Debt vs Opportunities

“Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised.” Warren Buffett

williamsgraphic

I stumbled across a number of companies which could be promising opportunities. Some highlighted by readers of my blog.

  • NXP Semiconductor (A major player in Near Field Communication for mobile payment. Even Apple has it in its Apple Watch.)
  • Volkswagen (Recent share sell down due to the diesel emissions scandal)
  • Diageo plc (DEO) (It produces, markets, and sells alcoholic beverages worldwide. A good dividend stock as it has managed to increase dividends for 15 years in a row)

Each has a compelling reason for me to buy them. However, upon reading into the financials of each of these companies, I realized that there are a number of red flags.

  • Erratic and inconsistent ROE and ROIC over the years (in the case of NXP and Volkswagen) – See below.

1

  • High level of debt. This basically killed off all three of these companies. As highlighted in this article by Motley Fools, it is important find out if the companies have Net cash on the balance sheet. (read here)

2

It made me recall a past clip which I have listened before (click here).

I could have study deeper into these companies or bought their shares but somehow my principle of seeking low or zero debt companies held me back.

In fact, there is a very high possibility that Volkswagen (VW) shares will rebound soon after (this scandal dies down), and I have no doubt that the company will survive this scandal. VW shares are now trading at a super low Trailing P/E of 5.38 (and on the other end of the spectrum, NXP being a tech growth stock is trading at a Trailing P/E of 43.34).

However, I do not like the sinking feeling of holding the shares of a company whose fundamentals are not really strong. Would I want to hold VW shares for the next 10 years – I don’t think so. I never did like cyclical automobile stocks.

Opinion: Think VW’s stock can make you rich on a rebound? Think again (read here)

It is seldom that I find companies with all the ‘stars’ aligned. For instance, great business moat, narrative, pristine balance sheet, high ROE, ROIC, good 5 years EPS growth, cheap valuation, business within my circle of competence.

More often than not, I buy shares of companies with some of these conditions fulfilled. However, one of my top requirement is that the company has low or zero debt. So I guess I will give these stocks a miss.

“Sit on your ass investing. You’re paying less to brokers, you’re listening to less nonsense, and if it works, the tax system gives you an extra one, two, or three percentage points per annum.

The big money is not in the buying and selling … but in the waiting.

It takes character to sit there with all that cash and do nothing. I didn’t get to where I am by going after mediocre opportunities.

Extreme patience combined with extreme decisiveness.”      Charlie Munger

 

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About apenquotes

Born in 1976. Married with 2 kids (a boy and a girl). A typical Singaporean living in a 4 room flat.
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