Invest in AmerisourceBergen for its Growth and Valuation – Speculate in a Potential Takeover
This is the first in a continuing series where I identify and present dividend growth stocks for an above-average long-term total return objective. Throughout this series I will be illustrating that there are several prudent sources of long-term return and there is also luck or chance. Personally, I suggest that investors strive to build their portfolios based on prudent fundamental realities and not simply invest with the hope that your stocks will rise.
The primary prudent sources of total return that I am alluding to are first and foremost sound fundamental valuation – although attractive undervaluation is even more desirable. The second primary source would be growth defined as the potential long-term rate of change of earnings and/or cash flow growth and dividend growth. When you invest at sound valuation, you position yourself to participate in the growth that the business generates on your behalf.
If you can identify attractive undervaluation, you can expect a secondary source and a potential kicker to total return that I like to call natural leverage. Simply stated, in addition to the operating growth and dividend growth that the company achieves, you are also positioned to get P/E ratio expansion. To clarify, you initially invest in a smaller level of earnings at a lower P/E ratio where the company over time delivers a higher level of future earnings that the market capitalizes at a higher P/E ratio. I metaphorically refer to this as a double-double. In the future you get double the earnings that are valued at double the P/E ratio. Of course, the math does not always work out so perfectly, but I hope you get the point.
Furthermore, I will be presenting stocks that I believe offer the potential for significantly above-average total return. Stated more clearly, I will be looking for dividend growth stocks that I believe can provide double-digit total returns including a growing dividend income stream. But perhaps most importantly, because of the focus on attractive valuation, I believe these future returns can be generated at greatly mitigated (lower) levels of long-term risk.
Moreover, it’s important to distinguish between long-term results versus short-term results. Intelligent value investors understand that investing in unpopular securities is where value is most often found. This is especially true when you are in a bull market like we have been in for the last several years.
Consequently, there are typically reasons why a stock’s valuation is low. The trick is in determining whether those reasons are valid, permanent or temporary. Nevertheless, the intelligent value investor understands that unpopular stocks can remain unpopular for some time, and therefore provide below-average short-term results. On the other hand, unpopular stocks that are erroneously valued can provide exceptional long-term returns based on the sources of long-term return described above.