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What I Look For in a Good Investment

If you’ve been investing very long, you no doubt understand the importance of having a solid system in place.

By “system” I’m not referring to a secret black box or to technical trading rules, though both can be valid approaches in the right hands.  I am speaking far more broadly.  Whether you are a value investor, a technician or a data-crunching quant, consistently making good returns in the market depends on having basic investment guidelines in place.

Today, I’ll share with you the basic characteristics I like to see in place when buying a stock.

1. Is the stock on the right side of a durable macro trend?

This is the very core of my investment process and, naturally, what I spend the most time writing about.  A durable macro trend is an economic inevitability driven by forces too powerful to stop.  Demographic trends, such as the aging of the Baby Boomers or the family formation of the Millennials, fall into this category.

Why do macro trends matter?  Because, to borrow an old expression, a rising tide lifts all boats.  If you are on the right side of a macro trend, the rest of the investing process becomes much easier and you have a much higher probability of success.

2. Is the stock attractively priced?

That sounds good. But how do you define value?

My methods here will vary slightly from stock to stock.  Often, I will take an income statement approach, comparing the stock’s current price to its historical or expected earnings, cash flows, or sales.  This might mean looking at the current P/E ratio or looking at a longer-term indicator such as the cyclically adjusted P/E ratio, or “CAPE.”  Sometimes, rather than focusing on the income statement, I’ll focus on the balance sheet, looking for assets that are undervalued on the books.  In this kind of deep value investing, you can often find companies whose individual parts are collectively worth far more than the current value of the stock.

3. Is management shareholder friendly?

We want to own companies with management teams that know their place.  They are employed for one—and only one—reason: To make money for you, the shareholder.

One of the best signs that management takes its obligation to shareholders seriously is the payment and consistent raising of a regular dividend.  But well-timed stock buybacks can also be an excellent way to reward shareholders and without the tax complications of dividends.  But the key here is that buybacks must actually reduce the number of shares outstanding and must not be used to “mop up” new shares issued via executive or employee stock options.

4. Is insider trading/ownership favorable?

In an ideal stock investment, you are on the same side of the trade as the key personnel running the company.  A “perfect stock” will have both high insider ownership, possibly by the company’s founder, and consistent new purchases by insiders.

The key here is “skin in the game.”  You want a management team of shareholders with their interest aligned with your own.  If a CEO has a large share of his or her personal net worth in the company they are managing, they are more likely to run it prudently and with a long-term horizon.

As I said, a “perfect stock” will have both high current ownership by insiders and regular open-market purchases, but “perfect” insider stocks are rare gems.  For the most part, I can tolerate a benign insider picture in which insiders are neither aggressive sellers nor buyers.  I’m happy if I see either favorable ownership or favorable new buying, and I am downright thrilled if I see both.

This article is an excerpt from the July issue of Macro Trend Investor.  If you’re not reading Macro Trend Investor, consider trying a one-month trial for $9.99.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. 

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The Bourbon Boom: Is It Investable?

Bourbon whiskey lovers rejoice: Production of your poison of choice has risen to levels last seen in the 1970s.

For whiskey to legally meet the definition of “straight bourbon,” it must be aged a minimum of two years in new charred oak barrels, and many of the high-end, small-batch bourbons so popular with the hipster crowd are aged significantly longer. For example, Maker’s Mark — one of Suntory’s (STBFY) higher-end brands — is usually aged about six years.This is definitely good news for bourbon drinkers. As recently as this past May, I reported news that I found to be deeply disturbing: we are drinking bourbon faster than the distillers can make it. And because bourbon — unlike, say, vodka or gin — has aging requirements, shortages cannot be immediately met by ramping up production.

So, a ramping up of production today is essentially a bet that today’s high demand for “traditional” spirits like bourbon is a sustainable trend and not merely a passing fancy of fashionable drinkers. Only time will tell whether this proves to be true, but we’ve seen drinks juggernaut Diageo (DEO) make a similar bet on scotch in recent years. In 2012, Diageo embarked on major five-year expansion plan, plowing $1.5 billion into new production facilities in Scotland.

And the aging period for scotch is significantly longer than that of bourbon; Diageo’s Johnnie Walker Black Label — a respectable though certainly not spectacular brand — has a minimum aging requirement of 12 years. (Diageo, by the way, has also jumped into the bourbon race with its heavily promoted Bulleit Bourbon.)

My bet is that the bourbon boom has longer to run. If you recall, the boom in vodka popularity steadily gained ground throughout the 1990s and 2000s, reaching its climax with the success of ultra-premium brands like Ketel One and Ciroc. If the past is any guide, the bourbon renaissance is still in the early stages.

The question is, is there any way to profit from it?

The Bourbon Boom

If you’ve ever dreamed of turning a moonshine still into a respectable business, this would certainly be the time. Just as microbreweries have become popular eating and drinking establishments, so have microdistilleries. And contrary to popular belief, you don’t have to distill your product in the state of Kentucky in order to legally call it bourbon; anywhere in the United States will suffice.

Of course, most of us lack the time, patience, and backwoods credentials to distill our own bourbon. And unfortunately, there aren’t too many pure bourbon plays left among alcohol stocks.

The two biggest alcohol stocks for bourbon — Diageo and Suntory — are massive multinational spirits companies, and bourbon makes up a relatively small part of their drinks portfolio. Suntory is the owner of the iconic Jim Beam brand, as well as Maker’s Mark, Knob Creek and even the stodgy Old Crow. But collectively, all of Suntory’s bourbon brands make up less than 10% of Suntory’s current revenues. And Diageo’s exposure to bourbon is so small as to be almost nonexistent.

What about indirect investments, such as in barrel makers (or “coopers” for the English majors out there)? Unfortunately, most coopers are relatively small and are privately held.

Are There Any Alcohol Stocks Worth Buying?

So, what alcohol stocks are we left with?

At the risk of offending purists, the closest thing to a pure play on “bourbon” would be Brown-Forman Company (BF-B), the maker of the iconic Jack Daniels Tennessee Whiskey.

I should be clear: Jack Daniels is not bourbon. It’s Tennessee Whiskey. But for most drinkers, bourbon and Tennessee Whiskey are close enough to be interchangeable, and Tennessee whiskey has enjoyed a healthy boom alongside bourbon over the past decade.

Alas, Brown-Forman is a very expensive stock at today’s prices, trading hands at more than 30 times trailing earnings and 25 times expected forward earnings.

That’s too expensive for my tastes. At, say, 20-22 times earnings, I would consider Brown-Forman attractive. But at today’s prices, your money might be better spent on its whiskey rather than its stock.

This article first appeared on InvestorPlace.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. 

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Investing With Billionaires: Buying a Sports Team

Jeff Reeves and I chat about the “billionaire boom” and what it means for sports franchise prices:

InvestorPlace’s Kyle Woodley carried the torch from there, adding this:

Well, it’s curtains for Donald Sterling.

A court has decided that the sale of the Los Angeles Clippers by the longtime owner’s wife is legal, and the Clippers will now fall into the lap of former Microsoft (MSFT) CEO Steve Ballmer for a cool $2 billion.

The deal will accomplish many things: It’ll give the increasingly relevant Clippers some more buzz, it’ll make their free agency period a little easier, and it’ll also wick some sweat from NBA management.

But it also just made a sports investment on the other side of the country look a little better.

Rich People Buy the Darnedest Things

Ever since May, when Ballmer announced his $2 billion bid for the Clippers, Wall Street quants began breaking down the deal from the investor’s perspective and found that, boy, did Ballmer overpay. Bank of America, for instance, “valued the Clippers between $1 billion and $1.3 billion.”

Clearly, he should’ve waited for a dip before buying.

If you’re laughing, good — you get the point. Namely, Ballmer couldn’t care less what kind of value he got on the team, nor do many would-be owners. Professional sports franchises are increasingly becoming the playgrounds of the uber-rich: owners like Mikhail Prokhorov of the Brooklyn Nets and Roman Abramovich of English Premier League team Chelsea, who sink large amounts of cash looking not necessarily for returns, but championship prestige.

And it seems that each time a new team goes up for sale, the dollar signs keep getting bigger.

You can read the rest of Kyle’s article here.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. 

 

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KORS Stock is a Tweener: No Longer a Momentum Stock, But Not Yet a Value Stock

Michael Kors (KORS) just can’t seem to catch a break.  Despite crushing fiscal 1st quarter 2015 revenue and earnings estimates on Monday, KORS stock is in freefall, down by about 6% on the day.

KORS reported earnings of $0.91 per share on revenue of $919.2 million, far exceeding analyst consensus expectations of $0.81 and $851.66 million, respectively. Total revenues were up 43.4%, and same store sales jumped by fully 24.2%. Gross margins increased slightly from 62.0% to 62.2%.  And KORS continued to poach market share from aspirational rival Coach (COH).

Overseas, the numbers were even better.  Per the press release, “In Europe, we were extremely pleased with our revenue growth of 128%, which was driven by a comparable store sales increase of 54.2%, as well as strength in our wholesale business. Lastly, revenue in Japan increased 89%, driven by comparable store sales growth of 48.8%.”

By an objective measure, KORS had a fantastic quarter. So…why the selloff in KORS stock?

Wall Street appears to be worried that KORS has grown too far too fast in North America and that markdowns and margin compression are doing to accelerate as a result.

We saw the same concerns crop up last quarter.  Then, as now, KORS soundly beat analyst estimates and still saw its stock price collapse.

Let me give it to you straight: the collapse in KORS stock has nothing to do with operating performance, which is still fantastic, and everything to do with valuation.  After the last earnings release I wrote:

“The biggest worry for KORS stock? Valuation. Kors is not cheap by any measure, trading at 33 times trailing earnings, 21 times forward earnings and nearly 7 times sales.”

In the two months that have passed since that article, not much has changed. KORS stock is still very pricey at 5 times sales, and this is after a 12% drop in the stock price since that last article was published.

Michael KORS is a fine company, but KORS stock is case study in what happens when a former momentum darling falls out of fashion.  Not even handedly beating earnings estimates is enough once sentiment shifts.

So, where do we go from here?

KORS is in that unfortunate limbo that many high-growth dynamos eventually find themselves in: It’s fallen out of favor as a momentum stock, but it is still too expensive to be a value stock.  Given KORS fantastic sales growth rates, KORS stock should trade at a premium to slower-growing rivals such as Coach or LVMH Moet Hennessey Louis Vuitton (LVMUY). At around 3 times sales, I would consider KORS stock an absolute steal.

Even at current levels, I would not be surprised to see a few bargain hunters fishing around.  But I wouldn’t advise trying to catch that falling knife just yet.  Be patient, and I expect you’ll get a better buying opportunity in the months ahead.

This piece first appeared on InvestorPlace.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.

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