The Pantry May Be One to Stock Up On
Rick Konrad submits:
"You can’t buy what is popular and do well" is one of the great Warren Buffett quotes. Even though over time, I have learned to be far more comfortable investing in quality businesses that throw off lots of free cash flow and earn superior returns on invested capital, many value investors start their search for cheap stocks with the new low list and those that are making news headlines that portray disappointment. Contrarianism does work; as Buffett says, there are many ways to get to "financial" heaven. As is obvious, the real challenge for us as investors is separating those businesses that have been unfairly beaten down because of Street overreaction from those that truly deserve to be disregarded and ignored. "Moribund and poorly run businesses deserve to languish" as the great mutual fund investor, John Neff once described.
So how do you separate these businesses? For many years, academics focused on low price to book value companies (or put another way, high book to market companies) as a place to seek superior returns. As it turns out, these companies demonstrated an anomaly to the prevailing capital assets pricing theory. Subsequent analysis showed that a low price to book value ratio implies that prices contain expectations of low ROE expectations. Such companies, at current prices are generally expected by the consensus to be poor performers and therefore considered risky.
Investing, Long Term Investment, stock market | admin March 30, 2010
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