IS IT A GOOD TIME TO BUY INTO
MATURE AND STABLE COMPANIES?
In our last issue, we had shared what cyclical stocks are, and if it’s good to invest in them.
In this issue, we’d like to share about mature and stable companies, another type of companies that legendary investor, Peter Lynch, had called “sluggards”.
As we focused on structural growth companies, we’d also like to identify businesses in their various stages of growth, as it is a good starting point in understanding the category of stocks that one is buying into or considering.
Peter Lynch in his book, “One Up On Wall Street”, stated that buying a stock without research is like playing poker without looking at the cards.
Would you play poker without looking at the cards, or in this case, continue to have a card in your hand that might not grow as much, and ends up as an opportunity cost to you at this point in time?
Generally, mature and stable companies, sluggards or slow growers are businesses that are growing about 3 – 4% per year or less, about the same rate as the general economy. These are often “large and aging” companies that could have been fast growers in the past; but have passed that stage of growth in their business or product cycle, or their industries have matured.
However, they could still be worthwhile to keep at the right price in your portfolio, as they usually do give dividends.
So, mature and stable companies could feature in your portfolio too if you are looking for dividends. ”Generally speaking, from the perspective of a shareholder, dividends are a good idea, provided (that) the company pays them out of reasonably strong cash flows.
For the regular man on the street, dividends provide a welcome flow of income.
For the company, the act of paying dividends arguably encourages a long-term horizon for managers, and prudence in investing2.”
In his book, Lynch also mentioned that some of us might have more knowledge or expertise in certain industries, products or services than the average person. It could be helpful to understand the inner workings as an investor, but it doesn’t mean that the choice of companies to own comes down to just familiarity or an increased demand over a certain period only.
Take the example of McDonald’s – the re-opening of the popular fast food chain in Singapore has sent many of us buying meals from them due to a pent-up demand while it was closed during this Circuit Breaker period.
McDonald’s stock price had increased almost 4.2 times1 since the last crisis in 2009, considering
its peak price last August. However, after the sharp drop in share prices this February and March, its share price is now only about 3.3 times1 after a slow recovery.
So, if you do consider its business outside this pent-up demand, and the fact that companies do not stay in the same category forever – McDonald’s has gone from being a fast grower, to a medium grower, and now, a mature and stable slow grower.
If you compare McDonald’s to a structural growth company like Microsoft, Microsoft’s share price has grown 12 times before the drop this year and it has also almost recovered to its peak.
Even though their current share prices are similar, it does not mean that their intrinsic values are so. The outcome of buying a company with structural growth and a sluggard would be starkly different, unless you would prefer receiving dividends. Also, what’s more important to consider is the valuation, and not just the price.
A line Warren Buffett wanted to quote for one of his annual reports in Lynch’s book was this: “Selling your winners and holding your losers is like cutting the flowers and watering the weeds3.”
Especially with the potential at this time to buy valuable companies at a discount, what would be the type of companies you’d choose to buy or keep if it was 2009 all over again?
Do speak to your Unicorn consultant if you would like to know more or have further queries.
Note: We will increase the frequency of our communication with you during the current turbulent times. We will continue to communicate monthly with you during usual times.
1. Google Finance
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