decisions. I'm convinced that's why the Million Dollar Portfolio team is so successful (they're outperforming the S&P 500 by 6%).
We're about to open up the doors to Million Dollar Portfolio for the last time in 2010. To find out more about how you can benefit from their research -- and follow along with their real-money buys and sells -- simply enter your email address in the box below.
Why We Sold This Market Darling
By Adam J. Wiederman | More Articles
November 3, 2010 | Comments (20)
Stock returns come in three stages, according to Million Dollar Portfolio associate advisor David Meier:
1. Mispricing. When a company's stock rises to its estimated intrinsic value.
2. Value creation. When a company's intrinsic value rises, along with its stock price, because of strong operating performance.
3. Market darling. When excessive optimism drives a company's stock to a sky-high premium multiple.
The company I'm writing about today is in the "market darling" stage.
Before I share its name with you, explain why selling is a smart move, and list three other market darlings you might want to sell, let me begin with some of the history we Fools have with the company.
What they saw
In October 2008, this restaurant company was dirt cheap. Its stock was down nearly 70% from its 52-week high because of rising food costs. But it was generating a ton of cash, and trading for less than nine times free cash flow.
The economics of the business were outstanding. It cost roughly $900,000 to launch a new franchise, and stores generated an average of $1.7 million in sales each year. With 22% operating margins, the store paid for itself in less than three years.
Even better, the company's visionary founder owned a significant portion of the company -- nearly $35 million worth, meaning his interests were fully aligned with shareholders.
During the third-quarter conference call that year, the company's CFO announced that the company planned to buy back up to $100 million worth of shares. His rationale? "Because they are on sale."
So, following his lead, the Million Dollar Portfolio team bought shares of the company.
As the company's stock dropped over the next few months, the MDP team bought even more shares, bringing their total allocation to 3%.
What they received
During 2009, the company's stock rose drastically. As it rose, the Million Dollar Portfolio team gradually sold blocks of shares to lock in the gains they achieved.
Just more than a month ago, the team closed out its entire position, making for a total gain of 158%.
Today, Chipotle Mexican Grill (NYSE: CMG) is up more than 400% since its IPO in 2006, and it continues to reach new 52-week highs.
True, it's still firing on all cylinders. But at today's price, too-optimistic growth expectations heavily factor into its share price. Here's a rough picture of Chipotle's valuation: Analysts project 20% growth over the next five years, or approximately half of the company's price-to-earnings and price-to-free cash flow ratios.
Though Chipotle is young and growing, these competitors are much cheaper, and they all come with the safety of a dividend:
Company P/E Ratio P/FCF Ratio
McDonald's (NYSE: MCD) 17 21
Yum! Brands (NYSE: YUM) 22 24
Darden Restaurants (NYSE: DRI) 16 13
Chipotle 42 39
Data from Capital IQ, a division of Standard & Poor's.
That's not to say that investors' optimism won't continue to drive up the price of Chipotle in the short term. But this sort of guessing game is a risky investment process. More importantly, when Chipotle's growth slows, the potential downside could be disastrous if you continue to hold.
Plus, co-CEO Steve Ells sold over $12 million of shares in early September, a move that can indicate an overvalued stock.
The crucial takeaways
There are three important lessons to learn from this example:
1. Sell in stages. The Million Dollar Portfolio team sold their stake in Chipotle over several months. They saw shares were getting overvalued, but they realized that there still could be more upside. Partially selling over time ensures that you secure your gains, while still taking advantage of further gains that might come thanks to the market's irrationality.
2. Remain unemotional. The Million Dollar Portfolio team loved (and still love) the company, even as they sold. I've never seen seven guys eat more burritos than these folks did, dismissing the calories as "research." But though you love a company, its business plan, and its products, you have to be able to distance yourself from all that, and the profits you've earned by investing in it.
3. Continue to monitor the company. The Million Dollar Portfolio team made it clear that they're not done watching Chipotle. In fact, if it takes a huge hit at any point, I'm convinced they'll open up a position again -- or at least add it to their watch list. Just because you sell a company, don't let all your research go to waste -- simply continue to keep an eye on it. Often the price will eventually return to your comfort zone.
These lessons are especially important because Chipotle's not the only market darling out there today. Here are a few other companies that might be market darlings, trading near 52-week highs with hefty multiples:
Company Current price 52-week high P/E Ratio P/FCF Ratio
Apple (Nasdaq: AAPL) $310.12 $319.00 20 17
Panera (Nasdaq: PNRA) $91.46 $95.41 27 15
Buffalo Wild Wings (Nasdaq: BWLD) $48.71 $52.99 24 54
Data from Capital IQ.
I think it's just a matter of time before investors get nervous with these companies (and their products) as well.
Lastly, it's important to have a sounding board for both buying and selling decisions. I'm convinced that's why the Million Dollar Portfolio team is so successful (they're outperforming the S&P 500 by 6%).
We're about to open up the doors to Million Dollar Portfolio for the last time in 2010. To find out more about how you can benefit from their research -- and follow along with their real-money buys and sells -- simply enter your email address in the box below.
Tuesday, October 19, 2010
Monday, September 20, 2010
Spotting the winners
Dora Hoan
Group CEO
Best World International Ltd
I BELIEVE it is crucial to take the pulse of the global economy to be able to make good investments, particularly in a post-crisis world. The prospects for the region however remains bright, as Asian consumption has been leading the global recovery relative to the US, the EU and Japan. I foresee even more opportunities for Asian economic growth in the next 20 years as a result of strong inter-regional and intra-regional trade.
I see ample opportunities in properties, construction, food & beverage and health & lifestyle.
Global markets on the whole are bouncing back but are still in their early stages of fragile recovery. Retail players have demonstrated renewed confidence in investing but they are observed to be more selective and not industry-specific. I would advise investing incremental cash in stocks of companies that have done fairly well over the years, with proven track record that they can withstand minor and major dips in the economy.
Investors must get a feel for a company, their accomplishments, their visions, goals for expansion and direction towards the future. It is particularly important in these uncertain times to look at the business model's scalability and sustainability. Certainly, more than trending and speculations, retail investors will go where real values come into play.
Group CEO
Best World International Ltd
I BELIEVE it is crucial to take the pulse of the global economy to be able to make good investments, particularly in a post-crisis world. The prospects for the region however remains bright, as Asian consumption has been leading the global recovery relative to the US, the EU and Japan. I foresee even more opportunities for Asian economic growth in the next 20 years as a result of strong inter-regional and intra-regional trade.
I see ample opportunities in properties, construction, food & beverage and health & lifestyle.
Global markets on the whole are bouncing back but are still in their early stages of fragile recovery. Retail players have demonstrated renewed confidence in investing but they are observed to be more selective and not industry-specific. I would advise investing incremental cash in stocks of companies that have done fairly well over the years, with proven track record that they can withstand minor and major dips in the economy.
Investors must get a feel for a company, their accomplishments, their visions, goals for expansion and direction towards the future. It is particularly important in these uncertain times to look at the business model's scalability and sustainability. Certainly, more than trending and speculations, retail investors will go where real values come into play.
Beating the market for 15 years
Beating the market for 15 years
BILL Miller may not rank among the Buffetts and Soroses of the world when it comes to being a household name. But the mutual fund manager's 15-year market-beating streak is legendary.
Related stories:
» The 7 deadly investment myths
» How to value a company
Born in Laurinburg, North Carolina in 1950, Mr Miller graduated with honours from the Washington and Lee University in 1972 with a degree in economics. He joined asset management firm Legg Mason in 1981 and took over equity fund management arm Legg Mason Capital Management in 1990.
The rest, as they say, is history. The Legg Mason Value Trust beat the Standard & Poor's 500 index every year from 1991 to 2005, growing from US$750 million (S$1.01 billion) to more than US$20 billion in the same time. Only in 2006 did Mr Miller's streak finally come to an end, with the Value Trust's 5.85 per cent return trailing the S&P 500's 15.75 per cent showing.
Mr Miller, chairman and chief investment officer of Legg Mason Capital Management, also manages the newer Legg Mason Opportunity Trust mutual fund. In total, he handles more than US$60 billion.
As a self-proclaimed value investor, his strategy is founded on analysis. He buys mainly large-cap stocks that he thinks are trading at large discounts to their intrinsic value, and takes a long-term view on them: not just buying and holding, but buying even deeper into stocks that he holds if their prices fall.
Mr Miller himself has played down the significance of his streak, once saying: 'Our so-called 'streak' is a fortunate accident of the calendar.' Be that as it may, the Legg Mason Value Trust averaged returns of 16 per cent for 15 years up to the end of 2005, a track record not to be scoffed at.
What were Mr Miller's strategies in achieving his record-breaking run?
Focus on companies, not trends
Mr Miller begins with the companies in mind, not the market trends. As the man himself has said: 'We don't have a forecast-and-trend approach - meaning we don't make a forecast of what we think is likely to happen, or what trends are likely to occur, and then adjust our portfolio to conform to the forecasts.
Related stories:
» The 7 deadly investment myths
» How to value a company
'We estimate the intrinsic value of our companies and invest where we can get the greatest discount to intrinsic value. Then we try to understand the environment we're operating in. But we start with valuation - that's always number one.'
A famous example of this approach in action is his bid for Google's initial public offer in August 2004. Back then, the prevailing sentiment held that Google was just another over-hyped Internet play.
Never one to follow the crowd, Mr Miller set up a task force to analyse the company. They developed a three-tier bid based on their valuation of Google, which turned out to be much higher than the final price of US$85 a share - meaning that Mr Miller scored 2.3 million shares at US$196 million. That initial investment is now worth over US$1.2 billion.
Look for value
When Mr Miller assesses companies on their own merits, he also looks at their current price relative to what he thinks is their intrinsic value. Value investors are the bargain hunters of the stock market, and Mr Miller looks for stocks trading at large discounts.
Related stories:
» The 7 deadly investment myths
» How to value a company
If a stock that he holds starts to fall, he simply sees it as a better bargain. Hence, his famous reply to the question of when he would stop buying a falling stock: 'When we can no longer get a quote.'
Of course, value investors always face the danger of being left with a value trap, or a stock that appears undervalued but is on the decline. Research and analysis is key to avoid ending up with a value trap on one's hands.
In this area, understanding the background of the industry is also important. Says Mr Miller: 'The trap comes in when there's a secular change, where the fundamental economics of the business are changing or the industry is changing, and the market is slowly incorporating that into the stock price.'
Go for the long-term
Mr Miller is definitely not a short-term speculator, and instead sums up his long-term view on stocks as 'creative non-action'.
Related stories:
» The 7 deadly investment myths
» How to value a company
'We are mostly inert when it comes to shuffling the portfolio around, with turnover that has averaged in the 15 per cent to 20 per cent range, implying holding periods of more than five years,' says Mr Miller.
Market changes seldom affect his decisions, either. 'Many funds have turnover in excess of 100 per cent per year, as they constantly react to events or try to take advantage of short-term price moves. We usually do neither. We believe successful investing involves anticipating change, not reacting to it.'
In the late 1990s, Mr Miller famously bought more and more shares of Internet company AOL, even as its price plummeted. Despite widespread scepticism about the wisdom of that choice, his decision eventually paid off when the stock came back strongly.
Do your own thing
Mr Miller's winning bets on Google and AOL illustrate a key component of his style: never be afraid to think differently.
Related stories:
» The 7 deadly investment myths
» How to value a company
After all, Mr Miller once served as a military intelligence officer in Europe. He also sits on the Board of Trustees at the Santa Fe Institute, a centre for research in complex systems theory. Though that may sound esoteric, analysing systems is part of Mr Miller's investing philosophy.
'What we are really trying to do is to think about thinking,' says Mr Miller. 'Understanding how groups behave is central to understanding how complex adaptive systems - such as the stock market - work.'
In practice, this philosophy means that Mr Miller often buys stocks which most investors would not consider holding, as he believes that the conventional wisdom about them is wrong. Of course, he is not contrary for the sake of being so: his decisions are backed by solid analysis.
Going long may not sound as exciting as speculation. Yet Mr Miller's style is not for the faint-hearted. Investors wishing to emulate his philosophy, whether in rejecting the conventional wisdom or buying even deeper into plummeting stocks, will need confidence in both themselves and their research.
BILL Miller may not rank among the Buffetts and Soroses of the world when it comes to being a household name. But the mutual fund manager's 15-year market-beating streak is legendary.
Related stories:
» The 7 deadly investment myths
» How to value a company
Born in Laurinburg, North Carolina in 1950, Mr Miller graduated with honours from the Washington and Lee University in 1972 with a degree in economics. He joined asset management firm Legg Mason in 1981 and took over equity fund management arm Legg Mason Capital Management in 1990.
The rest, as they say, is history. The Legg Mason Value Trust beat the Standard & Poor's 500 index every year from 1991 to 2005, growing from US$750 million (S$1.01 billion) to more than US$20 billion in the same time. Only in 2006 did Mr Miller's streak finally come to an end, with the Value Trust's 5.85 per cent return trailing the S&P 500's 15.75 per cent showing.
Mr Miller, chairman and chief investment officer of Legg Mason Capital Management, also manages the newer Legg Mason Opportunity Trust mutual fund. In total, he handles more than US$60 billion.
As a self-proclaimed value investor, his strategy is founded on analysis. He buys mainly large-cap stocks that he thinks are trading at large discounts to their intrinsic value, and takes a long-term view on them: not just buying and holding, but buying even deeper into stocks that he holds if their prices fall.
Mr Miller himself has played down the significance of his streak, once saying: 'Our so-called 'streak' is a fortunate accident of the calendar.' Be that as it may, the Legg Mason Value Trust averaged returns of 16 per cent for 15 years up to the end of 2005, a track record not to be scoffed at.
What were Mr Miller's strategies in achieving his record-breaking run?
Focus on companies, not trends
Mr Miller begins with the companies in mind, not the market trends. As the man himself has said: 'We don't have a forecast-and-trend approach - meaning we don't make a forecast of what we think is likely to happen, or what trends are likely to occur, and then adjust our portfolio to conform to the forecasts.
Related stories:
» The 7 deadly investment myths
» How to value a company
'We estimate the intrinsic value of our companies and invest where we can get the greatest discount to intrinsic value. Then we try to understand the environment we're operating in. But we start with valuation - that's always number one.'
A famous example of this approach in action is his bid for Google's initial public offer in August 2004. Back then, the prevailing sentiment held that Google was just another over-hyped Internet play.
Never one to follow the crowd, Mr Miller set up a task force to analyse the company. They developed a three-tier bid based on their valuation of Google, which turned out to be much higher than the final price of US$85 a share - meaning that Mr Miller scored 2.3 million shares at US$196 million. That initial investment is now worth over US$1.2 billion.
Look for value
When Mr Miller assesses companies on their own merits, he also looks at their current price relative to what he thinks is their intrinsic value. Value investors are the bargain hunters of the stock market, and Mr Miller looks for stocks trading at large discounts.
Related stories:
» The 7 deadly investment myths
» How to value a company
If a stock that he holds starts to fall, he simply sees it as a better bargain. Hence, his famous reply to the question of when he would stop buying a falling stock: 'When we can no longer get a quote.'
Of course, value investors always face the danger of being left with a value trap, or a stock that appears undervalued but is on the decline. Research and analysis is key to avoid ending up with a value trap on one's hands.
In this area, understanding the background of the industry is also important. Says Mr Miller: 'The trap comes in when there's a secular change, where the fundamental economics of the business are changing or the industry is changing, and the market is slowly incorporating that into the stock price.'
Go for the long-term
Mr Miller is definitely not a short-term speculator, and instead sums up his long-term view on stocks as 'creative non-action'.
Related stories:
» The 7 deadly investment myths
» How to value a company
'We are mostly inert when it comes to shuffling the portfolio around, with turnover that has averaged in the 15 per cent to 20 per cent range, implying holding periods of more than five years,' says Mr Miller.
Market changes seldom affect his decisions, either. 'Many funds have turnover in excess of 100 per cent per year, as they constantly react to events or try to take advantage of short-term price moves. We usually do neither. We believe successful investing involves anticipating change, not reacting to it.'
In the late 1990s, Mr Miller famously bought more and more shares of Internet company AOL, even as its price plummeted. Despite widespread scepticism about the wisdom of that choice, his decision eventually paid off when the stock came back strongly.
Do your own thing
Mr Miller's winning bets on Google and AOL illustrate a key component of his style: never be afraid to think differently.
Related stories:
» The 7 deadly investment myths
» How to value a company
After all, Mr Miller once served as a military intelligence officer in Europe. He also sits on the Board of Trustees at the Santa Fe Institute, a centre for research in complex systems theory. Though that may sound esoteric, analysing systems is part of Mr Miller's investing philosophy.
'What we are really trying to do is to think about thinking,' says Mr Miller. 'Understanding how groups behave is central to understanding how complex adaptive systems - such as the stock market - work.'
In practice, this philosophy means that Mr Miller often buys stocks which most investors would not consider holding, as he believes that the conventional wisdom about them is wrong. Of course, he is not contrary for the sake of being so: his decisions are backed by solid analysis.
Going long may not sound as exciting as speculation. Yet Mr Miller's style is not for the faint-hearted. Investors wishing to emulate his philosophy, whether in rejecting the conventional wisdom or buying even deeper into plummeting stocks, will need confidence in both themselves and their research.
Subscribe to:
Posts (Atom)