Saturday, May 15, 2010

New Era Value Investing: Chapter 6

As the chief investment officer at Fremont Investment Advisors, Nancy Tengler employed the value approach she describes in her book, New Era Value Investing.

In this chapter, Tengler describes some specific stocks that she has bought as a result of using RDY, the method described in Chapter 3.

Exxon Mobile (XOM) is a stock with tremendous volatility due to changes in investor sentiment with respect to the price of oil. While earnings fluctuate significantly, the company's dividend is a much better gauge of the company's long-term earnings ability than any one year's earnings. As a result, Tengler has purchased this stock when the yield compared to that of the market was extremely strong, and has sold when the yield has been relatively weak.

Wyeth is another example of a company that RDY identified in the late 1990s. The company was coming off the news of a failed merger, and had run into a number of bad news issues with some of the drugs it had developed. The market punished the stock, allowing value investors a buy opportunity which was identified by the fact that Wyeth's yield compared to the market was far out of line.

Despite being a great company for many years, General Electric (GE) stayed at a price that did not make sense for the value investor. Finally, in 2002, amidst a slew of bad news (CEO step-down, failed Honeywell acquisition) the stock fell to a level, relative to its dividend, that made sense to Tengler.

Tengler goes on to describe other RDY-identified buy prices for 3M, Kimberly-Clark, Gillette, Wells Fargo, and Marsh & McLennan. In these cases, temporary problems plagued companies, which hurt the stock for short periods of time. Buyers at these prices were rewarded.

Tengler finishes the chapter by discussing two stocks, Verizon and Heinz, that looked like buys per the RDY method, but never ended up rewarding their investors.

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