Below is a list of five companies we purchased in 2015 that gave us great returns and are of tremendous educational value. Be aware, however, that just because we made investments in them in 2015 and they met our value screens, does not mean we would, or even could, invest in them today. We bought when the prices were right, economic fundamentals were strong, and their margins-of-safety were sufficient to qualify for investment. Also keep in mind that for a few of these positons, the market was unjustifiably pessimistic about their future growth prospects – making them very hard to ignore.
McDonald’s Corp.
McDonald’s Corporation (MCD, Financial) is the owner and franchiser of one of the world’s most recognizable brands. Who doesn’t recognize those iconic “Golden Arches?” The arches symbolize the availability of quality food, treats and drinks sold at affordable prices in more than 100 countries. McDonald’s is without question the most dominant firm within the fast food hamburger market, with an approximate 45% market share. McDonald's is a lucrative business with solid sales, margins, returns, cash flows, and it has a healthy balance sheet. At the beginning of 2015, McDonald's was trading at $92.23 a share against solid three-year average EPS of $5.24. The company has paid dividends every year since 2000 and has won consumers’ minds as one of the best places to eat fast foods. Near year end, we closed the position at $118.14, collecting $3.44 in dividends. This gave us a superfast 32% rate of return.
NASDAQ Inc.
What investor doesn’t know NASDAQ Inc. (NDAQ, Financial)? American firms, Canadian firms, European and Asian firms have been listing their companies’ stocks on the NASDAQ for years, and no other international exchange lists as many technology-based firms. As the creator of the world's first electronic stock market, its technology powers more than 70 marketplaces in 50 countries, and handles 1 in 10 of the world's securities transactions. Nasdaq is home to more than 3,500 listed companies with a market value of over $9.1 trillion and more than 10,000 corporate clients. The company’s return on equity averaged 7% over the last three years and per share earnings grew at a rate of about 17.3% per year since 2005. Buying in at a reasonable price of $44.61, collecting 90 cents in dividends, and selling at $57.63 gave us a near risk-free (from our perspective anyway) rate of return of 31%.
Activision Blizzard Inc.
In the gaming world, Activision Blizzard Inc. (ATVI, Financial) is the best of the best. That is, they are the top developer and publisher of online, personal computer, video game console, handheld, mobile and tablet games. Most of its games are top sellers for the Xbox, Nintendo and PlayStation console systems. Activision Publishing controls three of the top five games on next-generation consoles life-to-date, including the Call of Duty franchise. They also control the World of Warcraft franchise which remains the No. 1 subscription”based online game in the world. Simply put, Activision knows how to keep customers coming back for more. We purchased Activision early in the year at $23.20, before seeing its stock price skyrocket. Collecting 23 cents in dividends and closing the position at $38.71 gave us a quick 67.8% rate of return. As of today, the stock is still trading at $38.71 a share. Does it still have room to grow? Perhaps. The momentum is with it, but we are not going to wait around to find out.
Microsoft Corp.
Who doesn’t know Microsoft Corp. (MSFT, Financial)? Chances are you’re using one of their products right now. Founded in 1975, Microsoft develops, manufactures, licenses, supports and sells computer software, consumer electronics and personal computers and services. It's best known for its Windows operating systems, Microsoft Office software suite, Internet Explorer and Xbox. Microsoft is the world's largest software maker by revenue and is always regarded as one of the world's most valuable companies and valuable brands.
Microsoft’s stock price probably peaked in 1999 before the bursting of the tech bubble in 2000, but it has always remained a fantastic company with a strong sustainable competitive advantage. Standard and Poor's and Moody's have both given AAA ratings to Microsoft’s credit capacity. Microsoft’s 2014 profits were $22 billion on revenues of $87 billion. We bought in early 2014 at $40.12 a share against three-year average EPS of $2.40, which equates to an initial “zero growth” rate of return of 6.0%. It also had a book value of $7.61 per share. By year end it was trading at $55.48 a share and had paid $1.29 in dividends, which equates to an annual rate of return of 41.5%.
MEDNAX Inc.
While MEDNAX Inc. (MD, Financial) has always been a great and often overlooked company, its 2015 stock price movement was a nice surprise. MD is a leading provider of physician services, including newborn, maternal-fetal and other pediatric subspecialty care. The company provides clinical care, neonatal intensive care, and anesthesia care at more than 90 hospitals, 100 ambulatory surgery centers and office-based practices. It also provides acute and chronic pain management services in over 20 pain management centers through its network of physicians and physician assistants. The company’s average return on equity over the last three years was 13.1%. Per share earnings growth was 12.7% per year between 2005 and 2014.
At the right price, we knew this stock was a great buy and worth holding on to for a long time. People are always getting sick and facing medical complications and challenges, and this need is not going to change any time soon. We bought at $55.87 in mid-2015, missed the peak point of $85.47, but closed at $71.66 in December 2015. This gave us a nice 28.3% rate of return over a relatively short holding period.
Conclusion
Time will only tell what 2016 has in store. A key lesson we learned last year was that we must stick to our guns and never deviate from our investment philosophy. The trick is to always invest in businesses with substantial competitive strength that sell at substantial discounts to intrinsic value.
