Make Money Investing The Warren Buffett Way
I have the learned the hard way that just because a stock is cheap does not mean it is a good investment. It can be tough sometimes to distinguish between a value play and a value trap. Value plays are stocks that are trading below their true value and will eventually reach this value. Value traps meanwhile are companies that appear to be trading cheaply but are trading at their current level for good reasons.
Here are 3 stocks that have been cheap for a long long time.
Long term investors should take a look at IBM (IBM). IBM is set to announce quarterly earnings today. Intel’s quarterly earnings have given insight into the IT market. For the first time in a long time, companies are resuming CAPEX spending on IT hardware and equipment. As the world’s number one server manufacturer, IBM stands to directly benefit from the rise in demand due to corporate IT spending.
Analysts are looking for revenue of $22.75 billion dollars and an EPS of $1.93. Analysts are expecting earnings growth of 13.5% and sales growth just south of 5%. IBM shares currently trade at $130 which is about 12 times the current year’s earnings estimate of $11.12. Shares trade at 10.8 times next year’s earnings. So, is now the time to buy IBM? I believe investors can buy the shares ahead of the quarter. The worst case scenario is that IBM may suffer a slight drop if earnings are not robust due to raised expectations. For long term investors, I think that IBM is cheap based on future growth prospects. Analysts such as Louis Miscioscia of Collins Stewart believe that IBM could earn $17 a share by 2014. Any weakness in the stock should be looked at as an opportunity to add shares.
Investors interested in IBM may also want to take a look at Dell (DELL). Dell is a solid value play on the resurgent PC market. Dell still has 12% of the PC market. With good numbers reported by chipmaker AMD; it appears that analysts may be underestimating Dell. Dell is one of AMD’s largest customers and AMD just reported a 33% increase in sales. After 5 years of negative earnings growth, analysts are only looking for 4% sales growth this quarter and 0% growth next quarter. If Dell can exceed these low targets, the stock should rally.
I do not currently own shares of Dell or IBM.
Photo by: ChrisDag
This should be an interesting week. The Dow Jones is at 7300 which is its lowest level since the mid 90′s. Financial stocks as a group are beaten down and the question is, Can they continue to go lower? The government is reportedly thinking of taking a larger stake in Citigroup. The government is expected to announce a plan that will stabilize the banking sector this week.
I will also be keeping an eye on automobile company stocks. General Motor’s market cap is down to 1 billion and the stock is selling for $1.77 a share. Ford may be selling for only $1.58 a share but the company seems to be in better shape than GM. Ford has not yet asked for any government funding and is gaining marker share from GM and Chrysler. Since Ford has not gotten any loans from the government, the company will have greater access to loans than its competitors.
How much lower can these stocks go? Dell is trading for $8 a share and the company announces earnings this week. Dow Chemical is down to $8 a share. At the rate that the stock is dropping the company may be insolvent before it can complete the Rohm & Haas deal. General Electric at $9 is at its lowest levels in 14 years. Can GE drop to $5?
