In overnight trading it was another record all-time high for the Nasdaq, but weaker financial stocks dragged the Dow to a small loss.
The ASX is similarly flat, the blue chips going nowhere fast… even after Rio Tinto Limited (ASX: RIO) reported a bumper set of results last night.
Flat markets feel boring. No rush to buy. No rush to sell.
Look beneath the hood however — past the popular blue chips — and you'll see a different story, especially during earnings season.
Take yesterday's huge gains for Carsales.Com Ltd (ASX: CAR) and Premier Investments Limited (ASX: PMV) for example. These Motley Fool Share Advisor recommended stocks jumped 8% and 12% higher respectively after updating the market.
Today's rocket ship is another Motley Fool Share Advisor recommended stock, hair and beauty company BWX Ltd (ASX: BWX).
The company behind brands including Sukin, Edward Beale and Renew Skincare reported a jump in revenue of 36%, declared an interim fully franked dividend of 2.5 cents per share, and reiterated its forecast of 30% profit growth for the full year.
In early trading, the BWX share price jumped almost 10% higher to $4.72. Scott Phillips, the Motley Fool Share Advisor ace stock picker, is on a roll.
BWX is not the cheapest stock in the world, trading on a forward P/E of almost 25 times earnings, but then again, not too many companies are forecasting 30% profit growth.
It often pays to pay up for growth.
Speaking of paying up…
Warren Buffett is often thought of as a value investor, someone who only buys companies when they are dirt cheap.
Nothing could be further than the truth. Buffett pays up to buy great companies. He's a growth investor.
In 2009, when his Berkshire Hathaway splashed out $US26 billion to buy rail company Burlington Northern, he paid a 32% premium to its prevailing share price, something that valued the rail company at 18 times estimated earnings. At that valuation, its hardly cheap for a capital intensive, slow growing railroad company, something Buffett admitted himself on public television.
At the time, Burlington Northern was Buffett's largest acquisition. But in August 2015, he went one better, buying aerospace manufacturer Precision Castparts in a deal valued at $US37 billion. Again Buffett acknowledged he was paying a very steep price. The deal valued Precision Castparts at 18 times projected earnings, not cheap for a large, relatively slow growing company.
What is the secret to Buffett's success?
Two things…
1) His ability to assess a company's sustainable competitive advantage.
2) His favourite holding period for stocks, and wholly-owned companies, is forever.
Finding companies with sustainable competitive advantages is the hard part, more so here in Australia.
Take Woolworths Limited (ASX: WOW) as an example. Once the undisputed king of supermarkets, a resurgent Coles and an aggressive newcomer in Aldi — not to mention its disastrous foray into the home improvement market — has seen it reduced to a struggling turnaround story. The Woolworths share price has slumped almost 33% from its high in 2014.
Telstra Corporation Ltd (ASX: TLS) once ruled the telecoms market. Aggressive and nimble competitors like TPG Telecom Ltd (ASX: TPM) have snaffled market share in the broadband space, consumer habits continue to change as more and more people cut off their landline phones, and in the mobile space, Vodafone and Optus are slowly but surely replicating Telstra's once dominant network coverage. The Telstra share price has fallen over 22% from its 2015 high.
In contrast…
CSL Limited (ASX: CSL) is a world leader in the provision of blood plasma therapies. Its sheer scale and substantial manufacturing know-how enables it to provide a reliable supply of diverse products at low cost. Choice and reliability are critical factors for its customers given the consequences of running out of supply. The company oozes competitive advantage. The CSL share price is trading at close to an all-time high, having gained over 270% in the past 5 years.
Sydney Airport Holdings Ltd (ASX: SYD) is a natural monopoly, benefiting from growing passenger numbers and increased revenue per passenger. The Sydney Airport share price has jumped 120% higher over the past 5 years, and the stock trades on a dividend yield of 5.1%.
As for emulating Buffett's "forever" holding period, although simple in theory, many individual investors find it devilishly hard to do.
The inevitable market corrections test your resolve to hold on to an investment. There will be periods of flat markets, like now. There will be periods where the share price drifts lower and lower, even though the underlying company is making great strides forward.
A case in point is the aforementioned CSL Limited. From 2008 to 2011, its share price slumped from $40 to $27, a whopping 33% fall. Today, the CSL share price is $113.
It has not been all plain sailing for the similarly aforementioned BWX Limited either. Although its share price is now 23% higher than this time last year, during that same 12 month period it had also fallen a whopping 33% from its 52-week high to its 52-week low.
Most investors hate volatility. We ALL hate losing money. Yet both are the relatively small price you pay for admission into the long-term wealth creating machine that is the stock market.
Be like Buffett. Buy great companies. Hold them for the long-term. Ignore the day to day share price movements. Great wealth awaits, over time.
