Jeff Saut
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Raymond James'i Jeff Saut üsna sümpaatsete mõtetega - tema viimane sõnavõtt allpool, kasulik lugemine.
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In the American whaling industry, which got under way during the eighteenth century, whalers slaughtered the giant Sperm whale for sperm oil, which came from the head and blubber and was important as fuel for lamps. Another type of oil, called spermaceti, extracted from the head, became the chief ingredient in candles. While boiling up the blubber and parts of the Sperm whale, whalers occasionally noticed a very pleasing fragrance. It turned out this was a third oil-like substance, located in the intestines of the whales. Called ambergris, it became the basis for very expensive perfume. The problem was that whalers found ambergris in very few of the whales they killed; nevertheless, the substance brought them a good income because the perfume manufacturers paid extremely high prices for it. So the whalers killed a lot of Sperm whales looking for those chosen few who had the right intestinal stuff.
-The Fall of 1st Executive by Gary Schulte
Investing is a lot like whaling. Investors are constantly searching for that whale of a stock with the “ambergris factor,” yet many of the big-names “whales” on Wall Street have not provided investors with “ambergris” for years . . . hello, General Electric (GE/$33.40). Indeed, hundreds of these blue-chip “whales” have not even come close to their 2000 highs despite the bullish ballyhoos of many of the broken-clock bull cheerleaders.
The problem with many of these beached-whales is that they have become so large that they cannot adapt and keep growing at rates that command expanding P/E multiples. And on Wall Street, ladies and gentlemen, growth is the “ambergris factor” that provides the pleasing fragrance that attracts buyers. Manifestly, g-r-o-w-t-h is what legendary investor Peter Lynch looked for in selecting many of his stocks. As expressed in his book One Up on Wall Street
All else being equal, a 20-percent grower selling at 20 times earnings (a P/E of 20) is a much better buy than a 10-percent grower selling at 10 times earnings (a P/E of 10). This may sound like an esoteric point, but it’s important to understand what happens to the earnings of the faster growers that propels the stock price. Look at the widening gap in earnings between a 20-percent grower and a 10-percent grower that both start off with the same $1 a share in earnings:
Base Year Company A - 20% grower Company B - 10% grower
Year 1 $1.00 a share $1.00 a share
Year 2 $1.20 $1.10
Year 3 $1.44 $1.21
Year 4 $1.73 $1.33
Year 5 $2.07 $1.46
Year 6 $2.49 $1.61
Year 7 $3.58 $1.95
Year 10 $6.19 $2.59
At the beginning of our exercise, Company A is selling for $20 a share (20 times earnings of $1) and by the end it sells for $123.80 (20 times earnings of $6.19). Company B starts out selling for $10 a share (10 times earnings of $1) and ends up selling for $26 (10 times earnings of $2.60).
Even if the P/E ratio of Company A is reduced from 20 to 15 because investors don’t believe it can keep up its fast growth rate, the stock would still be selling for $92.85 at the end of the exercise. Either way, you’d rather own Company A than Company B.
This in a nutshell is the key to the bigbaggers [the ambergris factor] and why stocks of 20-percent growers produce huge gains in the market, especially over a number of years. It’s no accident that the Wal-Marts (WMT) . . . can go up so much in a decade . . .
Admittedly, it’s extremely difficult to find 20% growers and then have the courage to hold them for the long term. But from a portfolio point of view, if you keep eliminating the stocks whose growth rate falters, you will avoid the “blubber” and be left with the “ambergris,” those chosen few that may turn into the 20% growers . . . the key to huge market gains. Raymond James’ research department works diligently attempting to find the “ambergris factor,” which is reflected in the outsized performance of our Analysts’ Best Picks List, our Focus List and ALL of our Strong Buy-rated stocks as can be seen in the nearby chart. Yet as noted in the new book “Unconventional Success: A Fundamental Approach to Personal Investment,” asset-allocation also plays a central role in determining investment results.
For example, we have been bullish on the energy sector for nearly four years; however, two years ago we decided it would be a good idea to add some coal stocks to portfolios in addition to our oil and gas stocks. While I am certain there are numerous coal stocks that have outperformed the four names we used, the real insight was knowing that you needed to own some coal stocks a few years back. The same can be said about knowing you should own some stocks that play to the themes of homeland security, water, precious/base metals, timber, post secondary education, etc. Luckily, most of these themes have done so well that the price appreciation of the shares we have recommended has caused them to become a VERY large “bet” in the investment side of the portfolio. Using energy as an example, stocks that play to this sector had grown into nearly a 40% portfolio weighting. Sensing this was too large, and that the price of crude oil was making a short/intermediate-term parabolic peak, we began rebalancing our energy stock positions about six weeks ago. To accomplish this rebalancing we sold 20% to 30% of each energy stock position except for our coal stocks. The proceeds from those sales are currently being held in cash.
Unlike many investors, we don’t mind holding cash because to assume the investment opportunity “sets” that are available today are as good/better than any opportunity sets that will present themselves next week, next month, or next quarter, is clearly naive. And speaking of cash, two weeks ago we sold one-third of those trading positions that were purchased on the Katrina-induced stock market weakness (August 29/30). Early last week we were stopped-out (read: sold) of the other two-thirds of those trading positions. This leaves us with nearly a 100% cash position in the trading side of the portfolio. Consequently, we enter this week once again fishing for the “Ambergris Factor,” and while it may not be an individual stock, one theme worth
reconsidering is “real estate in the sky” . . . a.k.a, the tower stocks. Unsurprisingly, the hottest thing going in tech-land currently is delivering more content (voice, video, data) to the handset, PDA, BlackBerry, etc. While there are numerous ways to get at this theme, the one that makes the most sense to us is the tower stocks. Fortunately, Raymond James has one of the best tower stock research teams in the country. Currently they think “ambergris” can be found in American Tower (AMT/$23.82/Strong Buy).
The call for this week: Ever since 9-11-01 we have suggested this was going to be the “fox trot” economy where, like the dance-step, fast/fast economic figures would be followed by slow/slow figures. In this week’s Barron’s economist David Rosenberg puts it much better than we ever could when he notes – [like now] only eight times in the past 50 years has the economy been confronted with the Fed tightening, oil prices rising and the equity markets heading lower. In seven of the previous eight occasions the gross-domestic product either slowed or stopped dead in the water. The odds, then, of a slowdown in 2006 are 88%, which David says is not “a track record worth betting against.” And that, dear readers, is why we remain “predominately defensive” and quick to sell our mistakes. As for this week, it is a tough “call” given the hurricanes’ aftermath, earnings-warning season and end-of-the-quarter machinations. Nevertheless, this morning “school” is back in session (futures sharply higher) since “educating Rita” didn’t cost as much as feared . . . stay tuned!Jeff Saut, Raymond James
