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Four Long-Term Winners Selling at Deep Discounts

by: Larry Bellehumeur July 22, 2008 | about stocks: ECA / GE / MMM / THI    

Larry Bellehumeur

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This is my first post ever at Seeking Alpha, so please be kind. I'm not a hot-shot investment pro, just a 'Do it yourself-er'. I've managed to beat the market 11 out of the past 13 years (and every year since the Dot-com bust) by buying stock the way my Grandmother used to buy wool ("I buy a bunch when it is on sale, so that I make more money on my shirts when I sell," she used to say).

Since I am a long-term 'buy and hold' investor, I personally see a lot of value in this market. Yes, there will be ups and downs, but in the end, these 4 stocks will seem like incredible bargains, 5 to 10 years from now...

1) 3M (MMM)

A classic bellweather, 3M has seen some ups and downs as of late. However, this is still an extraordinary business. ROE has been north of 30% for a while now, and it is one of the most consistent and generous dividend payers out there. Its strong exposure to international markets will help to buffer some of its downturn related to the US and US housing.

Based on 2009 Earnings of about $5.75, and a 2009 PE of 16 (more in line with its traditional value), this one could see $90 to $95 dollars before the end of 2009.

2) Tim Hortons (THI)

Anyone whom has ever been to Canada, especially Ontario, knows that Tim Horton's (referred to affectionately as "Tim's" by fellow Canucks) has a franchise like few others. Its complete dominance of the Canadian market is unquestioned.

What is questioned are its growth prospects, especially in the US. Tim's still has a lot of room to grow in Canada, namely in the booming parts of Western Canada. It now has about 500 stores in the US, mostly in the NorthEast. This has been a concern, as many Canadian retailers have failed in the US, but Tim's is doing it conservatively, and has a winning formula to combat the likes of Dunkin' Donuts.

It is also a Cash-flow machine, and has started paying a dividend (one that has grown from less than 0.5% to more 1.25%). Management will start to pay back its shareholders once the expansion slows down a bit.

Based on a 2009 Earnings of about $1.85 and a traditional PE of 20, this one should see the upper 30s (again) sometime in 2009. This would be 40% upside....

3) EnCana (ECA)

The dominant player in Natural Gas in North America, EnCana is in a position to flourish. The reason why I like it is management's prudence. Unlike many, when the price of Natural Gas plunged last year, they decided to hold onto much of their cash, and to do a massive share buyback/dividend increase... this type of Shareholder friendliness is not common in the Oil Patch.

EnCana is going to be splitting its businesses into two, to allow for an Oil based one (Refinery and some Canadian Oil Sands exposure) and a Natural Gas play. This will allow this giant to increase its nimbleness yet again.

Watch for EnCana to push well over $100 in 2009, with the ever increasing Natural Gas price.

4) General Electric (GE)

This one has been a real drag on my portfolio, being the main reason why I am down 3% year to date (much better than the market, I suppose). It is my biggest holding.

Sure, Immelt did disappoint and not warn the market. And yes, they still have a lot of Financial exposure. However, where else do you get:

  • Dividend rate north of 4%
  • Strong International exposure
  • Instant exposure to Aviation, Infrastructure, Oil/Gas and Green Energy booms

Watch for GE to rebound to its usual multiple of 16x earnings by 2009. Based on $2.40 in 2009 earnings, this will push the stock back in the $38 to $40 range before the end of 2009.

Happy Capitalism...

Disclosure: Long GE

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This article has 13 comments:

  •  
    Jul 22 03:25 PM
    Good article! I'm a Graham-and-Dodd man myself, so it's good to see some serious fundamental analysis. However, not sure whether THI will be able to maintain a P/E of 20. This is the same reasoning that made analysts two years ago forecast SBUX at $50 based on a "traditional forward P/E of 35". High P/Es make sense when a business has room for many years of above-market expansion, but once the business matures and gets closer to saturating its market, these P/E shrink very quickly to where you'd expect them based on the standard discounted cash flow model.
    Reply
  •  
    Jul 22 05:04 PM
    As new do-it-yourself investor I like your post here. I agree that there is value out there, and you gave some nice, straight forward example. Reading your take on things helps me feel like I'm not misreading some of the stocks that seem priced low now. I think patience will be required for some of them to move up, is all.
    Reply
  •  
    Jul 22 08:54 PM
    Thanks for your comments...

    Owen -- I do agree that THI's traditional PE might be somewhat difficult to maintain. However, its strong franchise, strong defensiveness and strong margins do deserve to be valued more than most, even if its growth rate is not "market-shatterin... It differs from our friends at Starbucks in two important ways. Tim's tends to be "less trendy" and tends to get more Blue-collar workers in its base. They tend to be more consistent in their buying, even in bad times. As well, while their coffee is not dirt cheap, their offering tends to be a lot less than the $5 Mocha lattes from Starbucks, making it less of a discretionary buy.

    One negative is also their relative newness to the market, having been spun out of Wendy's, so you don't get the long-term horizons to look back on.

    Michael -- sometimes the market does really give you gifts, as long as you are patient. Really tough to lose money in the market when you buy good companies at good prices, and show value. Thanks for reading!
    Reply
  •  
    Jul 23 08:26 AM
    hello Larry,thanks for dipping your toes in the mud and I hope you ll repeat the experience with other oversold stocks. We own GE ,just lately and don t mind to wait because of the nice dividend and I have been watching MMM for the last month and hoping to see my target price of $65 to come soon which would give us a nice 3%dividend (I just love dividends). I was told by my broker to buy ECA about 9 months ago and didn t act on it since I already owned CHK.
    but Larry since the price of oil and natural gas is coming down and to take advantage of it what entry point would you wait for ? I really want to buy it and would really like to share your thought on that with us on ECA.
    tipalia
    Reply
  •  
    Jul 23 08:28 AM
    Larry,

    Excellent! If only the analysts would use your grandmother's wisdom in their work...

    Worthy
    Reply
  •  
    Jul 23 09:16 AM
    With Buffet's "buy what you understand" philosophy, we in the States are at least 45 degrees off when it comes to investing in Canadian companies. I like Canadian National Railroad (CNI) and Transcanada Pipeline (TRP), but have kept away from pure energy companies, even though I know that to be fertile territory for the long term. Is ECA the best?
    Agree on GE. Imelt has greatly improved earnings and strategic positioning. The market has not yet followed. It will.
    Reply
  •  
    Jul 23 06:10 PM
    Dear Larry:
    I agree with your comment on GE except for one thing which seems to be the reason why some investors don't like it too much. They should spin off the media and possibly also the financial business. Someone said the sum of parts is worth more. Its only comparable competitor, Siemens, has outperformed GE since 1996, and this, despite of all the recent scandals. You tell me when they break up and I'll become a buyer.
    Regards.
    Reply
  •  
    Jul 23 06:34 PM
    Thanks everyone for your great comments...

    User 138602, I know EnCana quite well actually (they are one of my largest customers, as I sell communications equipment to them). I like them at this price, but suspect that they will fall another 10% or so during the "shoulder" season (time between the heat of the summer and the cold of the winter). They are much more Natural Gas focused, so they tend to trade a bit with that commodity. Their recent venture into Refining, and their Oil Sands efforts have them minutely affected by the cost of Crude. I would recommend picking them up before they split into two separate companies (Oil / Refining and Natural Gas).

    They are extremely prudent, and should be very shareholder friendly in the future. I suspect that you won't see booming results any time soon, though, San Fran. An alternate play in the CDN Large cap Oil and Gas space would be Canadian Natural Resources (CNQ). They are about to launch their Oil Sands efforts later in 2008.....They are also a large customer of mine. As for CNR (Railroad), they are very exposed to "North and South" trade. This means that their main shipments are from Canada to destinations in the US. In a way, you can think of them as a proxy for the US Economy, as they tend to ship items like Auto parts and Retail sales to the US. If you are looking for more exposure to Commodities (such as Grain, Potash and Coal), you might want to look at CP Rail (CPR) trading in Toronto, as it is more of an "East-West" play (they ship a lot of items to China/India). As for TransCanada, they are a good play, but not a huge growth play. Great for yield, and they may have among the most steady earnings on the planet, as most of their revenue is regulated.

    Disclosure -- Long on TRP, None on CNR, CNQ or CP.

    As for GE, it definitely is a bit of a contrarian play at this stage, Humble, that is for sure. However, I'm thinking that the Financial part of their company will right the ship soon enough, and in the meantime, their Industrial sector should keep them moving....

    Love the comments, everyone....

    Larry
    Reply
  •  
    Jul 23 07:23 PM
    Good Article
    I own THI, and GE
    So GE missed a quarter, who cares. They will provide long
    term investors with buckets full of dividends, and growth. Reading
    last night that green energy will be bigger than the internet in
    about a decade. Wind power dos'nt burn coal, and the US will
    eat it up to stave off being tied to the middle east. Boone Pickins
    and his billions invested into wind farms in Texas. When a oil
    man looks to green energy, watch out!
    "Tim's" is a small cap, and we know that the group has the
    most potential for growth. They are moving into the US at
    a moderate pace. In Canada they have a wide moat, as
    buffit likes to say. Go ahead and bet against these two
    companies, it's your loss.
    Cheers
    Reply
  •  
    Jul 23 08:25 PM
    I agree with your assessment that it's deeply under-valued. I don't agree that the 16X multiple is normal. Since 1997, the average P/E for MMM has been 24X. The market has paid down the P/E on MMM since 2003, when it was at 28X. More importantly, MMM generates alot more operational cash than reported earnings. ROE consistently stays in the 15-25% range. They have committed to a minimum 10% annual earnings growth rate, acquisition appears to be the bread and butter of this plan. Any conservative intrinsic value formula, inputting Armeggedon assumptions, still values MMM at $100 today. Throw in 60% earnings from overseas and I think MMM is safer than mothers milk for the long term investor.
    Reply
  •  
    Jul 24 02:42 AM
    231796, I did notice that I was a bit light, as I was referring more to their recent P/E ratio. Your numbers only make my case sounds better, so I'll stick with yours! One concern for MMM seems to be their perceived over-exposure to the thin LCD coating (don't know the correct term, I apologize) market. However, most people have either bought one of these, or with the sunset of Analog Service, many will move towards LCD style TVs. I think this is a stable business, so i am not sure what everyone is so afraid of (likely the same reason for the downfall in Corning as of late)

    Thanks for your post...
    Larry
    Reply
  •  
    Jul 24 02:42 AM
    231796, I did notice that I was a bit light, as I was referring more to their recent P/E ratio. Your numbers only make my case sounds better, so I'll stick with yours! One concern for MMM seems to be their perceived over-exposure to the thin LCD coating (don't know the correct term, I apologize) market. However, most people have either bought one of these, or with the sunset of Analog Service, many will move towards LCD style TVs. I think this is a stable business, so i am not sure what everyone is so afraid of (likely the same reason for the downfall in Corning as of late)

    Thanks for your post...
    Larry
    Reply
  •  
    Aug 05 11:34 AM
    There's no question some beaten down dividend paying stalwarts (GE; MMM and others of that ilk) will be higher when DJIA gets to 15,000. And, yes, they look very attractive now. I'm glad I didn't buy GE at 35 when I was temtpted. (No- I ended with VE at 59! BAD!) The real question is whether these are better horses than some others such as CAT. So do we wait with the ones we hold or bite the bullet and switch to a better horse(one that we think is better).
    Reply
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