Don’t Confuse Brains With a Bull Market
Undervalued Companies with Low Price-to-Book Value Ratios
Today we begin with some scenes from my recent Italian vacation, which for the most part, consisted of two solid weeks of fabulous food, delicious wine, good friends, an d beautiful churches and museums. Nothing unusual there.
What were unusual were two incidents that involved the law. After a week in Umbria, I had just driven, with my wife and another couple, down past Rome and Naples, and over the Sorrentine Peninsula to Amalfi. That last stretch was the most nerve-wracking dry-pavement drive of my life, roughly like the famous stretch of Lombard Street in San Francisco but steeper, a thousand times as long and with two-way traffic.
We made it.
And while checking in to our hotel, which I had reserved months before, a funny thing happened.
The well-dressed man at the desk brought out my reservation, and pointed to a figure, saying in a quiet voice, “This is the rate you contracted to pay,” (it was correct) “but if you’d like to pay in CASH you can have it for THIS price,” (at which he wrote a number that was 13% lower than the first).
I thought a few seconds, calculated that a couple visits to an ATM would yield the necessary cash, and said OK.
I was happy to save the money, and he no doubt was happy to avoid paying both the credit card fees and (more importantly) taxes to the Italian government. Now, technically, I have no proof the hotel was engaging in tax evasion, but considering that it’s ingrained in the culture of Italy—which has some of the highest taxes in Europe—and that I can think of no other reason a hotelier would ask a guest to pay in cash, I feel fairly confident in my conclusion. So the question is this. Am I complicit? Should I fear a visit from the Guardia Finanza, the Italian Police force targeting tax evasion and other financial crimes?
The other incident that involved the law came while I was driving along a secondary road in Umbria one Sunday morning. Seemingly out of nowhere, a trim Italian member of the Carabinieri appeared in the road, holding up a little red stop sign on a stick, and motioned me to pull over. Approaching the car, he asked for the vehicle’s papers, and then my license … took them back to his partner—who was standing by his car with a machine gun just in case—and then returned and asked me to join them. Turns out they wanted to enter my information in their book, but they needed my help to identify exactly what, on my license, were my name, state, etc. (Massachusetts is tricky one for Italians!) So I helped. And then they let me go. Routine traffic stop? You tell me.
Leaving law enforcement, let’s talk about Jesus statues.
Driving south from Amalfi, on the way to Sicily, we spent two nights in the beautiful town of Maratea (population 5,000), which has what I believed to be the world’s second-largest Jesus statue.
Here’s a picture of me in front of it.
Doesn’t look too big, does it?
Well, look again.
This statue, named Christ the Redeemer of Maratea, was erected by Piedmontese entrepreneur Stefano Rivetti who owned hotels in the town. Faced in beautiful white Carrera marble, and standing 69.7 feet high, it was completed in 1965.
We were there on a Sunday morning about 11, with no one else about. Amazing.
But now I know that this is only the world’s fifth-largest Jesus statue.
The fourth-largest, which was completed in 1959, is in Lisbon, Portugal. Named Christ the King, it was begun under orders from the authoritarian President of the Council António de Oliveira Salazar, and is now a national monument. The statue is 92 feet tall.
The third-largest—and most famous—is the statue called Christ the Redeemer in Rio de Janeiro, Brazil. Completed in 1931, the statue is 99 feet tall, and stands on a 31-foot pedestal, for a total of 130 feet.
The second-largest is the statue of Cristo de la Concordia in Cochabamba, Bolivia, which is 112 feet tall and stands on a 20-foot base, for a total of 132 feet. It was completed in 1994, and until recently was #1.
But just last week the good people of Swiebodzin, Poland (population 22,000), claimed the title with a statue that’s 108 feet tall, that stands on a 59-foot base, and has a 6-foot golden crown, for a total of 167 feet. (108 feet equals 33 meters, one for every year Jesus lived.)
The driving force behind the project was the Rev. Sylwester Zawadzki (now 78 years old), who raised the $1.45 million for the project from donations. Locals expect the town to benefit from increased tourist traffic, and I wish them well.
But I wonder if the folks in Rio de Janeiro should start calling the mountain that sits under their statue a “base?”
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I Refuse to Let the Financial Media Send You to the Poorhouse!
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As for the market, over the past two months, most of the stocks we’ve recommended in Cabot Wealth Advisory have gone up.
On September 7, in an issue titled “Up, Up and Away, I recommended Netflix (NFLX). It’s up 19%” since then.
On September 9, Paul Goodwin, editor of Cabot China & Emerging Markets Report, recommended China New Borun (BORN). It’s up 53% since then.
On September 13, I recommended JinkoSolar (JKS). It’s up 36% since then.
And on September 16, Brendan Coffey, editor of Cabot Green Investor, recommended ReneSola (SOL), which is up 26% since then and American Superconductor (AMSC), which is up 28%.
In hindsight, those were great recommendations. But in all honesty, the real hero behind those gains is the bull market.
And as the old market truism says, “Don’t Confuse Brains with a Bull Market.”
We try not to, and by the same token, we try never to forget that the market can go both ways. When it’s rising, it lifts all boats. And when it’s falling, even the best companies’ stocks have trouble keeping their heads above water.
Right now, the tide is still coming in. Most boats are being lifted, and I sincerely hope you’re making the most of it.
Cabot subscribers certainly are. Just last week, Whole Foods Market (WFMI), jumped 15% (!!) after reporting better-than-expected third quarter results. Las Vegas Sands (LVS) just advanced 10 days in a row, for a gain of 37%. And Google (GOOG) is up 85 points in the past four weeks! All these stocks are in Cabot advisories now.
But knowing that the pendulum on Wall Street swings left and right, I’m now expecting that some of the people who were responsible for creating those recent highs will have to sit through a period of … let’s call it discomfort… before their optimism is rewarded.
Now, I’m not trying to call a top here. I’m well aware that trends tend to go farther than expected, and that stocks that are overbought can remain overbought. Long-term, I’m as bullish as anyone.
But the market is a two-way street … and for new investments today, an argument can be made for taking the low-risk route, particularly is aggressive investing if just not your style. At Cabot, that means selecting something from Cabot Benjamin Graham Value Letter, which uses the classic value investing methodology that has worked so well for Benjamin Graham, Warren Buffet and thousands of other patient investors who have mastered the science of buying low and selling high.
The latest issue, which came out last week, had a special feature on Undervalued Companies with Low Price-to-Book Value Ratios.
Editor Roy Ward rotates through six specific Special Features a year, so he returns to this one twice a year, and the good news is that over the past 62 months (the period we’ve published the advisory) this is the best-performing selection criteria of them all, even outperforming the Classic and Wise Owl models.
Roy wrote, “To select these stocks, we applied four additional criteria to the stocks in our database:
• excellent financial strength
• increasing dividend payments
• low price-to-earnings ratios
• strong earnings prospects
The six stocks we chose present a wide range of industries: gold, securities trading, semiconductor components, energy, personal computer distribution and laboratory equipment and services.”
And I’ll give you one of them here. It’s Barrick Gold (ABX):
Roy writes, “Barrick Gold, based in Toronto, is the world’s largest gold producer with 26 mines in operation across five continents. The company’s new Cortez mine in Nevada is now producing 15% of the company’s total gold production at a very low $300 per ounce. Barrick has additional low-cost mines ready to start production during the next five years, which will lead to higher profit margins. Earnings per share surged 87% during the past 12 months and will likely increase another 17% during the next 12 months. At 14.3 times forward 12-month EPS, ABX shares are among the least expensive in the industry (Goldcorp, Agnico-Eagle and Silver Wheaton sell at 33 times forward EPS or higher). ABX is medium risk.”
Should you buy it now? Maybe, but the right way to invest in value stocks is to diversify, so that an unexpected dip by anyone stock doesn’t hurt too much.
And Roy says, “We strongly recommend buying as many of the six stocks as is practical to spread your risk. We encourage you to invest in the new recommendations at current price levels and hold until our next Low Price-to-Book Value Special Feature appears in the May 2011 issue of the Cabot Benjamin Graham Value Letter.”
Click here to learn more about Barrick Gold and this proven value investing system.
Yours in pursuit of wisdom and wealth,
Cabot Wealth Advisory