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guest post - Best Buy's been a 'best buy'

The following post was written by Saj Karsan. Saj regularly writes for Barel Karsan, a site dedicated to finding and discussing value investments, and applying logic to investment decisions (as opposed to falling prey to psychological biases).

In an "efficient market", all stocks are fairly priced by the market. If the US stock markets are efficient, and many finance industry professionals believe this to be the case, one cannot generate index-beating returns except through luck. However, if we were in an efficient market, it seems hard to believe that stock prices for even the most stable of companies should fluctuate so drastically from year to year and even from week to week. Yet that is exactly what happens.

Consider Best Buy (BBY), a US-based multi-national electronics retailer. It has generated consistent returns year after year, and has a low debt to equity ratio resulting in minimal financial risk. Yet its stock price has fluctuated dramatically, offering astute investors the opportunity to achieve enormous returns.

Below is a chart depicting Best Buy's annual return on invested capital (ROIC) contrasted with its stock price:



While ROIC has been predictable and consistently range bound for the last several years, the stock price has been anything but. It seems hard to believe that the market is efficiently pricing this security when its price can fluctuate wildly in relatively short periods of time while the company itself generates predictable earnings on capital. For example, if the company is worth X amount in early 2000, how does it become worth just one quarter of this amount 3 months later, and then three times this amount six months after that?

More recently, three months ago the market valued Best Buy at $7 billion, but now values it at $16 billion! Investors who recognized the mispricing have seen returns of over 100% in a 3 month period!

We've also seen other examples of this phenomenon: we've looked at graphs illustrating wild fluctuations in the historical P/E ratios of Coke (KO) and Walgreens (WAG) (a moneygardener favourite), for example, which have allowed value investors to buy in at tremendous discounts.

Value investors willing to put psychological bias aside and instead invest at the height of the market's fear can indeed achieve above average returns. If this topic interests you, consider subscribing to the Barel Karsan feed.

Disclosure: Author owns a long position in BBY

72 dividend hikes...

Dividend hikes can sometimes be signals of good financial health; a vote of confidence in the future by a company's management. Yes, amid the credit crisis, recession, and general 'sky is falling' theme, some firms are raising the amount of money they are paying to shareholders on a regular basis. Here is some of the action that has transpired since Lehman Brothers failed in September of 2008.

Shaw Comm. (SJR.B) + 5% raise, pay out ratio = 45%, yield=4.5% telecom
Canadian Utilities (CU) +6% raise, pay out ratio = 40%, yield=4.0% utility
ATCO (ACO.X) +6% raise, pay out ratio = 20%, yield=2.7% utility
CN Rail (CNR) +10% raise, pay out ratio = 23%, yield=2.1% transport
TransAlta (TA) +7% raise, pay out ratio = 91%, yield=5.6% utility

BP (BP) +6% raise, pay out ratio = 53%, yield=6.9% energy
TransCanada (TRP) +6% raise, pay out ratio = 58%, yield=4.9% utility
Fortis (FTS) +4% raise, pay out ratio = 63%, yield=4.3% utility
ADM (ADM) +8% raise, pay out ratio = 18%, yield=2.1% ag./commodity
Toromont (TIH) +7% raise, pay out ratio = 26%, yield=2.6% industrial

BCE (BCE) +5% raise, pay out ratio = 62%, yield=6.5% telecom
Rogers (RCI.B) +16% raise, pay out ratio = 64%, yield=3.8% telecom
3M (MMM) +2% raise, pay out ratio = 40%, yield=3.5% industrial
Coca Cola (KO) +8% raise, pay out ratio = 61%, yield=3.4% cons. staple
Abbott Labs (ABT) +11% raise, pay out ratio = 45%, yield=3.5% healthcare
Wal-Mart (WMT) +15% raise, pay out ratio = 28%, yield=2.2% retailer

P&G (PG) +10% raise, pay out ratio = 37%, yield=3.5% consumer staple
J&J (JNJ) +7% raise, pay out ratio = 38%, yield=3.6% healthcare
IBM (IBM) +10% raise, pay out ratio = 22%, yield=2.1% technology
Exxon (XOM) +5% raise, pay out ratio = 21% , yield=2.3% energy
Clorox (CLX) +9% raise, pay out ratio = 48%, yield=3.6% consumer staple

Other dividend hikes came from companies such as:
Diageo, Thomson Reuters, Costco Wholesale, Target, SYSCO, ING Canada, Molson Coors, Tim Hortons, Monsanto, Genuine Parts, Metro, Progress Energy, CCL, WPP PLC, SNC Lavalin, Uni-Select, General Dynamics, Jean Coutu, McGraw Hill Ryerson, Home Capital Group, National Grid, Vodafone, Cardinal Health, Marsulex, Telus, Florida Public Utilities, National Fuel Gas, Oil Dri Corp., Flowers Foods, Lowes, PPD, Supervalue, Pepsico, McDonalds, Assurant, Excel Energy, Ace, Airgas, AmerisourceBergen, AAON, Raven Industries, Bunge, Communications Systems, Portland General Electric, Amtrust Financial, FactSet Research, Talisman Energy, Safeway, Occidental, Southern Company, JM Smucker, Hudson City Bancorp.........the list is endless if you read Dividends4Life.

buying 'made in China', and other links

When you refuse to buy products that are made in China, and instead seek 'Made In Canada' or 'Made In USA' labels are you perpetuating lavish lifestyles of excess.? Frugal Bachelor thinks so.

Thicken My Wallet wrote about 5 questions you need to answer when starting a business

Investing website, The Motley Fool calls SYSCO (SYY), McDonalds (MCD), and Wal-Mart WMT) 3 ridiculously cheap, high quality companies. All 3 generate return on equity above 20% and have solid histories of dividend growth. I recently doubled my SYSCO position.

doubled my SYSCO holding

Today I made my first equity purchase in my non-registered portfolio since February. I doubled my position in food service firm SYSCO (SYY) at $22.95/share.

For my thoughts on SYSCO click here.

About half of this purchase was made with dividends and distributions which I've received over the past few months.

Like all of my other holdings, SYSCO will be a long term piece of my portfolio. The stock currently yields more than 4%, and trades at a P/E ratio that is well below it's historical average. The company is having a flat 2009 due to the recession, however I expect the company to come out of this downturn with more market share, and to return to earnings growth that will warrant a P/E north of where it is today. The restaurant industry is under a dark cloud right now due to the downturn in consumer discretionary purchases. I believe in due time this area will pick up and SYSCO will benefit.

Clorox hikes dividend 9%

The maker of Brita® filters and Liquid Plumr® has raised it's dividend by 9%. Consumer products firm Clorox (CLX) announced a dividend raise today from $0.46 to $0.50 per share. I own shares of Clorox and it certainly feels like it has been a while since my last dividend raise within my portfolio. It is welcome news indeed.

Here is a glance at Clorox's recent dividend history:

Fiscal 2005 = $1.10
Fiscal 2006 = $1.14
Fiscal 2007 = $1.20
Fiscal 2008 = $1.60
Fiscal 2009 = $1.84
Fiscal 2010 = $2.00 (EST)

This represents a compound growth rate of the dividend of 12.7%.