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A Stock You Can Hold Forever

By Stansberry Research Interview Series
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:
 
 
Lows in 1988
Highs in 1988
Market Cap
$49 billion
$62 billion
Sales
$8 billion
$8 billion
P/S
6.12x
7.75x
Earnings
$1 billion
$1 billion
P/E
49x
62x
 
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?
 
 
Coke's Current
Buffett's Buy Range
P/E
21x
49x-62x
P/S
4x
6x-7x
 
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.
 
Good investing,
 
Graham Summers




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Market Notes
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Leadership from Johnson & Johnson and Merck lifting the Big Pharma ETF higher.
 
In The News: High unemployment rate and slowing economy worries may cap interest rates.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1223.75 +0.1% +10.9%
Oil 37.80 -1.1% +0.8%
Gold 136.50 -1.9% +20.7%
Silver 28.08 -4.9% +57.6%
US-Dollar 79.65 +0.6% +5.2%
Euro 1.33 -0.3% -10.5%
Volatility 17.99 -0.2% -18.6%
Gold Stocks 576.48 -2.5% +25.0%
10-Year Yield 3.16 +7.5% -8.4%

World ETFs
Symbol Price
Change
52-Wk
USA 122.83 +0.1% +10.8%
Canada 30.41 -0.5% +17.1%
Russia 22.00 +0.1% +18.9%
India 38.15 +0.6% +22.5%
Israel 16.92 +1.0% +11.2%
Japan 10.56 -1.2% +6.6%
Singapore 13.66 -0.4% +18.6%
Taiwan 14.87 -0.3% +19.0%
S. Korea 57.35 +0.3% +21.8%
S. Africa 71.15 -1.5% +28.2%
China 43.99 +0.3% -1.5%
Lat.America 52.69 -1.0% +8.5%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 134.90 -2.1% +18.0%
Big Pharma 64.04 +0.1% -2.8%
Internet 72.89 +0.4% +27.4%
Semis 16.25 +0.4% +26.6%
Utilities 30.98 -0.7% +0.2%
Defense 18.55 +0.4% +8.7%
Nanotech 10.16 +0.8% +1.6%
Alt. Energy 10.20 -0.4% -4.6%
Water 18.77 +0.8% +14.5%
Insurance 16.14 +0.4% +19.6%
Biotech 20.65 +0.4% +27.3%
Retail 19.65 +0.3% +27.0%
Software 24.83 +0.7% +24.3%
Big Tech 53.88 +0.1% +22.7%
Construction 13.30 +0.8% +16.2%
Media 13.75 +0.2% +23.7%
Consumer Svcs 67.43 +0.1% +23.1%
Financials 54.95 -0.1% +7.0%
Health Care 63.89 0.0% +1.3%
Industrials 63.79 +0.4% +19.8%
Basic Mat 74.54 -0.1% +27.5%
Real Estate 55.53 +0.3% +24.4%
Transportation 91.65 +0.3% +25.1%
Telecom 22.69 +0.2% +14.6%