Old School Value

2009 Top 40 Best Stocks to Retire On

This is part 2 of a 4 part series looking at each of the companies selected and listed by Fortune in their 2009 Fortune 40: The Best Stocks to Retire On list.

Part 1 | Part 2

Bargain Growth aka Growth at a Reasonable Price (GARP)

Companies 11 through 20 are categorized as stalwarts or companies that can consistently create growth. This is the Peter Lynch style section of the portfolio.

Another Lynch precept is to invest only in companies with debt-to-equity ratios below 0.33. That requirement eliminated three of our 2008 holdings: 3M, McKesson, and Parker Hannifin all carry slightly too much debt. Meanwhile, two of our other stocks, Accenture and Microsoft, managed to generate more free cash flow last quarter, proving themselves to be what Lynch calls “stalwarts,” or consistent performers. They remain on our roster. - Fortune

Now let’s look at the next 10.

40 Best Retirement Stocks: No.11-20

1. Cisco Systems (CSCO)
2. Microsoft (MSFT)
3. Walgreen (WAG)
4. Gilead Sciences (GILD)
5. Mastercard (MA): Outside circle of competence
   
6. Thermo Fisher Scientific (TMO)
7. Baker Hughes Inc (BHI)
8. Becton Dickinson & Co (BDX)
9. Bristol-Myers Squibb (BMY)
10. Carlisle Companies (CSL)

Although I understand what Mastercard does I’m still uncertain about the valuation process and my abilities to get deeper into financials so I’ll let it be. If you look at the embedded spreadsheet at the bottom of the post, you’ll see that I didn’t highlight a single one out of this 10 because I don’t believe there are any bargains in this list as the categorization suggests.

BHI, BDX and MSFT were priced lower than my valuations but BHI is too inconsistent and unreliable to be included in any long term portfolio. BDX looks to be a good company but the margin of safety just isn’t there.

Microsoft (MSFT) Commentary

Regarding MSFT, I’ve never liked it as an investment. As a company, MSFT is always falling behind in everything they do. They are slow to react, slow to innovate and slow to adjust. Look at the romping they get from Apple with the mp3 players, Mac books is inching up and even iPhone is a better mobile product than Windows Mobile (although iPhone isn’t just a software). Apple’s growing fan base can’t be beat.

In the gaming section, Wii is the market leader. I can’t actually remember MSFT ever being a leader in the gaming section either. Nintendo had lagging console game sales for years but put a major turnaround through innovation something that I find is missing with MSFT.

Search and Bing? Still less than 10% while Google has over 75% market share. Younger, sleeker and innovative company just sped past.

But having said all that MSFT is still likely to grow at a consistent pace with Windows and Office, they just can’t seem to dominate anything other than what they were doing since their startup years.

• Current Price: $24.04
• Discounted Cash Flow Fair Value: $32.17
• Ben Graham Formula Value: $43.50

Walgreen (WAG) Commentary

WAG is a company that I’ve always like and is a prime example of a consistent and faithful company. It goes about its business with expert precision and execution. If you look at their margins for the past 10 years, it is solid as a rock. No veering off course into stupidity, which is why the company is so widely followed and constantly hovering around fair intrinsic value.

This recession is a good chance for entry points on WAG for people that have been waiting for years to get a consistently growing company.

• Current Price: $29.34
• Discounted Cash Flow Fair Value: $24.42
• Ben Graham Formula Value: $52.74

Thermo Fisher Scientific (TMO) Commentary

TMO is a new addition to the portfolio and it is a good pick.

Thermo Fisher Scientific Inc. (Thermo Fisher), incorporated in 1956, is engaged in serving science. It provides analytical instruments, equipment, reagents and consumables, software and services for research, manufacturing, analysis, discovery and diagnostics.

• Current Price: $40.39
• Discounted Cash Flow Fair Value: $39.76
• Ben Graham Formula Value: $40.75
• Comments: Margins, growth and return metrics are good. FCF growth has been very strong but wonder whether it can be sustained. Increased margins in FY 2008. Sales becoming flat.

It seems like its premium value has been removed and is now trading at fair value. Really does seem like a GARP pick.

Becton Dickinson & Co (BDX) Commentary

Becton, Dickinson and Company (BD) is a medical technology company engaged in the manufacture and sale of a range of medical supplies, devices, laboratory equipment and diagnostic products used by healthcare institutions, life science researchers, clinical laboratories, industry and the general public.

• Current Price: $70.70
• Discounted Cash Flow Fair Value: $82.04
• Ben Graham Formula Value: $138
• Comments: Has consistently produced plenty of FCF but FCF growth has been minimal, very good CROIC of 15%, steady growth in shareholders equity/book value, stable rising margins, debt to equity is consistently dropping, sales has been increasing.

Bristol-Myers Squibb (BMY) Commentary

Has a nice dividend of 6% but growth has been somewhat slow when it comes to cash. However, their ability to generate cash returns off invested capital is very good at over 15%. I’m not very interested in BMY myself but I do wish there was somebody that could analyze and value Mead Johnson Nutritionals (MJN).

• Current Price: $20.24
• Discounted Cash Flow Fair Value: $17.11
• Ben Graham Formula Value: $29.94
• Comments: FCF is positive most of the time but inconsistent as in not able to raise it steadily with some big losses in between. Average return metrics. Normalized earnings is also low and inconsistent. Margins and sales unstable. I wouldn’t consider as a retirement stock.

Fortune 40 Best Stocks to Retire on Part2

Disclosure

No positions in any stocks mentioned at time of writing.

Continuing on by popular demand, this is part 1 of a 4 part series looking at each of the companies selected and listed by Fortune in their 2009 Fortune 40: The Best Stocks to Retire On list. View the original list on Fortune.

Part 1 | Part 2

The new 2009 Fortune’s Best Stocks to Retire On is not a complete makeover from last years pick of 40 stocks but there has been quite a number of changes. Enough to keep things interesting.

You can also refer to my commentary on the 2008 best stocks list to catch up.

Excerpts from the Fortune Article

Snippet on how the 2008 list performed.

The Fortune 40 delivered a 20.3% loss for the 12 months ended June 1… The S&P lost 30.1% during the same period… [our]record since inception in 2002: The Fortune 40 has averaged 10% annualized returns, nearly doubling the S&P’s 5.1%.

Best performers from 2008 selected companies.

Our star stocks last year included smokeless-tobacco company UST (acquired by Altria), which returned 25.9%. Then there was National Presto, which manages to sell both ammunition and diapers, among other disparate products. It’s an unlikely combination, to say the least, but one that is apparently impervious to the economy. Investors rewarded National Presto with a 17.6% gain last year.

Worst performers from the stock list.

Our worst decliners were two small-cap recommendations pummeled by the collapse of energy prices. Offshore construction and engineering concern Global Industries plummeted 55%, and natural-gas driller Grey Wolf sank 57% before being bought in December. (Quite a contrast to how my small-cap picks have performed)

Growth and Income Selection

The first 10 companies that make up the list is part of the growth and income section of the portfolio. As the Fortune portfolio is a bag of companies fit for retirement, Fortune has categorized their portfolio positions according to each of the four strategies.

The growth and income companies are blue chip companies based on Jeremy Siegel’s book The Future for Investors.

Siegel’s stock-picking philosophy emphasizes established companies with proven products, consistent returns, healthy long-term earnings growth, and high dividends. Perhaps they aren’t the glitziest names, but “boring” can be another word for “sturdy,” and that’s appealing these days.

CL,USB and ITW were dropped this time around and replaced with MCD, FPL and WMI.

40 Best Retirement Stocks: No.1-10

1. Abbott Laboratories (ABT)
2. Coca-Cola Co (KO)
3. General Mills Inc (GIS)
4. Johnson & Johnson (JNJ)
5. Procter & Gamble Co (PG)
6. Waste Management Inc (WMI)
7. McDonald’s Corp (MCD)
8. FPL Group (FPL)
9. Accenture Ltd (ACN)
10. Chubb Corp (CB)

Once again, I’ll be passing on Chubb as I don’t have a good understanding of insurance companies and their financials.

This time around, the price discrepencies are quite small but the solid picks are JNJ, PG and the new addition, MCD. With most of the companies, it has been less than 2 months since I put up the 2008 Fortune Best Retirement Stock list and blue chips won’t change within 2 months, so the commentary is the same.

Johnson & Johnson (JNJ)

Johnson & Johnson stock analysis and report

Johnson & Johnson is engaged in the research and development, manufacture and sale of a range of products in the healthcare field. Johnson & Johnson has more than 250 operating companies. The Company operates in three segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics.

• Current Price: $56.60
• Discounted Cash Flow Fair Value: $70.16
• Ben Graham Formula Value: $98.37
• Comments: increase in debt-equity, good margins, good FCF

Procter & Gamble (PG)

The Procter & Gamble Company is focused on providing branded consumer goods. The Company’s products are sold in over 180 countries around the world primarily through mass merchandisers, grocery stores, membership club stores, drug stores and in high-frequency stores, the neighborhood stores, which serve consumers in developing markets

• Current Price: $51.75
• Discounted Cash Flow Fair Value: $68.75
• Ben Graham Formula Value: $102.49
• Comments: good FCF, steady margins, super CROIC, decrease debt, outstanding

McDonald’s Corp (MCD)

McDonald’s Corporation franchises and operates McDonald’s restaurants in the food service industry. These restaurants serve a varied, limited, value-priced menu in more than 100 countries globally. The restaurants are operated either by the Company or by franchisees, including franchisees under franchise arrangements, and foreign-affiliated markets and developmental licensees under license agreements.

• Current Price: $57
• Discounted Cash Flow Fair Value: $68.75
• Ben Graham Formula Value: $105.43
• Comments: Generates cash, earnings with consistent and high returns. Market leader, still growing consistently.

2009 Fortune 40 Best Stocks to Retire on Part1

Disclosure

No positions of any stocks mentioned at time of writing

Two months ago, I put up a list of negative enterprise value stocks that I ran from the Yahoo screen in order to test how the strategy would perform when net nets disappear.

No I didn’t make over 100% over a short period of time but I hope I did grab your attention.

Two months ago, I performed a negative enterprise value search and wrote up the results. I admit two months is certainly not a good indicator of performance and I’m probably getting ahead of myself but the list has performed incredibly well. They were random picks without any research but were businesses I knew about. The negative enterprise stocks have gone up 103.98% during the last two months.

These cheap undervalued stocks were listed just before the overaused usedll market went up so expecting the same type of results will be wishful thinking. But it does indicate how negative enterprise value stocks would perform.

Previous Cheap Stocks Results

• Tuesday Morning (TUES): UP 523.81%
• Global Sources (GSOL): UP 69.75%
• Horsehead Holding (ZINC): UP 65.16%
• Heidrick & Struggles International Inc (HSII): UP 34.22%
• Tandy Leather Factory (TLF): UP 27.37%
• Build a Bear Workshop (BBW): UP 10.46%
• DIVX Inc (DIVX): DOWN 2.91%
• S&P average: UP 23%
  

I was surprised at how TUES recovered and topped the list. I’m sure there must be similar contrarian businesses out there.

Well let’s go fishing again and see what we catch this time.

Screen Settings

The screen criterias are:

• Enterprise value <= 25m
• Enterprise value/Revenue <= 1
• ROE >= 0

Negative Enterprise Value Stocks

QLT Inc. (QLTI)

QLTI is a Chinese company was mentioned quickly in the article where I went through 100 net nets with the investment spreadsheet. Their latest quarterly reports reveal that a significant amount of cash and receivables disappeared. Although QLTI is no longer a net net, it is still in negative enterprise value territory.

Prices as of May 25

• Current Price: $2.34
• Cash per share: $2.37

Comments: QLTI is trading at a cheap price but they been involved in a couple of expensive litigations and probably more in the future. This only means more cash thrown at legal fees and charges. Won’t be adding this one on my list.

Man Sang Holdings Inc (MHJ)

Another Chinese, Hong Kong to be correct, company. The cheap stocks list seems be filled with Asian companies lately. I wonder why that is… ??

Man Sang Holdings, Inc. is principally engaged in the purchasing, processing, assembling, merchandising, and wholesale distribution of pearls, pearl jewelry products and jewelry products. In addition, the Company owns and operates a commercial real estate complex in Shenzhen, the People’s Republic of China. The Company offers six product lines: Freshwater pearls; Chinese / Japanese cultured pearls; South Sea pearls and Tahitian pearls; Pearl jewelry, and Other jewelry products.

• Current Price: $2.30
• Cash per share: $10.19

Comments: MHJ is currently trading at a HUGE discount to the amount of cash it is holding. In terms of revenues, it has been positive for the 9 out of 10 years and the important free cash flow has also been positive except 1999 and 2008. Last year MHJ used up $13.1 million in FCF where $60.7mil was used in capital expenditures. Considering their average capex has been around $1 mil for the past 9 years, if the $60.7m is a one time occurence for future growth, MHJ may be a very very ver interesting prospect.

On paper MHJ has a liability of $171m but upon a deeper probe, it turns out that $79m is from a “Minority interest”. Minority interest is defined as

“A non-current liability that can be found on a parent company’s balance sheet that represents the proportion of its subsidiaries owned by minority shareholders.

If ABC Corp. owns 90% of XYZ inc, which is a $100 million company, on ABC Corp.’s balance sheet, there would be a $10 million liability in minority interest account to represent the 10% of XYZ Inc. that ABC Corp does not own.”

I haven’t gone through the previous statements but it seems like MHJ has quite number of payables and loans it needs to pay off.

Avalon Holdings Corporation (AWX)

Avalon Holdings Corporation (Avalon) is a subsidiary of American Waste Services, Inc. (AWS). Avalon’s business segments are waste management services, and golf and related operations. The waste management services segment includes waste disposal brokerage and management services, and captive landfill management operations. The golf and related operations segment includes the operation and management of golf courses, fitness centers, dining and banquet facilities, and a travel agency.

• Current Price: $2.30
• Cash per share: $1.4

Comments: Capital intensive business with extremely tight margins. Safe to say that the margin of safety has probably eroded but waste management is always a business with a moat. Only problem with AWX is that it loses money in the process.

As a going concern, AWX looks to be worth around the $5 mark with a high level of uncertainty.

Mastech Holdings (MHH)

Mastech Holdings, Inc. (Mastech) is a provider of information technology (IT), brokerage operations staffing, and consulting services. It operates five Global Recruiting Centers located in the United States, Asia, and Europe that deliver a range of recruiting and sourcing services.

• Current Price: $3.09
• Cash per share: $1.56

Comments: Just found out MHH was a spin off from iGATE in Sep of 2008. It was spun off at a price of $9.75 and then plunged to $1.10 within a month as everyone sold off. Will definitely look more into this one

Had a huge run up in price after its first quarter announcement but there may be more value remaining.

Additional Comments

Although there were some more interesting names, many of the larger cap companies have now disappeared from 2 months ago. Who knows where the markets are headed, but it’s always best to scoop up the bargains while they exist and buy more if it gets cheapers.

Disclosure

No positions held at time of writing.

This is part 4 (final part) of the Fortune 40 Best Stocks to Retire on.

Part 1 | Part 2 | Part 3 | Part 4

We previously looked at the first 30 companies that made up the list in Fortune’s 40 best stocks to retire on. Here we look at the final 10.

Best Stocks to Retire On: No.31-40.

1. Plexus Corp (PLXS)
2. Tessera Technologies Inc (TSRA)
3. BP (BP)
4. Diageo (DEO)
5. Novartis (NVS)
6. Koninklijke Philips Electronics (PHG)
7. Sanofi Aventis (SNY)
8. Total S.A (TOT)
9. Unilever (UL)
10. Vodafone Group (VOD)

This last group consists of companies that are not on the popular buy lists but here are some comments on a few of the companies.

Tessera Technologies (TSRA)

If you go through the numbers for Tessera, you will immediately notice its crazy performance.

For the past 5 years it has averaged

• increased shareholders equity by 35%
• increased FCF by 52%
• CROIC of 17%
• a FCF/Sales of 27% (this means for every dollar of sales, it has converted 27c into FCF.)
• the other return margins are outstanding as well

This is probably all too well reflected in its share price of $16. By my guess, TSRA has to continue growing its cash at 40% for the current price to make sense. A more realistic growth of 13-14% yields a price of $9.40.

A company worth watching and studying.

TSRA Stock Price Estimates

• Stock price as of May 18: $16.07
• Discounted Cash Flow Fair Value: $9.58
• Graham Value: $24.22

BP (BP)

BP doesn’t seem to be as popular as Exxon (XOM) or Royal Dutch (RDS.A) but BP is also very consistent and throws off huge free cash flow. Their dividend yield is still at 7% and they had a profitable Q1 to get things back on track.

BP Stock Price Estimates

• Stock price as of May 18: $47.26
• Discounted Cash Flow Fair Value: $69.64
• Graham Value: $100

Sanofi Adventis (SNY)

Of the 10 companies listed, SNY seems to be the only one that can be considered cheap.

SNY is a pharmaceutical company engaged in the research, development, manufacture and marketing of healthcare products. The company does business in two activities - pharmaceuticals and human vaccines.

From their numbers I see that their FCF growth is rather low but the cash growth has been consistent for the past 4 years, their tangible shareholder’s equity has been rising very nicely and their CROIC numbers are great.

SNY could be an alternative to PFE for those that understand pharmaceuticals.

SNY Stock Price Estimates

• Stock price as of May 18: $30.51
• Discounted Cash Flow Fair Value: $48.76
• Graham Value: $54.29

Calculate Fair Value with Free Investment Spreadsheets

To calculate the fair value of stocks for yourself, you can download the free DCF investment spreadsheet, Ben Graham investment spreadsheet or get the premium version which includes many more features.

Fortunes 40 Best Stocks for Retirement - Full List

Fortune 40 Best Stocks to Retire on FULL

Disclosure

No positions in any stocks mentioned at time of writing.

This is part 3 of the Fortune 40 Best Stocks to Retire on.

Part 1 | Part 2 | Part 3 | Part 4

We previously looked at the first 20 companies that made up the list in Fortune’s 40 best stocks to retire on. Here we look at the next 10.

40 Best Stocks to Retire On: No.21-30.

1. Pfizer Inc (PFE)
2. Regal Beloit Corp (RBC)
3. UST (UST) - Being bought out.
4. VF Corp (VFC)
5. Adtran Inc (ADTN)
6. AVX Corp (AVX)
7. Fair Isaac Corp (FIC)
8. Global Industries (GLBL)
9. Grey Wolf (GW) - No longer trades
10. Penn Virginia Resource Partners (PVR)

As we get lower down the list, we now come upon companies that some may not have heard about before. Topping the Fortune best stocks list in this 3rd installment is Pfizer, a pharmaceutical company that has kept falling since 2000. Not to mention the well known fact that its patent for Lipitor, its bread and butter, will soon expire. Pfizer and its increased activity in acquiring companies has also increased debt. Cheap but not cheap enough to consider buying in my opinion.

Pfizer (PFE)

As I mentioned above, PFE is likely to encounter short term problems with the loss of Lipitor and trying to merge Wyeth into its operatoins.

Some points regarding their numbers:

• cash cow
• past 3 years sales have been flat
• good margins but fluctuates due to industry
• rising debt to equity

Stock Price Estimates

• Stock price as of May 5: $14.95
• Discounted Cash Flow Fair Value: $26.71
• Graham Value: $28.40

UST (UST)

UST is being acquired for around the mid $69’s. It’s always fun to see what the buyout price is compared to the investment spreadsheet. It just indicates that I am not being over optimistic or pessimistic for companies as a going concern.

Fair Value Calculations with Free Investment Tools

To calculate the fair value of stocks for yourself, you can download the free DCF investment spreadsheet, Ben Graham investment spreadsheet or get the premium version with many more features.

The First 30 Companies from Fortune’s List

Disclosure

No positions in any stocks mentioned at time of writing.

I was going through the Manual of Ideas site and taking a look at the previews and samples. If you aren’t aware, Manual of Ideas is a service that focuses on deep value companies. They issue newsletters that contain a truckload of ideas on companies you’ve never heard of.

The headline “Portfolio Manager’s Review Picks Top 5 Ben Graham-Style Deep Value Investments” caught my attention since this has been the focus on Old School Value of late. The sample they have up is an 8 page report but all the “top picks” have been hidden in black but what got me more interested was the list of 100 companies passing the deep value screen. (The 100 companies list starts from page 4)

So how do you go through 100 deep value net net companies without spending hours looking up the information? Modify the existing net net investment spreadsheet so that it runs more than 4 companies simultaneously.

Let me put up the results first.

Results from 100 Companies Passing Deep Value Screen

From the initial filter, 19 companies surfaced but after checking the numbers of some companies, that number was reduced to 16. The companies in alphabetical order are as follows.

• ATV - 11% discount to liquidation net net value.
• ACTS - 40% discount
• HILL - 31% discount
• FTAR - company is liquidating and has already distributed $2. The calculated liquidation value is $3.47 which is in the ballpark of the $2.76-$3.44 declared liquidation. Judging by the current stock price, the company will be liquidated for around $3.
• GRVY - 16% discount
• HLYS - 27% discount
• HRAY - 27% discount
• HTX - 24% discount
  
• IKAN - 34% discount
• IPAS - No longer net net
• LTON - 27% discont
• MTSN - 13% discount
  
• MEMS - 4% discount
• NED - 13% discount
• NSTR - 19% discount. Liquidating at the $1.90 range.
• PDII - 24% discount
• QLTI - No longer net net. Latest filing reveals a significant decline in cash and receiables.
• SWIR - No longer net net. Company is made up of restricted cash which shouldn’t be included in liquidation.
• ELOS - Trading at liquidation value

From the list, there are quite a few Chinese companies and they all seem to have one thing in common. Holding large cash reserves. I’m not sure whether these companies are being conservative to survive the downturn or lack the commitment to return shareholder value.

Deep Value Stocks Trading at Deep Discounts to Cash

If you look at the embedded PDF below, the best net nets are the ones comprised mostly of cash compared to its total liabilities. Unless it is a company whose business model lies in acquiring receivables like ASFI, I feel it is best to find a cash loaded company.

The ones that hold a large amount cash compared to total liabilities are

• ACTS - $265 mil in cash equivalents vs $17 mil in total liabilities
• HLYS - $69 mil in cash equivalents vs $10  mil in total liabilities
• HRAY - $60 mil in cash equivalents vs $7  mil in total liabilities
• IKAN - $63 mil in cash equivalents vs $18  mil in total liabilities
• LTON - $96 mil in cash equivalents vs $17  mil in total liabilities
• MEMS - $66 mil in cash equivalents vs $3  mil in total liabilities
• NED - $151 mil in cash equivalents vs $39  mil in total liabilities
• ELOS - $197 mil in cash equivalents vs $39  mil in total liabilities

(You may have to recheck these numbers, as I may not have checked with the SEC for all).

Comments on HRAY, LTON and PDII

I recently bought HRAY, LTON and PDII where HRAY and LTON are both Chinese companies and compete with each other directly.

I listened to the past 2 conference calls and a couple of filings for HRAY and LTON and one thing that does concern me with HRAY is the management. HRAY received an offer for 51% of the company at $4 per share, but they did not respond for weeks resulting in the withdrawal of the bid. The company isn’t covered by any analysts so the conference calls didn’t offer any real insight. I’ll have to start questioning them in the next conference call. LTON on the other hand seem to have responsive management.

The big issue with China is to determine how the strict governemt regulations affect businesses as well as the mindset and mentality of businessmen compared to the west. For this reason I have never invested in China, but I’ll learn something about Chinese companies with this investment.

PDII has an interesting business model - they are a contract sales team for pharmaceutical companies. However, with the consolidation of the pharma industry, it seems like business is slow and they will continue to lose money for the rest of 2009. However, the CEO seems to be agressive and bullish in seeing change. If this does happen, I expect PDII to do very well over the long run when the economy returns.

Modified Net Net Deep Value Investment Spreadsheet

Now to what you are all interested in.

Changes include:

• Allows you to enter 20 tickers
• Deleted the restricted cash line from assets
• Fixed the conditional formatting to display a “red” or “green” properly

Download the Free Investment Spreadsheet

View instructions on how to install the spreadsheet

Net Net Deep Value Screen Results

Disclosure

I hold HRAY, LTON, PDII at the time of writing.