Monday, August 24, 2009

Stocks to Watch

Here is an update of stocks I like* for my own portfolio at the right price.

The maximum price I'd pay takes into account an acceptable margin of safety** and differs for each company. In other words, I believe these are intrinsically worth quite a bit more than the max price I've indicated in this post and in the prior Stocks to Watch posts. I also believe most of these companies generally have favorable long-term economics (i.e. the best of them have high and durable ROC) and, as a result, intrinsic values will grow over time. Of course, I may be wrong about the core economics and that margin of safety could provide insufficient protection against a loss. Still, a year from now I would expect to be willing to pay more for many of these based upon each company's intrinsic value growth over that time frame.

After last week's rally more than half of the stocks below are selling at prices above what I'd be willing to pay (under the dashed line in the list below). Mr. Market is in a bit too good of a mood right now for my taste.

So they're less cheap now but still excellent businesses at the right price. In contrast, back in February, almost all of the stocks on this list were below (in some cases well below) the highest price I'd be willing to pay.

The stocks in bold have two things in common. They are:

1) currently owned by Berkshire Hathaway (as of 6/30/09) and,
2) selling below the price that Warren Buffett paid in the past few years.

There are several other Berkshire Hathaway holdings on this list but they don't have the 2nd thing going for them.

These are all intended to be long-term investments. A ten year horizon or longer. No trades here.

Stock/Max Price I'd Pay/Recent Price
JNJ/65.00/61.03 - Buffett paid approx $ 62/share
COP/50.00/44.20 - Buffett paid approx $ 82/share...ouch
KFT/30.00/28.34 - Buffett paid approx $ 33/share
USB/24.00/20.41 - Buffett paid approx $ 31/share
WFC/28.00/27.94 - Buffett paid approx $ 32/share
BNI/80.00/84.77 - Buffett paid approx $ 75/share
(Splits, spinoffs, and similar actions inevitably will occur going forward. Will adjust as necessary to make meaningful comparisons.)

Tactically these might all be getting more difficult to buy considering the extent of the recent rally.

Many stocks have rallied enough that the risk of paying more than necessary in the short-term is certainly there.

Yet, another risk, of course, is missing a stock entirely because it continues to rally. There is no perfect answer to this. The risk of missing something you like when a fair price is available (error of omission) can be more costly than suffering a short-term paper loss.

Here are some thoughts on errors of omission by Warren Buffett from an article in The Motley Fool.

And also...

"During 2008 I did some dumb things in investments. I made at least one major mistake of commission and several lesser ones that also hurt... Furthermore, I made some errors of omission, sucking my thumb when new facts came in." - Warren Buffett's 2008 Annual Letter to Shareholders

In other words, not buying what's still attractively valued to avoid short-term paper losses is far from perfect with your best long-term investment ideas.

To  me, if an investment is initially bought at a fair price, and is likely to increase substantially in intrinsic value over 20 years, it makes no sense to be bothered by a temporary paper loss. Of course, make a misjudgment on the quality of a business and that paper loss becomes real (error of commission).

Bottom line: when highly confident that a great business is available at a fair price it's important to accumulate enough while the window of opportunity exists. Sometimes ignoring the risk of short-term losses is necessary to make sure a meaningful stake is acquired.

Ending up with just the quantity of "an eyedropper" when I'd like a full glass is not much fun.


* This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here are never a recommendation to buy or sell anything and should never be considered specific individualized investment advice. In general, intend to remain long the above stocks (at least those that at some point became cheap enough to buy) unless market prices become significantly higher than intrinsic value, core business economics become materially impaired, prospects turn out to have been misjudged, or opportunity costs become high.
** The required margin of safety is naturally larger for a bank than for something like KO. When I make a mistake and misjudge a company's economics in a major way, the margin of safety may still not be sufficient. Judging the durability of the economics correctly matters most. If the economics remain intact but the stock goes down that is a very good thing in the long run.