How do you navigate resulting the uncertainty on Wall Street? One often tried technique is to mimic the moves of successful investors.
Robert Shiller, an economist at Yale University, has pointed out that many people try to mirror the strategies of investors such as Warren Buffett. The problem is that by not understanding exactly how someone makes decisions, you cannot fully duplicate the process.
A 2008 study by Gerald S. Martin of American University and John Puthenpurackal of the University of Nevada, Las Vegas, showed that when SEC filings reveal changes in the Berkshire Hathaway portfolio, the stock prices of any newly acquired companies had an abnormal one-day increase, averaging 4 percent.
But wait. A paper by R. David McLean of Georgetown University and Jeffrey Pontiff of Boston College pointed out that the effectiveness of investing strategies diminishes by more than 50 percent after publication.
A follow-up paper indicated that the one-day positive surprises on firms’ earnings announcements accounted for virtually all the ongoing outperformance. Why? Probably because forward projections of corporate earnings are often positive but erroneous.
Now you are probably totally confused as to what you should do. The answer of course is research. Yes, I know looking for stocks with increasing dividends and an intrinsic value above the share price can get dull. How about something more exciting.
OK, here is an investment idea that does not pay dividends and whose share price is currently above its intrinsic value and could be overvalued.
IDEXX Laboratories (IDXX)is recently traded at $293 per share, versus $245 a year ago. I wrote about the company a year ago because of my personal menagerie encompassing multiple horses, donkeys, dogs, and cats…not to mention miniature goats and a parrot.
IDEXX is a medical equipment and services company operating in the animal veterinary space. The company’s shares have been rising significantly.
So, why IDEXX? To start, the company reported a year-over-year increase in first-quarter revenue of $626 million, a gain of 9%. The consensus was for $617 million.
First quarter net income using generally accepted accounting principles (GAAP) was $1.29 per share, versus $1.17 a year ago. The Street consensus was $1.20 per share.
Yet, at the end of the first quarter, cash, cash equivalents, and short-term investments were $81.4 million, down from $90.3 million as of March 31, 2019.
COVID-19 was a mixed bag for the company. On the positive side, the company’s livestock, poultry, and dairy (LPD) business benefited from accelerated customer orders. Resulting in the divisions revenue increasing 12%.
IDEXX’s water microbiology testing division also benefitted with revenue increasing 13% year-over-year. Finally, the companion animal group, which generates 88% of total revenue, chalked up an 8% year-over-year increase.
However, revenue at the companion animal group began to fall off during the latter part of the first quarter as vet visits declined. Pet owners stayed home and delayed their pets elective procedures and wellness visits.
Although IDEXX withdrew its full-year 2020 guidance due to a lack of visibility regarding it future, the company remains strong financially.
It increased its credit facility to $1 billion and issued $200 million in notes. Spending was reduced by $25 million through temporary salary reductions and suspended cash compensation for board members.
Looking ahead, IDEXX has seen “meaningful improvements” in its tracking of clinical visit and diagnostic testing trends in mid- to late April. The company said that a combination of businesses reopening in conjunction with moderate social distancing have been key.
IDEXX’s intrinsic value of 203.80 is about 69 percent of the current share price, versus a preferred 110 percent. Nonetheless, my projected earnings number for this year is $5.00, as compared to $4.89 in 2019, with a projected share price of $308, or about 5% above where the shares are currently trading.
Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.