I have a great undervalued stock pick for you today, as recommended by our value expert Roy Ward. But first, let me take you back to 2008…
One of my long-time practices here at Cabot is doing surveys of my staff, to get a read on perceptions about the future.
For example, back in November 2008, five years after the launch of Cabot China Investor (since renamed Cabot Global Stocks Explorer), Chinese stocks were booming and the perception was high that China would soon be flooding the U.S. with growing numbers of high-quality goods.
So I asked the staff, “In what month and year will the first Cabot employee buy or lease an automobile manufactured in China?”
I recorded 17 answers, which have been posted on the refrigerator ever since. The first 16 guesses ranged from June 2009 to August 2015, so all those people have already been proven wrong—because it’s not even possible to buy a Chinese car in the U.S. The final surviving guess is August 2018, which is not far away.
In short, back in 2008, people (and not only in this office) were optimistic that Chinese cars (cheaper than Korean cars and nearly as good) would soon be available to us all. The reality, however, has been quite different. And a really smart person back in 2008 might have picked up on the prevailing sentiment and leaned against it—perhaps by shorting overvalued Chinese stocks.
So I asked myself, what might people be wrong about today.
Where (excepting politics) is there great unanimity about a topic where the perception is unlikely to be achieved in reality?
One answer I came up with revolves around the concept of self-driving cars, or, as the industry likes to call them, autonomous vehicles.
Everyone has seen photos of Google’s cute white self-driving cars. They’ve read rumors of Apple’s development efforts. And of course, they’ve noticed the fatal crash of the Tesla owner who was using Autopilot.
At the same time, everyone has noticed the runaway global success of Uber and Lyft as they supersede the antiquated taxi industry.
Combining those two—so the theory goes—yields a fantastic future where:
You can get in your own car, say, “Take me to work.” And then proceed to get some work done—or update your Facebook page—while the car drives you there.
You can get in your own car that evening, after a night on the town (even drunk as a skunk), and say, “Take me home.”
You can summon an autonomous vehicle in an Uber fleet using an app on your smartphone, and have it take you to your destination without dealing with a single human being.
You can sit at home and let your car go out and make money for you all by itself—call it auto-Uber.
Sounds wonderful, doesn’t it? But let’s be realistic. How long do you actually think it will be before even one of these scenarios becomes reality?
Yes, the technology makes these scenarios increasingly possible.
But the real world includes people, who have a habit of acting stupidly.
It includes insurance companies, whose main mission is to make money and who are already devising ways to cope with the expected reduction of accidents (and fatalities), as autonomous vehicles grow increasingly capable.
And it includes government regulators and their associated lobbyists who, in general, represent established interests and thus fear radical change.
And I think that those established forces will present substantial roadblocks to the fantastical future that people are currently dreaming about.
Furthermore, I believe that the valuation of Uber in particular, which is something like $62 billion, reflects the synergies of two investment bubbles!
Two Investment Bubbles
The first bubble is the one that believes technology will solve everything, and that the fantastic scenarios of self-driving cars are just around the corner. Yes, Uber and Lyft provide a wonderful service and I believe their human-driven services will continue to thrive; I just don’t think the auto-Uber is as close as people (even me) have been dreaming.
The second bubble is the Unicorn (billion-dollar start-ups) Bubble, which in many ways is an echo of the internet bubble that propelled the Nasdaq to wondrous gains in 1998 and 1999.
The collapse of the internet bubble kicked off a long period of disenchantment among stock market investors that persists to this day; even in today’s strong bull market, retail interest is only tepid. And as money came out of the stock market after the 2000 peak, it went several places. First it went into cash and bonds, because they’re safe. But it also went into hard assets like cars, wine, fine art and precious metals. Most recently, it’s gone into private equity, especially into the unicorns, those rare creatures that can make an early investor filthy rich.
Uber: The Apple of Private Equity
The trouble with private equity, however, is that it lacks the day-to-day corrective mechanisms of the public markets. On the way up, all is terrific. But when a private company like Uber gets bid up and up and up (partly because everyone wants a piece of the action), it risks getting just as overvalued as those internet stocks in 1999.
In my mind, therefore, Uber today is a lot like Apple (AAPL) was last year. Uber is the Apple of private equity, and when the reality turns out not to be as rosy as people are dreaming today, the company’s valuation is likely to fall, just as Apple did after investors saw that growth was slowing and the magic at the company was waning.
I think it will be interesting to see what happens.
One Undervalued Stock: Kroger (KR)
Kroger is one of those old retail names that’s still hanging on, in a world where internet commerce is advancing by leaps and bounds. Many investors have give up on the company, as evidence by its 24% decline over the past year. But Roy Ward, Cabot’s Senior Value Analyst, says the stock is an attractive, undervalued stock buy here. Here’s a piece of what Roy wrote to his readers in his latest issue.
“Kroger operates retail food and drug stores, multi-department stores, jewelry stores, and convenience stores throughout the U.S. Kroger is the largest grocer in the U.S. and operates 2,778 supermarkets and multi-department stores, 1,400 of these have fuel centers. The company operates under several names including Kroger, City Market, Dillons, Food 4 Less, Fred Meyer, Fry’s, Harris Teeter, Jay C, King Soopers, QFC, Ralphs, and Smith’s. Kroger also operates 785 convenience stores directly or through franchisees, 323 fine jewelry stores, and an online retail website.
“Kroger recently acquired Axium Pharmacy Holdings, a specialty pharmacy; Vitacost.com, an online retailer of vitamins and health-oriented products; and Roundy’s, a grocery store chain. Several years ago, management devised a new strategy to cut costs, increase efficiency, and grow sales and earnings consistently. It also created ‘Customer 1st,’ a customer-focused shopping program to gain shopper loyalty. The results have been impressive, and management will continue its strategy in 2016 and 2017. Management will also focus on over 200 remodels, new store openings, and its program to enrich shoppers’ visits.
“I expect sales to rise 7% and EPS to climb 16% to 2.30 during the next 12-month period. The company’s purchase of Roundy’s is producing better than expected results. Management forecast a slight slowing in EPS growth because of fluctuating gasoline profit margins, but overall growth is on target. At 18.0 times latest 12-month EPS, the company stands out as an undervalued stock in the consumer staples sector. Kroger’s board of directors increased the quarterly dividend to $0.12 from $0.105, resulting in a yield of 1.3%.”
Roy also provided his readers with a precise Maximum Buy Price and a Minimum Sell Price for Kroger, and you can get those too if you become one of his regular readers. When you do, you’ll get accustomed to good news like this, which Roy recently sent to his readers.
“Matthews International (MATW) reached its Min Sell Price of 58.91 and should now be sold. MATW was first recommended in November 2013 at 41.73. MATW has advanced 41.2% in the past 32 months compared to a gain of 20.4% for the Standard & Poor’s 500 Index during the same time period. SELL.”
Pretty neat, huh?
Admittedly, investing in companies like Kroger and Matthews isn’t as fun as investing in self-driving cars, but it’s not as dangerous either. And the results are very rewarding!
In fact, in the 20+ years that Roy has been running this system publicly, his Value Model has provided an impressive return of 1,191.7% compared to a return of 574.1% for Warren Buffett’s Berkshire Hathaway! During the same 20-year period, the Dow has gained just 252.2%.
To learn more about Roy’s excellent investing system, and to get his latest undervalued stock picks, click here.
