Investing is Not a Game
Not Your Ordinary Health Care Company
I love sports. I can remember learning all kinds of sports when I was a young kid--about a century ago! Baseball, basketball, hockey, skiing; you name it, I tried it. Only trouble was; I was pretty terrible at all of them. Small in stature and no coordination--that was me.
My dad took me to baseball, basketball and football games. It didn't matter who won. I always had a good time and still remember some of the games that we attended together. Mom liked to come to baseball games with us to see her favorite player, Ted Williams.
In high school, I ran track and earned my "letter" in my senior year--I think I still have it somewhere. When I entered Babson College, they had no track team, so I tried swimming. I enjoyed swimming and learned a skill that would become a staple of my exercise program later in life.
I continue to enjoy sports. I read the sports section every day; I go to an occasional baseball or hockey game; and I swim almost every day. I love to watch all kinds of sports on TV, but I avoid spending hours doing that. My favorite is the Olympics where the old phrase, "the thrill of victory and the agony of defeat," comes to life.
Following the stock market is a lot like following sports, but in this arena, the phrase "the thrill of victory and the agony of defeat" takes on a whole new meaning. Investing is not a game; the victories and defeats involve your life savings. Yet too many investors become lazy and invest in stocks on a whim, as if it were just a game. Games don't have serious consequences, whereas investing almost always does. Don't become lax! You should treat every investment as if you are investing all of your money into each and every stock.
Even though investing is not a game or sport, there are several analogies that can be applied. Like an athlete, I try my best to stay focused and stick to my investing "game plan," in other words, my investment strategy. I won't buy a stock unless I am convinced that it is the most undervalued stock among the thousands of choices in the stock market. When my investment strategy isn't working (no plan is perfect), I might make a tiny adjustment, just as a baseball manager might adjust his lineup.
Warren Buffett is often criticized when the stock market is advancing by leaps and bounds and his investments are just plodding along. Mr. Buffett sticks to his investment strategy, though, because he is confident that over the long term, his investments will provide a satisfactory return. His 20% per year returns are quite satisfactory, indeed.
Finally, we need to learn from our mistakes. Athletes make plenty of them, and the most successful athletes learn from their mistakes and then put the experience behind them. I have always admired individuals who can improve their skills by analyzing what went wrong. Warren Buffett was quick to admit that he made some mistakes in 2008. I'll bet he won't make those mistakes again!
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My featured stock today is a health care company that has created its own unique niche. I have studied the company's sales and earnings trends. I have read about management's strategies, goals, and plans for the future. I am confident that I could put all my money into this stock, because the outcome is obvious: the stock will be a winner! In fact, I like it so much that it was featured in the May edition of Cabot Benjamin Graham Value Letter, of which I am the editor.
ResMed (RMD) designs, manufactures and distributes medical equipment and supplies to diagnose and treat sleep-disordered breathing such as apnea. Principal manufacturing facilities are located in Sydney, Australia, where ResMed's initial products for treating apnea were developed in 1981. The company's products are distributed in 68 countries throughout the world.
ResMed continues to focus on the development of products to solve sleep problems. These range from snoring, often associated with apnea, to severe apnea, where the airway temporarily collapses during sleep, restricting breathing for 10 seconds or more. Interrupted breathing can occur several hundred times a night and affects about 20% of the adult population.
The company has a strong balance sheet with minimal debt and lots of cash. ResMed pays no dividend. I forecast earnings per share growth of 20% during the next 12 months. EPS growth has averaged 19% during the past 10 years with no declining years.
ResMed has stimulated rapid growth in the sleep-disordered breathing industry by educating physicians and sufferers about serious health problems caused by sleep disorders. Up to 90% of people who have existing problems remain undiagnosed and untreated. The vast number of sufferers offers many opportunities for ResMed to grow rapidly in the future. I believe the company will produce 20% earnings growth during the next several years.
ResMed shares are undervalued at 18.4 times next 12-month EPS compared to the company's 10-year average P/E (price to earnings ratio) of 26.1. ResMed is a leader within a segment of the healthcare industry that is in its infancy. I expect the stock to advance to our recommended sell price within one to three years. Buy RMD now.
J. Royden Ward
For Cabot Wealth Advisory
Editor's Note: You can read more about ResMed and get continuing coverage of the stock in Cabot Benjamin Graham Value Letter. There you'll not only find buy and sell advice for RMD, you'll get dozens of 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. This year he's already uncovered several stocks that were sold for double-digit profits! Don't miss out on his next recommendations ... click here now to get started today!