Avoid the 'Herd' With This Trio of Benjamin Graham-Style Value Stocks

Ingrid Hendershot is a leading money manager known for following a Buffett-Graham style of value investing. The contributor to MoneyShow.com and editor of Hendershot Investments, explains, Our goal is to avoid the pitfalls of herd-mentality investing. As long-time students of the stock market, we have developed valuation models to assess the relative merits of high-quality companies; we scour annual reports, SEC filings and news to independently determine company valuations, thereby avoiding the pitfalls of herd-mentality investing, explains Ingrid Hendershot, a money manager. Quarterly earnings conference calls with management keep us abreast of corporate developments and give us insight into the heartbeat of corporate leadership. We adhere steadfastly to rigorous buy and sell disciplines. Our number one rule on the buy side is Don't overpay for a stock. We want to buy with a margin of safety. We would rather pay a fair price for a great business than a great price for a fair business. As Philip Fisher stated, If the job has been done correctly when a stock is purchased, the time to sell is almost never. We believe in patient investing for the long term. Quintessential investor, Benjamin Graham, described the stock market in the short term as an imperfect voting machine where stock prices are based partly on emotion and partly on reason. In the long term, the stock market is a weighing machine where prices are driven by fundamentals. For this reason, we are willing to wait patiently until Mr. Market recognizes the value of our high-quality firms. Oracle Larry Ellison, who owns 30.6% of Oracle's stock and continues to serve as Chairman and Chief Technology Officer, founded the company in 1977. Since introducing its first database software in 1979, Oracle has grown to become a global technology market leader with sales topping $39 billion. In fiscal 2019 (May), Oracle's cloud services & license support, cloud license & on-premise license, hardware and services businesses represented 68%, 15%, 9% and 8% of total sales, respectively. To transition its business into the cloud, management plans to leverage its large operating scale, which includes a 50% share of the global database management market; its technology breadth, which stems, in part, from key acquisitions; and its large installed base of more than 430,000 worldwide customers. To support its cloud transition and drive growth during the past five years, Oracle has invested nearly $30 billion, or 15% of its revenues, in research and development. For fiscal 2019, revenues increased 3% on a constant currency basis with reported revenues relatively flat at $39.5 billion. Net income and EPS each more than tripled. On an adjusted basis, EPS increased 16%. Return on shareholders' equity in fiscal 2019 was an outstanding 50%. These solid results were driven by the company's high margin Fusion and NetSuite cloud applications businesses which continue to grow rapidly while Oracle downsizes their low-margin legacy hardware business. The shift from commodity hardware to cloud applications resulted in an adjusted operating margin of 47%, the highest the company has generated in five years. Oracle is gaining market share in the cloud applications business. During the fourth quarter, the company added over 5,000 new Autonomous Database trials. This new Gen2 Cloud Infrastructure offers a self-driving database that automatically encrypts all data, backs itself up, tunes itself, upgrades itself and patches itself when a security threat is detected all without the need of human intervention or downtime. Oracle's profitable operations generate strong cash flows. With minimal capital expenditure needs, Oracle's free cash flow has significantly exceeded net income over the years, a sign of high-quality earnings. Over the last decade, free cash flow has grown from $7.7 billion to $13 billion at the end of fiscal 2019. During the year, Oracle repurchased a whopping 734 million shares for a total of $36 billion. Between the share buyback and dividend, Oracle returned $39 billion to shareholders in fiscal 2019. Oracle's dividend yields 1.7%. With a relatively low 27% dividend payout, the company has ample room to increase the dividend steadily even while it transitions its business to the cloud. Based on Oracle's current market cap, the stock is attractively valued with a free cash flow yield of 7%. Long-term investors should add Oracle to their database, a high-quality technology market leader with financial strength and an attractive valuation. TJX Companies TJX traces its roots back to 1976 when Ben Cammarata, general merchandising manager of Marshalls, was recruited to develop and lead the launch of a new off-price chain selling family apparel and home fashions. Under Ben's leadership, T.J. Maxx was born, with its first two stores opening in Massachusetts during 1977. TJX has continued to grow steadily over the years, opening stores in new markets, countries and continents. TJX is also launching new chains and acquiring other retailers to bring its popular off-price model to an even wider network of customers. In 1990, TJX acquired a five-store chain called Winners, which has grown into a winner by becoming Canada's leading off-price retailer. In 1992, HomeGoods was introduced to expand TJX's presence in the booming home fashions market. T.K. Maxx was launched in 1994 and introduced the off-price concept to the United Kingdom. In 1995, TJX acquired Marshalls, which doubled the company's size. The newest divisions include HomeSense and Sierra Trading Post, an online retailer rebranded as Sierra. TJX launched its e-commerce site in 2013 and opened its 4,000th store in 2017. TJX delivers a rapidly changing assortment of quality, brand name merchandise at prices 20%-60% less than department and specialty store regular prices. TJX can offer these savings because of its opportunistic buying strategies. As the largest off-price retailer, TJX has tremendous buying power and solid relationships with more than 21,000 merchandise vendors in 100 countries. This retail recipe engenders strong brand loyalty from consumers of all ages. Over the past five years, TJX has grown sales at a spiffy 8% annual rate. During the same period, earnings and EPS compounded at 8% and 12% annual rates, respectively. TJX's return on equity averaged a highly fashionable and profitable 53% during the past five years. In fiscal 2019 (January), TJX rang up $39 billion in sales, more than double its sales a decade ago and up 9% over last year on a 6% comparable store sales increase. Same-store sales have increased each year for 23 consecutive years. The company has reported only one year with a decline in same-store sales over its 40-plus year history, a truly remarkable retail achievement. During fiscal 2019, TJX grew total square footage by 4%, adding a net total of 236 stores, and ending the fiscal year with 4,306 stores. This is a terrific feat particularly during another year with thousands of retail store closings. Return on equity in fiscal 2019 was a fancy 61%. As part of its disciplined capital allocation policy, TJX increased its fiscal 2020 dividend by 18% to $0.92 per share marking the 23rd consecutive year of dividend increases. During this period, the dividend has grown at a 22% compound annual rate. TJX expects to repurchase $1.75 billion of stock for the full fiscal 2020 year. TJX ended the first half with $2.2 billion in cash and investments, reflecting the company's strong cash flow generation and financial flexibility. Long-term investors shopping for a bargain should consider The TJX Companies, a well-managed high-quality business with strong brand loyalty, outstanding cash flows, steadily growing dividends and substantial share repurchases. UnitedHealth UnitedHealth Group traces its roots to Dr. Paul Ellwood, the health-policy guru who coined the term health maintenance organization during the 1960s. In 1977, Paul Ellwood helped entrepreneur Richard Burke establish United Healthcare to manage the newly created Physicians Health Plan of Minnesota, an early HMO. As the nation's largest health insurer, the firm provides insurance through employer and individual plans, Medicare Supplemental and Advantage plans, Medicare plans plus benefits and health care delivery in more than 130 countries worldwide. Since its founding, the firm has consistently differentiated itself from its peers through the effective use of technology to improve care. Today, UnitedHealthcare, the firm's health care insurance arm, collaborates with Optum, its information and technology-enabled health services arm, to deliver better clinical outcomes while bending the cost curve. The largest business within Optum is OptumRX, a pharmacy benefit manager. OptumHealth provides healthcare services to over 14 million patients through more than 36,000 physicians and 900 primary, urgent and surgery care centers. OptumInsight provides data analytics, artificial intelligence, consulting and management solutions. Further, four of five U.S. hospitals rely on Optum IT to process $65 billion in annual billings. Integration of UnitedHealth Group's health insurance business with Optum provides the company with a significant competitive advantage, namely lower costs. Given its low cost producer advantage and its long history of remaining on the leading edge of healthcare industry changes, UNH is well positioned to navigate through future healthcare reform. During the past five years, UnitedHealth has grown revenues at a healthy 15% annual rate with net income and EPS compounding even higher at 21% annual rates, respectively. Return on shareholders' equity averaged 18.4% during the last decade, including 22.1% in 2018. This demonstrates the company's well-established capital allocation strategy. The firm has increased its dividend at or above a 20% clip during the past decade with the dividend compounding at a 25% annual rate during the past five years. During the first half of 2019, the company returned $6.4 billion to shareholders through dividends of $1.9 billion and share repurchases of $4.5 billion. Investors seeking healthy long-term returns should consider buying UnitedHealth Group, a high-quality market leader with profitable growth, growing dividends and a favorable outlook.

Avoid the 'Herd' With This Trio of Benjamin Graham-Style Value Stocks

Quintessential investor Graham described the stock market in the short term as an imperfect voting machine.

Columnist Conversation

Some Comments on Ray Dalio's $1B Bet on Stocks Going Down

Picking Up Some Sarepta

Added Some CRM

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.