Price Paid vs. Value Received

 | Mar 11, 2014 | 4:30 PM EDT  | Comments
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Stock quotes in this article:

cmg

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bbrg

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rt

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wlt

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wtw

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bp

An inferior asset can be a far superior investment than a superior company depending on price. --Howard Marks, Oaktree Capital.

This statement by Howard Marks is very critical in investing. Stated simply, price is what you pay; value is what you get. The best opportunities come when you can buy a superior company at a ridiculous price, but that often happens during the stages of a bear market.

I got have my cake and eat it, too, when Chipotle (CMG) shares were trading for $240, allowing me to buy this high quality business for around 22x earnings. Given the superior returns on capital that Chipotle was -- and is still -- generating, it was not a lofty valuation (even to a value investor).

But today, at nearly $600 a share, Chipotle is a high quality company whose shares are trading at a ludicrous price in my view. (I'm not selling what I own, but I'm not buying either.) Looking at a name such Brave Brio (BBRG) or even Ruby Tuesday (RT) may offer a better value from a price point of view.

Looking at price paid vs. value received, I like to always check in on the 52-week low list to see if anything stands out. As of today, on all U.S. Stock Exchanges -- NYSE, AMEX, Nasdaq, and OTCBB -- there are 11 stocks trading at 52-week lows. How is that for a contrarian indicator of where the market sits today?

Walter Energy (WLT) is one of the anointed 11. Despite the stock's discount-to-book, I don't like its debt burden of $2.8 billion against $260 million in cash. Of the other remaining 10, nothing really jumps out as gold nugget hiding in the ruble.

One name that continues make investors feel like they are catching a falling knife is Weight Watchers (WTW), which is now trading at $21. I talked about WTW when it was trading for $29 and $24. I guess I haven't learned my lesson yet. I haven't bought any shares but I continue to watch the stock. The company's debt of $2 billion is something to watch but WTW earned $280 million in free cash flow last year, $290 million the year before and $380 million the year before that. At current valuations, the shares are trading for less than 4x free cash flow (FCF) and less than 11x  enterprise value (EV) to FCF. Surely, an activist investor will come in at some point, right?

While not trading at a 52-week low, at $48 a share, oil giant BP (BP) yields nearly 5% and trades for 6.5x trailing earnings and 10x forward earnings. It's the highest yielding of the big-cap oil majors and cash flow is gushing out like the oil it produces. Indeed, BP's cash flow has enabled the company to meet its legal settlement obligations without disrupting the dividend.

Prices are a funny thing in the stock market. The savvy investor relies on prices as a source of information as opposed to letting it control his or her investment decisions.

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