Thursday, April 23, 2009

Best Big Companies for the Long Term

This is a guest post from Jae Jun from Old School Value. His blog is focused on value investing.

In the current market, small caps are not the only companies that are undervalued or mispriced. Although the markets have risen substantially from its lows there are still bargains to be had, especially if your focus is on buying for the long run. Late last year, Forbes released their platinum 400 best big companies and 200 best small companies which is a fantastic source of finding undervalued bargains. Take for example the following companies which were reviewed and estimated on Dec 11, 2008.

Blue Nile (NILE)

  • Price on Dec 11: $27.84

  • Estimate price: $32

  • Current price: $36.88

Jos. A. Bank Clothiers (JOSB)

  • Price on Dec 11: $26.15

  • Estimate price: $44

  • Current price: $36.61

Diodes (DIOD)

  • Price on Dec 11: $4.39

  • Estimate price: $15

  • Current price: $12.24

FactSet Research Systems (FDS)

  • Price on Dec 11: $38.36

  • Estimate price: $44

  • Current price: $48.22

These are small to mid cap size companies so the price difference is to be expected, but todays market also has created many of the same opportunities within the large cap universe.

Forbes Best Big 400 Companies Screen

  1. Immediately exclude financials (don’t understand or know how to value them)

  2. Run the companies through the investing spreadsheet with the PE as the growth rate, but capped at 15% except for some special cases. The selected companies shall exhibit;

    • Positive, consistent and growing cash flows.

    • Consistent margins. Fluctuating/decreasing margins over several years will not be accepted unless the other criterias are outstanding.

    • Above average returns from capital investments (CROIC, ROE, ROA)

    • Strong balance sheet

  3. Companies should have at least 5 years of operating history

  4. The companies that make the cut will have to be reviewed individually

As I was going through each of the first 25 companies, I noticed there were many capital intensive companies with high debt loads. This is because Forbes ranked the companies based on ROE where having a high debt load can play a significant role.

Also, the spreads between the current price and estimated price were much smaller as a percentage as these companies are heavily followed and more likely to trade closer to its fair value.

Going through the first 25 businesses has produced 7 candidates for further analysis. They are:

  • Apple (AAPL)

    • Great company. Need I say more?

    • Estimated fair value: $160

  • Hug Group Inc (HUBG)

    • Consistent margins, reduced debt, increased FCF/debt. Bottom line margins have not dropped too much.

    • Estimated fair value: $25-$43

  • Monsanto (MON)

    • Strong profits in recession, increased margins significantly, metrics are up.

    • Estimated fair value: $100

  • Cliffs Natural Resources (CLF)

    • Mining and natural resources is cyclical. FCF +ve past several years and margins increased. Good margin of safety but unpredictable. Cheap price could factor in the unpredictability.

    • Estimated fair value: $53-$60

  • Google (GOOG)

    • Great company. Need I say more? Incredible numbers.

    • Estimated fair value: $390-600 (Difficult to tell with GOOG)

  • Occidental Petroleum Corp (OXY)

    • Oil company but FCF +ve for past 10 years, numbers and margins are excellent for this company.

    • Estimated fair value: $87

  • Nucor (NUE)

    • Excellent company and numbers but big drop in last year margins.

    • Estimated fair value: $60

Full List of 25 Companies

Forbes 400 best big companies undervalued and cheap stocks


No positions in any stocks mentioned

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