Acquiring permamently expensive stocks

Warren Buffet’s quotes can be found in his shareholder letters, at speeches, interviews or at legendary general meetings of Holding Company Berkshire Hathaway and are true nuggets of investment wisdom. One of my favorite of his quotes is this:

It is far better to buy a wonderful business for a fair price than a good company for a low price.

To be honest, it took me some years to really comprehend the full meaning of that quote. Having a value investing mindset, it is perfectly clear, that the price of a stock matters a lot and that overpaying should be avoided. So seemingly “undervalued stocks of robust businesses” have always been on my watchlist. And of course, there are always plenty of them. Companies that temporarily undergo some challenges which has been reflected in their stock prices. I would have seen shares of businesses like Kellog, Mondelez, KraftHeinz or Fresenius SE in that category. Acquiring one of these four companies in this example group at price weaknesses could make perfect sense, long term. These are good companies with a strong market position and each has a strong and durable economic moat. But as said, you want to make sure, to buy stocks of such companies as low as possible, when they are undervalued to see their shares get back into their “merited” valuation over time. Because as we all know, in the medium and long run, the stock market is a weighing machine.

But what about businesses whose share prices seemingly never undergo temperary weaknesses? Companies with shares that almost never can be found undervalued?

Let’s look here as well at four businesses as an example: L’Oreal, Estée Lauder, LVMH (Louis Vuitton Moet Hennessey) and Alphabet.

So, that’s an interesting group, isn’t it? With L’Oreal, we have the world leader in cosmetics, its peer Estée Lauder is a smaller but incredibly profitable cosmetics giant as well. LVMH is the number one in luxury, having swallowed Tiffany’s in 2020 and last but not least we have Alphabet in our example group, which through its Google search engine became so to say the synonym for the internet.

These four businesses play in the premier league of stocks. You can hardly find stronger businesses than these undisputed high quality companies. Every long term oriented investor being so lucky of having had these gems in his or her investment portfolio absolutely should hold them for decades. These are stocks for life.

As each of these four companies stock chart shows, share prices have shown practically an uninterrupted upward trend.

So, with cosmetic giant Estée Lauder, every dollar invested back in 2011 would now be worth almost USD 8. Just think of that, we are talking about a relatively unspectular business. The figure even downplays the actual return because we here ignore the cash dividend paid out to its shareholders during the time period 2011 to 2021.

Louis Vuitton Moet Hennessey (LVMH) is the undisputed luxury king and has already been a giant back in 2011. It’s share price has been climbing up five times with occasional set-backs which have been quickly overcome on its upward trend. Personally, I cannot remimber having seen the stock price ever being below a Price Earnings Ratio of 35 for a longer time period. But it doesn’t matter when you bought stocks of that wonderful business because after a few years, earnings per share have litterally grown into the stock valuation and hindsight, investors would have want to kick themselves for not having bought much more stocks. Increasind every US dollar by the factor five is already great, and when you factor in the dividends LVMH has been churning out, it clearly shows a compelling investment case.

L’Oreal like Estée Lauder have absolutely fantastic underlying businesses. Both are capital light cash machines. They spend a tiny amount on chemicals which consitute their cosmetics yet both of them spend billions each year in advertising. L’Oreal’s brand equity is breathtaking, it clears something like 60 % of revenues as gross profit – just think about that, it shows how much of a money machine L’Oreal is. What few people know, that L’Oreal holds roughly 10 % of European pharma giant Sanofi Aventis. So, always keep in mind that in addition to huge cash inflows from its core business, L’Oreal receives cash dividends from Sanofi Aventis each year. So, given the high quality nature of L’Oreal, is anyone surprised to aving seen its stock price moving from EUR 84 to EUR 366 in a decade? Of course not, intelligent investors see the quality of a business. But here’s that catch: investors shy away from buying businesses with stock prices at All time High. But in the case of L’Oreal this again would have been a mistake. Buying L’Oreal at any time is – as Warren Buffet quotes – acquiring pieces of a wonderful business at a fair price. Just think of that: L’Oreal’s dividend has been increasing by 10 % each year. We are speaking hera about a European Dividend Aristocrat after all.

Alphabet’s stock price keeps climbing so incredibly smoothly and you can immediately recognize similarities between the chart of L’Oreal and Alphabet. Now, just think about that: investors acquiring stocks of Alphabet in 2011 for around USD 300 have seen their investments steadily climbing to over USD 2’300. That’s exactly the stock price growth you would have seen in the case of Estée Lauder in the last decade, but keep in mind: in addition, Estée Lauder also paid out an increasing cash dividend each year. So, total return has been even higher than in the case of Alphabet, which does not (yet) pay out dividends.

So, all four businesses (Estée Lauder, LVMH, L’Oreal, Alphabet) have shown excellence operative and financial performance in the last decades which was reflected in their climbing stock prices. On all investment metrics, these wonderful businesses always looked kind of expensive. But here again, bear in mind that the

Price is what you Pay, whereas Value is what you get.

And here it is very clear: Estée Lauder, LVMH, L’Oreal and Alphabet are excellent businesses with various levers of growth. Considering that, its highly likely that they will continue growing their valuations in tandem with their business fundamentals quality, making a compelling investment case in future as well.

Disclaimer
You are responsible for your own investment and financial decisions. This article is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.

About Financial Shaper

Check Also

Roche’s spin-off jewel Givaudan

Short term, stock markets are a popularity contest In 2000, in the midst of a …

Leave a Reply

Your email address will not be published. Required fields are marked *

Newsletter Signup

Subscribe to our newsletter below and receive a

Free eBook

"Comparing Bitcoin to Gold"