Sunday, July 7

Week 105 - Updating the Stock-picker’s Secret Fishing Hole

Situation: The term “stock-picker” generally refers to a longer term investor, someone who takes a long position in a company. Shorter term investors often take a short position by borrowing a stock and immediately selling it, thinking that its price is too high and it can be bought back later at a lower price. If you read this blog regularly, chances are good that you’re a long. Warren Buffett is a long. At the 2013 Annual Meeting of Berkshire Hathaway, he and Charlie Munger made it clear that they have never taken a short position and never will. This begs the question: "Where do you find the best stocks to own long-term?" 

In this blog, we try to highlight companies worth owning over the long term, companies that have finance value due to a business plan that their managers have perfected over time. Most such companies are in a boring business. People will drift away from you at a cocktail party if you talk about owning stock in companies with products such as toothpaste, electricity, plastics, and Tylenol. Where there is a grouping of many such companies, that would be what we call a “stock-picker’s secret fishing hole” - secret because it's too boring to talk about. Here at ITR, we think many such companies can be found in the Dow Jones Composite Index of 65 stocks (see Week 68). Those are picked by the WSJ’s managing editor for their sustainable earnings growth. Twenty are transportation companies, 15 are utilities, and the rest are “industrials” - the 30 companies composing the famous Dow Jones Industrial Average (DJIA). The 65-stock list typically has a turnover rate of less than 5%/yr: in the average year, two companies will be removed from the list (usually because of a merger) and replaced with two others.

Finance Value has to be estimated before you put money toward financing a company. We have a good metric for long-term Finance Value (reward minus risk with respect to total returns - see Column E of the Table where red highlights denote lower long-term Finance Value), and another good metric for recent Finance Value (increasing sales and cash-flow growth for the past 1-3 yrs as determined from the Barron’s 500 List). A company’s 2012 rank on the Barron’s 500 List is noted in Column F of the Table and compared to the 2011 rank in Column G. If the rank is lower in 2012 than in 2011, we red-highlight the 2012 rank and consider the company to have a recent Finance Value that is trending lower. 

We find that 10 of the 65 companies earn high marks by both measures, and list those at the top of the Table. In the next 3 sections of the Table, we break out data for “industrials”, transports and utilities. As expected, several of the 10 top companies are rarely mentioned in the financial press. These are companies such as Consolidated Edison (ED) among the utilities, and JB Hunt Transportation Services (JBHT) among the transports. JBHT has been so rewarding to its investors for so long that you have to wonder what business news editors are thinking when they avoid publishing news about JBHT. They’d probably defend themselves by saying something like this: “Trucking is a fragmented, high-revenue, high-cost industry with a low profit margin. So why write articles about such a boring group of small companies.” Here at ITR, we’ll answer that by saying: “All money is green. Any company that consistently makes a lot of it is worth your readers’ attention.” 

Bottom Line: Today’s blog simply puts a fine point on one of Warren Buffett’s investing tricks: find established companies that have carved a moat around a business by making mundane things happen better than their competitors.

Risk Rating: 5

Full disclosure: I have stock in JNJ and KO.

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