Tuesday, June 17, 2014

It's Hard finding Stocks in the current Market with a "Margin of Safety"

It is getting harder to find value in the market recently. If you look back to every business cycle you will see during it many companies will deserve higher and lower multiples depending on how their business is accelerating or decelerating.  Many company's stocks have gone up in this bull market for a few reasons: 1. multiple expansion 2. the earnings per/share growth 3. where we are in the business cycle. In the current bull market the economic outlook is a rising tide as all companies are getting the benefit of the doubt. 

I looked at a few companies this morning:

Altria Group Inc. (NYSE:MO) The current P/E of each diluted share is 17.7 compared to a normal of 14.9. Current price $41.45 using the normal P/E the price should be $34.89
Union Pacific Corporation (NYSE:UNP) The current P/E of each diluted share is 20.3 compared to a normal of 16.5. Current price $99.81 using the normal P/E the price should be $81.12
The Coca-Cola Company (NYSE:KO) The current P/E of each diluted share is 20.8 compared to a normal of 19.3. Current price $40.66 using the normal P/E the price should be $37.72

You can still make money and a decent return buying these quality companies but buying at a discount to the normal P/E can result in superior returns.

Currently long KO of the stocks mentioned. 

***What makes investing in businesses so special is they can grow and produce products people want and grow faster than normal that could result in historical data being totally irrelevant. In the case of Union Pacific Corp. I haven't done enough research to know if they deserve a high multiple because they are expanding in Mexico or business has picked up and will continue to do so.  The one key caveat investors should worry about is investing at the wrong time and suffering when business slows down. 

It comes back to Benjamin Graham and the term of Margin of Safety! 

Margin of Safety taken from Investopedia:

A principle of investing in which an investor only purchases securities when the market price is significantly below its intrinsic value. In other words, when market price is significantly below your estimation of the intrinsic value, the difference is the margin of safety. This difference allows an investment to be made with minimal downside risk. 

Thanks for reading let me know your thoughts!

DSF

Disclaimer: This is a personal weblog. The opinions expressed here are my own. All data and information provided on this site is for informational purposes only. Please do your own research before investing. 

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