Thursday, August 17, 2006
It’s a harem right now in the stock market...
As you probably recall, Warren Buffett famously withdrew from the stock market in 1969, closing his investment partnership.
High-quality investment opportunities were nowhere to be found. As he said about the lack of opportunities: “I feel like a sex-starved man on a desert island.” But... a few years later... after the collapse of stock prices in late 1973 and early 1974, you could hardly miss all of the outstanding investment opportunities. Buffett announced the start of a new bull market saying, “I feel like a sex-starved man in a harem filled with beautiful women.” It was time to buy. And Buffett knew it simply by looking around.
It’s been a harem this year, too. We’ve been given once-in-a-decade opportunities to pick up the highest-quality equities at rock-bottom prices. I feel like a pig eating from a blue-chip trough. And boy has it paid off...
In January, I recommended buying the world’s leading maker of desktop printers – Lexmark (LXK) to readers of my investment advisory. We bought for less than 10-times the cash the company will generate this year from operations. With its huge globally installed base of 50 million printers, buying Lexmark at those prices was like buying an annuity.
Meanwhile, Wall Street was almost giving the stock away because of renewed competition from HP. Boo hoo. So, maybe the stock wasn’t worth $90 per share. But it certainly was worth more than $50. And we bought at $45.
There was nothing to worry about: Lexmark has calmly gone about cutting expenses to compete more effectively. You can see the results in the company’s second-quarter numbers, which were released on July 25. Sales are down 5% from last year, but thanks to cost cutting, gross margins were substantially higher (32% compared to 29%).
Even more importantly, because the company generates so much cash from operations, it has been able to take advantage of its lower stock price to buy back shares. In the first six months of 2006, Lexmark bought back $600 million in stock (more than 10% of the shares outstanding).
We’re up 16% in a little over six months, on stock that we bought at a “no risk” price. We’ve got almost identical gains in Anheuser-Busch (BUD), the world’s leading brewer... and another dominant business selling at incredibly cheap valuations. Investing is rarely this easy.
Although I made a name for myself covering tech stocks and understanding new technologies, I’ve always been an investor first.
Why reach down into lesser quality stocks, which have far bigger risks, when you can get higher returns in totally safe investments...? It doesn’t make any sense to me, which is why, as long as some of the best businesses in the world are trading for peanuts, I’m going to stay focused on blue chips.
I recommend you do the same.
Semiconductors firmly in the lead… $SOX up 8% this week.
Foreign ETFs at new highs: iShares Hong Kong, iShares Spain, Europe Fund.
New high for China’s largest mobile carrier, China Mobile… pulling the iShares China 25 ETF back to old highs.