Price is very, very, very, very important. Very.
Buying stock in even the best company at a terrible price leads to a poor investment. This is undeniable.
But even the best companies go on sale occasionally. So today, I asked some of our top analysts to name names, and reveal the top stocks on their wish lists, by answering this question:
If you could own stock in any company at a reasonable price, which company would you pick?
Here are their answers.
Matt Koppenheffer: Two words: Berkshire Hathaway
I would, however, be all over Visa
For me to start getting excited about the stock’s price, I’d like to see it at or below $60 a share.
Tim Beyers: If only I had listened to my instincts. Two years ago, at $22.82 a share, I bet on Netflix
"Were Netflix on pace to never become anything more than a movie-rental business, I wouldn't just be selling the stock -- I'd be shorting it," I wrote at the time. "Yet, thanks to its emerging Watch Now instant-viewing service, I see a far richer future for Netflix than others might."
The stock has more than doubled since. Sigh.
I'd love to own Netflix, but not at present levels. Valuation isn't my primary concern. Instead, I believe that a topsy-turvy market should give me a chance to buy at less than $45 a share, or 25 times trailing earnings. That's a fair price given Netflix's growth opportunity, which just got bigger thanks to a streaming deal with Nintendo for the Wii.
Morgan Housel: Hands down, it'd be Costco
Here's a rundown of its business model:
- Sell for a hair above wholesale cost, just barely covering the warehouse's operating expenses.
- Make all your profit on membership fees.
You get a good view of this by breaking out parts of its income statement:
|
Segment |
2008 |
2007 |
2006 |
|---|---|---|---|
|
Net Margins from Sales |
1% |
1% |
1% |
|
Membership Dues |
$1.5 billion |
$1.3 billion |
$1.2 billion |
|
Net Income |
$1.3 billion |
$1.1 billion |
$1.1 billion |
So all profits come from membership fees. This is important, because competition has to have an equally large membership force to compete with retail margins. You can't just start from day one and compete with Costco. The only way smaller competitors can be as profitable is to sell at higher retail prices. That moat means not only large, but also safe profits for years to come.
Alex Dumortier: The company I'm looking at has a long pedigree in the public markets, and it's been a great success story. Moreover, its prospects still look good, even though it is being overshadowed by higher-growth foreign competitors. How much would you pay for the stock, which has a 1.9% yield and expected EPS growth over the next 3-5 years of 10.7%? At 20.8 times its average inflation-adjusted earnings over the prior 10 years (cyclically-adjusted earnings), it looks richly priced at present.
Oh, did I mention this company's name? It’s the S&P 500. If this index drops to about 883 (from the 1100s today), you'd be paying 16 times cyclically-adjusted earnings. At that price, a full weighting in U.S. stocks looks like a reasonable bet. At 12 times cyclically-adjusted earnings, which the index achieved last March, your expected long-term return becomes really mouth-watering. We could yet see those valuations this year; historically, all major bear markets have witnessed single-digit cyclically-adjusted price-earnings multiples.
Toby Shute: Setting aside valuation, and thinking about which businesses you'd want to own, is a fantastic starting point for any investor. From there, you can decide what price you'd pay for each security, and then just watch and wait for Mr. Market's next tantrum. That's admittedly easier said than done, since most of us have trouble just sitting still. (I personally use CAPS to scratch that itch.) Sometimes, though, you don't have to wait long.
In January 2009, I wrote about one of the best industrial companies I've ever seen -- Graco
Those are our dream stocks. After you’ve shared yours in the comments section below, take a look at the 10 top-performing stocks in the market.
