1) 6x EV/EBIT for a high ROIC Company 2) 78% of Net Cash, Profitable Business
Stock #1:
6x EV/EBIT.
6% dividend yield.
29% operating margins.
44% ROIC.
Strong net cash position.
Recorded operating profits for 40 consecutive years.
Stock #2:
Trades at 78% of net cash
Profitable.
Great business hidden inside a bad business.
I always liked that Graham/Munger analogy.
Ben Graham and Charlie Munger go to the grocery store each morning.
Graham scours the whole store, every item. Each day he buys the most mispriced SKU. It could be eggs or batteries or toilet paper - anything really. He’s doesn’t care about the product.
Munger looks at the same 3 or 4 items each day. But he almost never buys. Maybe once a year he’ll buy a luxury brand that was mislabeled, and therefore mispriced.
Both investors do well. At their core, they’re doing the same thing. Searching for underpriced goods.
So, who would I rather be? Munger or Graham?
My answer: Ted Weschler.
A man who could make money in quality AND deep value stocks.
Today we’ll talk about two stocks:
Munger Style - A high ROIC, sustainable business with reasonable capital allocation trading at 6x EV/EBIT.
Graham Style - A profitable business priced below net cash. Management leaves a bit to be desired, but the stock is cheap.