Published
by: Lyon Capital Management, LLC - A Registered Investment Advisor
24B Grove Street * Pittsford, NY 14534 * Tel: 585-248-9821 *
www.lyoncapital.com
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SMART Investing |
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Value vs. Growth |
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Dividends! Divine! |
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A 1998 Re-Cap |
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Prices: Then and Now |
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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!
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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%) |
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