6-Month check on stocks

Similar to how Barron’s gave themselves a report card on their 1st half of 2011 stock picks, I tabulated the return of the stocks that I am invested in from Jan 3rd to Jun 30th of this year. 

Stock     Price change

  • XOM     +10.36%
  • PFE      +18.87%
  • WTR        -1.79%
  • JNJ         +7.78%
  • ADP      +13.78%
  • LLTC       -3.45%
  • INTC       +8.04%

Assuming equal weight in investments this gives an overall return of 7.7%, exclusive of dividend reinvestment.  The S&P 500 returned 3.83% for the first half.  So I exceeded the benchmark by 200%.  I continue to believe that the discounted earnings and dividend flow model* gives an investor a powerful tool to value stocks, which can be used to create a portfolio that can meet or exceed the return of an index over the long term. 

*someone (N.Y.) pointed out that in my forecasting, I am not actually estimating cash flows, but rather flows of earnings and dividends, and discounting those items.

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Berkshire And Snap-on Revisited

A few months ago, I estimated Berkshire Hataway’s DCF stock price at the improbably precise figure of $113,046.04 when the stock was at $127,850. Since February 14th, the stock has fallen about 10.5%, to around $114k and change. I think it’s now a buy, especially with low oil prices. Snap-On hit my price target a couple of weeks ago, and already gained 9%!

DCF estimates for Snap-On Tools and Berkshire Hathaway

I did DCF estimates for Snap-On Tools (sna) and Berkshire Hathaway (brk-a) over the weekend.  I get $55.61 for SNA and $113,046.04 for BRK.A.  As if my estimates were that precise.  SNA traded at 59.01 on 2/11, meaning I’m valuing the stock 7.2% below the close on Friday.  BRK.A traded at $127,400 on 2/12/11, meaning I’m calculating value at 12.5% below the current stock price.  Barron’sraved about Berkshire Hathaway a couple of weeks ago, but I don’t see it. I’ve got the EPS right in the range Barron’s estimated and am forecasting growth of 3, 10, 8, 8, and 8 percent for the next five years.

A few things:

  1. Analyzing Berkshire Hathaway is very complicated.  It took me all Saturday to read/analyze the 10Ks for the last couple of years.  It is amazing that the head office only consists of 10,000 square feet.  It must be all accountants and a couple of lawyers.
  2. Heavy discounts were applied to Berkshire Hathaway in case of losses from ‘inherited’ insurance coverage  and in case the CEO retires/dies.
  3. I don’t see how railroads and trucking (XTRA) can not be affected by rising oil prices.

Illustration of compound interest

If you bought 100 shares of Exxon 35 years ago for $2.77 per share, and reinvested the dividends,you’d have $230,944 today. source. That’s an annual return of 19.2% compounded, exclusive of taxes.

** update **
if you bought Exxon on Dec. 31st 1976, you would have had a compounded return of 17.1%. Berkshire Hathaway, by contrast, gave a compounded annualized return of 21.1%. Source

If the price of oil goes up to $130 next year as Mark Waggoner claims it will source, the annualized return on Exxon from 1976-2011 could exceed that of Berkshire Hathaway.

DCF Estimates By Request

By request, I did DCF estimates for Jet Blue – JBLU and Steve Madden.

Jet Blue looks like it’s a buy, but be careful. One of my friends described investment in an airline as ‘controlled descent into poverty’ Warren Buffett lost a ton of money in USAir in the ’90s. That said, I know one individual (very wealthy) who invested in Southwest immediately after Sept. 11th and sold in early 2004 for a 30% profit. I know another individual who sold Delta recently after buying it last march, for almost 300% profit. Jet Blue is non-union, and if it ever unionizes, its costs will increase substantially.
I actually like Jet Blue because the planes are comfortable and you can watch satellite TV during flight. Southwest is the Greyhound of the sky and seems to attract gutter trash and desperate business people. I hate their no assigned seat system. Anyway, back to Jet Blue. All of my experiences have been pleasant. They had trouble moving from their old fare booking system to Sabre, but it looks like those troubles are behind it, finally. So, remember that the secret to making money with an airline stock is buying and holding until you hit your price target, and then get out.

Steve Madden looks expensive despite the glowing report in Barrons a couple of weeks ago. Maybe I am missing something in my valuations?

My Stock Portfolio Performance

Here are the stocks I’m currently invested in with their performance tabulated:

Stock Annualized Performance YTD
XOM 10.86% 4.40%
PFE -3.08% -8.08%
WTR -1.36% 23.24%
LLTC 33.01% 12.34%
JNJ 0.16% 0.16%
ADP 12.29% 12.29%

I bought two stocks this year, fewer than last year. A long-term (11 year) investment, Exxon is up modestly for the year to date.  Pfizer continues to disappoint.  Aqua America is up quite a bit this year, but the holding has not performed very well since I bought it.  Linear and ADP did well.  Johnson & Johnson did poorly because of the recalls, and how they handled them.

I think my criteria for Pfizer was: “it does what? — I should buy a lot of that stock, it’ll do great!”  I’ll never do that again.  I bought Aqua America, because I wanted a utility, but I overpaid for it.  After these stocks, I decided to utilize more sophisticated analysis than interpreting drug commercials with Bob Dole in them. Working for Vitesse when the shenanigans were uncovered might have had something to do with wanting to weed out overpriced stocks, or stocks with problems on their books.

My stocks are pretty diversified, although you could argue that PFE and JNJ overlap quite a bit. My aggregate return for stocks I picked using my method are up 8% this year and were up 42% last year.  The S&P 500 is up 9.83% so far this year and was up 23.43% last year.  Goldman Sachs is not going to beat my door down for my stock picking advice but I am confident in the screening method I use.

DCF Analysis for Coach

Having accompanied someone to Coach outlets in my time, I decided to look at Coach as an investment because the stores seem to be like the Apple store, except perhaps busier. Their gross margins are enormous: 72-73%. Everything they sell is made in China*. On the last conference call they specifically said they are forecasting lower margins in 2011 due to rising labor costs. I did a DCF (see attached) and I get $40.24 for value. See attached.Coach_DCF_Analysis

*note that someone could probably make handbags in the US, at the same price point, with lower, but still decent margins.
Disclaimer: I don’t own Coach stock but probably will purchase shares if the price goes below my DCF number.