How Can I Find Value in this Market?


Sell in May and Go Away…

With such an overvalued market, I bet you thought about that old saying, didn’t you? After all, finding value in a stock market that has been running higher and higher for the past 9 years is called “mission impossible” by many investors. You might as well sell and go away until the market cools off. But just don’t go yet…

There is lots of value to be found

For all the sceptics in this room, I’ll start by showing you several of my picks from my 100K portfolio created between September and December 2017. I’ve compared those picks against the S&P 500 total return. Since October 1st 2017, the S&P 500 total return (including dividend) shows +8.25%. I’ve picked 7 holdings showing double, triple and even 5 times this return.

  • Andrew Peller (ADW.A.TO): +45.83%
  • Microsoft (MSFT): +31.35%
  • Lazard (LAZ): +27.68%
  • Visa (V): +25.51%
  • Apple (AAPL): +22.59%
  • Texas Instruments (TNX): +22.14%
  • Gentex (GNTX): +17.36%

Source: Ycharts

The idea here is not to brag about my best picks (I wold sound like an old fisherman, right?). After all, I also picked shares of Enbridge (ENB.TO) (-7.20%), Hasbro (HAS) (-10.95%) and Alimentation Couche-Tard (ATD.B.TO) (-7.66%). The point here is to show you that I picked those 7 stocks when investors were screaming on rooftops that there was no more value in this overhyped market.

Now, where do you find value in this crazy market?

First, I accepted a long time ago that I wasn’t a day trader. I accepted that I will not be chasing short-term gain. Finally, I accepted the price I pay doesn’t really matter, it’s what I buy that does. I wish I had bought shares of Johnson & Johnson (JNJ) back in the $70’s when I could have paid $2 a share. But I had to buy them in the 2010’s while it was around $65. Did I pay the right price back then?

I don’t really care.

You know why? Johnson & Johnson has always shown the same incredible value: it is a company with a strong power of innovation. The JNJ I bought at $65 in 2012 is the same JNJ in 2018 that is trading almost double this price.

JNJ Operations are divided into 3 segments: Consumer, Pharmaceuticals and Medical Devices & Diagnostics. Pharmaceuticals represent about 40% of its revenue and is concentrated around immunology, oncology & psoriasis drugs. JNJ has an impressive brand portfolio of personal care goods. Most brands are #1 or #2 in their markets, and products are being sold worldwide. The fact that JNJ develops speciality drugs makes it harder for generic drugs to compete.

JNJ is a powerful engine that is continuously being fueled to turn even faster. An investment in JNJ is an investment in a world class company. You buy a complete brand portfolio with only winning products. The company is well diversified among its product offerings, its pharmaceutical division along with its world diversification. Despite its relatively low yield, the company will not only reward you with constant and increasing dividend, but also with a steady capital appreciation.

With so many income streams from various segments, cash flow creation is never an issue. I would not count on the same dividend growth rate JNJ has shown over the past 10 years, but it will keep its place among the strongest Dividend Kings. With a 56th consecutive increase, shareholders can sleep well at night.

What did I just do with JNJ? I just wrote down the essential of my investment thesis. This was an excerpt of what you can find in my 200+ stock cards library.

Now you get it; the value is found in your investment thesis

Next week, I’ll get back to you about a full article on stock valuation and I’ll tell you why you shouldn’t be spending too many hours playing around with your model. But for now, let’s focus on what’s matter: a company’s real value.

The true value of a business is not found in its books or in its share price. The true value is found inside the company through its growth vectors, through its ability to innovate, through its competitive advantages.

The price of a great company goes up and down all the time. It doesn’t mean the company is better or worse from time to time. This is just a perception we get from the market. In the meantime, if you focus on picking the right company based on a strong investment thesis, you will be right 100% of the time… you’ll just have to wait a few years to prove your point.

Today is not different than the previous 100 years

I just wrote that I wish I had the opportunity to buy JNJ at $2 back in the 70’s. Many investors think that the only way to get rich is to go back in time and buy those solid companies 40-50 years ago. They think that it was the only way to buy stocks at a ridiculously low price. But today isn’t different than what happened on the market since its inception.

Do you remember how we thought Google (GOOG) IPO was expensive back in 2004? The stock opened at $85 and closed its first day of trading at $100.34. ONE HUNDRED dollars for a single share??? That was “too much” for me. It “wasn’t worth it”.

In 2014, GOOG did a 100% stock spinoff and created GOOGL. Therefore, for your $85 investment, you would show a total share value (GOOG + GOOGL) of $2,189. That’s nearly 26 times your investment and that value was created only in 14 years.

Today is no different than what happened in the stock market back in the 70’s or the 80’s. Great companies will continue to grow and reward you as a shareholder. The point is only to pick the right companies, not the right price.

Disclaimer: long all the above except GOOG and GOOGL

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