Articles filed under "moats"



Huh? Market-Beating Value Funds Buy Amazon

As if the public heat from playing hardball with book publisher Hachette wasn’t headache enough, Amazon (AMZN) now has to face the ignominy of suddenly being attractive to, gulp, value investors.

The managers of the Oakmark and Oakmark Select mutual funds just revealed that in the second quarter they established sizable Amazon positions. The $15 billion Oakmark fund had a 2.1% stake at the end of June, and the more concentrated $5.7 billion Oakmark Select established a 4% position.

Oakmark certainly had a lower entry point to capitalize on. At its second quarter low in early May, Amazon stock was trading nearly 30% below its late January peak, though it has recovered some since.

AMZN Chart

AMZN data by YCharts

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Mid-Year Report Part Two: Not All Stocks Overpriced

As we reported in our Mid-Year Report Part One, halfway through 2014, stocks are looking pricier. As investors who choose individual stocks mull the taking of profits, eating of losses and some judicious rebalancing, it’s worth asking very broadly: what’s still cheap?

^SPX Chart

^SPX data by YCharts

Rather than search for super-low-priced shares at this point, we’re looking at the S&P 500 components and using the YCharts Stock Screener to sort out companies trading at a forward PE ratio of below 15. That gives us a pretty big list, ordered by market cap here and also featuring dividend yield and payout ratio. There are 125 stocks in all.

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Market Rarity: Great Company at Very Good Price

Express Scripts (ESRX), the largest pharmacy benefit manager, is a rare opportunity at this market juncture. It has a rock-solid demographic tailwind -- aging Baby Boomers -- in addition to an expected pick-up in prescription demand as more Americans gain coverage through the roll out of the ACA.

US Consumer Price Index Chart

US Consumer Price Index data by YCharts

Yet some short-term operational issues have kept a lid on price appreciation of late.

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Mid-Year Report: Not All Stocks Overpriced

Halfway through 2014, stocks are looking pricier. As investors who choose individual stocks mull the taking of profits, eating of losses and some judicious rebalancing, it’s worth asking very broadly: what’s still cheap?

^SPX Chart

^SPX data by YCharts

Rather than search for super-low-priced shares at this point, we’re looking at the S&P 500 components and using the YCharts Stock Screener to sort out companies trading at a forward PE ratio of below 15. That gives us a pretty big list, ordered by market cap here and also featuring dividend yield and payout ratio. There are 125 stocks in all.

And it turns out, with YCharts’ focus on value investing, we’ve written about a fair number of these stocks during the last six months.

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Wide Moat Stocks Trading Below Fair Value

Six years into a bull market that has seen broad multiple expansion of late, it is ever harder to find anything that has the faint whiff of value. Interestingly, asset managers including Franklin Resources (BEN), Bank of New York Mellon (BK), Eaton Vance (EV), BlackRock (BLK), and T. Rowe Price (TROW) still offer a compelling valuation proposition even as assets have swelled in this bull run.

The Market Vectors Wide Moat ETF (MOAT) is stocked to the brim with asset managers. The portfolio -- which outpaced the SPDR S&P 500 ETF (SPY) since its start two years ago -- piggybacks on Morningstar’s impressive Wide Moat Focus. It’s reconstituted quarterly to hold the 20 stocks in Morningstar’s (MORN) small universe of stocks deemed to have wide moats, which trade at the most compelling discount to the research firm’s proprietary estimate of fair value.

(Full disclosure: Morningstar is an investor in YCharts.)

All but T. Rowe Price are in the portfolio for this quarter, trading at discounts to fair value of nearly 10%. And T. Rowe Price is in the batter’s box, barely missing inclusion as it trades at a 6% discount. Granted, single digit discounts are not exactly a wide margin of safety, but context is important. Morningstar says the overall market now trades at a 4% premium to fair value. And the 150 or so wide moat stocks now trade at a 3% premium. So even a modest discount is a relative plus. A year ago the wide moat stocks traded at an average discount of 3%.

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Norfolk, CSX: Coal-Dependent Railroads' Future

U.S. railroads represent the ultimate in wide-moat stocks, a category of transportation infrastructure that can’t on a practical basis be reproduced and which become more valuable as the economy grows and as national and international shipping and trade grow. That’s why Warren Buffett’s Berkshire Hathaway (BRK.B) bought one of the best railroads, BNSF, or Burlington Northern Santa Fe.

For Norfolk Southern (NSC) and CSX (CSX), which cover similar route systems across the Eastern part of the country, the economy’s growth hasn’t fully been reflected in their results because their biggest customer is the coal industry, and it’s shrinking rapidly. Electricity generated by coal fell almost 25% between 2007 and 2012, before rising slightly last year, while cheaper natural gas enjoyed a roughly 33% increase in use for electricity generation during that period, according to the U.S. Energy Information Administration. Tightened emissions standards are also leading to coal power plant shutdowns.

Coal accounts for nearly 25% of revenue at Norfolk Southern and CSX. So, the railroads had to scare up a lot of increased business from manufacturers and other shippers over the last couple of years just to keep revenue sliding sideways, while Union Pacific (UNP), which operates in the West, enjoyed stronger revenue growth. As we wrote earlier this year, Union Pacific outperforms BNSF of late.

NSC Revenue (TTM) Chart

NSC Revenue (TTM) data by YCharts

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Bloody Disruption: New Threat to Quest, LabCorp

What sounds more threatening: the combination of Obamacare and giant private insurers like UnitedHealth Group (UNH) moving to reduce the cost and at times frequency of medical testing; or a 30-year old vegan and college dropout with some famous friends?

If you’re Quest Diagnostics (DGX) and Laboratory Corp. of America (LH), it may be the dropout, named Elizabeth Holmes, who left Stanford to launch a medical testing startup, Theranos, that has raised $400 million of investors’ money, valuing the company at $9 billion, and already operates testing sites at a handful of Walgreens (WAG) stores, with the potential of thousands more to follow.

Theranos and Holmes a week ago were the subject of an admiring Fortune magazine article that had a former Stanford chemical engineering professor of Holmes – now her employee at Theranos – comparing her to Steve Jobs and Bill Gates. Make that super admiring.

The back issues of business magazines are full of the Next Big Things we’ve never heard from again, of course, and problems with regulation, technology, competition or management could upend this Cinderella story. Theranos (you really should read the Fortune article; it’s fascinating and well-reported, and asks all the right questions even if it can get them all answered) performs conventional blood tests with a fraction of the amount of blood used by Quest and LabCorp and others, we’re told in the article; it charges less and provides results faster; there’s less pain involved (Holmes, we learn, is also needle-phobic). And it builds its own diagnostic equipment, while Quest and LabCorp buy theirs from the likes of Siemens (SIEGY), Olympus (OCPNY) and Beckman Coulter.

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Dividends, Strength, Late-Bull-Market Performance

Investors hungry for income know steady dividend payers such as AT&T (T), Coca-Cola (KO), Chevron (CVX) and Procter & Gamble (PG) can sate their appetite. All currently have dividend yields above the 2.6% level on the 10-year Treasury note:

T Dividend Yield (TTM) Chart

T Dividend Yield (TTM) data by YCharts

But knowing how best to feed on income payers can significantly boost a portfolio’s ultimate payout: total return.

High yielders are a bit like fried food: the fat income yield tastes great but is not necessarily the healthiest choice for long-term returns. Stocks with standout dividend growth are the smug grilled choice: good for your long-term health if not exactly super filling for those in pursuit of current income. A new piece of research from the Leuthold Group suggests the best way to feed on dividend paying stocks is to focus on companies that serve up key quality metrics, such as high return on equity, return on assets, solid cash flow and healthy debt to equity levels.

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Disruption Fetish: Western Union and Xoom

Companies that can claim technologies that hold the promise of disrupting large and established markets seem to collect true-believer investor followings, and we have spent a good part of 2014 writing about how the disruption fetish has pushed some of these stocks past what seem to be reasonable valuations.

(For a refresher, here are links to recent articles on LinkedIn (LNKD), Twitter (TWTR), Shutterstock (SSTK), Yelp (YELP) and Workday (WDAY), the latter as an example of a highly-value software-as-a-service stock. Disrupters all.)

A disrupter that caught our eye in recent weeks is Xoom (XOOM), which provides consumer-to-consumer international money transfers and is thus aimed at taking business away from Western Union (WU). In a recent issue of Barron’s, hedge fund manager Mario Cibelli named Xoom as his second largest holding, equal to 12% of his fund’s assets. Cibelli told Barron’s he expects Xoom’s pre-tax profit to rise eight-fold by 2017, and sees the stock more than doubling.

There’s little doubt that Cibelli is smarter than yours truly, but before you similarly load up on Xoom shares – and by inference dismiss Western Union as a has-been – some investment research is called for.

Xoom’s growth is decelerating. Its revenue rose 53% last year to $122.2 million. But it forecast 2014 revenue of $157 million-to-$162 million, at best a 32% increase. It also expects a loss for the year. On the basis of those numbers, Xoom has a market cap of about $800 million and its stock trades at about five times 2014 projected revenue.

XOOM Chart

XOOM data by YCharts

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Why MasterCard Stands Above Credit Card Stocks

The fact that nearly half of Americans tote around less than $20 in cash on a daily basis is no doubt cheerful news for American Express (AXP), Capital One Financial (COF), Discover Financial Services (DFS), MasterCard (MA), and Visa (V).

While consumer mobile payment apps continue to struggle to gain traction (Square Wallet having just closed up shop) the major credit and debit global payments systems are clear beneficiaries of our cash-less tendencies: Nearly eight in 10 of us have less than $50 in our wallets on any given day according to a new Bankrate (RATE) survey.

AXP Revenue (TTM) Chart

AXP Revenue (TTM) data by YCharts

Interestingly, amid a market that is trading slightly above fair value according to Morningstar (MORN), Capital One is at a 14% discount to fair value, MasterCard currently trades at a 10% discount to Morningstar’s estimate of fair value, and Visa is 5% below its fair value estimate. American Express and Discover trade at or above fair value. (Full disclosure: Morningstar is an investor in YCharts.)

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