Do you buy stuff “retail” or “wholesale”?
I often equate the investment business to the perfume business. Everyone wants to pay “retail” for my product. They want what the business press is most excited about. They want the latest hot IPO or invest in the company with the hottest gadget. People like “buzz” and energy and seeing their investments in the business news.
They also like simple stories they can focus on. Gold going to $5000 an ounce is a simple story. Apple Inc. taking over the world of computing and the Internet is another. And my current favorite the investing public paying “retail” prices for high yielding securities whether debt or equities because of TINA – There is No Alternative. I hope you know fortunes will be lost on this latest and simplest of financial concepts.
In order to be successful in the financial markets, especially equities, you need to know valuation. And I’m not talking about price earnings ratios, price to sales, dividend yield and or any other simplistic financial metrics in current use today. You need a little more sophistication. You need a new and different type of financial math so you can distinguish “retail” from “wholesale” prices in the equity markets.
So the question is, “How do you know what price you are paying, “retail” or “wholesale”?
One possible investment strategy I have been highlighting since the start of my blog is our “Coming out of the Blue” investment strategy. I have been highlighting large capitalized companies whose share price, for one reason or another, has fallen below EBV-3 (see Economic Book Value under Key Concepts), our last EBV line we color blue, with a subsequent rally – sometime later – transiting above this same blue line or EBV-3. We at Acker Finely colloquially term this investment strategy “Coming out of the Blue”.
I am not making any specific stock recommendations with these blog posts, as I have mentioned numerous times. My purpose is to highlight teachable situations so you can learn our unique financial algorithms and apply them to your own investments with the possibility of helping others who want to learn and follow this work.
One company that caught my eye this week was Cliffs Natural Resources – CLF.
Cliffs Natural Resources – CLF
As always let’s start with our model price chart on CLF.
Cliffs Natural Res with weekly price bars, EBV Lines (colored lines) and model price (dashed line)
For those interested, a daily updated chart of CLF subsequent to this post will be maintained on Facebook, here.
As you can see CLF had a negative transit into EBV-3 mid-March of this year. As a rule I never fool around with companies that have a negative transit of EBV-3. I recommend, generically, with all investment situations when they do have a negative transit of EBV-3 or as we say “Going into the Blue” the investment should be sold. As a warning it is not uncommon, even when dealing with large cap equities, that companies can go bankrupt or never re emerge as a healthy company once this EBV line is crossed.
The opposite is true when a company has a positive transit of EBV-3. A positive transit of EBV-3 is a signal the company and its stated assets on the company’s balance sheet has value or is gaining value in the eyes of the public marketplace.
For reference I have also included our long-term model price chart on CLF for the last 7 and half years.
Cliffs Natural Res with monthly price bars, EBV Lines (colored lines) and model price (dashed line)
You can see that CLF traded as high as EBV+7 in 2008. One of the many advantages of using our EBV lines, is they represent a constant to the company’s ever changing balance sheet. So EBV+7 of 2008, can be compared to EBV+7 of today based on the company’s latest balance sheet. You are comparing apples to apples – fundamentally. Again this is NOT technical analysis that unfortunately our work is easily confused because our fundamental analysis is in chart form.
So for fun, and I realize this number is not on our model price chart (and hard to figure since our charts are logarithmic, but would be above $241 figure on the left side of our model price chart), what would CLF be trading at if the stock were at EBV+7?
Would you believe $278.16!
In other words, investors were paying $278.16 for CLF (merchandise) that today costs $23.15! In my mind $278.16 is the “retail” price and $23.15 is the “wholesale” price. I’m making this determination based solely on the EBV levels and NOT on our calculation of model price.
Looking at our long-term model price chart again, CLF almost traded to EBV+5 in 2010 and 2011. Again, comparing apples to apples if CLF were trading at EBV+5 today that would mean a price of $129.93. Still a big difference but obviously not as great as CLF was trading at EBV+7. This is valuation explained. At what EBV level gives you the best chances of success investing your hard earned dollars. That’s right, our last EBV line, EBV-3 the bottom blue line. If you’re investing in companies at this level, EBV-3, that’s “wholesale” pricing in my mind.
I love investing “wholesale”.
I think people are born to purchase equities at “wholesale” prices. It’s a mentality. Yes, the analysts hate the stock. The business press will simply ignore the company or use it as an example of what NOT to do for various reasons. But if you just focus on the math, you will be OK with your own investment judgment.
Myself, I just purchased some CLF at $21.34US that some investors were paying $278.16 for back in 2008. Can you imagine this? Same company. Same management. How is this possible? Who cares! Investors are throwing out the trash and I’m dumpster diving.
You don’t have to put your whole portfolio in this name. That would be too much risk. Why be risky? As these large cap stocks have a positive transit of EBV-3 just put some in your portfolio. Say 2 to 5%. Forget about it. If the stock has a negative transit through EBV-3 sell the position, as I mentioned earlier. Easy. When do you sell? Whenever you want. How about EBV+7? How about EBV+5? Do you really care?
“Coming Out of the Blue” is about buying “wholesale” and waiting for your merchandise to achieve “retail” pricing. If you’re going to make 200 to 700% on your investment do you really care how long this re pricing takes? I know I don’t.
Do you buy stuff “retail” or “wholesale”?
P.S. All of the “Coming Out of the Blue” blogs on various stocks have been doing quite well. Have a look at First Solar (FSLR) that I highlighted back on November 28, 2012. FSLR is up 80% since my blog post. Do I care? With so many “Coming out of the Blue” names – lots of eggs in lots of industry baskets – maybe I never sell the position. Who Knows? Since I purchased FSLR at the right price (wholesale prices) do I really care? Not me!
P.P.S. Since its May and the business press is filled with articles on the wonderful sophistry of “Sell in May and go away” illogic, let me revise this quote and say, “Buy ‘Coming Out of the Blue’ stocks and go away”.
P.P.P.S. As Mark Eaves points out on our Model Price Application on Facebook – Comments Section, Citigroup is close to having a positive transit of EBV-3. I am NOT making a security recommendation here however this will be bullish for Citi, the equity markets and subject of “Coming Out of the Blue” future blog post. Yes, sometimes I can see the future – and so can you!
If interested here are some links to other “Coming Out of the Blue” blogs I have written.
Question and Answers about “Coming Out of the Blue”
How Jumbo Returns are Possible – Part 1
How Jumbo Returns are Possible – Part 2