Saturday, May 7, 2011

When is the price right?

Market timing is near impossible according most of the big investor names. Earlier I presented you though with some ideas about how to value stocks and to buy at the right price. Opportunities to buy at the right price occur much more frequently during depressed markets or in recovering markets while they become exceedingly rare during speculative market bubbles or raging bull markets. So we're buying good companies at good prices not at any price!

BTW most stocks that I like, I do own myself. I have been muttering about Microsoft, Johnson and Johnson, CNRL, the Canadian banks, XIUs and many others. When I write about them there is a good chance that I own them as well.

I do not make recommendations; I just use these stocks as examples. However, If I write here on this blog that I like a stock why wouldn't I buy them? This is also true for today's example: Manulife (MFC). In fact, I owned MFC for many years and collected faithfully the dividends.

But the events in 2008 disgusted me and I sold because I saw better places to put my money elsewhere. I sold it all. The reason for my disgust was that Manulife's management, in its arrogance or pure stupidity, had sold investments where they guaranteed its performance without the appropriate back up. That was done during a BULL market – how stupid do you get? They had sold so much of this investment type that when the market tanked the company got into big trouble.

Well, they have hopefully learned. In the meantime their sales of many other products haven't declined. Manulife is still a 'play on the stock markets and on interest rates'. A little like Berkshire Hathaway! Manulife uses its insurance premium income to invest. So that is the ultimate form of using 'other peoples' money to make a profit.

The company does extensive research to determine its risk exposure to the numerous hazards their premium payers may experience. Once the potential damage pay-outs and the operating costs (admin, marketing, etc.) are taken care of they can use the remaining money for investment. Since the damage claims do not happen all at once, they can also use that portion of the premiums that is not due right away for investment. Same like Mr. W. Buffett does.

In 2008, MFCs investment acumen was far from perfect and many years of profits where gone out of the window; their stock was punished accordingly (see figure). As of today, their share price is not far off the lows reached in 2008-2009.
Chart is from GlobeInvestor

In the meantime, the company has rebuild a lot of its capital, its revenues have kept on increasing (see figure below) and soon its profits will recover as well (one certainly hopes so). Manulife makes money from higher interest rates and an appreciating stock market – that is where most of their money is/will be invested. Consider it a mutual fund that is highly levered using other peoples money (and hopefully this time with better risk management).

If you are a long term bull, like me, especially when you think we're at the beginning of an era of higher inflation and interest rates, then Manulife is the place to be. Below is a screenshot of the Manulife data as provided by the Canadian Share Owner Association – I highly recommend membership and also subscription to their data base.

The chance that this stock will go down a lot  is, in my judgement, low. Based on my assumption of a P/E high of 16, average annual earnings growth of 10% - once its earnings have recovered to their old levels, and a dividend yield averaging 2.5% (better than after tax GICs by itself), the share price might go as high as $95 per share in the coming 5 to 10 years.

So for more aggressive investors who want to diversify away from Gold and Oil, here may be an attractive investment opportunity. This is just an example as to 'how to buy at the right price'. It also shows that this type of investing is not risk free and that you should only do it when it forms a small part of a larger portfolio.

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