Monday, August 7, 2006
While just about every asset available to us is expensive (Gold at $650, oil at $75, and the S&P 500 at 17.5 times earnings), the world’s most dominant companies are cheaper than they’ve been in years.
I’m talking about the stocks growth investors usually avoid because they couldn’t possibly rise very much - The Intels (INTC), Cokes, and dare I say, General Electrics (GE). They’re cheap. As in really, really cheap.
Take Coke (KO) for example.
Coke, besides making delicious drinks that rot your teeth, is best known as Warren Buffett’s favorite investment. He owns roughly 8% of the shares outstanding.
Buffett first bought Coke back in 1988. Now, we can't be sure of the exact date because the available SEC filings don't go back that far, but Buffett's 1988 letter to Berkshire Hathaway shareholders announces that he'd purchased $592 million worth of the company by the year's end.
However, we do know that Coke's 1988 market cap traded between $49 billion and $62 billion. That same year, Coke had $8 billion in sales and $1 billion in earnings. Using the above market cap numbers, we can determine the following valuation for Coke's business in 1988:
So investing legend Warren Buffett bought Coke when it was trading between six and seven times sales and 49x and 62x earnings. How’s this compare to today’s valuation?
Today, we can buy Coke, and get a better bargain than Buffett did. And not only is Coke cheaper than when Buffett bought it, it's actually more profitable.
In 1988, Coke had gross margins of 57%. Today, they're 65%. In 1988, net margins were 12%. Today, they're 22%. And throughout the more than 15 years of increased profitability from 1988-2005, Coke's nearly tripled its sales.
Simply put, Coke is now a more profitable company than when Warren Buffett first bought it.
I recommended Coke to subscribers of my Inside Strategist newsletter in December 2005. As of this morning, we’re up 8%.
I know... 8% in seven months doesn’t seem like a big gain to some of you. But I’ve never once had to worry about this company.
It’s probably the safest pick in my entire portfolio. It’s the most recognizable brand in the world... a stock you can hold forever. I expect we’ll see at least 10% annual gains on Coke for the next 15 to 20 years.
Slow growth, but no worries... and you could do worse than have Warren Buffett as your business partner.
Earnings today: Anworth Mortgage, El Paso Corp, Frontier Oil.
Secondary education leaders Apollo Group and Career Education continuing a long slide.
Leadership from Johnson & Johnson and Merck lifting the Big Pharma ETF higher.