Vuru Blog

Jim Cramer’s Most Recent ‘Buys’ – And Their Flaws

Yoseph — Fri, 29 Jun 2012 16:53:10 +0000

While Jim Cramer has certainly made terrible calls, he has made some good calls in the past and we want to help retail investors pick the good from the bad.

More specifically, for each of his picks, we’ll let you know analyst ratings, how they measure up from a fundamental perspective, and whether they’re undervalued according to a discounted cash flow valuation using a 15% discount rate.

Below are some of Jim Cramer’s most recent “Buys” as of this past Friday. Some of them are definitely worth a look and some not so much. We hope that you’ll use this as a starting point for analysis. Without further ado, here are 5 Jim Cramer picks:

1. Jabil Circuit (JBL)

JBL provides electronic manufacturing services and solutions in the Americas, Europe and Asia. JBL is currently trading at $19 with a $3.9B market cap.

Jim has company on this recommendation. Wall Street analysts give this stock an average target price of $28.64, suggesting a potential upside of 50.7%. Vuru’s Growth Price is a little more conservative with a target price of $18.87. This assumes an annual free cash flow growth rate of -3.9%, whereas Wall St. is assuming at least 13% annual growth. Somewhere in the middle of those two is probably a fair value for JBL.

The biggest weaknesses for JBL lie in their miniscule profit margins (hovering around 0-2% over the past 10 years), and their high capital intensity. As a result of this, their ability to deliver positive free cash flow and net income can be unpredictable at times.

2. Oracle Corp. (ORCL)

ORCL is an enterprise software company that develops, manufactures, markets, distributes, and services database and middleware software, applications software and hardware systems worldwide. ORCL is currently trading at $27.06 with a $136B market cap.

Wall Street analysts have put an average target price of $33.93 on this stock, suggesting an upside of around 24%. Vuru lands on a similar target of $33.50. They both assume 15% annual free cash flow growth rates.

In terms of its numbers, ORCL is a strong business. However, it is in the technology sector and the rapid speed of advancement can often render big players obsolete (E.g. RIMM or NOK). That’s probably it’s greatest weakness.

3. Target Corporation (TGT)

TGT is a big box retailer in the United States. It’s currently trading at $58.58 with a $38B market cap.

I don’t know if it’s a coincidence that Wall Street analysts seem to be consistently in line with Cramer’s thinking, or not. In this case, they’ve set an average target price of $63. To us, that’s ludicrous. That assumes an annual free cash flow growth of over 30% over the next 10 years. Pretty aggressive. Vuru’s assumed 13.1% growth, putting a target price of $41.52 on TGT. This suggests this stock is overvalued by 29%.

Moreover, Target’s valuation isn’t its only weakness as a potential investment. It also operates in a highly competitive industry (Wal-Mart is a competitor) and has to expend significant capital on property and equipment just to stay competitive.

4. Coach Inc. (COH)

COH designs and markets accessories and gifts for men and women in the U.S. and internationally. COH is trading at $60.81 with a market cap of $17.5B.

Again, Cramer and Wall Street are at one, with analysts having an average target price of $81.73. Vuru’s Growth Price pegs the fair value of COH at $41.93, suggesting it’s overvalued by 31%. Cramer is way off the mark here. Even with Vuru’s valuation, it’s assuming the company will double its free cash flow every ~5 years. Wall Street is assuming it will consistently double every ~2.5 years, over 10 years.

Overall, Coach is a pretty good business: 20%+ net profit margins; 70%+ gross profit margins; and only medium capital intensity. As far as we can tell, the only concern is slowing department store sales.

5. AT&T Inc. (T)

T provides telecommunication services to consumers, businesses, and other service providers worldwide. Trading at $35.70 with a market cap of $209B. In this case, analysts and Cramer actually diverge. Wall Street put the average target price at $33.62, suggesting a sell. We actually happen to agree with Cramerica here in terms of valuation. Vuru’s Growth Price pegs the fair value at $46.67, suggesting an upside of 30.76%.

Nevertheless, AT&T has a significant weakness as a business. They have to expend large amounts of capital to ensure their infrastructure is top notch and as a result, keep their competitive edge. This can be detrimental if they are unable to cover this cost through debt. It should be noted that this isn’t unique to AT&T. The capital intensity of telecom companies in general is high.

An Interview with Saj Karsan

Yoseph — Thu, 21 Jun 2012 19:14:21 +0000

At Vuru, we’re heavily focused on empowering individual investors and thought it would be a great idea to talk to experienced investors about how they got started. This is the first in a series that we’ll be doing around this topic.

Today, we’re interviewing Saj Karsan (@SajKarsan). He’s the founder of Karsan Value Funds and blogs about his thoughts on value-focused approaches and ideas at barelkarsan.com.

1. You were an engineer before completing your MBA and turning your hand to investing. What first sparked your interest in a change to focusing on investing and how did you get started?

I’ve actually always been passionate about businesses. But the reason I went into engineering instead of business was because I was caught in the hoopla that was the tech bubble in the late 90′s. As a teenager I bought into the notion that anything and everything to do with computers was going to take-off forever, and so I enrolled as a computer engineer with the expectation that companies in that industry would always have money/funding.

2. What or who has had the greatest impact on shaping your investment approach and how does that relate to the criteria you look for when evaluating a potential investment?

If not for Warren Buffett, I probably wouldn’t be in this field. I had studied market returns and came to the conclusion that it’s a waste of time to try to beat the market, until I came across the writings of the Oracle of Omaha. I immediately took to his common sense (which is not so common after all) approach as well as that of his teacher, Ben Graham. I was fortunate enough to meet Buffett a few years ago, wherein I got to hear his investing principles in person.

3. What’s the best investment you’ve made so far and why do you think it performed well?

There are a few successes listed here. If I had to pick one, it would probably be Quest Capital, which no longer exists. Basically, it fell to panic levels in 2009, it traded well below the value of its assets, and management was buying back shares with all of its cash flow until the company was sold. When you buy a company cheaply that is run by good stewards of capital, you will probably do very well.

4. And the corollary, what’s the worst investment you’ve made and what did you learn from it?

There are a few that haven’t worked out, as per my Value Fail page. A common theme has been that I misread management’s intentions and/or abilities. In many cases, the signs were there, but I missed them in my excitement for other features that made the investment attractive. For example, Blonder-Tongue Labs was extraordinarily cheap, but it’s run by a guy who went bankrupt himself a few years ago. Is this really the kind of guy you want running a business you own? Probably not! For some reason, I had to learn that the hard way, and I have no one to blame but myself.

5. It’s vital to learn from your mistakes in investing. Has your approach to investing evolved with these experiences?

Definitely. There’s no sense buying a company cheap if the assets are just going to be whittled away by a manager that cares nothing for shareholder value. As such, I’m much more cognizant now than I was a few years ago of the importance of good capital allocators at the helm of the companies I own.

6. What are the biggest potential pitfalls most retail investors are facing today and how should they avoid them?

I don’t think the biggest pitfalls have changed in many decades. Retail investors still think very short-term, buying when the market is expensive and panicking when the market gets cheap. Instead, they should be doing the exact opposite. Focus on safely-capitalized companies that trade cheaply relative to predictable earnings, and you will do quite well over the long-term.

7. From your reading your blog and tracking your fund’s progress, you’re obviously passionate about value investing. What inspired you to dive in and start your own fund and what is your highest conviction pick right now?

When I realized how the investment management industry works – that these firms are mostly marketing machines, with a short-term emphasis and little interest in truly delivering value to investors – I knew that there was an opportunity to do better. I don’t like to put all my eggs in one basket, but if I’m forced to pick one stock right now, it would be SuperValu, a company that is improving its operations while trading at a price to free cash flow of just 2. There are certainly some risks, but some potential rewards as well. I’ve written more about it here.

8. Lastly, what are the top 5 investment books you’d recommend for investors just starting out?

The Intelligent Investor by Graham

Irrational Exuberance by Shiller

The Little Book That Builds Wealth by Dorsey

The Aggressive Conservative Investor by Whitman

Contrarian Investment Strategy by Dreman

5 Billion Dollar Businesses with 5%+ Yields

Yoseph — Wed, 13 Jun 2012 15:15:52 +0000

Unbelievable. Un-frigging-believable. People will actually pay you (yes, you) to own shares in their company. Crazy, hunh?!

It’s surprising more people don’t take advantage of dividend investing. There are high quality companies out there that are not only undervalued but also produce a wicked yield.

That’s the sweet spot for us: A company that has the potential to have a good run up and will also pay us to wait. It’s the best of both worlds.

As usual, we looked high and low, making calls to long lost lovers, sea-faring captains, and even my cousin Esmerelda, to find a group of stocks that have sustainable dividends and are highly profitable. More specifically, each of these companies are undervalued or close to their fair value according to a discounted cash flow valuation using a 15% discount rate, have a market cap of at least $1B and have a dividend yield of at least 5%.

Here are these 10 titans of industry with plenty of upside that will pay you in the meantime:

1. AT&T (T)

T provides telecommunication services to consumers, businesses and other service providers worldwide. AT&T has a market cap over $200 billion, a yield of 5%, and is consistently profitable. Trading at $34.56, analysts don’t put this stocks’ value much higher than that. Target prices range between $26.50 and $36.50. According to them, in the best case scenario, there isn’t much room to run. Vuru’s Growth Price puts the value of this business at $46.69 per share, suggesting an upside of 35%.

2. Southern Peru Copper Corp. (SCCO)

SCCO mines, smelts and refines mineral properties in Peru, Mexico, and Chile. It’s a $25 billion dollar company with an average net profit margin of 28% over the past 10 years. It also has a dividend yield of 7%. Currently trading at $29.62, Wall St. analysts have a wide range of target prices for this stock, $28 (Dahlman Rose) – $47 (JP Morgan), with the average being $36, suggesting an upside of 21%. Vuru’s Growth Price disagrees with this assessment. It says SCCO is overvalued by 16%, with a value of $24.83.

3. GlaxoSmithKline (GSK)

GSK engages in the discovery, development, manufacture and marketing of pharmaceutical products, over the counter (OTC) medicines, and health-related products worldwide. It’s a $110 billion dollar company with an average net profit margin of 19% over the past 10 years. It also has a dividend yield of 5.5%. Currently trading at $44, Wall St. analysts have an average target price of $48, suggesting an upside of 9%. Vuru’s Growth Price disagrees with this assessment. It says the stock is overvalued by 13%, with a value of $38.

4. Alliance Resource Partners (ARLP)

ARLP produces and markets coal for utilities and industrial users in the United States. Alliance has a market cap of $2.2 billion, a dividend yield of 6.94%, and has produced over $14 in profit for every $100 in revenue over the past 10 years. It’s trading at $59.65 and analyst target prices range between $75 and $92. The average is $82.25, suggesting an upside of almost 38%. Vuru puts the fair value of ARLP slightly lower than the average of the analyst target prices. It’s Growth Price is $80.56, meaning this stock is undervalued by 35%.

5. Astra Zeneca (AZN)

AZN discovers, develops and commercializes prescription medicines for cardiovascular, gastrointestinal, infection, neuroscience, oncology and respiratory and inflammation diseases worldwide. Astra has a market cap of $50 billion, a dividend yield of 6.9%, and has produced over $20 in profit for every $100 in revenue over the past 10 years. It’s trading at $40.90 and analyst target prices average at $46.51, suggesting a small upside of almost 14%. However, Vuru is more aggressive in its valuation, pegging the fair value at $77.59, meaning this stock is undervalued by 89%.