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Bargain Bin Blue Chips Update Q2 Week 6

109 views  2012-05-13 13:15   Tagsblue  chip  dividend  bargain  bin 

The DJI closed at 12,820.60 on Friday, down -1.67% from last week's close of 13,038.27. The Dow is up +93.46% from March 6, 2009.

Reminder: my definition of blue chip stock is market cap of at least 1B and a dividend payment history of at least 10 consecutive years.

This week finds me tinkering once again with my undervalued stocks list. I have made several significant changes based on a revision of my personal investment strategy first principles. First, I have struck banks from the list because I consider them too high risk for my liking and second I have redone the list to include any and all of my blue chip watchlist stocks that are trading below book value.

Banks are too risky to be properly labelled as investments because the financial crisis of '08/09 remains essentially unresolved, therefore I am willing to wait an indeterminate amount of time before investing in those particular types of businesses. The key word when it comes to banks is derivatives. Now to be honest, from the modicum of attention I pay to news of the financial sector, it appears that the least risky banks are those of Singapore and Canada. So if I do end up buying financial shares in the next Crisis Market, it is certain that I will choose bank shares of institutions based in the aforementioned sovereign nations. Meanwhile, as an idiot's guide to margin of safety, I have preset the buy price of all my blue chip watchlist banks (other than Canadian and Singaporean) to $1. While it is likely the blue chip banks will never sink to that level, such a strategy plays in my favor as long as I have the advantage of choice in what stocks to choose and what stocks not to choose.

Meanwhile, the Dow is still high relative to the fundamentals of the economy. However, whether or not the economy is weak or not weak, macro-issues scary or not scary... these things I am not factoring into my investing per se - I am simply keeping in mind the maxim that the economy does not have to be in a bubble for the Dow to drop significantly. The most recent high on the Dow of 13,279.32 occurred on May 1 of this year. If the Dow does fall -30% from that point, we are looking at a 9,295.52 level while -50% would bring the Dow to 6,639.82; a level closer to the crisis-ridden lows of March 2009. It is entirely possible that the Dow could go to 15,000, to 20,000 in the next five years without a significant correction, but I would rather be cautious. It is the turtle who won the race after all, not the hare.

When it comes to my list of bargain bin blue chips, I am now using book value instead of relative price as my main benchmark for their cheapness.  I have listed below all the companies from the blue chips watchlist that are at this moment trading below book value per share. I rank book value into 5 levels to determine cheap or dear - two for overvalue, one for fair value and two for undervalue:

  • 3X Book Value = High-Noon
  • 2X Book Value = Retail
  • 1X Book Value = Fair Value
  • 3/4X Book Value = Wholesale
  • 1/2X Book Value = Bargain Bin

When it comes to establishing a buy price, I use the BAR formula (idea taken from this book):

  • Book Value
  • Average Price
  • P/E Ratio

The following three conditions together signal a buying opportunity: price to book of 0.5 or less, P/E under 10 and the stock price near its 5-year low.  Ideally, all these will happen together within a Dow drop of -30% as this is the minimum level of market cheapness verified by my research into Crisis Market (see my last blog post) investment strategy.

The following list of below-book-value companies tracks stocks in my blue chip watchlist that are getting cheap. It keeps me on track with buy-low-sell-high. Buy at wholesale and sell at retail, or better yet, buy at bargain bin price and sell at high noon price.

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