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Cornelius Chan Blog

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Bargain Bin Blue Chips Update Q2 Week 7

215 views  2012-05-20 09:40   Tagsblue  chip  dividend  bargain  bin 

Bue chip stock (my def.) = market cap of at least 1B and a dividend payment history of at least 10 consecutive years.

The DJI closed at 12,369.38 on Friday, down -3.52% from last week's close of 12,820.60. The Dow is up +86.65% from its 5-year low on March 6, 2009 and down -7.27% from its recent high of 13,338.66 on May 1.

Last week I made some changes to my Bargain Bin. Instead of tracking stocks in my blue chip watchlist that were making 52-week, multi-year or decade, or even all-time lows, I revised the criteria to stocks that are trading below book value. Also, I struck banks from this list because there is a risk some banks could go bankrupt should the right set of political circumstances manifest.

According to my definition of a bargain bin stock (P/B of 0.5 or lower), out of a list of 246 blue chips in my watchlist only five have the dubious distinction of being bargain binn'ers - and all are Japanese! And once again, I am revising how I track my undervalued stocks list. In order to focus on my preference for "hardcore, deep value investing" I will list only those stocks that are trading at half of book value or less here in the weekly update. As the Dow falls further, more stocks will appear on this list and conversely as the Dow rises less.

Am I making a mistake by choosing to invest only in stocks that are priced at half of book value? Perhaps. The way I see it however, I have three choices: sift through lots of high quality companies experiencing problems, sift through lots of medium quality companies that are experiencing problems or sift through lots of low quality companies that are experiencing problems. Because let's face it, the only way to get a stock trading at half of book is to expose it to some kind of problem - whether general business problem (Sony), profitability problem (Nokia), debt problem (Veolia Environnement), revenue problem (Sharp), nationality problem (YPF) or my favorite of them all, Mr. Market problem (tons of stocks from '08-09).

It is said (and I agree), "it is far better to buy a wonderful company at a fair price than a fair company at a wonderful price". That being the case, why not wait until the great quality company is trading at cheap prices during a historically low point in the Dow? Like in October 2002 or March 2009? The sad fact is I missed both those moments due to a lack of sufficient preparation. This blog helps me to focus myself for the next one.

Meanwhile, the following blue chip companies are now trading at less than half of book.

  1.    Denso Corporation                                     0.48
  2.    Nintendo Co.                                               0.13 
  3.    Nippon Telegraph & Telephone Corp.         0.28
  4.    Sharp Corp.                                                0.41
  5.    Sony Corp.                                                  0.44

There is not one company so far in this list, based on the fundamentals, I would want to invest in. They each have declining revenues and/or declining assets and increasing debt to assets. However, as long as they are above a billion market cap and continue their record of annual dividend payments, I will not strike them from my blue chip watchlist. Because you never know when a good company that has fallen on hard times will turn things around.

In a lighter vein, from the front cover of Nintendo's 2011 annual report it is clear just what are the state of affairs of these bargain bin'ners.  LOL

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