A Missed Opportunity With Infinity Property & Casualty

But you can use valuation as a great check on whether the market bets you're making are reasonable.

May 12, 2014 at 10:01AM

Since last week's update, the real-money Inflation-Protected Income Growth portfolio chose auto insurer Infinity Property & Casualty (NASDAQ:IPCC) as its newest pick. In the trading blackout window after that selection, Infinity Property & Casualty reported substantial earnings growth and raised its guidance for the year.

On that news, Infinity Property & Casualty's shares rose. By the time the trading window reopened and I actually opened a limit order to buy shares, the company's stock traded above my $65 buy-below price. As a result, the iPIG portfolio has not yet bought Infinity Property & Casualty. The market will do what the market will do, and as an individual investor, you can't win them all.

So now what?
Earnings releases change the publicly available information about a company and are a key driver of valuation shifts over time. In Infinity Property & Casualty's case, the results were solid enough to increase the iPIG portfolio's valuation estimate to $765 million from $750 million prior to the earnings announcement. It also increases the iPIG portfolio's buy-below price to $66.50, up from the original $65.

Of course, mentioning the company again resets the trading restriction period. Still, since the next earnings release is about a quarter away, it's not too likely that the iPIG portfolio's valuation estimate will change much between now and then. Once the trading window reopens, I expect to set a fresh limit order with the hope of buying below that new $66.50 price point.

The benefits of not overpaying
With this leap past the iPIG portfolio's buy below price, Infinity Property & Casualty may wind up following a path similar path to energy pipeline giant Kinder Morgan (NYSE:KMI). For several months after its original selection, Kinder Morgan was "the stock that might get away," since its price leaped past the iPIG buy below price before the portfolio could buy.

In Kinder Morgan's case, patience paid off in a couple of ways. For one, the company's stock price eventually dropped below the iPIG portfolio's buy below price, enabling the purchase. For another, Kinder Morgan still trades under that buy below level, several months after the iPIG portfolio bought its shares. Waiting on Kinder Morgan to drop to that buy below level may have seemed silly while the stock was substantially higher, but it did reduce the iPIG portfolio's downside exposure to the actual drop.

Using valuation to sell
At their core, all valuation estimates boil down to guesses regarding how a company's operations will perform in the future. Most companies can't tell you with certainty what they'll earn next quarter, but their market price and valuations depend in part on what they'll do -- or even if they'll still be around -- 20 years from now.

Valuation estimates provide sanity checks on market prices by giving investors a tool to describe what the market is projecting for a company when it places a price on the company's shares. You can then compare that projection to your own vision of the company's prospects and decide whether you think the market has it about right or is wildly off track -- and invest accordingly.

It was a valuation estimate that led to the iPIG portfolio's recent sale of Air Products & Chemicals (NYSE:APD). The industrial gas and chemical giant continues to perform admirably, but a recent valuation estimate revealed that its market price reflects optimism that activist investor Bill Ackman can make it even stronger. Ackman has called Air Products & Chemicals a potential $200 stock within three years, if it makes the type of leadership changes he's suggesting.

While Ackman may wield enough influence to make the leadership changes he's suggesting, there's still a lot of work between "change the boss" and "change the company." And even then, there's still no guarantee that the changes Ackman proposes will succeed well enough for Air Products and Chemicals' stock to truly be worth $200 in three years.

It's not perfect, but it generally works
There are no guarantees in investing, but generations of investors have successfully used valuation to guide their buy and sell decisions. The iPIG portfolio has used valuation as one of the key factors in its decision-making process. The portfolio finished last week at $41,194.26, up from its $30,000 starting point in December 2012 and up more than $175 over the week. Valuation may not be perfect, but it still seems to be working well enough thus far to help this portfolio perform well.

Top dividend stocks for the next decade
Valuation is only one part of the iPIG story. To make the cut, every iPIG pick needs a dividend with a history of growth and decent prospects for continued growth. That's because the smartest investors know that dividend stocks simply crush their non-dividend-paying counterparts over the long term. That's beyond dispute.

They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

To follow the IPIG portfolio as buy and sell decisions are made, watch Chuck's article feed by clicking here. To join The Motley Fool's free discussion board dedicated to the IPIG portfolio, click here. To see the iPIG portfolio's online tracking spreadsheet, click here.

Chuck Saletta owns shares of Kinder Morgan and his wife owns shares of Infinity Property & Casualty. The Motley Fool recommends Kinder Morgan. The Motley Fool owns shares of Kinder Morgan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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