We now see more downside risk than upside potential for one of our previous large-cap stock picks. Additionally, we believe the likelihood of further gains in another stock from our mid-cap portfolio is now offset by fundamental risks and high valuation.
What makes this large-cap's stock attractive is the valuation discount of about 50% compared to the post-crisis company. The primary catalyst to closing this discount is the completion of a sale by March 2018. We believe that the gain potential for this value stock pick more than offset the risks.
The stock market seems to be again underestimating the ability of turnaround management to reverse the seemingly grim outlook of a struggling iconic company--including these recent examples to the contrary: Microsoft, Walmart and McDonald's.
These value stock opportunities have impressive financial traits: strong balance sheets, prodigious cash flows and generous payouts to shareholders. Strategically, they have powerful brands, strong negotiating leverage with grocers, impressive distribution networks and increasingly talented and fresh leadership teams.
Amazon joined Apple in reaching a $1 trillion market capitalization. $1 trillion is about the same as the total value of New York City property and the total value of loans at JP Morgan, the nation’s largest bank in terms of assets. Jeff Bezos’ $160 billion stake would place him (personally) as the #33 largest company in the S&P 500 in terms of market cap, next to Coca-Cola, Disney and Netflix. We aren’t bold enough to predict whether the shares will continue upwards or if they are in a bubble reaching maximum inflation. Setting aside for a moment their investment prospects, let’s admire the truly remarkable milestone that these two companies have reached.
EV/EBITDA: What Is It & Why Are We Using It More?
In reading recent editions of The Turnaround Letter, you have probably noticed that we are increasingly using EV/EBITDA as a valuation measure, rather than the better-known price/earnings multiple. We thought it might be useful to describe this measure and why we like it.
This Forbeswrite-up follows up on the recent Top Stock Tips report--naming The Turnaround Letter's Crocs recommendation the top performer of 2017: With 90% gains, CROX beat out 100 other investment ideas included in the report; and the stock continues to have value investing appeal, according to Putnam.
George notes, "We see additional upside for the stock in 2018 as management's efforts continue to bear fruit, though the gains will likely be more muted than we saw in 2017."