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Fool.com suggested that I buy the following five stocks this week: Apple (AAPL), Canadian National Railway (CNI), Corning (GLW), Stamps.com(STMP), and Vail Resorts (MTN). Their investment reports explained that now would be a good time to purchase shares in the companies because of their expected future growth in sales or their stellar historical earnings trend.
Yet the reports left me baffled, as no attention was paid to whether price paid for a share was justified relative to the value given in return. I think that purchase price as an investment criteria lost popularity. And if we live in an investing world where purchase price is no longer relevant, your financial advisor may argue that paying attention to peak price today is nonsense since in the future, the peak price will be higher.
But relying on future growth and earnings trend is tricky. First, when the market unanimously expects a company’s earnings to grow in the future, the current price of the stock typically reflects that expectation and excellent earnings trend in the past tend to draw competition that may squeeze profits in the future.
Besides, to rely on a future outcome to justify a present valuation rarely amounts to a welcoming outcome. Here is an analogy: because you would not marry anyone based solely on what you expect them to behave in the future, you should not purchase a stock based on what you expect it perform.
But I won’t leave you with just a rant against the popularity of some stocks nor with the palpable tip of how not to find a spouse. This week I found a stock that may interest the investor that finds the adjectives “frugile”, “cheapskate”, to be compliments rather than insults.
If you are not sure you meet the definition of a cheapskate, I offer the following three-step verification process: If you drive a car that was manufactured before year 2010; your closet is filled with cloths that you can’t remember when you bought them; and you often find yourself bragging at a cocktail party about a gas station nearby that charges a nickel less per gallon than the competition, I welcome you to join me in the cheapskate club (you won’t be getting a welcome gift though.)
If you met the criteria, I suggest you take a look at DHI Group (DHX). As shown in the table above, over the past decade the stock traded as high as $19 per share and as low as $2 per share. And with an average 10-year free cash flow of 91 cents and current valuation of about $2.50, it should warrant your passion for thrift.
During the past decade the company traded at multiple between 24 and 4 times the free cash flow. Compare that to less than 3 times the 10-year free cash flow based on current valuation. If you read my prior posts, you will remember that I define free cash flow is operating income less capital expenditures for the sake of simplicity.
It is always a good practice to watch if earnings reported in the income statement give a somewhat or a similar picture as what the free cash flow metrics show. It is hard to say how the relationship between free cash flow and net income should look like, but a lack of relationship should be a red flag. DHI Group passed that test.
And I felt the company had plenty of adjusted earnings to service its liabilities. Adjusted earnings are earning taken from the income statement as reported on the company’s annual filing with the SEC after my subjective removal of non-cash expenses such as depreciation, impairment of goodwill and intangible assets.
Before I leave you to reflect on “to be a cheapskate or not to be”, I remind you that this post should be read as a starting point. It is my goal to bring to your attention certain securities that I find of interest, but not by any means recommend you to purchase them as that decision is based on your personal goals, risk tolerance, and financial circumstances that I know nothing about.
For Seeking Alpha premium members, I would suggest reading Anythony Rago’s article about the company. And if you were too frugal to purchase the premium subscription, an article by the the pseudonym Shadowstock offers some details on the company as well.