UnThreaded | Threaded | Whole Thread (97) | Ignore Thread Prev | Next
Author: BuildMWell Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 46814  
Subject: Re: The BMW Method Date: 2/8/2004 9:41 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 13
"Just thought I would throw in 3 cheers as well for your discovery. It does confirm my beliefs JNJ is undervalued." - Chinwhisker

Great observation! Johnson and Johnson happens to be one of the 64 stocks I am following closely. I would love to hear what your analysis shows.

Actually, Abbott Labs brought me to JNJ. Both have been beaten down of late...both are going to come back. Historically, ABT has been a better performer than JNJ but I actually like JNJ better right now. If you compare the two with the CAGR's plotted you will see exactly why. JNJ is moving from the 10% CAGR up through 11% while ABT is not moving at all with respect to it's lower CAGR.

The JNJ data shows up another advantage of taking this very long view of a company's growth over time. Look at 1994 to 2000 for JNJ. JNJ was available at $9/share in 1994 and was at $54/share by 2000. The $9 price in 1994 was significantly below the historical growth rates...of course 1994 was a recession year. The low price made since but without the trend lines, who would know that JNJ was severely undervalued while some other company was not?

Anyway, if an investor knew that JNJ was undervalued in 1994 by a significant amount, that investor could have netted an annual gain of 34.8% over the next 6 years when JNJ was moving above it's historical highest growth range. Plus, it paid a "maximized" dividend the whole way!

Starting in 2000, JNJ over-corrected to below it's average growth rate and was again available at attractive levels. Sure enough, it started back up again moving from $34/share to $64/share in under two years...another 37% increase. All of these are long-term gains and subject to the lowest tax rates. Plus, the dividend was there the whole time sweetening the deal!

Just a couple of months ago, JNJ was again at the lowest growth rates since 1994. Now, 1994's price was at a CAGR of 8%! I honestly doubt that will be repeated again anytime soon. But, thinking about that is interesting to me.

That is the overall logic of this method. Once you see that JNJ (or any stock for that matter) is selling at a price that puts the CAGR at levels never seen before, you have to ask yourself, "Is this rational? Do I think that JNJ is a viable business that can recover to it's old performance?"

I have never found a case where the answers were not pretty easy to answer. Does anyone believe that JNJ is a significantly different company than it was in 2002? It was selling at $64/share but it was at it's historically highest CAGR. It was over-priced! That was all that was wrong with JNJ!

At $43/share it is under-priced. At $70/share, I will be looking to lighten up on JNJ. Of course, all this is predicated on how fast it gets to $70/share. If history repeats itself, that will happen in 18 to 20 months. Do the math. The last two recoveries netted 35% to 37% in what I call the "short-term". By my definition, long-term is "over 20 years"...short-term is "under 5 years." Like I have said, patience is the key to making money.

I consider myself to be a "trader" since I do so many short-term trades. I am also a "market timer!" However, my persective is significantly different. I buy and sell maybe 6 or 7 stocks per year, I am very patient and I let the market do the work. All anyone needs is faith in the market. At any point in time, some stocks are under-valued and others are over-valued. The key is to know what to buy and what to sell...and when the time is right.

What I have covered here is another iteration of the same method. Once you see the big picture, you can break the chart down into smaller pieces and analyze the CAGR's that exist within the longer term trends. Once you see the smaller trends, your return on investment will grow greatly. While the DOW might grow at 8% over the long haul, JNJ beats that average! Other DOW stocks have not. The DOW is an average of 30 stocks so if you can pick the best of the DOW, you can always beat the DOW. This is what led me to the BMW Method in the first place.

So, Chinwhisker, do you look at JNJ as I do? I would love to hear your take on this investment after plotting the CAGR onto the chart. Does my analysis match yours? If so, let's get rich together. That is my goal with trying to explain the BMW Method to other folks. It works for me.

Speaking of stodgy old DOW stocks...do the curves for JP Morgan (JPM) and Citigroup (C). Look what was available in the last 18 months! 100% returns were there for the taking but the DOW was up a measly 27%. Who needs high-tech when you can double your money on JP Morgan? This isn't rocket science.
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post  
UnThreaded | Threaded | Whole Thread (97) | Ignore Thread Prev | Next

Announcements

Post of the Day:
Value Hounds

Medallion Financial: TAXI!
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and "#1 Media Company to Work For" (BusinessInsider 2011)! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement