In the spirit of stock recommendations

[wiseheart]

I thought I should give out two recommendations that have done well for me and are valued fairly well. Im not pumping, and I welcome criticism. This board provides some good info and I take recommendations from regulars quite highly.

Ill leave my analysis out unless someone wants it. I should have recommended these a couple days ago when I think they were oversold, but they posted some good gains today.

Recommendation 1: (STKL) Sunopta Canadian company that is fairly diversified in the agribusiness sector. I originally bought them because they supplied ingredients to Java Juice. Now, they seem to be gobbling up companies on a rate comparable to Google. I bought in at ~$7.40 shortly before they announced earnings in early 2006. However, I think it might be slightly overvalued at the moment, and it usually has pullbacks at these levels, so I would wait for a strong pullback day to buy-in (I think it will drop back back down to around ~$12 or so b4 heading back up)

Recommendation 2: (IFN) India Fund Fund of Indian companies. In a growing economy with a good chart and a big fat dividend. They have a semi-annaul stock buyback. I bought in at ~$41. Like STKL I would wait until another down day and buy in around ~$46

[ahnuld]

Graham strongly advises against buying companies that require acquisitions to further growth as they tend to have problems down the road. Why do you cite that as a positive in the company above?

[wiseheart]

Because I don't think they need acquisitions to grow, merely they are acquiring companies because they are able to. That is to say, I think their base agrobusiness model is solid. It might say that management doesn't know what to do with the money so they are buying other companies, but the same could be said of Google, and in their case it seems to be working well.

Perhaps, you could provide some more info on what kind of problems Graham says they will encounter? I can think of a few possibilities but Im not familiar with his thoughts. [img]/images/graemlins/smile.gif[/img]

[kimchi]

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Like STKL I would wait until another down day and buy in around ~$46


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Sound like a candidate for a future limit order regret.

What would your strategy be if it didn't touch $46?

[APXG]

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Because I don't think they need acquisitions to grow, merely they are acquiring companies because they are able to. That is to say, I think their base agrobusiness model is solid. It might say that management doesn't know what to do with the money so they are buying other companies, but the same could be said of Google, and in their case it seems to be working well.

Perhaps, you could provide some more info on what kind of problems Graham says they will encounter? I can think of a few possibilities but Im not familiar with his thoughts. [img]/images/graemlins/smile.gif[/img]

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One illusion often overlooked is that acquisitions inflate price-to-earnings multiples when the company being acquired is trading for less than the acquirer, which is almost always the case. It is thus possible to mask declining organic revenues through consistent acqusitions. As far as I know, Graham's analyses heavily depend on price multiples.

[wiseheart]

Kimchi,

I'm merely implying that is where I buy in if I were not already purchased. As it is I am more of a long term investor rather than a trader, so I am just going to hold onto my position, thus I don't have the need to formulate a good strategy on when to buy in, just wanted to warn that Ive seen a lot of profit-taking with these stocks, especially STKL, after big run up days.

APXG,

That brings a question I have been pondering, which I guess I will research if no one wants to give me the easy answer. In which industries can we rely on P/E as a strong indicative factor of valuation and in which industries is it less important? Or is P/E always going to be one our most important factor to look at?

[RicoTubbs]

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One illusion often overlooked is that acquisitions inflate price-to-earnings multiples when the company being acquired is trading for less than the acquirer, which is almost always the case. It is thus possible to mask declining organic revenues through consistent acqusitions. As far as I know, Graham's analyses heavily depend on price multiples.

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What are you talking about? How does an acquisition "inflate price-to-earnings multiples"?

Also, it is possible to mask declining organic revenues through consistent acquisitions, but I don't think there's anything special about organic vs. acquired earnings growth. $1 of earnings is $1 of earnings, regardless of whether it was grown organically or acquired. You might believe that organic revenue growth is more persistent than acquired revenue growth, but that's an empirical question and is likely to be highly idiosyncratic.

[APXG]

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One illusion often overlooked is that acquisitions inflate price-to-earnings multiples when the company being acquired is trading for less than the acquirer, which is almost always the case. It is thus possible to mask declining organic revenues through consistent acqusitions. As far as I know, Graham's analyses heavily depend on price multiples.

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What are you talking about? How does an acquisition "inflate price-to-earnings multiples"?

Also, it is possible to mask declining organic revenues through consistent acquisitions, but I don't think there's anything special about organic vs. acquired earnings growth. $1 of earnings is $1 of earnings, regardless of whether it was grown organically or acquired. You might believe that organic revenue growth is more persistent than acquired revenue growth, but that's an empirical question and is likely to be highly idiosyncratic.

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Sorry I might be wrong, but here's the logic. The acquirer is buying a cheaper revenue stream in PE terms than it generates on its own. Cheaper = acquisition requires less shares to be issued than if the companies had identical PEs. Less shares = higher resulting EPS = lower PE. One could thus use acquisitions to peg PE to a certain ceiling while organic earnings are declining. Yes/no?

[RicoTubbs]

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Sorry I might be wrong, but here's the logic. The acquirer is buying a cheaper revenue stream in PE terms than it generates on its own. Cheaper = acquisition requires less shares to be issued than if the companies had identical PEs. Less shares = higher resulting EPS = lower PE. One could thus use acquisitions to peg PE to a certain ceiling while organic earnings are declining. Yes/no?

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I still don't know what you're saying. I'll guess, though. I assume you're talking about a scenario that looks like one of the following, but I'm not sure which:
1) Company A trades at a P/E of 18. Company B trades at a P/E of 15. Both firms have identical balance sheets and have cash flows that are expected to be identical in the future.

2) Company A trades at a P/E of 18. Company B trades at a P/E of 15. Based on the expected future cash flows, shares of each firm are expected to return 12% going forward.

In the case of #1, the market is mispricing one of the two companies. Firms that have identical balance sheets and identical expectations of future cash flows should have identical stock prices. The fact that the market is mispricing one stock (overvaluing A or undervaluing B) means that A is making a good decision to acquire B by issuing shares. B should be trading at A's multiple, but for whatever inefficient market reason, isn't.

In the case of #2, the market is valuing both firms correctly, which means that A has higher future cash flows than B (or a lower discount rate, whatever). If the market is rationally valuing both A and B separately, then the market will probably value the combined entity of A and B appropriately. The future cash flow growth of the combined entity will be a weighted average of the growth rates of the individual companies (+/- synergies), so the P/E ratio on the combined firm should be somewhere between the P/E ratio of A and the P/E ratio of B.

If you want to talk about this more, it would be helpful to give a simple example where you lay out some numbers (e.g., A's share price is $X, its EPS is $Y, its growth rate is Z; same thing for B) and whether you're allowing for any inefficient pricing by the market.

Probably the best place to start would be to ask: Why is the market valuing one firm's revenue cheaper than the other's?

[pig4bill]

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Graham strongly advises against buying companies that require acquisitions to further growth as they tend to have problems down the road. Why do you cite that as a positive in the company above?

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That sounds really funny and ironic considering what Berkshire has done.