My Trading > My Trading Journal > September 14, 2015

My Trading Journal

September 14, 2015

7:00 pm (PST)

A good low-risk, long-term opportunity has presented itself with a couple of well-known, well-liked companies - WalMart (WMT) and Procter & Gamble (PG).

Normally, I would publish a well-detailed analysis of the value of the companies based on valuation ratios. I am not going to do that in this case, for a couple of reasons. First, these companies are very popular, so their business characteristics are already known. And second, these are long-term plays, so the ultimate price targets will vary based on what happens over the next couple of years. Although I won't get into a detailed comment on their valuation, WMT does have a high valuation - especially considering the stock has dropped so much.

Here is a quick list of the advantageous characteristics of their businesses:

  • Both are large companies with a lot of public information.
  • Both are category leaders.
  • Both have long operating histories.
  • Both have very simply business models which do not have much strategic risks.
  • Both operate in industries where they sell basic goods, so their business have a strong visibility in the future.
  • Both are very large companies, so their financial performance is very stable, which lends itself to stable stocks.

Both companies have high dividend yields - 3.0% (WMT) and 3.9% (PG). Both companies are also raising their dividends yearly.

Here are the 2 charts:

If we simply use the old price highs for the stock as long-term price targets, we can calculate the projected returns, as deailed in the table below:

Stock Current
price 		Price
target 		Projected
return
WMT 64 89 39.1%
PG 68 91.5 34.6%

Projected returns

It took about 9 months for these stocks to drop form their 52-eek highs to their current levels. Therefore, it should to take too long for them to go back up to those levels. Since volatility tends to be higher when stocks drop than when they rise, it will take more time for these stocks to go back up than they did to go down. Therefore, it would be prudent to expect a minimum of 1-2 years before these stocks reach those old highs. If we calculate the returns based on a 2-year recovery rate, we get the following annualized returns:

Stock Stock
return 		With dividend
yield added
WMT 17.9% 20.9%
PG 16% 19.9%

Those returns are very attractive, considering how low-risk these stocks are. If we look at a worse-scenario, here are the returns if the stock take 5 years to recover.

Stock Stock
return 		With dividend
yield added
WMT 6.8% 9.8%
PG 6.1% 10.0%

Even if it takes 5 years to recover, you still get a 10% return for these stocks. Although these returns don't seem too attractive, these are worse-case scenarios. These particular stock ideas should appeal to investors who are very risk-averse and looking for a lower-risk stock investments which will have a lower volatility and lower chance of losing money. In a world where the historical 10% returns sees to be a thing of the past, these returns will appeal to long-term investors looking to rely on a double-digit return which they can use to model their portfolios value longer-term.

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