The excitement is rising among those of us who follow the Sport of Kings. The Belmont Stakes is this weekend, and California Chrome has a great chance to win the Triple Crown. It really looks to me like only Wicked Strong and New York shooter Tonalist have anything close to a chance to spoil the party.
While I really like California Chrome, betting on him is not a smart move. In fact, since the horse is going off at 3-to-5 on the morning line, betting the best horse in the race actually has negative expectation. Even if you guess right, you just do not make much money.
It reminds me of most of the Wall Street research I read. Firms will recommend a stock and have a price target that is 10% or 20% above the current market price of the stock. Look at McDonald's (MCD), for example. Several firms have raised the stock to Buy or Outperform in the past week, with price targets around $110-$115. The stock is at around $102 this morning, so why on earth would I take all of the different market-related risks, such as geopolitical, economic and individual company risks, for such a paltry return?
Apple (AAPL) was just upgraded this week by a major firm with a $675 price target. Since the stock trades at $647, why on earth would any rational investor buy the stock for a potential return of a little over 5%? One good whisper or rumor can send that stock down more than that in milliseconds. A negative event can send the stock down several multiples of the target return before you can reach out to click the sell button. A wide variety of things can happen to send a stock or even the whole market lower in a hurry, and putting money at risk for these types of returns just makes no sense at all.
I prefer to put my money at risk searching for returns that are measured in many multiples of the purchase price. Furthermore, I like to risk capital on situations that have a margin of safety present in the balance sheet, in order to increase my odds of success. I want to think like a private-equity investor and not a short-term trader, to maximize my gains. I want a portfolio of companies that only need to survive until they thrive to multiply my money several times over.
I was chided for not taking gains recently in Resolute Forest Products (RFP), as I round-tripped the stock from a 50%-plus gain back to a single-digit profit. Of course, in hindsight, I wish I had booked the gain and then bought the share back, but that is not what I am looking for from this company. Although newsprint is a fading business, it is not a dying one, and Resolute dominates the market. Its housing and lumber-related business will pick up when housing does, and while that may not happen this year, it will happen eventually. The company trades for just 50% of book value and has a debt-to-equity ratio of just 0.321 and a current ratio of 2.6, so survival until things turn around seems to be likely. I expect to make two or three times my money at a minimum from this stock over time.
The same holds true of MFC Industrial (MIL), another favorite holding of mine right now. The company is in the commodity supply-chain business and also has a merchant banking division. If there is something you need in the commodities world, such as metals, minerals, natural gas, oil, chemicals, plastics, food additives, animal feed or wood products, this company will find it, ship it, produce it if possible and even finance it if necessary.
MFC Industrial's merchant banking business has been buying up midstream natural gas facilities and other energy-related assets. This company will do OK in the current economic environment, but when we finally get a real sustained economic recovery, sales, earnings and the stock price will skyrocket. I don't care if the stock goes up a few percentage points in the short term. I am looking for four or five times my money over time from this stock. The shares are trading at 60% of book value, and the company has a current ratio of 2.4, and the debt-to-equity ratio is just 0.21. As a bonus, the shares yield 3.2%, so I get paid to wait for my money to multiply.
Stocks can move by double-digit percentage points in the blink of an eye. I am far more interested in the long run, where I can cash in my investment for multiples rather than just percentages.