So far, the shop has all 12 past Press On Research issues. And no one other than paid subscribers of Press On Research and members of select mailing lists has seen any of these.
Some highlights from these issues are below.
As of this writing, the average gain for all 12 picks is 50.3%. These picks are crushing the stock market since April 2015 I began releasing them.
As of this writing, the stock market has produced a 15.8% return.
This means my exclusive and unreleased picks since April 2015 have outperformed the stock market by 34.5 percentage points.
Two companies I recommended grew from sub $500 million market caps to $1 billion plus market caps as of this writing.
One company as of this writing is now past $2 billion in market cap.
You can choose to buy each issue individually at its full price or buy all past issues at the current 33% discounted rate.
In these issues not only do I recommend fantastic companies – and one terrible one to avoid – but I continue what I began in How To Value Invest and teach you what the metrics I use mean, why they’re important, and what they mean for the investment thesis.
By buying these issues you’ll also see a bunch of new things since the last time I released a recommendation article. Some of which are below…
Refined and expanded investment processes
Analysis and valuation of investment float
Some of the new metrics and analysis tools I use including Owner’s Earnings.
I’ll continue adding more products to the Shop as time goes so make sure to check back regularly.
If you’re interested in seeing my past stock picks that have destroyed the market since April 2015 and learn along the way go to the page linked below.
Below is an excerpt from the March 2016 Press On Research issue to release exclusive to subscribers tomorrow March 15th. If you’d like to subscribe to Press On Research go to the links above or below.
What Do You Do When A Company You Own Drops In Price?
March 2016 Press On Research Issue
By Jason Rivera
Press On Research Volume 1 Issue 10
What do you do when a company you own stock in drops in price? What about when it drops a lot in price?
Do you panic and get anxious? Do you buy or sell more without doing any extra work? Do you ask your buddies what they think of the company even if they know nothing about investing?
If you do any of these things don’t worry as you’re not alone. This is how most investors react when something they own drops significantly in price.
But the goal of Value Investing Journey and Press On Research is not only to find the best investments possible to build long-term wealth. But also to teach so we can become better investors and thinkers.
And a major trait of any great long-term investor is the ability to control emotions.
Study after study shows most normal – average – investors buy at the height of stock prices and sell at the bottom of the price swing.
This is awful and is one reason most people don’t beat the market over time.
So how can you stop being an average investor?
There are several ways but today I want to talk about how to control emotions.
If you can’t control your emotions it doesn’t matter how great of an analyst you are you’ll still be a terrible investor.
In April 2015 I recommended what I thought was a great asset manager NAME REMOVED. Since then the stock price has dropped ~35% depending on what price you bought at. And I’ve gotten email from several readers asking for an update on the company.
Because of this today’s Press On Research isn’t a normal recommendation issue.
We’re going to reevaluate NAME REMOVED to see if I made a mistake in my analysis last year. And to show you the step by step process I take when reevaluating companies I own to take emotion out of my decision making processes.
I go on from here to reanalyze the company in full and show the step by step process I use so you can learn to do this yourself.
I found that while the company has dropped in absolute dollar terms and the economics have deteriorated a bit that the company is cheaper now than it was last April compared to its profits. And the business model and economics are still fantastic.
The company has an FCF/Sales of 40.3%. Pays a huge dividend. Is selling at only ~2 times its estimated 2015 full year profits. And is now selling below its book value by a significant margin.
I found nothing new that would destroy the investment thesis I laid out last April. And I was so happy after reevaluating the company that I recommend subscribers up their position in the company.
To find out what this great company is and to learn a valuable lesson on what you need to do when reevaluating a company you own subscribe to Press On Research.
And if you’re a Value Investing Journeysubscriber remember you also get a 50% discount on a one year Press On Research subscription. Or you can join for only $49 to get tomorrow’s released issue and all back issues.
Similar newsletters to Press On Research sell for several thousand dollars at a big newsletter company so you’re getting a great value here.
If you have further questions about Press On Research please go to the link in this sentence or email me at email@example.com.
Huge Margin Of Safety And Potential Competitive Advantages Mean As Much As 341% Gains For Us
February 2016 Press On Research Issue
By Jason Rivera
Press On Research Volume 1 Issue 9
When you think of investing in microcaps the last thing you think about is finding a company with gigantic competitive advantages.
Of course we search for companies that have them. But we rarely find these companies.
After all small companies are small for a reason…
Most of the time they’re newer businesses that haven’t refined their business models. Are struggling to find niches to thrive in while fending off giant competition. And are just trying to stay afloat as they grow sales and profitability.
These are a few of the reasons why here at Press On Research I haven’t talked much about competitive advantages at this point.
Almost 100% of companies with huge long-term competitive advantages are the biggest companies in the world.
I can only think of a handful of microcaps I’ve evaluated over the years that have had even small short-term competitive advantages.
And only a few that if they got bigger, could have massive advantages over competition. And none that already had them.
So why am I talking about competitive advantages here on Press On Research? Because I’ve found a $263 million company that’s building a massive competitive advantage now.
But this isn’t even the best thing about the company…
Even if it takes them decades to build their competitive advantages to the scale of a world dominator, or it doesn’t build its competitive advantages at all. It’s so undervalued now that it doesn’t matter. We still should make a ton of money owning this company over time.
It’s selling between 20.9% and 341% below its true value. And its priced now as if the market expects the company to go out of business as its selling at a 25.9% discount to just its net asset valuation.
This is one of the most conservative valuations investment analysts do.
But this company is far from terrible… It’s profitable on an operating margin basis in eight of the last ten years. And on an return on invested capital (ROIC) basis has been profitable every year of the last ten.
It’s grown revenues 3.67 times in the last ten years. It’s got a strong balance sheet that’s in a net cash position. And its operations are becoming more efficient over time.
Best of all this company operates in an industry that’s necessary to governments around the world. And will remain so for decades to come.
This all means that not only will the company not go out of business, but that it’s already a good to great business priced far below its true value.
By buying this company we get to combine the ideas of two value investing giants Benjamin Graham and Warren Buffett.
But most important for you is this means we should expect great returns over time… Even if the company isn’t able to build its advantages. If it does this company could become a multi bagger in the long-term.
But before we get to all this I need to explain what competitive advantages are.
What Is A Competitive Advantage? And What Kind Of Advantages Are There?
A competitive advantage is simply something that gives you advantages over competitors. They’re simple to understand as outside investors. But difficult – impossible in some industries – to cultivate over the long-term.
Why? Because in most cases competition works to erase any competitive advantages over time.
Let’s start by talking about the kinds of competitive advantages companies can have.
In general there are five different advantages companies can build. And often if you have one kind of advantage over competition you may have others as well.
Patents, Brand Names, Trademarks, Etc
These advantages are things like patents, trademarks, copy rights, customer lists, or brand names that protect valuable assets the company owns or have the rights to use.
Think Altria and Philip Morris, Louis Vuitton, Coach, Michael Kors, Ralph Lauren, etc.
These can be indefinite assets in the case of trademarks, copy rights, and brands. Or short to long-term – one to 30+ years – in the case of patents.
If a company has a lot of these assets make sure to check how long they’re supposed to last, especially when it comes to patents. This information is in the company’s annual reports in the footnotes.
These assets are listed on balance sheets under terms like indefinite lived assets, intangible assets, or the other names above.
Unless you have an ultra-powerful brand like Marlboro, these are the weakest competitive advantages to keep over the long-term. Why? Because even immensely profitable drugs like Viagra come off patent in time.
These are also the only kinds of advantages you’ll find listed on a balance sheet. The rest of the bunch you can only find doing thorough analysis on a company and knowing what to look for.
Network effects come from having a large network of customers using your service.
When networks reach a tipping point it makes it difficult for similar companies to compete because the more people you have. The fewer – generally –will use competitor sites that are similar.
This competitive advantage is a gigantic barrier to entry for smaller competition. But the network effect can also tip backwards if you don’t continue to do things well.
Current companies that have gigantic network effects are ones like Facebook, EBay, and LinkedIn.
Yes, there are similar – much smaller – companies out there but unless you search for them they’re hard to find. And they only operate in niches.
Many times once a company gains this advantage over competitors it becomes almost impossible to compete if you offer similar products.
The only time these advantages don’t work is if you’re doing something a lot better and your competition is getting worse. Think MySpace before Facebook came around.
If you’re trying to cultivate this competitive advantage you either need to be different or a lot better than competition to gain any share.
Even then you’re still hoping to gain enough subscribers and customers to reach the tipping point so this effect will swing in your favor.
The next two competitive advantages many times go together so I’m combining them.
Economies of Scale And Low Cost Operator Advantages
The economy of scales advantage comes when you’re so big you can lower your costs below competitors. This gives you a huge advantage with customers because you can have lower prices for goods you sell.
The keyword within this advantage is efficiency.
The more efficient you are as a company the lower costs you’ll have. The lower costs you have to charge to customers. The more profitable you’ll become at the expense of non efficient competition. Even if they’re bigger when you start.
When it started Wal-Mart was smaller than K-Mart. Now K-Kart is almost nonexistent due to Wal-Mart’s competitive advantages and efficiency.
Companies gain these advantages because they do more business and sales than similar companies. So their costs spread out over a wider range of products and suppliers.
Some giants like Wal-Mart have so much power over suppliers they can negotiate lower prices when they buy products as well. Furthering their advantage.
This can be a double edged sword though if not cultivated right.
If not done well this can also lead to a chase to the bottom to ever lower profitability. The container shipping industry is one example. It’s efficient and cost effective but has always struggled to stay profitable.
If done well this can lead to crushing of competition and a huge barrier to entry which keeps smaller companies out of the industry. Or crushes non efficient competitors already on the market.
Other companies not mentioned above that have a combination of these two advantages are GEICO, Coca-Cola, Pepsi Co., Altria, and Philip Morris.
At first you’d be surprised to see a government/regulatory aided competitive advantage right?
After all governments around the world do everything they can to end monopolies. And try not to help certain companies at the expense of others in an industry. But this backfires when the law of unintended consequences comes in to play.
This can be the most powerful competitive advantage of all. Why? Because if an industry is highly regulated by government it keeps competition out. And whoever is already “in” gains all the business.
This explains why Altria, Philip Morris, British American Tobacco, Lorillard, and the other tobacco giants have dominated their industry for decades.
It also explains why they have generated such huge profits for so long. And why newer, smaller, and more innovative companies haven’t disrupted the industry.
If you’re going to get regulated and taxed to death what’s the incentive for smaller more innovative companies to come into the industry?
There isn’t one.
Take a look at the taxes on cigarettes below as an example of why small companies can’t get into the tobacco business.
The dollar numbers above are the average per state tax rate per pack. These are on top of the federal per pack tax rate of $1.0066 as of July 2014.
These taxes combined with the other regulations at cigarette companies are why cigarettes cost so much.
This is also why when this advantage combines with something like a powerful brand name – Marlboro –companies can continue to raise prices. And still get customers to buy.
This means higher margins, greater profitability, and higher returns for shareholders. At least until governments raise taxes again and the process of raising prices starts again.
All tobacco related companies enjoy this competitive advantage. And today’s recommendation does as well… But I’ll get back to this later.
For more information on competitive advantages go to the following links.
The August Press On Research pick is out tomorrow. And below is an unfinished excerpt from the issue.
We Can Buy This Company For Free
By Just Paying For It’s Cash
By Jason Rivera
Press On Research Volume 1 Issue 5
On two islands a small tech company is providing some of the biggest names in the tech world with necessary services most of us never think about.
When we think of tech Intel’s (INTC) microchips and processors. Google’s (GOOG) search engine and Android. Microsoft’s (MSFT) operating system. And Apple’s (APPL) phones, tablets, and other gadgets come to mind.
If not new tech like of Facebook’s (FB) or Twitter’s (TWTR) social networking does.
The tech industry is rarely on the minds of value investors as an industry to research though.
Most of us stay away from it. This is because of how fast things change in the industry.
And value investors love to invest in stable companies and industries.
But today’s recommendation isn’t in the tech hardware, software, or app businesses. It’s in a stable industry. And the service it provides is necessary for industry giants.
Not only does it meet my strict criteria for valuation, safety, and quality. But one of the biggest and best value investors in the world owns a significant portion of the company.
I don’t research any company based on other prominent value investors owning portions of them. But when I read in financials that a prominent value investor owns a company I’m considering recommending it’s always something I love to see.
And I’ve invested alongside this prominent value investor one time before…
That time led to a 50+% gain for the portfolios I manage.
The last time it was a ~$20 billion company going through a special situation. The company had great margins. A lot of cash. A lot of debt. And was undervalued by a substantial margin to my conservative valuations.
This time it’s a ~$450 million company that has great margins. Its margins are even better than its bigger competition. More cash than the company’s current market cap. And it’s undervalued by a substantial margin to every one of my conservative valuations.
But before I tell you what the company is I need to tell you how it does business.
Handle With Care
When thinking about deep value investing in small caps. The last companies you consider are high tech companies.
Technology changes so fast that it’s hard to evaluate high tech investments as a deep value investor. Because deep value investors like stable, safe, businesses.
Most of the time value investors stay as far away from the tech sector as possible.
But there is another side of this industry most people don’t even know of. And this is where our recommendation today does business.
Companies who build parts that go into computers have to make sure their parts work well once manufactured. And since most of these hardware manufacturers have their assembly lines set up to make the chips, processors, and memory. They have to outsource the testing of their products to third parties
Without third party specialists like our pick today testing and packaging products. The part and product manufactures would have to test them in house. And would have to take money away from R&D that would have to be put towards expensive testing and assembly equipment.
Not only does this outsourcing save the tech giants and manufactures money and time. But it also brought to life an entire specialized packaging, testing, and assembling industry.
Combined this industry does billions of dollars worth of work. And saves the tech giants billions of dollars by letting other companies buy the expensive equipment to do these specialized processes.
To see what this company is. And what the other four Press On Research picks have been. You can subscribe here.
“Question: According to a business week report published in 1999, you were quoted as saying: “It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.”…would you say the same thing today?”
Here’s Buffett’s answer:
“Yes, I would still say the same thing today. In fact, we are still earning those types of returns on some of our smaller investments. The best decade was the 1950s; I was earning 50% plus returns with small amounts of capital. I could do the same thing today with smaller amounts. It would perhaps even be easier to make that much money in today’s environment because information is easier to access.
Yes, I’ve said this before many times. But it’s an important concept to understand.
Small ultra safe investments that produce a ton of cash. Have little to no debt. Pay dividends and buy back shares. And are cheap are my favorite investments.
These kinds of businesses are what Value Investing Journey and Press On Research is all about.
Today’s recommendation has no debt. Owns more cash, cash equivalents, and short-term debt equivalents than its entire market cap.
And just its net cash, cash equivalents, and short-term debt equivalents make up 77% of its market cap.
This doesn’t count any of its property, plant, and equipment, future premiums earned, or cost-free float. And this company is undervalued by 29% to 70%.
But this still isn’t all… It’s also much more profitable than competition.
Today’s pick isn’t just a great company with all the above traits. It’s also in Buffett’s favorite industry to invest.
Investing In Insurance
Most people won’t research insurance companies. I wouldn’t early in my investing journey. And many professional analysts stay away too.
This is because insurance companies are hard to understand at first. Have new and confusing terminology to learn. And normal profit metrics don’t matter much for them.
But if you learn how to evaluate them not only will you learn they’re easy to evaluate once you know what you’re doing. But you can use the same repeatable process on every insurance company.
And Buffett has continued to buy into insurance – his favorite industry – constantly over the decades. And it’s why he’s so successful.
In reality insurance companies are easy to understand.
Insurance companies take money – premiums, the insurance version of revenue – as payment for insuring things like businesses, equipment, health, life, etc.
The insurance company doesn’t have to pay you a dime of the money it earns over the years. Until there’s some kind of damage or theft of whatever’s insured. When this happens they pay the agreed upon insurance rate out to the policyholder.
While the company continues to earn money – premiums again – it invests some of it so it can pay back your policy in the future. And also make a profit in excess of the amount earned, invested, and paid out.
If the company writes its policies and invests well over time it will earn underwriting profits. And grow the assets it can use to write more policies and invest more money.
If it doesn’t, the company will go out of business when a major disaster strikes.
Think of insurance companies like investment management companies. But instead of only earning management fees. Insurance companies earn premiums on top of investment earnings. These effects can double profits over time… If management is great at what they do.
The insurance business while easy to understand is one of the hardest businesses to be great at.
Other than being a low-cost operator like GEICO. Owned by Berkshire Hathaway. There are no competitive advantages in this industry. And it also experiences wild swings of huge profitability than massive losses.
But if the company writes policies and invests money well over a long period they can grow to great sizes at almost no extra costs. The only new costs may be to hire more staff.
Insurance companies also hold the greatest secret in the investment world… Float. This is how Buffett built his fortune. And how we’ll start to build ours.
But before we get to this we need to know why float is so important.
Brief Berkshire Hathaway History
Buffett began buying Berkshire Hathaway stock in 1962 when it was still a textile manufacturer. And when he still ran his investment partnership.
He bought Berkshire stock because it was cheap compared to the assets it had. Even though the company was losing money.
He continued to pour millions of dollars into Berkshire to keep up with foreign and non union competition. But none of this worked.
In time Buffett realized he was never going to make a profit again in the textile industry. So whatever excess funds Berkshire did produce he started buying other companies.
The first insurance company Berkshire Hathaway bought was National Indemnity Company in 1967.
Since then Berkshire’s float has grown from $39 million in 1970 to $84 billion in 2014.
Float compounds like interest does. But not only does float compound, if you use it right it also compounds the value of the company that owns the float.
Since 1967 when Berkshire bought National Indemnity, Berkshire’s stock price has risen from $20.50 a share to today’s price of $210,500. Or a total gain of 10,268%.
This is the power of insurance companies when operated well. And today’s recommendation is an insurance company that operates the right way too.
But before we get to that I need to explain how float makes this possible.
The Biggest Investment Secret Revealed
‘Float is money that doesn’t belong to us, but that we temporarily hold.” Warren Buffett
Float is things like prepaid expenses. Billings in excess of expected earnings. Deferred taxes. Accounts payable. Unearned premiums. And other liabilities that don’t require interest payments.
But they are the farthest thing from liabilities.
Instead of paying this money out now like normal liabilities. Companies can use these “liabilities” to fund current operations.
Float is positive leverage instead of negative leverage like debt and interest payments.
Think of float as the opposite of paying interest on a loan. Instead of paying the bank for the cash you’ve borrowed. The bank pays you interest to use the money you loaned. And you can use this money to invest.
Using cost-free float to fund operations can improve margins by up to a few percentage points.
The best way to explain why float is so important is with the following quote:
“Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of free – other peoples money – in highly productive assets so that return on owners capital becomes exceptional.” Professor Sanjay Bakshi adding to something Warren Buffett said about great businesses.
I said in last month’s issue: “When a company’s float/operating assets ratio is above 100% it means the company is operating with “free” or cost-free money.”
But this isn’t true with insurance companies.
For an insurance company to operate on a cost-free basis it has to produce underwriting profits for a sustained period.
I look for underwriting profits of at least five years straight to consider its float cost-free.
And the company I’m going to tell you about today has earned an underwriting profit every one of the last 10 years.
When you come across companies that are able to do this on a consistent basis you should expect exceptional returns in the future.
This is because when a company operates its entire business on a cost-free basis it means several things. 1) It’s a great business. 2.) It’s an efficient business. And 3.) float magnifies profit margins.