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MightyMo
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P&P Score: 99.87   Points: 395.20   Accuracy: 62.49%   Average Pick Score: 1.26   Annual Return: 13.80% (60.67% since 1/3/08)  

MightyMo's Blog : GIS: The definition of a safe stock

Date May 12, 2011  Edited: May 12, 2011    Comments Comments (8)    Rate this post Recommend This Post (58)   
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I was somewhat surprised that GIS was omitted  when JtW published an article  using  RW (Research Wizard) to select stocks defining a 'margin of safety'.


Prior to publishing his list of stocks, I made an attempt to guess 5 or 6 securities. Two of the  stocks were selected by the RW criteria used; however the one I thought  would surely made the list but did not was GIS. Maybe JtW can provide the answer, I hope he does. Maybe it's because GIS's dividend is slightly below 3%. GIS to me is the blueprint that defines  a 'margin of safety' stock.


Let's take a look at GIS.



General Mills (NYSE:GIS) is engaged in the manufacture and marketing of branded consumer foods worldwide.


　


 


 



GIS had a market capitalization greater at the end of 1st qtr 2009 than it did at the end of the 4th qtr 2007. (the noted bear period)


GIS appreciated 9.41% during the market ‘bad’ year of 2008 (S&P was down 36.38%). (Dividends are included)


GIS share price appreciated over 11% during the last 12 months.


GIS has outperformed the s&p500 seven times out of the last eleven years


GIS worst year in the last 10 years was in 2002 when it was down only  7.61%.




GIS share priced has gained annually in 8 out of the last 10 years, some years double digit. The only other year of loss was 1.14% in 2003.



GIS pays a 2.90% dividend and has a 43% payout ratio (anything below 60% is considered excellent)



GIS has paid a dividend for 111 straight years and has increased dividends the last 7.



GIS has a 5-yr dividend growth rate of 10.87%.(remember this is during a period of non-inflation).



GIS has a P/E of 15. GIS is priced at a discount to the industry average.


GIS sales have increased in each quarter for the last 10 years.



GIS gross profit has increased in each of the last 5 years.


GIS revenues has increased in each of the last 5 years


GIS has low volatility , a beta of 0.20.



GIS has positive ‘free cash flow’, at the end of 2010, it was an excellent 30% of revenue.


 


GIS closing share price on May 11 is 38.80. However, it has a fair share value calculated at 86 (invested capital (equity and debt) + excess cash / shares outstanding). (Using Buffet's formula it has a potential  price value of 126 based on free cash flow divided by risk free rate --4458/4.2%-- plus cash - debt divided by shares--)

Tags : GIS  

8 Comment(s):

Author MightyMo     Date May 12, 2011 11:39  Edited: May 12, 2011 by MightyMo Abuse this post Report Abuse
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I responded to inthemoney's blog about 'ultimate safety' stocks. The four stocks he relates all LOST during the down year of 2008. The two stocks I have written about on this site in regards to safety, WMT and GIS both had share appreciation in 2008 and both were up yesterday during the market downturn. They are both up today as well...
Also, of the four stocks inthemoney states in his blog, 3 of them pay or pay less than 2.5%, too low in my book.
Author MightyMo     Date May 13, 2011 11:40 Abuse this post Report Abuse
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GIS up today on a market downday...............
Author JoeJustJoe     Date May 13, 2011 11:45 Abuse this post Report Abuse
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Now at 34.76...jist thunk I'd log that in fer "posterity" poiposes. :-) My deemed "safety" play BRK.B ainna doin as well. Any ideas on why not? :-) 3J
Author JoeJustJoe     Date May 13, 2011 11:46  Edited: May 13, 2011 by MightyMo Abuse this post Report Abuse
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Oh yeah...fergitted to mention. Congrats on BIOMO's ave pick score :-) 3J
Author JohntheWizard     Date May 14, 2011 08:34 Abuse this post Report Abuse
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Mo,

GIS lost -8.5%, including dividends, from October 21, 2007, till March 6, 2009. That loss was incurred during the last three weeks of the bear market. Its maximum drawdown was -26% during the last bear market. It went down another -5.5% just during the first two weeks of the bull market. After those two weeks, it just went straight up, somewhat faster and more than WMT.

Don't get me wrong, this is a good stock. But statistically, as soon as I relieve a tiny little bit of the condition that the market cap of a stock coming out of the bear market should exceed the one when it entered, all bets are off about the positive performance of the pack of 61+ mid and large caps before AND after the last bear market.

For me, however, the icing of the cake lies in the fact that, each week or month, you can preselect a dozen stocks of this pack and your CAGR increases by a factor of two, while the drawdown stays very modest. See how well the 12 best did last week, +2.2% in a down market, excluding the dividend I received from BTW (a few percent). This works real time, Mo. How many people got a better deal this past week? I updated my pack with three new stocks, yesterday at closing, ending up for the coming week with:

MANT EMS MFA CMP SOHU DV UTHR XCO DLB BWP NTES FDO

One of the things we could do is formulate a fixed portfolio of liquid mid and large caps, with conditions on liquidity and cap size plus two extra conditions over 11 years:

(1) Maximum drawdown better than -40%
(2) CAGR>10%/year.

Any other ideas? The icing of the cake will then be again to weekly or monthly preselect the best dozen or two dozen of those 100(?) stocks using Graham’s recycling principle, and just take 40% - 50%/year. The exit will be a collective maximum drawdown of -25%. An individual stock will exit when its individual maximum draw down exceeds -40%.

I believe that Graham was the first one to introduce the idea of margin of safety. He defined it as a difference between fundamentals at the same time, not market caps between different times.

Hope this answers your question,

John
Author JohntheWizard     Date May 14, 2011 14:01 Abuse this post Report Abuse
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Mo,

In (ap)praising GIS as a " margin of safety stock", you missed for me the most important fundamental: NET MARGIN.

GIS's net margin averaged over the past 11 years was 9% (!!). It went down to 4.4% in the Internet crisis and to 7.8%(!!) in the credit crisis, the latter one being far above its sector average. It is presently at 11.4%, just under its sector (consumer staples) average of 11.8%.
Author MightyMo     Date May 15, 2011 11:42 Abuse this post Report Abuse
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JtW
I appreciate your comment.
It's true what you said about GIS when you look at it from 10/21/07 to 3/6/09, however it is considered normal in the industry to do comparative and historical analysis using the calendar year. GIS's stock price was up in 2008. GIS did tumble the last two weeks of the stated 'bear market' period, however from 10/21/07 to 02/25/09 it was still up...only dropping from a gain the last couple of weeks. However, that is NOT my point.
My point relates to safety as to profit and losses for me.
I was completely out of the market on Mar 6, 2009. If I had own GIS, I would have sold out way before Mar 6 and even if I held it going into 2009, I would have utilized my NO. 1 rule - never let a profit become a loss - before late Feb 2009. GIS held up nicely during the overall period in question. It is only one of the criterias used.
For the record, I do not or never had held GIS in my real accounts. It is one however on my watch list. I would prefer the div rate being over the 10year treasury yield or at least 3% before purchasing. I do currently own 12 stocks in my tax deferred acount paying dividends. Again GIS is not one of them. However, I would not have any problem it being one of my 12.
You need to be careful when analyzing net margin. It's different for each industry. For example, in the home furnishings sector, 5% is the goal. In the airline industry, moneys collected for future travel is considered 'unearned revenue' and is not counted in Net margin until realized (earned - once customer actually travels). Hence the airline industry normally shows a loss during the 1st quarter where actually a 'pot of cash' is held in Unearned Revenue for those travelling on summer trips. Cash is the most important data to consider when it comes to safety as to dividend stocks, not accounting manipulations.
Author JohntheWizard     Date May 15, 2011 12:57 Abuse this post Report Abuse
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Mo,

Thanks for your elaborate reaction. I myself am only making statistical bets on packs of 12 or more stocks. In real and game life. This year I made only one exception and bought AUNFF. I am only going to exit when Silver hits $23.

As to fundamentals, we made a little program to chart the 11-year monthly history of practically each important fundamental of each stock, the sector thereof, the S&P500, and the total universe of some 6500 stocks. We made a weekly updated 15MB Dbase to chart these fundamentals within seconds. We calculate the fundamentals of sectors and other aggregates different from the way Zacks and VectorVest are doing it, as these companies average instead of consolidate the financial fundamentals.

Professionally, I know how to read an Income Statement, Balance Sheet and Cash Flow Statement, not from an analyst point of view (investment perspective) but from a business perspective. Despite this insight and available data, our back and forward testing shows that we (our little group) can only beat the market when you bet combinations of share price, outstanding shares, and trading volumes, no fundamentals of mid and large caps. When someone like you who shows talent for individual stock picking, we jump on it and see how we can quantify some of her or his judgment. So we adapted our quantified margin of safety, not based on calendar years as you suggested but on 52-wks high’s and low’s. We introduced a ratio of safety, a form of inverse volatility. We know that our back testing for these novel weekly changing packs of 12 mid and large caps (XOM is one of them next week) is reliable in that it really reproduced and predicted the past since the onset of our present bull market. These 12 low-volatile stocks are weekly or monthly selected from 193 still active mid and large caps and 16 inactive stocks that used to play their roles.

Thanks for sharing your views,

John
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