Last July we examined two industry leaders in two very different cyclical industries: Oracle Corporation —a stock I own — and International Paper.
ORCL is a leader in enterprise software and IP is a leader in paper and packaging (think: corrugated boxes and paper cups). At that time the two companies traded at comparable valuations of approximately 13 times estimated earnings. Both stocks paid a dividend. ORCL yielded 1.2 percent, while IP yielded a more substantial 2.9 percent. Both stocks were cheap as measured by their respective p/e’s, and, in particular, when compared withtheir peer group companies and the S&P 500.
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Despite their similar valuations in July 2014 both stocks had very different earnings histories. ORCL’s five-year earnings registered in the mid-double digits, and was expected to slow to the low double digits in the subsequent five year period. IP’s five-year earnings growth, on the other hand, was flat due largely to a restructuring; five-year estimated earnings growth was expected to grow in the mid-single digits.
Read more here: The Arizona Republic
Investing is like an essay exam rather than a multiple-choice quiz. Essay answers are more nuanced than multiple-choice — more like an informed judgment call than the unassailably right answer. As a professor, I give my students essay questions because they create a complete picture of what young scholars know and don’t know.
Similarly, investing, like real life, rarely presents us with questions that are as straightforward as those on a multiple-choice test. That is why I am interested in investing in the stocks of well-managed, industry-leading companies; I don’t have to know “the answer.” I simply need the confidence that management is moving the company in the right direction no matter the short-term trends of the market. These companies won’t always generate positive returns, but the dominant ones in each industry have a much better chance of succeeding than the second- and third-tier companies. I also know I increase my odds of success if I select the most attractively priced stocks with the greatest potential for total shareholder return.
Let’s examine two leaders in two very different industries with similar price-to-earnings (p/e) valuations. Click here to read my column in its entirety: The Arizona Republic