My Value Investing Roots
Three Geniuses and Me!
Nu Skin Enterprises (NUS): Quality, Value and Growth
If you’ve been reading my Cabot Wealth Advisory columns for a while, you know that I’m a strong advocate of value investing as a safe way to profit in the stock market—in fact, it’s been a central force in my investing life since I’ve had any money to invest!
Like many college students, I was inspired to enter my particular field by an extraordinary professor, but the story actually begins much earlier than that.
Back in 1946, Dr. Wilson Payne and Benjamin Graham held meetings at Babson College to find a way to calculate the true fundamental value of a company. Dr. Payne was the Dean of the Investment Department at Babson College (known back then as Babson Institute) and Benjamin Graham was professor of Advanced Security Analysis at Columbia University and investment advisor with the Graham-Newman Corporation. The two collaborated to devise formulas that would estimate a fair value range for stocks based on Mr. Graham’s guidelines.
Many years later, I attended Babson, 15 miles west of Boston, and majored in Finance and Investments. I had the good fortune to take several courses taught by Dr. Payne, who made a lasting impression on me. Dr. Payne, a genius in math, made learning fundamental securities analysis painless. His teachings were based upon Benjamin Graham’s analyses.
After graduating from Babson, I worked for Paine, Webber in Boston for a few years and, after a stint in the Army, I was hired as Director of Research at Econometrics Research and Management in Boston. I was given the task of developing a computerized research system to analyze and evaluate stocks. I called upon my old friend and college professor, who was more than willing to lend assistance for free!
In 1969, Dr. Wilson Payne and I teamed up to develop computerized models using the formulas which he and Ben Graham devised to estimate the true fundamental value for companies 23 years earlier. We hired Dr. Richard Fey, a math professor at Boston University, and two computer programmers. And there I was, a newbie in the very sophisticated world of investments, standing among giants!
We developed a reliable system to estimate Maximum Buy Prices to indicate when to buy a stock, and Minimum Sell Prices to estimate when to sell a stock. In addition, we added Benjamin Graham’s guidelines for standards of quality, value and earnings growth to quantify each company’s attributes for comparison purposes.
I left Econometrics a few years later, after buying the exclusive rights to use the software programs that my team worked so hard to develop. I still own the rights and now use my computers to perform all of the calculations we developed decades ago. I am happy to report that the analyses we developed, based on Benjamin Graham’s teachings during the 1930s and 1940s, still work very well!
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My wife and I have further adapted my old computer programs to fit today’s modern computer operating systems. She’s an expert programmer. Our computers crank out two million calculations at the beginning of every month to create dependable ratings and forecasts.
Benjamin Graham emphasized investing in high quality companies. In his mind, all else is a gamble not an investment. For this reason, I include only 1,000 high-quality companies in my value stock database.
In addition to looking for high quality ratings, I also seek companies with high value and growth ratings. I can easily find undervalued companies by comparing a company’s current price to my Graham-generated Maximum Buy Price target.
Finally, I find companies with high growth ratings. These ratings are based on past, current and forecast growth rates for sales, earnings, dividends, cash flow, and book value.
During the past 17 years, I have recommended high-quality undervalued companies with steady growth every month in the Cabot Benjamin Graham Value Letter and its predecessor. My recommendations have increased 640% compared to an advance of 134% for the Standard & Poor’s 500 Index during the same period through September 30, 2012.
More recently, my recommendations have increased 27% since the beginning of this year which is far better than the comparable gain of 15% for the S&P 500 or the performance of mutual funds and hedge funds. High-quality stocks that are undervalued have consistently outperformed the stock market indexes in both advancing and declining markets. Investing in quality stocks at bargain prices makes sense in any stock market environment.
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After scanning my 1,000 stock database to find a stock that fits well within Benjamin Graham’s parameters for quality, value and growth, I find that Nu Skin Enterprises has all the attributes needed to shine during the next one to two years.
Nu Skin Enterprises (NUS: 41.92) Max Buy Price = 40.34; Min Sell Price = 65.61
Develops and distributes personal care products and nutritional supplements under the Nu Skin and Pharmanex brand names. Based in Provo Utah, NUS derives a whopping 86% of sales from outside North and South America. Europe contributes less than 10% of sales.
An analysis of Nu Skin’s fundamentals reveals how attractive the company is. Using the analyses developed by Benjamin Graham and Dr. Wilson Payne, Nu Skin scores high in almost all rating categories.
I double-check my ratings and estimates with the leading research services to make sure my underlying data is accurate. Nu Skin’s high quality rating in the Ben Graham system is derived from the company’s balance sheet, which contains low debt and lots of cash ($6.20 per share) and from Nu Skin’s record of steady sales, earnings, and dividend growth during the past decade. My high quality rating is supported by Standard & Poor’s quality rating of A-, S&P’s third highest ranking.
Nu Skin is undervalued. Its stock price is currently just above my Maximum Buy Price of 40.34 and below Standard & Poor’s discounted cash flow value of 51.40.
Nu Skin’s high growth rating is bolstered by the company’s steady 10% sales and earnings growth during the past decade. The future looks even brighter: I project EPS growth of 15.7% annually during the next five years. My favorable growth rating is reinforced by IBD’s (Investor Business Daily’s) Growth Rating of 99, IBD’s highest score.
NUS’s stock price performance has been disappointing during the past six months. Worries about the company’s new product development in China and Japan led to a 20 point drop in NUS’s stock price five months ago. However, Nu Skin successfully launched its suite of AgeLOC products in China in April, which boosted sales significantly in the second quarter. Apparently, the slowdown in Nu Skin sales in China will not materialize. Therefore, I believe the current stock weakness presents an excellent buying opportunity.
Sales increased 23% and EPS (earnings per share) soared 56% during the past 12 months ended 6/30/12. I expect sales to increase 12% and EPS to rise 14% during the next 12 months. At 12.8 times latest EPS, NUS shares are a bargain. The dividend yield of 2.0% and Low Risk rating create an excellent investment opportunity. I advise buying NUS at or below 40.34 which is my Maximum Buy Price. Sell when NUS’s stock price reaches my Minimum Sell Price of 65.61 within the next one to two years.
Until next time, be kind and friendly to everyone you meet.
Editor of Benjamin Graham Value Letter
Editor’s Note: You can read more Benjamin Graham and receive continuing coverage of Nu Skin Enterprises in the Cabot Benjamin Graham Value Letter. There you’ll not only find buy and sell advice for Nu Skin, you'll get 20 other excellent value stock recommendations from J. Royden Ward each and every month. Roy applies the strategy of the father of value investing, Benjamin Graham, to find the market’s best undervalued stocks. And he will tell you exactly when to sell. Don’t miss out on his next recommendations ... click here now to get started today!