Sunday, September 23, 2012

"Time to tighten up our investment Tenets and add a little more emphasis on "Return on Equity"

Dow Jones Industrial Jones Average 13,579  (Up)  Week ending 09-21-2012

I was looking last night at my "The Essential Buffett"
book by Robert G. Hagstrom and decided to add an investment Tenet in regards to "Return on Equity"to my investment discipline.  Buffett puts a very large emphasis on ROE as part of his criteria and "Margin of safety" where I have always focused on earnings and earnings growth.

So here is my new "Dual " Tenet to add to my investment Tenets in Blog #1 of "Freewilly's Stockpicker blog", that is my first blog from 2009.(a must read along with Isaac Asimov's verse there in the comments section).

Here it is: "I will only purchase stocks with a Return on Equity of 15% or higher and that have a PEG Ratio of less than 1.50." *** ( It is OK if the PEG ratio goes above 1.50 after you are already invested in the stock.)

So I will put out a few examples of stocks that fit in with this new dual criteria. Oddly, they are both in the suddenly hated Transportation sector. 

Tata Motors Ltd. ADS ( Symbol TTM, $25.36) is the first stock that fits this more scrutinizing criteria. This Mumbai , India of passenger, commercial, defense and homeland security vehicles has some very interesting numbers. This one comes up aces with the new criteria. Tata Motors has a current Return on Equity of 49.99%. That will work for sure. But add to that a PEG ratio of a very low .58.

(*** definition of PEG - Price/earnings-to-growth ratio. The PEG is calculated by dividing a stock's P/E by its projected long-term earnings growth rate. ( PEGs use forward P/Es, and three-to-five-year growth rates.) The PEG provides a snapshot of the relationships between three important stock attributes — share price, earnings per share and the rate at which those earnings are expected to grow. Generally speaking, the lower the PEG, the less expensive a stock is relative to its growth projections.) 

 Tata Motors has 5 year sales growth of 76.19%. Earnings for 2012 are looking like $3.51 per share and for 2013 it appears to be $3.89 per share. The one year Total Return is 68.84% and the 3 year Total Return is $105.3 %.  You certainly can live with those numbers.

The second transport stock that appeared with this type of ROE/PEG screening is: 

C.H. Robinson Worldwide Inc. (Symbol CHRW, $57.62) has a Return on Equity of 35.11%. The PEG ratio is 1.27, so within our strict parameters. CHRW offers a 2.29% dividend yield to get you started. 5 years sales growth has been a healthy 8.26%.

Earnings look fine here with 2012 earnings of $2.89 per share and 2013 earnings of $3.29 of share. 

Wall Street has not been kind to CHRW,  with the one year total return of (-11.97)% and a 3 year total return of only 3.71%. So you need to think long term here, and get good sleep at night. 

Happy Trails!


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