I use a couple of value approaches to find stocks that are selling at bargain prices. I described the first approach in my Cabot Wealth Advisory last month, and if you missed it, you can find it here
Wise Owl Model
My second value approach is called the Wise Owl Model, so named because I wanted everybody to think that the approach is wise. (Clever, eh?) The methodology is based upon a meeting between Benjamin Graham and my former college professor, Dr. Wilson Payne.
In the meeting, Benjamin Graham and Dr. Payne developed a method for estimating the intrinsic value of a company. From that came methodologies for calculating the Maximum Buy Price and a Minimum Sell Price. Dr. Payne then taught me and many other students how to estimate buy and sell prices. The estimated prices are not perfect, but when intelligent analysis is added, results are outstanding.
My goal in the Wise Owl Model is to find sound, high-quality companies with positive outlooks. Buying industry leaders with annual 20% to 30% price appreciation potential makes sense to me, especially if losses are few and far between.
The system is not infallible (none is), but as Benjamin Graham once said, "Investors do not make mistakes, or bad mistakes, in buying good stocks at fair prices."
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Ward's Words of Wisdom: Buy an industry leader at a low price and sell at a higher price. Buy low and sell high--it's that simple!
My stock recommendation for today is Stryker Corp. (SYK). The company develops, manufactures and sells specialty surgical and medical products. The company's orthopedic division makes hip, knee and other implants. Stryker also makes surgical drills and saws, medical video cameras and instruments for implants. Stryker derived 38% of sales last year from international markets, which are expanding rapidly.
SYK is in an industry with above average growth and has taken advantage by spending heavily on new research. The resulting steady stream of innovative products has produced rapid growth during the last several decades. I expect 20% actual earnings growth during the next several years led by new orthopedic implant products.
A steady stream of new health care products for an aging population coupled with well-managed cost controls should push SYK's share price substantially higher in 2008. The stock is a bargain at 21.5 times next 12-month EPS. The dividend yield is low at 0.5%. I expect SYK shares to advance to my Minimum Sell Price of $90.78 within one to two years.
The stock market is performing noticeably better now, and I advise buying a mixture of growth and value stocks to keep your portfolio balanced. SYK is a leader in the health care industry with strong growth potential, and at a very reasonable price. I strongly recommend buying SYK at its current price.
J. Royden Ward
Analyst and Editor of Cabot Benjamin Graham Value Letter
Editor's Note: Stryker is featured in the latest issue of Cabot Benjamin Graham Value Letter, and updates on it (and other value stocks) will be provided in the newsletter until the stock reaches its Minimum Sell Price. In the newsletter, you will find all the tools you need for value investing, the same tools developed by Benjamin Graham and used by Warren Buffett. Click the link below to learn more.
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