Saturday, September 7, 2013

Intrinsic value of Intel

Many investors feel that they have no time or access to the right data, thus they invest based on recommendations from their brokers or worse, based on ‘hot tips’.  If you really don’t have time or knowledge to research your own individual stock investments, it may be better to invest in a stock market ETF rather than in an individual stock or in niche ETF’s that focus on green energy ,or high tech, or whatever other specific strategy.

I invest in both ETFs and individual stocks. The ETFs help me to invest in say the ‘Canadian Stock Market’. Also, in other markets, with which I am less familiar I tend to buy ETFs. Currently I am focussing on the U.S. and Europe. I also discussed on this blog the Moderate Dividend – Low P/E Stock Portfolio. The idea was to invest once a year in stocks screened for a low Price/Earnings ratio that paid dividends between 3 to 5% per year.

I reported the results on this blog. I noticed that the portfolio seemed to take off with a vengeance in the first 4 months of each year and then, in the second half of the year, it gave back a significant portion of the profits. By year’s end you sell off the stocks and select a new set of stocks that makes the screening criteria. The end result was that I performed nearly as well as the TSX60 iShares fund XIU in the first year.  I restarted the portfolio again this January and the stocks took off big time in the first 4 months or so plus I received of course the dividends. But when the market again started to sag during the summer, I decided to take the profits which were close to 20% rather than handing them back to the market in the 2nd half of the year. Near year-end we may repeat this strategy.  Thus, with a 6 months’ time horizon the moderate dividend and low P/E portfolio works fine, but we’re trying to be long term investors.
Apart from owning market ETFs we’re also trying to build a solid ‘Buy & Hold’ portfolio with dividend income and that we can use to write covered call and naked put options to augment cash flow. I am quite enthusiastic about the performance of this strategy to date with an emphasis on solid U.S. manufacturing and high tech companies that pay a decent dividend yield and with predictable earnings performance. That is where our discussion of intrinsic value comes in. 
Rather than worrying about short term market gyrations we’ll be focussing on companies that are dominating their field of business. Stocks such as Wells Fargo, Johnson & Johnson, Apple and Microsoft.  Although enormous in size, these companies are relatively easy to understand in GAAP conforming annual statements such as the balance sheet, Income and Cash flow statements. You can treat the stocks of these companies nearly as a government bond except instead of interest you receive a portion of the company’s profits. We have written about buying a company at the ‘right price’ but when we had to evaluate what those companies were actually worth, we stumbled. The market gyrates without much reason and often seems to be more psychotic than rational. Well, ‘seems’ is too soft a word. The market IS psychotic and it overvalues a stock one day and the following day it becomes utterly depressed and severely undervalues that same stock. This is what Warren B calls ‘mispricing’ and he loves to buy mispriced cheap stocks. He likes to hold such stocks forever if possible.
Cheap means the stock price is trading below its ‘intrinsic value’. The intrinsic value is nothing more than adding up all of a company’s future earnings when expressed in today’s dollars. That is what we have done in our earlier Microsoft example. We calculated that Microsoft’s intrinsic value today is: US $58.92 and it trades at around $30 per share. So, would you like something such as Microsoft for 50 cents on the dollar while still earning 10% per year?  Ten (10) percent is the discount rate we applied to Microsoft’s earnings rather than the rate of inflation. “

I was so excited, I bought the company!’ Remember that commercial by the Remington Electric Shavers company?  Viktor Kiam, another legendary investor, appeared in the Remington commercial’s stating: "When my wife bought me a Remington shaver, I was so impressed I bought the company".  That reminds me of Peter Lynch’s Fidelity’s Magellan Fund. Peter bought Hanes because his wife loved Hanes’ L’eggs stockings at the time and made a ‘six bagger’ (600% profit).
I digress (as usual). So can we find more stocks with tremendous intrinsic value that we can buy on the cheap? Well, here is my intrinsic value spreadsheet with numbers that I collected form in under five minutes. The numbers are exiting, but don’t forget to do your own fact checking. This is just an example… and not a recommendation. So, if it takes not much more than copying a few numbers from GlobeInvestorGold and pasting it into the intrinsic value spreadsheet do you think you can do that, rather than following yet another ‘hot tip’ on which you lose money?

Click on figure to magnify



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