The New One-Two “Value” Punch
I liked the vaccine-manufacturer Baxter when I
first recommended it a year ago. They make drugs and surgery-related
products that patients and doctors absolutely need. But now I like them
even more because of something they did recently ...
Emerson Electric (another one of my
recommendations during the past year) did the same thing. So did Teck
Resources.
As a result, all three companies now give
investors an irresistible one-two punch that is impossible to ignore.
1. They’re all in hot sectors.
2. And they’ve all raised a ton of money in
the past few months.
Baxter makes vaccines, including the swine flu
vaccine. Emerson Electric makes industrial automation and
power-generating equipment. Its sales are growing rapidly in developing
countries. Teck is Canada’s biggest base-metals producer. Metal prices
have been surging these days.
Both Baxter and Emerson raised $500 million
from issuing bonds earlier this year. Teck raised $4.3 billion.
Cash and growth is a nice combination. Of
course, the extra cash helps them take advantage of the hot sectors
they’re in. But it has another important advantage ...
The Ultimate Protection from Banks
Banks aren’t the bad guys. More than likely
Baxter could have gotten a $500 million loan. But a bank’s conditions,
restrictions, covenants, and interest rates, taken together, are much
more burdensome than issuing a bond.
Besides, banks are being more careful these
days (as they should in the middle of a recession). For Baxter and
shareholders alike, banks are just one less thing to worry about ... one
less thing that can go wrong.
Everyone Is Hoarding Cash
What will Baxter do with the extra cash? I
would think they would use it to increase their production of swine-flu
vaccine. They have some big contracts and, like many other vaccine
makers, they’re running behind schedule.
But I’d be wrong. They say they’re going to
use the money for things like working capital, capital spending,
dividend payments, share repurchases, and business development. (I still
think they should be doing everything in their power to step up
production of that vaccine, though!)
Sounds like Baxter is keeping their options
open.
Baxter is part of a bigger trend – companies
accumulating cash not for any specific expenditure but just to have it.
As the CFO of Alcoa, another big cash hoarder
says, “They’d have to beat me over my head to get it out of my hands.”
Watch the Cash Burn
Hoarding cash is not good for the economy,
whether it’s done by individuals, banks, or companies. But as a value
investor, I’ve always liked companies that generate lots of cash. Of
course, what they do with that cash matters.
And this is where your judgment comes into
play. If they’re sitting on the cash, are they being “prudent?” Or does
it indicate a lack of confidence in the company’s future?
Alcoa’s CFO sounds like he puts the company’s
cash under his pillow every night. Sorry, but that’s not very
reassuring.
Baxter sounds like it wants to spread the cash
around as it sees fit. That’s much better.
Emerson is going ahead with its plans to make
a billion dollars’ worth of acquisitions this year. That’s better still.
That is what superstar companies do. While
others are playing defense, they go on the offense. And at the end of
the day, Emerson always makes sure they have enough cash to give their
shareholders more money. They’ve raised dividends for 50 years in a row
and counting.
The Next Black Monday?
On Black Monday, in October 1987, the market
plunged over 500 points. It happened because the big trading companies
weren’t able to shut down their computerized trading programs. And it
could happen again. But this time, thanks to much more powerful
computers, it would be far worse.
These powerful computers allow the giant
brokerages that use them to process trades in a fraction of a second.
It’s called “High Frequency Trading,” and it’s responsible for about 70%
of the action on Wall Street.
That stinks. It means that those brokerages
see the market before you do ... react to the market before you do ...
and cause prices to go up or down before you’ve had a chance to blink.
That’s just slightly unfair to the individual
stock trader, wouldn’t you say?
The SEC will have to deal with the
transparency issues raised by High Frequency Trading. Meanwhile, you can
protect yourself by following this advice from IDE’s Steve McDonald,
editor of
The Bond Trader.
1. Avoid the hot stock or trend of the week.
With High Frequency Trading, it can turn against you in a nano-second.
2. Avoid day-trading as much as possible. With
so many trades now occurring behind your back, it has become dangerous
to play the price movement guessing game.
3. Stick with the investing strategy the
entire IDE staff has been advocating since day one: a long-term time
horizon, high-quality dividend stocks, and quality bonds at a discount.
(For specific recommendations, start reading our flagship newsletter,
Sound Profits.)
Their Mistake, Your Big Opportunity
Last week, we brought you a special report on
Rusty McDougal’s recent trip to the Arizona desert, where he discovered
buried treasure. Rusty’s host for the trip, Riverside Resources, is
in the process of figuring out how much gold is actually hidden in those
desert sands.
The official estimate is 1.2 million ounces.
Rusty says that’s the minimum. It’ll likely be much more.
But the market isn’t giving Riverside much
credit for its buried gold – even if it turns out that’s all there is.
With a market cap of $12 million, the market has, in effect, valued
Riverside’s estimated 1.2 million ounces at about $4.29 per ounce.
“It doesn’t make any sense,” Rusty says. “I
have another company in my portfolio and its buried gold is going for
nearly $31.23. And they are very similar companies.”
Rusty has seen odd gaps like this before. And
he says it’s only a matter of time before this one closes. As Riverside
continues to document its find, the price per ounce will go higher,
elevating the company’s share price. “Right now is the best time to buy
shares of Riverside, while their price is undervalued,” he says.
For a report on Rusty’s trip,
click here. See for yourself why Rusty says “Riverside is quite the
bargain.”
Invest Safely,
Andrew Gordon
Investor's Daily Edge
We want your feedback! Let us know your thoughts on this article. Email
us at Email:
feedback@investorsdailyedge.com
