Buy Like Buffett

General Electric (NYSE: GE) has been dead money for some time now. The stock is down nearly $40 and down 72.5% over the last 10 years. The company finally reported positive quarterly earnings after two and a half years of declining earnings. The company earned $3.3 billion dollars (30 cents per share) as second quarter earnings increased 15%.

During the most recent conference call, CEO Jeff Immelt noted that “Equipment orders increased 17%, including 20% growth in the Energy Infrastructure segment and 14% at Technology Infrastructure. Oil & Gas and Healthcare orders were particular bright spots and helped hold total company orders backlog roughly flat, excluding the impact of foreign exchange.”

While it’s great that bottom line growth is improving, GE still came in light on top line growth. Revenue came in at $37.4 billion which is a 4.3% decline. This is a clear indication that some of GE’s positive results were due to cost cutting moves. Growth was positive at every division except for Technology Infrastructure. The highlights were as follows:
- +93% growth at GE Capital
- +13% growth at NBC Universal
- +59% growth at Home & Business Solutions
- -11% decline at Technology Infrastructure

A major problem area for GE over the past few years has been its GE Capital division. GE Capital is the financial arm of General Electric that provides commercial loans to small and mid sized businesses. GE Capital was adversely affected by the credit bubble bursting over the past few years. The division had $84 billion dollars in real estate alone. Immelt allowed GE Capital to balloon in size in recent years and the division ended up holding over $550 billion dollars in assets. The real estate business has been a difficult area for GE with the company losing $524 million last quarter.

Well, the good news for GE is that the losses at GE Capital appear to be abating. In the 2nd quarter of this year, GE Capital delivered a 93% increase in net income earning $700 million dollars. The company believes that the worst is over for its financing arm. GE Capital grew so large that it put the entire GE franchise at risk so the company is slowly selling off assets to reduce its size.

GE may have a huge debt load but the company is well capitalized. GE reported over $74 billion dollars in cash and cash equivalents. The firm generated $6.3 billion in free cash flow last quarter. This is a 10% decline from last year’s $7 billion dollar intake. GE is still awaiting regulatory approval of its $13.75 billion dollar deal to sell 51% of NBC Universal to Comcast.

Healthcare and oil and gas segments performed particularly well. An industrial rebound would be a major boost to General Electric’s dormant stock price. GE’s industrial and manufacturing businesses and financing arm would be major beneficiaries of any uptick in industrial production.

Earnings are projected at $1.30 for 2011 and $1.60 for 2012. This puts a P/E of 11.4 for 2011 and 9.3 for 2012. Shares trade at 1.4 times book value. The total expected return is 13.45% with earnings expected to grow at 10.75% and a dividend of 2.7%. Management expects to increase the dividend payout next year. GE is no longer the safe buy and hold forever company that it once was. The stock has a standard deviation of approximately 25%.

At under $15 per share, GE is an attractive company due to the large future cash flows, earnings potential, and the expected dividend hike.

Disclosure: I do own shares of GE.

Photo by: Mykl Roventine

Everyone in the world knows about Apple Inc. (NASDAQ: AAPL). If it’s in the technology arena, Apple does it. Apple makes money selling computer hardware and software applications. Apple generates sales from everything including it popular lines of iPods, iMac’s, iPhones, and iPads. Apple even derives revenue from music, books, laptop accessories, laptop cases, laptop sleeves, headphones, speakers, cables, and docks.

Shares of Apple Inc. dropped to $250 today. Apple’s stock has been in a steady freefall over the past 3 weeks. Shares have fallen from the $270’s and the stock has trimmed over $15 billion dollars off of its market cap. Why the steep drop? Some spectators believe that the price drop is due to a glitch with the phone’s antennae. Apparently the phone has a tendency to drop calls if it is held at the wrong angle. Apple is holding a press conference tomorrow to address the “death grip” issues.

I think that the drop in Apple’s shares is not totally due to the glitch. Apple’s shares have followed a similar pattern after the introduction of the iPad, and previous generation iPhones. Investors bid the stock up ahead of the introduction of a new product and then dump the shares after the product launch. This strategy is creating a buying opportunity for smart investors.

While Apple may have to modify existing phones or give free bumper cases to iPhone users, the fundamental growth story at Apple still remains unchanged. Consumer demand is still extremely high for the iPhone 4G and the iPad. Apple is still on place to earn over $16 per share next year. Apple is currently trading at a significantly discounted multiple to the company’s historical P/E of 32.

If the rumors are true about Verizon getting the iPhone, that would open up a whole new market for Apple. Analysts estimate that Apple could easily sell an additional 12 to 15 million iPhones in the first year alone. The iPad is still in its infancy and has continued room for sales growth with Apple just launching the product this year. Imagine what sales will be like when the iPad becomes available on Verizon’s network.

Apple may be a $230 billion dollar company but the growth is alive and well. The P/E ratio at 15 is actually lower than the company’s projected growth rate of 16.5%. Apple deserves to trade at a premium valuation not a discounted one. Even if you attached the industry average P/E and multiply it by the average earnings estimate, Apple is worth at least $350 per share.

At $250 or below, Apple is definitely a buy.

Disclosure: I do not own shares of Apple.

Today I would like to take a look at an investment mistake that I have made in the past. It is a common mistake of many investors,. The mistake is failing to stay invested in great growth stories that have the potential for multibagger status. Selling a stock too soon can rob you of the potential profits. Many investors worry about holding a stock too long but too few consider whether they have given up on a stock too quickly.

Here are 3 great growth stocks that I sold too soon.

Netflix (NFLX)

Who knew that renting DVD’s through the mail would become so popular? Shares looked expensive in the early 2000’s at $26. Since then the stock has split and returned 1300% over the past 8 years. Needless to say, my selling early was a big mistake.

Chipotle Mexican Grill (CMG)

I thought that this would be just another fad restaurant chain. There are so many chains in the restaurant industry that it’s difficult to tell which ones will make it and which ones will now. Well, Chipotle made it. Chipotle shares are up over 200% since the chain was spun off from McDonald’s in 2006.

Google (GOOG)

During Google’s initial IPO, shares were selling in the $85 dollar range. I bought in at $145 and I sold out way too early in the upper 200’s. I failed to see the long term growth potential of Google. Shares of Google are now approaching $500 and the stock could be an earnings giant for a decade or more.

An important lesson to learn from this is that sometimes the best investment ideas can be found in your existing portfolio.

Tomorrow I will take a look at 3 stocks that I believe have multibagger status written all over them.

If you typed in symbol BBI today looking for Blockbuster’s stock then you may have been surprised to find it no longer listed. Blockbuster was delisted from the New York Stock Exchange today for failing to maintain a $1 share price. Shares of Blockbuster haven’t traded at $1 since last October. The movie rental chain had hoped to stay listed by convincing shareholders to agree to a reverse stock split by merging Class A and B shares. Blockbuster could not garner enough votes among shareholders to approve the plan.

This might just be the final curtain call for Blockbuster. Blockbuster blamed low voter turnout for the failure of its reverse split plan. This begs the question, if shareholders are so apathetic that they didn’t even bother voting for the stock to avoid delisting then who will rescue Blockbuster? It’s not the bondholders. Bondholders have refused to budge on restructuring the $630 million dollars worth of bonds outstanding paying 11.75%. Bondholders seem content on forcing Blockbuster to make these high interest payments even if it is going to drive the company out of business.

There is no way that Blockbuster will survive this year with its current debt obligations. Blockbuster had to request an extension until August on a $42.4 million dollar interest payment that was scheduled to be paid tomorrow. Do bondholders really believe that Blockbuster will be able to repay the principal due to bondholders in 2014? The belief of bondholders must be that Blockbuster is worth more money in liquidation than as an ongoing entity in the future.

If shareholders and bondholders aren’t buying Blockbuster’s recapitalization plan then neither should you. Bankruptcy is now the best alternative for Blockbuster. It is the only way for the company to unburden its $900 million debt load. Blockbuster could emerge from bankruptcy as a leaner more efficient company with a legitimate chance of competing against Redbox and Netflix.

Blockbuster’s stock was worth 15 cents per share when it last traded on the NYSE. Blockbuster now trades on the pink sheets under the symbol BLOKA.PK.

Disclosure: I do not own any shares of Blockbuster

The current market decline has created a great opportunity for value investors. Long term investors do not have to chase speculative growth names because the market has put a lot of large cap U.S. companies on sale. There are a number of household names trading at less than 10 times earnings. Listed below are 4 companies that are selling at a discount to their intrinsic value.

Intel Corporation (INTC)

The recent Dow drop has turned Intel into an accidental high yielder. Intel trades just under 10 times next year’s earnings and has a dividend yield of 3.3%. Intel has a tremendous balance sheet as many tech bellwethers do. Intel has over $16 billion dollars in cash and just $2.5 billion dollars in debt. Intel is a great buy with tremendous free cash flow and an 11.5% earnings growth rate.

Corning (GLW)

Corning is probably the cheapest stock on the list. Shares trade at just 8 times next year’s earnings and the company has a projected growth rate of 11.6% over the next 5 years. Corning has a fortified balance sheet with almost $4 billion in cash and approximately $2 billion dollars in debt. Corning is a cash cow that generates significant operating cash flow. Shares trade just above 1.5 times book value.

Bank of America (BAC)

The nation’s most recognizable bank is trading at just 7 times next year’s earnings estimate. Bank of America has the earnings power to overcome any significant losses in its loan portfolio. The lax financial reform bill shows that the government is still backing the big banks. At just $13.70 a share, Bank of America is a buy.

General Electric (GE)

General Electric has fallen to buy territory again at under $14 a share. Long term investors are getting a great chance to buy a global franchise that trades at just 10 times forward earnings. Even with the dividend cut last year, GE is still yielding almost 3%.

Disclosure: I do own shares of Bank of America and General Electric.

There is a huge public outcry against BP (NYSE: BP) and rightfully so. The oil conglomerate’s lax standards and reckless behavior has led to the greatest oil spill that we have ever seen. Hundreds of thousands of people are boycotting BP stations and refusing to buy their gas there. Others are rooting for a BP bankruptcy. Although BP should have to pay every dime back to claimants harmed by the oil spill, a BP bankruptcy is not in the best interests of the United States.

Here are 3 reasons to root against a BP bankruptcy.

1. The federal government would be on the hook for BP’s liabilities.

A BP bankruptcy means that the company would be unable to pay back all of its liabilities. If BP declares bankruptcy then the government would be responsible for paying off all of the damage claims. The federal government would have to reimburse fishermen, oil rig workers, cleanup crews, and other employers. More than seven million businesses have been affected by the BP oil spill. If BP defaults then taxpayers are on the hook for all of the compensations claims.

2. The United States would increase its dependence on Middle Eastern oil imports.

BP is the only large integrated oil company that does not import a large percentage of its oil from the Persian Gulf. In 2009, Exxon (NYSE: XOM), Valero (NYSE: VLO), and Chevron (NYSE: CXV) imported 26%, 29%, and 36% of their oil from the Persian Gulf. Each of these companies imported over 100 million barrels from the Gulf. BP North America imported only 10 million barrels from the Persian Gulf which was less than 6% of its total imports. A BP bankruptcy would mean more U.S. dependence on Middle Eastern oil.

3. The number of jobless Americans would rise even further.

A BP bankruptcy would hurt all of the small business BP station owners. The majority of BP gas stations are independently owned and operated. Approximately 90% of BP gas stations are independently owned which means that a BP boycott hurts store owners and not BP. BP makes its money on oil exploration and drilling. A long term BP boycott will just increase the unemployment rate by putting thousands of station owners and families out of business.

As a BP shareholder, I would obviously be against a bankruptcy filing because it would completely wipe out my equity position. But as you can see a BP bankruptcy would have a ripple down effect on all U.S. citizens as well.

What do you think?

Photo by: showmeone

The Dow has dropped back below 10,000 and it looks like the market is in a downtrend. Many analysts and market commentators are bearish on the market. They believe that the market could take another leg down. So, what should you do with your portfolio? Is now the time to buy or sell?

Here are 4 solid strategies for your portfolio.

1) Pick up some dividend plays.

Market downturns are a great time to pick up some stocks with growth potential and solid dividends. Yields tend to get very attractive when stocks retreat. Take Exxon (NYSE: XOM) for example. Exxon is historically a terrible dividend play but the oil giant’s shares are so low that Exxon is yielding 3% right now. Exxon has been beaten down to the mid $50’s based on pure speculation that Exxon is interested in BP. The share price drop seems unjustified.

2) Buy stocks using dollar cost averaging.

You can never when a market is at its absolute bottom. So, the time is buy is when you think prices are low for equities using dollar cost averaging. I typically like to buy portions of a stock in thirds. I start my position with the first third. I add the second third when the price dips. Then I buy the final third last. You may not get the absolute best price but it keeps you from catching a falling knife.

3) Stay away from bonds.

Market dips are not the time to buy bonds. Investors run to the safety of bonds which drives down bond yields. Ten year treasury bonds are currently yielding under 3%. That tells you that investors are running scared. You should be looking to buy stocks when investors are fearful and sell stocks when investors are greedy. Bonds will be more attractive when investors become hopeful again.

4. Buy some protection.

Nervous investors can add some protection by buying put options to protect their long positions. For investors that are unfamiliar with your put options, put contracts give you the option to sell shares. These options are normally good for a year or less. Put options will limit your downside risk and you don’t have to dump your shares to do it.

Check out Kevin at 20’s Money post on Investing In The Next Lost Decade.

Today on CNBC’s Strategy Session, Patty Edwards recommended a longtime favorite stock of BuylikeBuffett. Chicago Bridge & Iron is an often overlooked stock in the construction and engineering space. I have been buying shares of Chicago Bridge & Iron (CBI) over the last year. Chicago Bridge & Iron is a nice mid-cap play with a decent balance sheet and solid growth potential. This is a long term holding which should maximum appreciation over the next 5 years. Shares trade at just 9 times next year’s earnings which seem cheap based on the projected EPS growth rate of 11.5%. Investors looking for a nice infrastructure play may want to take a look at CB&I.

While Bank of America (BAC), JPMorgan Chase (JPM), and Wells Fargo (WFC) dominate the headlines, there is one large bank that just slowly continues to grow away from the limelight. That bank is US Bancorp (USB). US Bank took TARP funds just like the other big banks but unlike the other big banks has been able to escape the public backlash.

US Bank has been a longtime Buffet holding because of the company’s great management team and conservative approach to lending. The company’s management is a big reason why the banking giant’s loan portfolio has been outperforming that of its banking peers. It’s non performing loans percentage is much lower than Citigroup and Bank of America. US Bank is the 5th largest bank in the US based on asset size and US Bank has been quietly increasing its size by buying up failed banks over the past year. There have been continuous rumors that US Bancorp may acquire a larger regional bank to expand its operations.

US Bancorp has reported nearly two consecutive years of profitability. Last quarter’s earnings were very solid. USB had earnings of $648 million dollars and an EPS of 34 cents per share. Profitability increased 55% and total deposits increased almost 14%. The encouraging news was that consumer loan delinquency was decelerating even as the bank was increasing its reserves for loan losses. Investors should pay attention to the July 21st earnings release to see how US Bancorp’s sizeable commercial loan portfolio is holding up.

US Bank pays out a much higher dividend than its banking competitors. Shares of US Bancorp are not expensive but are not particularly cheap either at $23. Shares trade at 11 times forward earnings and 1.8 times book value.

It’s always important for value investors to be able to tell the difference between a value stock and a value trap. Value stocks are stocks that are trading below their true intrinsic value. These stocks are sometimes unfairly beaten down due to market events. Value traps are stocks that look like good investment opportunities and may appear to be cheap but really are not. Value traps deserve to trade at low prices. A value stock is a good company trading at a distressed price. A value trap is a distressed company trading at its proper price.

Value Stock or Value Trap?

Take Research in Motion for example. Research in Motion (RIMM) trades at $52 a share as shares plunged over 10% after releasing subpar earnings Thursday. Sales and subscribers slightly underperformed Wall Street expectations. Research in Motion continues to lose market share to the iPhone and Android phones. Analysts have been rushing to downgrade the stock hitting it with sell ratings. Research in Motion is a stock that is close to becoming a value play. If investors get an opportunity to buy shares in the 40’s, that would be a solid purchase.

Despite all of the negativity over Research in Motion, the company is still adding subscribers. The company is still growing just at a slower rate. 2011’s EPS is expected to come in at $5.90. Research in Motion is cash rich with $1.5 billion in cash and no long term debt. The company has even started buying back 3% of the outstanding shares. The key for RIMM is its new Blackberry phone. Will its new Blackberry phone be able to take market share from the Google’s and Apple’s of the way? Analysts believe that will all depend on how successful RIMM’s new apps and browser is.

My Take

I have to admit there is some risk in buying RIMM but the opportunity to buy a solid tech company trading at just 7.5 times earnings would be attractive to me in the mid 40’s.

Do you think that Research in Motion is a value stock or a value trap?