From Stansberry Research:
Most people forget what they own when they buy shares of stock…
They buy stocks expecting the share price to rise 20% or more each year so they can turn quick profits. They forget (or never even realize) that what they’re actually buying is a piece of the business.
You can bet that if they invested in a private business in their local town, they would be far less concerned about how much other people think that business is worth. More important, they’d demand the business to turn regular profits and management to return a reasonable share of those profits to the owners.
But for some reason, most investors don’t treat their investments in publicly listed companies the same way.
We do. As long-term investors, we look for companies where management treats its shareholders well. But sometimes, that’s easier said than done… Too often, management couldn’t care less about its owners. Instead, it treats corporate profits recklessly by enriching itself personally and squandering the money on bad ventures.
Like us, legendary investor Warren Buffett also looks for well-run, shareholder-friendly businesses. He became one of the richest people on the planet by understanding and investing in companies that constantly generate high returns on tangible assets without the need for large ongoing capital investments.
Buffett talks about return on tangible assets and economic goodwill. We call it “capital efficiency.” But the concept is the same.
In our Capital Efficiency Monitor, we calculate capital efficiency by looking at metrics like return on assets (“ROA”), free cash flow (“FCF”), how much cash the company returns to shareholders by way of dividends and share buybacks, and revenue growth. We then weight and rank them accordingly. But as a basic litmus test on capital-efficient, shareholder-friendly companies, you can compare how much a company spends on itself versus how much it returns to shareholders. You want to own companies that reward shareholders, not managers.
Investors who can learn this investing concept and implement it will do much better than those who simply roll the dice on which stocks may see their share prices jump higher.
As Buffett points out, consumer franchises are some of the best places to find this type of company. Take chocolate manufacturer Hershey (NYSE: HSY), for example…
In December 2007, just before the market crashed, we recommended shares in our flagship Stansberry’s Investment Advisory newsletter. Most investors were turned off by the company’s slow sales growth. Shares had fallen from their mid-2005 highs around $65 to about $40. But everyone was focused on the wrong thing…
From 2001 to 2007, Hershey returned more than $3.4 billion to shareholders through dividends and share buybacks. To put that in perspective, for every dollar in gross profit, the company returned an average of $0.29 to shareholders. And it only spent an average $180 million per year in capital expenditures (“capex”) over the same period. That’s nothing for a company that had around $5 billion in yearly sales.
After our recommendation, the overall stock market fell about 50% over the next 15 months. Hershey suffered, too. But it declined by less than half of the overall market’s fall. And since then, the stock has soared. Subscribers who followed our recommendation are now enjoying gains of more than 200%. The benchmark S&P 500 Index is up less than half that over the same period.
Most investors don’t factor in the impact that these reinvested dividends and consistent share buybacks have on a company’s future total returns.
Today, Hershey has annual sales of $7.5 billion – about 50% higher than a decade ago. It spent about $250 million on capex last year – roughly the same as it did 10 years ago. Meanwhile, cash profits – as measured by FCF – have quadrupled and cash returned to shareholders has nearly tripled.
This is the beauty of capital-efficient businesses… As sales and profits grow, capital investments don’t. Thus, the amount of money available to return to shareholders not only grows in nominal dollars, it also grows as a percentage of sales.
These types of companies look after their shareholders. Bought at the right price, they can help protect you from a major market pullback and lead to you to huge, triple-digit gains over the next few years.
Hershey is one of the most recognizable brands in America as a result of the enduring nature of the products it sells. Our grandparents enjoyed Hershey’s chocolate bars 50 years ago. Our bet is our great-grandchildren will enjoy them 50 years from now.
It’s not often that you can realistically expect to make 20 times your money in an individual stock. It’s even rarer to expect to safely hold a stock for 20 years. But with capital-efficient companies like Hershey, you can.
Sometimes investing is simple.
As mentioned, we recommended Hershey in our flagship Stansberry’s Investment Advisory newsletter in December 2007. Readers who followed that advice are sitting on gains of more than 200%. We re-recommended the stock in June 2018 as Hershey’s valuation level relative to its FCF was nearly identical to its valuation back in 2007. Including dividends, investors who followed that advice are up about 20%.
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