Comments on: Value in Large Cap Stocks

By: Glenn Busch

Glenn Busch — Tue, 27 Jul 2010 02:39:26 +0000

Good stuff as always.
I took a rough stab at valuing Monsanto based on a sum of the parts. I took modest growth for their Seed and Genomics division, a worst case scenario for their Agricultural Products (Roundup), and factored in a free option on increased global food demand.

http://valueinvestingcenter.com/2010/07/26/valu...

Comments, critiques, anything left out?

By: Jeremy Grantham: Portfolio Outlook and Recommendations | Street Capitalist: Event Driven Value Investments

Tue, 20 Jul 2010 16:14:37 +0000

[...] posted recently that I am also seeing value in large cap stocks many of which seem to have strong exposure to emerging markets and franchises that should be able [...]

By: Tariq

Tariq — Mon, 05 Jul 2010 22:06:43 +0000

I think that Nestle is pretty amazing from their developing market exposure. They supply baby formula to much of the developing world and I think that kind of supply chain is really underestimated.

I agree, they are probably undervalued a bit as a result of their pink sheet listing.

By: Martin knight

Martin knight — Mon, 05 Jul 2010 21:37:45 +0000

My three largest positions by far are KFT BUD and Nestle. NSRGY has an even lower enterprise to sales than KFT (1.43 versus 1.58) and may be undervalued partly because the US market only has a pinksheet listing and also because it has stakes in other companies. In the style of Greenwald's Value Investing I did a cap to adjusted book (book plus 3 year r&d and half 3 year sg&a) this w/e and came up with 1.09 for KFT and 1.5 for Nestle. In the food and pet products segment DLM is probably even better value (ev/sales 1.1, cap/adj book 1.02) but of course is smaller and riskier.

By: Tariq

Tariq — Sat, 03 Jul 2010 21:29:07 +0000

I think Microsoft is interesting, but I'd rather buy into it around $15-18 per share. I think they are facing substantial headwinds on the consumer-end. It seems like with young people, they are more and more often using smart phones for a lot of casual computer usage. That kind of shift in behavior is going to cut into Microsoft's bottom line because it means their products will be used less.

So far they have really shown 0 ability to really penetrate into the mobile market. Right now it's RIMM, GOOG, and AAPL. But, I feel like RIMM might also be on the way out.

Anyway, I think what you'll end up with is Microsoft sort of re-trenching and focusing on business/large enterprise users. The blueprint I'd refer to is what IBM did. Ultimately, that means there is potential for free cash flows to decline in a few years, so it means when using a DCF you've got to be more careful.

By: Psychiatry

Psychiatry — Sat, 03 Jul 2010 06:57:09 +0000

I'd look at Microsoft as well, the price drop has offered a 2+ dividend and the cash flow is still very large and can be used for share repurchases. WMT is good too but I believe the appreciation of the yuan will actually significantly take its dominance into question. They simply have too much business with chinese sourcing and production to shift gears fast enough. It could take years to secure this measure of contracts with WMT, and the yuan will appreciate along the way – I believe other retailers will begin to grow very quickly but Walmart will pay a good dividend meanwhile. My instinct tells me the sun is going to set on Walmart as all retail stories do eventually fizzle out, historically.

By: Tariq

Tariq — Thu, 01 Jul 2010 00:31:53 +0000

I have heard the multiple compression argument and I'm not sure if I buy it. I think as long as there are opportunities for growth (that are validated) these behemoths are going to warrant P/Es greater than 10. Speaking of Pfizer, one idea I've heard tossed around is that instead of buying JNJ you purchase companies that are pure plays on its business units.

So Pfizer for the drug biz, maybe Boston Scientific or another for the medical devices biz. I'm not sure what would be the appropriate competitor to its consumer products division though. But the idea is that if you do a break up analysis of JNJ and then find separate pure plays, that are selling -even cheaper- than the JNJ units, you buy. I think though, at least for investing in JNJ, one of your primary reasons for buying it is the dividend and their history of increasing it. It's the kind of company I think that if I was forced to hold for 15 years, I'd come out okay. I didn't care for Pfizer's Wyeth deal either.

I've looked at YUM, it should do well.

I like WSH. You get the company at around 9x cash EPS. It operates in an oligopoly and has the lowest market share versus two other larger competitors. So there is potential for growth. Plus, it acts as a croupier-play on insurance markets. If you get in at today's prices, you have the optionality that comes from margins expanding if the insurance market goes from soft -> hard. Globally, as more large companies come online they'll have a need for insurance and it makes sense to use a broker if you are chief risk officer because you can put all the agency risk on their advisory businesses (in order to help keep your job if things go wrong).

By: marketfolly

marketfolly — Wed, 30 Jun 2010 23:51:36 +0000

Great stuff Tariq, have been poking around a lot of large cap names as of late because they truly look undervalued. My concern (at least with JNJ) is that maybe the company/industry is just seeing multiple compression. It's only natural over time and after all, these companies are behemoths. The emerging markets exposure though still leaves opportunity for growth.

While not necessarily a big value name at the moment, I'd keep an eye on Yum Brands as their emerging markets expansion has been a huge win. Definitely think you're on the right track looking at MA and MON as well. Some others I'd throw out as possibilities to examine further would be: MJN, EL, and VRSK has popped up on a lot of my screens. Lastly, I'd toss out PFE as well. Huge company, solid dividend, just continues to get sold off. Lot of different factors at play with that one and the pipeline etc. Have seen lots of value guys jump in it only to get burned as they have to be down 20% or so on it.

Jay
@marketfolly