Three Stocks With A Margin Of Safety

March 2, 2009 at 12:27 pm  ·  Category: Fundamental Analysis, Stocks

I don’t normally buy deep value, preferring instead an approach more like growth at a reasonable price, but three stocks with a real margin of safety have really caught my attention of late.

(1) Pfizer (PFE).  The giant drug maker has been under siege for a while now due to fears about the company’s operations after its leading drug, Lipitor, goes off patent protection in 2011.  But the stock has just gotten ridiculously cheap.

The stock is trading around $12 with $1 in net cash and short term investments.  They earned $2.43 last year and analysts are forecasting $2.07 in 2009.  That represents a 5-6 forward multiple.  We’re talking about an 18% earnings yield on this year’s earnings.   This is not some backwater, second rate operation either.  This is Pfizer.

Pfizer recently announced the acquistion of Wyeth (WYE) for $50 a share ($68 billion).  I really like this move.  They are using the current distress in the economy to pick up Wyeth, which has an excellent portfolio of drugs.

(2) Dell (DELL).  Dell is trading for about $8.50 with about $3.50 in net cash and short term investments on the balance sheet.  You get the business for $5.  They earned $1.25 last year and analysts are forecasting $1.12 this year.  Even if they only earn $1 that’s a 5 forward multiple.  If they earn less, it’s still a cheap stock.

(3) eBay (EBAY).  eBay is trading around $10.30 with $1.80 in net cash and short term investments.  They earned $1.71 last year and analysts are forecasting $1.44 this year.  That’s a 6 forward multiple.  Even if they only earn $1.25, that’s a 7 forward multiple.

Each of these stocks is not only cheap, but highly profitable, with high quality of earnings and strong balance sheets with a ton of cash and little debt.  None of them are remotely in danger of going out of business. 

I think you get a real margin of safety with any of these stocks and I’m happy to hold them for the long term at these levels regardless of any negative short term price action.

No matter what happens with the stock price, the underlying reality is that these are real businesses, in the real world, with real assets and real business operations that continue to earn real profits.   As a shareholder, those assets and profits are mine.  At these prices, we’re talking about forward earnings yields in the high teens.  Negative price action doesn’t have any effect on that. 

The technicians can say whatever they want about the downtrending stock prices.  What the technicians always miss is that behind these stocks are real businesses.  And these real businesses are currently available at compelling valuations. 

Disclosure: Top Gun is long Pfizer (PFE) and eBay (EBAY) and has no position in Dell (DELL).

Posted by Greg Feirman  ·  Trackback URL  ·  Link
 

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