By J. Royden Ward, Editor of Cabot Benjamin Graham Value Letter
From Cabot Wealth Advisory 11/22/10 Sign up for free Cabot Wealth Advisory e-newsletter
Twice a year, I combine Warren Buffett’s and Ben Graham’s criteria for choosing stocks for a special feature in Cabot Benjamin Graham Value Letter, the publication I edit. To find investment opportunities for you, I looked for stocks with:
1) Free cash flow of more than $20 million – cash needs include dividends, operating expenses, capital improvements and research.
2) Net profit margin more than 15% – a good indicator of growth sustainability.
3) Return on equity more than 15% – a barometer of future appreciation.
4) Discounted cash flow value higher than current price – Standard & Poor’s is a good source to find discounted cash flow estimates.
5) Market capitalization more than $1 billion – small companies not allowed.
6) Standard & Poor’s rating of B+ or better – indicates financial stability and steady growth of earnings and dividends.
7) Positive earnings growth during the past five years with no deficits – very important to adhere to.
8) Dividends currently paid – always important and helps your return, too.
I screened our Benjamin Graham Common Stock Database and found two high-quality companies that fit our criteria. Both companies, Microsoft and Oracle, are giants in the Information Technology sector, and both are producing impressive growth numbers.
Oracle (ORCL) is a leading software manufacturer with a worldwide reach. The company is the largest developer, manufacturer and seller of information management software and services. The company’s database software and product support services provide a large revenue stream enabling Oracle opportunities to expand. Also, during the past several years, Oracle has purchased an impressive number of large software providers, which will help achieve management’s goal to offer a complete line of business software solutions to customers.
Management’s acquisition strategy with the objective of positioning the company for strong growth is generating extraordinary results despite the weak U.S. economy. Oracle’s January 2010 purchase of Sun Microsystems is producing cost savings and new sales opportunities. Sales increased 48% (partly due to the Sun acquisition), and earnings jumped 40% during the three months ended 8/31/10. I expect sales and earnings to rise 20% or more during the next 12 months driven by new acquisitions and by expansion into faster growing foreign markets.
ORCL has begun paying a small dividend, which currently yields 0.7%. The company’s shares sell at 13.8 times forward 12-month earnings per share, which is very reasonable for a company growing at a 20% pace.
I will continue to follow Microsoft and Oracle and other blue-chip, high-quality companies in my Cabot Benjamin Graham Value Letter. My next issue, coming soon, will focus on undervalued stocks with low price to earnings growth (PEG) ratios. I hope you won’t miss it! Click here for more information.
By Michael Cintolo, Vice President of Investments, Editor of Cabot Market Letter and Cabot Top Ten Report
For Cabot Wealth Advisory, 1/17/08 Sign up for free Cabot Wealth Advisory e-newsletter
Oracle (ORCL) is one of the giants of the computer software business, with $20 billion in revenues and a nearly perfect record of annual earnings growth over the past decade. In the third quarter, it saw revenues grow 28% while earnings grew 41%. And after-tax profit margins are a fat 30.4%
This year, the company's earnings are expected to grow 26% to $1.27 per share, yet the stock is trading at just 17 times those estimated earnings. And that's cheap.
I look at the chart, and I see a stock that's been in an uptrend since the market bottom in 2002, but it's an uptrend that's still not hot. As I write, the stock is at 22, which is just where it was in late September. The 50-day moving average is at 21.
Finally, I also note that Oracle is recommended in Cabot Benjamin Graham Value Letter. By editor J. Royden Ward's calculations, the stock earns a score of 9.29 on a scale of 10, scoring especially high on the scales of both growth and technical rating and somewhat lower on the scales of value and quality.
If you had to buy one stock today, I don't think you'd do badly with Oracle, regardless of what the market throws at you.
Vice President of Investments and Editor of Cabot Market Letter and Cabot Top Ten Weekly
A growth stock and market timing expert, Michael Cintolo is editor of Cabot Market Letter and Cabot Top Ten Weekly. Since joining Cabot in 1999, Mike has uncovered exceptional growth stocks and helped to create new tools and rules for buying and selling stocks. Perhaps most notable was his development of the proprietary trend-following market timing system, Cabot Tides that has helped Cabot place among the top handful of market-timing newsletters numerous times.
|Oracle Corp. (ORCL)
500 Oracle Parkway
Redwood Shores, CA 94065
|Index Membership: S&P 100, S&P 500, S&P 1500 Super Comp, Nasdaq 100 |
Industry: Application Software
Full Time Employees: 105,000
1/17/08 Oracle (ORCL): Especially high on scales of growth and technicals