| MARKET CONDITIONS |
We're going to raise the buy-up-to price on our newest recommendation, gun-maker Sturm, Ruger & Company (NYSE: RGR).
We recommended RGR due in large part to its smart management team. We like investing in companies that are great capital allocators. They don't fritter away their profits on bad investments and acquisitions. They reinvest enough cash to maintain and grow the business and recognize the rest belongs to shareholders. That's what RGR does. Here's what I said at the time:
Since CEO Mike Fifer took over in 2006, Ruger has worked hard to create excellent shareholder value. Every $1 management has reinvested in the business has produced $11 of market cap – a sensational record few other companies can match. Ruger knows what to do with the money it hangs on to and it pays out the rest in dividends and share repurchases.
Most businesses don't understand the importance of smart capital allocation, including some huge ones with enormous amounts of capital to give back to shareholders (like Microsoft). So when we find a company that has a smart management team, a strong dividend history and is cheaper, we need to buy.
We usually like to buy stocks trading below 12-13 times free cash flow, though there are no formulas for that. But I'm willing to spend up to 15 times for such a high-quality company.
Ruger's trailing 12-month free cash flow (cash profit after paying all expenses and taxes) is about $4.43 per share. Fifteen times that is $66.45 per share. So today, let's raise the buy-up-to price for RGR to $66 per share.
BUY Sturm, Ruger (NYSE: RGR) up to $66 per share. Right now, shares trade around $64.
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Microsoft (Nasdaq: MSFT) CEO Steve Ballmer announced in August that he'll retire within a year. And according to news agency Reuters, three of Microsoft's 20 largest shareholders want co-founder Bill Gates to resign as chairman. Reuters' source said the investors, who chose to remain anonymous, are afraid Gates would block much-needed initiatives.
Microsoft's primary problem isn't a declining PC market or bad management. (Sales are strong regardless of these supposed "obstacles.") Its problem is bad capital allocation.
The company has spent $22 billion buying three giant losing acquisitions (Quantive, Skype, and Nokia) since 2007. Bad capital allocation is the reason Microsoft's stock is so cheap around $33 today. The stock could rise to $40 if Ballmer and Gates were both replaced by a great capital allocator, like automaker Ford's Alan Mullaly.
Ford lost $17 billion in 2006. Mullaly was hired in September of that year. It took a few years and lot of difficult changes including a massive $23.6 billion loan against all of Ford's assets but Mullaly turned the company around. Ford was the only "Big Three" U.S. automaker that didn't go bankrupt or receive a government bailout. (GM and Chrysler did both.) Now it's consistently profitable and has a great balance sheet with more cash than debt (not including its finance company's debt).
If Mullaly got Ballmer's job at Microsoft, I bet the stock would rally 10% the day of the announcement. His reputation is 100 times better than Ballmer's.
Our advice hasn't changed on Microsoft and there's a good chance the stock will rally as top management turns over in the coming months.
BUY Microsoft (Nasdaq: MSFT) up to $34 a share. Right now, shares trade around $33.80.
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Today, Intel (Nasdaq: INTC) paid a quarterly dividend of $0.225 per share. That's the same amount it's paid for the last four quarters. It hasn't raised its dividend yet this year, like it has for the last 11 years in a row. This doesn't worry me, for two main reasons.
First, some companies cut or fail to raise their dividends because their business is in trouble. Intel is a fantastic business in pristine financial health. It's not in trouble at all. Second, Intel had the money to spend on dividends but it's making a wise decision to reinvest it back into the business instead. The best dividend-payers are companies that grow their businesses.
You can't have steady dividend growth without steady profit growth. Intel is sowing the seeds for enormous profit growth over the next few years. Some people might take Intel's lack of a dividend increase so far this year as a bad sign. I disagree. Intel will continue to be an excellent business. And it will continue to grow its dividend over the long term.
Also, remember to keep its annual dividend-raising record intact, Intel could leave the dividend alone for the first three quarters of any given year, then raise it in the last quarter. Intel is already set to pay out more in 2013 than it did in 2012. As long as Intel raises its dividend by the end of 2014, its annual dividend-raising streak will remain intact. The advice on Intel remains the same.
BUY Intel (Nasdaq: INTC) up to $24. Right now, shares trade around $22.80.
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I often suggested that in a market starved for higher-yielding income, a dividend increase from ETP could be met with enthusiastic buying. That didn't materialize. But the stock has performed well, regardless. Investors who bought the stock when we first recommended it are up 29%.
Our advice on Energy Transfer Partners remains the same.
BUY Energy Transfer Partners (NYSE: ETP) up to $52 a share. Right now, shares trade around $51.90. Please be patient if ETP is trading over our maximum buy price by the time you read this. Never pay a penny more than $52 per share.
We recommended RGR due in large part to its smart management team. We like investing in companies that are great capital allocators. They don't fritter away their profits on bad investments and acquisitions. They reinvest enough cash to maintain and grow the business and recognize the rest belongs to shareholders. That's what RGR does. Here's what I said at the time:
Since CEO Mike Fifer took over in 2006, Ruger has worked hard to create excellent shareholder value. Every $1 management has reinvested in the business has produced $11 of market cap – a sensational record few other companies can match. Ruger knows what to do with the money it hangs on to and it pays out the rest in dividends and share repurchases.
Most businesses don't understand the importance of smart capital allocation, including some huge ones with enormous amounts of capital to give back to shareholders (like Microsoft). So when we find a company that has a smart management team, a strong dividend history and is cheaper, we need to buy.
We usually like to buy stocks trading below 12-13 times free cash flow, though there are no formulas for that. But I'm willing to spend up to 15 times for such a high-quality company.
Ruger's trailing 12-month free cash flow (cash profit after paying all expenses and taxes) is about $4.43 per share. Fifteen times that is $66.45 per share. So today, let's raise the buy-up-to price for RGR to $66 per share.
BUY Sturm, Ruger (NYSE: RGR) up to $66 per share. Right now, shares trade around $64.
______________________________________________________________________________________________________________________
Microsoft (Nasdaq: MSFT) CEO Steve Ballmer announced in August that he'll retire within a year. And according to news agency Reuters, three of Microsoft's 20 largest shareholders want co-founder Bill Gates to resign as chairman. Reuters' source said the investors, who chose to remain anonymous, are afraid Gates would block much-needed initiatives.
Microsoft's primary problem isn't a declining PC market or bad management. (Sales are strong regardless of these supposed "obstacles.") Its problem is bad capital allocation.
The company has spent $22 billion buying three giant losing acquisitions (Quantive, Skype, and Nokia) since 2007. Bad capital allocation is the reason Microsoft's stock is so cheap around $33 today. The stock could rise to $40 if Ballmer and Gates were both replaced by a great capital allocator, like automaker Ford's Alan Mullaly.
Ford lost $17 billion in 2006. Mullaly was hired in September of that year. It took a few years and lot of difficult changes including a massive $23.6 billion loan against all of Ford's assets but Mullaly turned the company around. Ford was the only "Big Three" U.S. automaker that didn't go bankrupt or receive a government bailout. (GM and Chrysler did both.) Now it's consistently profitable and has a great balance sheet with more cash than debt (not including its finance company's debt).
If Mullaly got Ballmer's job at Microsoft, I bet the stock would rally 10% the day of the announcement. His reputation is 100 times better than Ballmer's.
Our advice hasn't changed on Microsoft and there's a good chance the stock will rally as top management turns over in the coming months.
BUY Microsoft (Nasdaq: MSFT) up to $34 a share. Right now, shares trade around $33.80.
______________________________________________________________________________________________________________________
Today, Intel (Nasdaq: INTC) paid a quarterly dividend of $0.225 per share. That's the same amount it's paid for the last four quarters. It hasn't raised its dividend yet this year, like it has for the last 11 years in a row. This doesn't worry me, for two main reasons.
First, some companies cut or fail to raise their dividends because their business is in trouble. Intel is a fantastic business in pristine financial health. It's not in trouble at all. Second, Intel had the money to spend on dividends but it's making a wise decision to reinvest it back into the business instead. The best dividend-payers are companies that grow their businesses.
You can't have steady dividend growth without steady profit growth. Intel is sowing the seeds for enormous profit growth over the next few years. Some people might take Intel's lack of a dividend increase so far this year as a bad sign. I disagree. Intel will continue to be an excellent business. And it will continue to grow its dividend over the long term.
Also, remember to keep its annual dividend-raising record intact, Intel could leave the dividend alone for the first three quarters of any given year, then raise it in the last quarter. Intel is already set to pay out more in 2013 than it did in 2012. As long as Intel raises its dividend by the end of 2014, its annual dividend-raising streak will remain intact. The advice on Intel remains the same.
BUY Intel (Nasdaq: INTC) up to $24. Right now, shares trade around $22.80.
______________________________________________________________________________________________________________________
I often suggested that in a market starved for higher-yielding income, a dividend increase from ETP could be met with enthusiastic buying. That didn't materialize. But the stock has performed well, regardless. Investors who bought the stock when we first recommended it are up 29%.
Our advice on Energy Transfer Partners remains the same.
BUY Energy Transfer Partners (NYSE: ETP) up to $52 a share. Right now, shares trade around $51.90. Please be patient if ETP is trading over our maximum buy price by the time you read this. Never pay a penny more than $52 per share.
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