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Published by: Lyon Capital Management, LLC - A Registered Investment
Advisor
24B Grove Street * Pittsford, NY 14534 * Tel: 585-248-9821 *
www.lyoncapital.com
Value Investing is SMART
Investing
By Doug Lyon, CFA
Lyon Capital Management is a firm that follows the value investing philosophy. Over
long periods of time this style has generated higher risk-adjusted returns than other
investment styles.
Stocks out of favor
Value investors buy stocks that are out of favor and are, as a result, undervalued. It
is indeed an oddity when investors feel better paying more for something that has a good
chance of going down in price.
Measuring risk
Paying exorbitant prices for companies that are high risk is not the value investor's
way. We won't buy a stock unless we believe that the potential upside exceeds the
potential downside by at least 5 to 1. If we are evaluating the ABC company, currently
priced at $30 per share, and we see that the possible downside is $25, we would need
strong evidence that the potential upside is at least $55.
Appreciation
We look for potential appreciation of the stock we purchase of at least 50% over three
years time. So, if we buy stock in ABC Co. at $30 a share we only do so only if we have
good reason to believe the stock will increase in value to at least $45 per share in three
years or less.
Real leaders in industry
We also look at whether a company has a leadership position in an industry with good long-term
growth potential. Even if a company is temporarily having some problems, if it is the
leader in a growing industry, that company will likely do pretty well over a long period
of time.
Traditional analysis
We buy stocks that are cheap using classic valuation ratios such as price to book
value, price to sales, price to cash flow, and price to earnings. We compare these
valuation ratios to historical valuations, to other similar companies and to the broad
market.
These are all good reasons to choose a SMART investment style - value.$$
Value vs. Growth
By Kate Lyon
The
Investing Buy Cycle
We talk frequently about the value management style. Value managers look for stocks
that are out-of-favor and undervalued by the market. Growth managers look for companies
that are growing and will continue to grow. Being a value investor takes courage - because
few people like the stocks you pick and you may have to endure some down side while
waiting for your up side. But the picture above paints a thousand words when it comes to
potential risk and reward. Where do you want to be in the buy cycle? $$
We Love Dividends, Do You?
By Doug Lyon, CFA
Dividends are an often overlooked component of an investment's total return. A dividend
is a share of a company's net profits paid out to all holders of stock. Most companies pay
dividends quarterly and in cash. Unlike interest payments on bonds, each dividend payment
must be approved by the board of directors of the company issuing the dividend.
A dividend is often referred to as the "current yield" of a stock. It is
quoted in percentage terms with the yield (or dividend) being a percent of the price of
the stock.
At the shareholder's option, dividends can be automatically reinvested in the company's
stock through a D.R.I.P. (dividend re-investment program) or can be paid out in cash. When
we make investments in companies that pay a dividend we usually take the dividend in cash
so that it is available for use by the client or to buy other undervalued securities.
Dividends are an important feature that we look for in a stock investment. As a value
investor, often our biggest obstacle is time. When buying stocks that are out-of-favor and
undervalued, these stocks sometimes stay undervalued for awhile or even become more
undervalued before their value is realized by the market as whole. A nice dividend yield
of 2%, 3%, 4% or even 5% makes waiting a little easier.
As value investors we are more comfortable having a nice well-covered dividend (meaning
chances are good that the dividend will not be cut or eliminated) to keep us company while
we wait.
Or, in finance lingo, current income in addition to potential capital appreciation from
an investment helps reduce volatility and thus improves the expected risk adjusted return.
$$
What Drove the Market in 1998?
By Doug Lyon, CFA
1998 was a year when the 20 or 30 largest stocks, which are mostly "growth"
stocks, and in my opinion are very overvalued, contributed the to the vast majority of the
gains shown by the major stock indices. What follows is an analysis of the past and
current stock market environment by noted value investor David Dreman. From the February
8, 1999 issue of Forbes Magazine...
" Before you throw in the towel on large-cap value stocks, take a look at what
is going on deep inside the stock indexes. The 4,600-stock NASDAQ index, which is
weighted for the capitalization of its companies, was up 40% for 1998. Twenty large-cap
technology stocks, including Microsoft, Cisco, and Dell Computer, were responsible for 85%
of the index's gain. Take them out, do an unweighted average of the other 4,580 stocks,
and you have a loss of 4%.
The same is true, to a lesser degree, of the S&P 500: A handful of sizzlers
(some of the same ones that drove the NASDAQ) account for most of the S&P's 26% price
gain. Last year will go down as the year that most stocks trailed the indexes by a country
mile."
The condition that prevailed for much of 1998 may continue a while longer. However, I
firmly believe that investing in undervalued out-of-favor stocks will provide superior
risk adjusted returns over the long term. They have in the past.
Mr. Dreman suggests avoiding the "internet bandwagon" and recommends putting
money into oil, tobacco and financial stocks. We have examined these areas closely, have
made some buys and continue to be patient long-term investors. If value is your style,
give us a call or visit us on-line at www. lyoncapital.com $$
Prices: Then and Now
In each of our winter issues of The Lyon Letter we like to provide a chart that
gives our readers an idea of what happened in the year gone by. It was a bit of a roller
coaster last year ... just take a look and you'll see!
| |
12/31/97 |
12/31/98 |
Change |
| Gold (per ounce) |
$288 |
$288 |
0 |
| Crude Oil (per barrel) |
$17.40 |
$12.05 |
(31%) |
| 10 yr. U.S. Treasury Security |
5.75% |
4.75% |
(17%) |
| DJIA (Dow Jones Industrial Average |
7980 |
9181 |
16% |
| CPI (Consumer Price Index) |
162 |
164 |
1% |
| 30 yr. fixed rate mortgage |
7.05% |
6.67% |
(5%) |
| Eastman Kodak Stock |
$64.63 |
$72 |
11% |
| Price of a Big Mac |
$1.92 |
$1.99 |
3.7% |
| Mark McGwire rookie card |
$25 |
$200 |
700% |
| Russian stock market index |
812 |
59 |
(93%) |
A Free Service For Those of You On-Line
You can obtain The Lyon Letter on-line. Each time we publish the newsletter we
can notify you, via e-mail, that the letter is available at our web site. Advantages
include:
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Early and immediate access to the
newsletter |
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Extended information on the
"Pick-of-the-Quarter" |
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An additional "on-line user's
only" article in each issue |
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If you would like to receive The Lyon Letter electronically, just send us an
e-mail at: lyoncap@frontiernet.net or visit
us at www.lyoncapital.com and send us e-mail from there. Your e-mail address will not be
given to anyone else and we will remove you from our paper mailing list! Some back issues
are now available on-line at our web site.
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