Weekend Update #462 - December 18th, 2021
Stocks covered: GIS, ROL, GPN, WM (NYSE), MRU (TSX), TRP (TSX, NYSE)
Dear Friends of Purple Chips,
At Thursday, the Dow was at 36,000, a little higher than last week.
In this video, we look at the following:
The NFIB Optimism Index;
Higher Interest rates on the horizon;
Changes to our portfolios - we took profits on
General Mills, added to TC Energy, added to Rollins and reduced Metro.
Discuss Reversion to the Mean using the valuations of Waste Management and Global Payments as examples;
A quote by a noted economist Milton Friedman
Please click on the icon below to view the video.
Transcript of Update 462:
On Thursday, the Dow Jones was around 36,000 which was slightly higher than last week. The news this week was that the Federal Reserve announced rates would probably start to rise in March of next year. They forecast that rates would likely go up by ¾% by year end. The market rallied on this news, but I see it as a sign that rates have bottomed and in the long term I fail to see any positive news in this. Recall that stocks compete with bonds and when interest rates start to rise, it draws capital away from stocks.
Slide 3 – Valuations
On Thursday, the low valuations were:
Checkpoint, Fidelity National, Global Payments, Medtronic, Veeva Systems, Fresenius Medical, Tencent and AT&T.
On the TSX there was Stella Jones, TC Energy, Saputo, Fiera Capital and Enghouse Systems.
Slide 4 – Spotlight – NFIB
In the Spotlight this week, we have 2 items to look at: First is the NFIB Business Optimism survey and the second is the FOMC meeting remarks. Pause your video to read these.
Slide 5 – Spotlight- FED Remarks
Slide 6 – Satellite Holdings
We were busy this week and made changes in all 3 of our portfolios.
In our satellite positions, we sold out our position in General Mills On Dec 14th. We had bought this in January of this year and sold it for a 19% profit at $65.79. We used some of the funds to add to our position in TC Energy at $58.60.
Slide 7 – TC Energy
Here’s a slide of TC Energy and despite the name that doesn’t sound very green, it’s a company that operates pipelines, cogeneration plants and has a pretty good green rating.
Slide 8 – TC Energy- Green rating
I like this company for 2 reasons:
1. Predictable earnings that are based on long term fixed price contracts
2. A dividend of almost 6%, that should keep growing.
I own this stock personally at this level and I think it’s a good place to park money and get well paid while you wait for higher levels.
Slide 9 – Core US
On Friday last week we added to Rollins at $32.10. Now we have an overweight position. This is a good company at a good valuation.
Slide 10 – Description - Rollins
Here’s a business description of Rollins. The nice thing about their business is that they are in pest control which is pretty recession proof and they also have a lot of different customers.
Slide 11 – Chart - Rollins
Here’s a chart of Rollins and you can see a 20 yr trend of growing earnings.
Slide 12 – Core CAD
We reduced Metro to Underweight at $66.02.
Slide 13 – Reflections
This week, my topic is valuation. I’m going to show you 2 good companies that are at the opposite ends of their historical valuation ranges: Waste Management and Global Payments. My objective is to illustrate the concept of reversion to the mean. All companies go through cycles in their valuations, where they go from being reasonably valued to either expensive or cheap for a variety of reasons. The variable to focus on is not the price of the stock, rather its the trend in earnings and the outlook for the business.
Slide 14 – Waste Management
Here’s the chart for Waste Management. They are a good company, but when you look at their valuation, they look very expensive. Right now, they are trading at 35X earnings and for the last 20 years, they’ve traded close to 27X earnings and when they were cheap, they traded at 24X earnings. At 24X earnings, the shares would be around $115 compared to today’s price of $165.00. All I can say is Caveat emptor.
Slide 15 – Global Payments
Here’s the chart for Global Payments. They are also a good company, but when you look at their valuation, they look really cheap. Right now, they are trading at 16X earnings and for the last 20 years, they’ve traded around 21X earnings and when they were expensive, they traded at 26X earnings. At a fair valuation of 21X earnings, the shares would be around $165 compared to the current price of $127.00.
In conclusion, reversion to the mean is an important concept to keep in the back of your mind because it teaches you to respect history and to avoid the notion that “This time its different”.
Slide 16 – Notes
Here’s a quick reminder that there is no video on New years weekend.
Slide 17 – Quote
I’ll finish with this quote by Milton Friedman, the noted Economist. “Inflation is like alcoholism, the good effects come first.”
- END –
So that’s all for this week, I’m John Schwinghamer, the author of Purple Chips, have a great weekend!