The Capital Markets Offer New Value - 4 / 6 / 2009

Having poured over financial journals and newspapers this weekend, it would seem we have reached the Rubicon. This is one of the rare instances in which we can truly say the Dow Jones index has found its fair value. New information has turned to a slow drip from the torrential gushers of financial information in January, February, and March. The upside last week was really the balance of remaining short covers and some new found optimism from the G20, and this weekend analysts had either nothing new to say or nothing to say at all. So this, value minded folks, is the time to go hunting. It's the time to begin seeking out great, large cap value and begin rebuilding that portfolio.

Please remember that there will be ups and downs as non-value minded speculators fuel daily momentum each way. There are very important disciplines to remember in value investing. Value looks out a year at least. Value sets its price targets the day of purchase. And value puts a minimum 15% downside stop loss into its principal purchases.

I won't pretend to have the ability to pick the best performers this year, but I will discuss the why's and hows of the companies purchased, always keep an eye on principal investments made, current pricing, and also manage stop loss barriers so those that chose to follow have a decent road map and understanding of my current thinking on each of the positions discussed today and in the future.

Also please recognize that in the spirit of keeping this daily piece limited to a 2 minute read, I won't include tedious competitive industry analysis, financial statement reviews, discussions of management, foolhardy projections, and misguided valuation models resulting in a 10 page research report for each. If you want to know why, please re-read past postings paying close attention to statements on research analysts and wall street's so called experts.

I'll begin with 2.

1. General Electric - "GE", NYSE, current price: $10.60 - This Company's stock price is down 60% in the last 12 months. Why? First, they are one of the most fully valued companies at any time. More analysts cover GE both in the US and in the World than cover virtually any other company. GE is considered the bell weather stock for the US economy. Fear of GE's GE Capital division's liabilities and massive redemptions in mutual and equity funds were also responsible for the price collapse. So now GE sits with a 6.3x trailing PE multiple. In recessions GE, like IBM, is able to sustain its operating margins and grow its sales. They can do this while their competitors fall victim to expenses assumed with overly optimistic fixed costs. Most of these costs were added by competitors in 2007. I expect GE to show modest revenue growth, but significant earnings growth (vs. Research "experts" predictions) and have a price target of $15.50 (that's 50% growth this year). My stop loss is a bit more than 15% given its Dow Jones index related volatility, and in at $7.95.

2. Dell Computer - "DELL", NASDAQ, current price: $10.00 - This company has the same industry position advantages as GE. They are the Walmart of the computer industry in the following way - their inventory management and supply chain management combined with their assembly costs - provide them with decisive margin control advantages its competitors do not yet have. Add to this their customer loyalty and quick service and you have a perennial winner in a commoditized segment. Currently trading at 8.0x earnings, this company's stock was beaten down by fund redemptions as well, and while I do not expect to see $30.00 any time soon, i do expect limited downside risk at $8.50 (15%) and have a price target in at $14.00 - that's 40% this year.


There you have it, 2 really great value investments beaten down unfairly by market forces.

Build Value Everyday

Brad van Siclen