Some selling has come into the markets and we are starting to see some “high flyers” come down to earth after having an amazing run-up. For example, Wall Street darling Tesla (TSLA) is now trading at $ 205.00, a full $ 60 off of its all time high of $ 265.00. SolarCity (SCTY), another Elon Musk company, is now trading at $ 60.00, a full 30% its highs. Some of the 3D printing stocks have also come down. That is what happens when just a little bit of selling comes into the market: Wall Street starts to realize that maybe the prices are starting to get ahead of their valuations.
At the same time, many “boring” companies with quality earnings have barely budged. This is similar to the tech bubble where “dot-com” names were getting ridiculous valuations on little to no earnings while established companies were forgotten and traded at reasonable valuations. I think we are in a similar situation yet again. We have companies that have had a nice run up with no real earnings behind them and at the same time, we have these “boring” companies that trade at reasonable earnings yield.
International Business Machines (IBM)
Earnings Yield: 8.00%
Return on Capital (ROC): 90.22%
Dividend Yield: 2.00%
What’s interesting about IBM is how recent and how much of it Warren Buffett (Trades,Portfolio) has bought of the tech giant as it now represents roughly 12% of Berkshire Hathaway’s portfolio. And until recently, you could have bought it near Warren Buffett(Trades, Portfolio)’s cost basis of $ 174.00.
I think years from now this will be one of those “I should of bought it” stocks. I’m not one to usually coattail Buffett as I like to stick with the magic formula stocks, but considering the impact it has to Berkshire’s portfolio, you have to pay attention.
Exxon Mobil Corp. (XOM)
Earnings Yield: 13.20%
Return on Capital (ROC): 23.69
Dividend Yield: 2.60%
With an earnings yield of 13.20%, this is definitely the cheapest of the three. The $ 415.88 billion market cap is something to take note of as that’s pretty close to a “half a trillion” market cap. But size also has its advantages. For example, Exxon enjoys better margins and higher returns on capital than its peers as it is able to integrate refining and chemical manufacturing.
Exxon is also one of the newer Warren Buffett (Trades, Portfolio) purchases and had an immediate impact to the Berkshire Hathaway portfolio as it now represents 4% of the portfolio. As today’s current price of $ 96, it’s still close to his cost average of $ 90.
Wal-Mart Stores (WMT)
Earnings Yield: 9.00 %
Return on Capital: 24.92%
Dividend Yield: 2.50%
Probably the most interesting of the three companies, Wal-Mart is starting to get into a stage where it’s going to have to get creative to keep its growth “exciting.” As such, it is using its brand to try new concepts such as Wal-Mart Express and Wal-Mart Neighborhood Market which are the equivalent to a convenience store. Whether these concepts will pan out is yet to be determined. But I’m interested because if it is successful, Wal-Mart has the infrastructure and logistics to easily scale up. Not to mention, it continues to expand in Asia with the more traditional Supercenter structure.
Its 9% yield is not bad considering its current economic moat. Wal-Mart continues to be a low cost provider thanks to its massive scale and it continues to be able to purchase mass quantities at low prices.
Nevertheless, with almost 50 million shares in the Berkshire Hathaway portfolio, Wal-Mart represents almost 4% of the Berkshire Hathaway portfolio. Buffett’s cost average is in the $ 50s, but he has purchased shares as high as $ 77.
Obviously, these three will become better bargains if their prices drop. My guess is if they do drop, we will see a rotation from those “high flyers” into more stable companies like those mentioned.
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I’m in love with value investing and in particular Joel Greenblatt’s “magic formula”. I run a well diversified portfolioVisit earningsyield’s Website