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I love the "ATM" machine in the stock market
Tuesday 8 December 2015
As a value investor, I love the opportunities which can be found in strong profit and loss accounts of listed companies. There are astounding differences in the financial strength of companies in the stock market. It is really worthwhile to search for earnings and 'precious pearls'. Some striking examples:
Many investors love the so-called "leverage" used by a company, which is using debt in order to achieve a leveraged effect on the return on equity. I do not like this. I prefer companies who do not rely on banks for their financing. It is only in times of crisis, that shareholders will find out how financial independence can be an invaluable asset for industrial enterprises.
It is an exceptional characteristic when public companies are really well positioned, and capable to develop independently.
Their strength is shown in their profitability and then also reflected in the balance sheet. Usually, healthy companies have bank debt and earnings after tax of between 3% and 8% per year on total sales.
This in itself is not enough for me. For years, we systematically search for our Value Fund "ME fund Special Values" for companies which achieve double-digit profit margins. Here are a few examples from our research:
Apple (AAPL) achieved a return on sales totalling 22.85%,
which comes to USD 53 billion profit per year.
Alphabet (formerly Google GOOG) is sitting on a net cash cushion of some USD 62.4 billion and a year, later on USD 15.4 billion will be added to this, because the return on sales is 22.8%.
Money makes the world go round. If you consider these numbers, you will quickly realise the “who, what, how, when and where" that can be achieved in our world when it comes to research, marketing, recruitment, etc. This will take other companies' breath away.
Such gems can not only be found among the mega-communication corporations, Even smaller companies have their Champions. Dolby Laboratories (DLB) thrives in secret on Wall Street. You are probably familiar with the brand name from movies “Dolby Surround”. They are the world leader in acoustic systems and achieved an annual turnover of USD 970 million and have, believe it or not, some USD 670 million cash in the till. Every year, 18.69% of revenue is added as net profit, which works out to USD 181 million to go on top of that sum in the till. No Bank debt whatsoever!
Oh, you say, that's just America. The country of the capitalists and exploiters, without social support systems. Is such a situation still possible when unbridled capitalism is constrained?
No, not at all and far from it. These 'pearls' even exist here in Germany. I suggest you visit the company Rational AG. In
Bavaria. They have for decades been the world leader in professional kitchens for hotels, restaurants, canteens, etc. This has for many years been one of my favourite stocks on the exchange. Just look at their balance sheet and earning power.
But sit down first. You will be astounded.
Financial investors are free to choose. They can buy any stock they like. Nobody forces them to do anything. For me as a value investor I have long known that: Good balance sheets are much better in reality, while weak balance sheets are much worse in general than they look. For this reason alone the decision is clear for me: I sleep a lot better with an "ATM" machine in the portfolio.
Wish you all a week full of "Value"
Yours, Markus Elsässer