I recently had the opportunity to talk stocks with one of our value-investing-focused contributors, who said that the biggest challenge he’s facing right now is finding investments that are still undervalued. That’s a slightly alarming comment, as it suggests that stock prices have been bid up to unsustainably high levels based on investor excitement (that doesn’t accurately reflect improving fundamentals).
So that’s a warning sign. However, I’m not too worried, because several other signs are telling me we’re still a long way from irrational exuberance (as Alan Greenspan called the climate at market tops).
For one thing, our Investment Digest Market Outlook still regularly features contributors who are downright pessimistic about the market’s short-, medium- and long-term prospects. In the latest issue, one advisor wrote of the rally, “We continue to believe this is a house of cards,” and quoted Pimco’s Bill Gross, who said stocks today are just “the cleanest dirty shirt.”
On top of that, many of the advisors who are bullish today came to the position grudgingly, and still advise caution. In the latest Digest, one contributor wrote, “This seems madness to me, but I can’t deny the fact that we have a bull market by just about any technical measure you want to measure it by.”
Our latest Investment Digest also included several gold and silver investments, which are still very popular among advisors who are skeptical of stocks and think Fed policy will inevitably lead to inflation.
Finally, there’s the growth investing adage, proven true again and again, that trends tend to last longer and go further than expected. There’s no denying that the market is in an upward trend (just look at a chart), so the benefit of the doubt here goes to further upside action.
That being said, I did begin with a red flag from my value investing colleague, and it still stands. So today’s stock pick is a good value for the cautiously optimistic. Or, as Joe Shaefer, who recommended it in the latest Investment Digest, wrote, “Even in a market I don’t much care for, I have to say that a company selling for a P/E of less than 11 at a 25% discount to book value that is still growing, with a nice moat thanks to its size and existing relationships, is definitely worth a look.” Here’s his recommendation:
“Ingram Micro, Inc. (IM), with only a $2.2 billion market cap, is still the world’s biggest wholesale distributor of computer products and related services. Its revenues were a tad over $36 billion in 2011. … I think of IM as a sort of stand-in for worldwide consumer and business electronics consumption. The company distributes through some 170,000 resellers in more than 100 countries. Over the past decade, they’ve increased revenues by 65%, cash flow by 94% and earnings per share by 253%. Their book value went from $10.85 to $21.89 (more than $6 more than its current price.) …
“Even in a market I don’t much care for, I have to say that a company selling for a P/E of less than 11 at a 25% discount to book value that is still growing with a nice moat thanks to its size and existing relationships is definitely worth a look. The company’s financial strength doesn’t rate high on the Altman Z-Score scale. Still, it resides in the ‘gray’ area like so many other, much larger, firms, and it is net-net debt free. At these prices, the company is selling below its low for 2011, hardly a banner year from a stock price or scintillating market perspective. The consensus estimates for 2012 hover around $1.84, at which price the company would be selling at 8.3 times earnings. …We will buy 500 IM shares to establish a pilot position. We will be adding to this if the market falls.” — Joseph L. Shaefer, The Investor’s Edge, September, 2012
Wishing you success in your investing and beyond,
Chloe Lutts
Editor of Investment of the Week
