My Value Investing Roots
Three Geniuses and Me!
Nu Skin Enterprises (
): Quality, Value and Growth
If you've been reading my
Cabot Wealth Advisory
columns for a while, you know that I'm a strong advocate of value
investing as a safe way to profit in the stock market-in fact,
it's been a central force in my investing life since I've had any
money to invest!
Like many college students, I was inspired to enter my
particular field by an extraordinary professor, but the story
actually begins much earlier than that.
Back in 1946, Dr. Wilson Payne and Benjamin Graham held
meetings at Babson College to find a way to calculate the true
fundamental value of a company. Dr. Payne was the Dean of the
Investment Department at Babson College (known back then as
Babson Institute) and Benjamin Graham was professor of Advanced
Security Analysis at Columbia University and investment advisor
with the Graham-Newman Corporation. The two collaborated to
devise formulas that would estimate a fair value range for stocks
based on Mr. Graham's guidelines.
Many years later, I attended Babson, 15 miles west of Boston,
and majored in Finance and Investments. I had the good fortune to
take several courses taught by Dr. Payne, who made a lasting
impression on me. Dr. Payne, a genius in math, made learning
fundamental securities analysis painless. His teachings were
based upon Benjamin Graham's analyses.
After graduating from Babson, I worked for Paine, Webber in
Boston for a few years and, after a stint in the Army, I was
hired as Director of Research at Econometrics Research and
Management in Boston. I was given the task of developing a
computerized research system to analyze and evaluate stocks. I
called upon my old friend and college professor, who was more
than willing to lend assistance for free!
In 1969, Dr. Wilson Payne and I teamed up to develop
computerized models using the formulas which he and Ben Graham
devised to estimate the true fundamental value for companies 23
years earlier. We hired Dr. Richard Fey, a math professor at
Boston University, and two computer programmers. And there I was,
a newbie in the very sophisticated world of investments, standing
We developed a reliable system to estimate Maximum Buy Prices
to indicate when to buy a stock, and Minimum Sell Prices to
estimate when to sell a stock. In addition, we added Benjamin
Graham's guidelines for standards of quality, value and earnings
growth to quantify each company's attributes for comparison
I left Econometrics a few years later, after buying the
exclusive rights to use the software programs that my team worked
so hard to develop. I still own the rights and now use my
computers to perform all of the calculations we developed decades
ago. I am happy to report that the analyses we developed, based
on Benjamin Graham's teachings during the 1930s and 1940s, still
work very well!
My wife and I have further adapted my old computer programs to
fit today's modern computer operating systems. She's an expert
programmer. Our computers crank out two million calculations at
the beginning of every month to create dependable ratings and
Benjamin Graham emphasized investing in high quality
companies. In his mind, all else is a gamble not an investment.
For this reason, I include only 1,000 high-quality companies in
my value stock database.
In addition to looking for high quality ratings, I also seek
companies with high value and growth ratings. I can easily find
undervalued companies by comparing a company's current price to
my Graham-generated Maximum Buy Price target.
Finally, I find companies with high growth ratings. These
ratings are based on past, current and forecast growth rates for
sales, earnings, dividends, cash flow, and book value.
During the past 17 years, I have recommended high-quality
undervalued companies with steady growth every month in the Cabot
Benjamin Graham Value Letter and its predecessor. My
recommendations have increased 640% compared to an advance of
134% for the Standard & Poor's 500 Index during the same
period through September 30, 2012.
More recently, my recommendations have increased 27% since the
beginning of this year which is far better than the comparable
gain of 15% for the S&P 500 or the performance of mutual
funds and hedge funds. High-quality stocks that are undervalued
have consistently outperformed the stock market indexes in both
advancing and declining markets. Investing in quality stocks at
bargain prices makes sense in any stock market environment.
After scanning my 1,000 stock database to find a stock that
fits well within Benjamin Graham's parameters for quality, value
and growth, I find that Nu Skin Enterprises has all the
attributes needed to shine during the next one to two years.
Nu Skin Enterprises
(NUS: 41.92) Max Buy Price = 40.34; Min Sell Price = 65.61
Develops and distributes personal care products and nutritional
supplements under the Nu Skin and Pharmanex brand names. Based in
Provo Utah, NUS derives a whopping 86% of sales from outside
North and South America. Europe contributes less than 10% of
An analysis of Nu Skin's fundamentals reveals how attractive
the company is. Using the analyses developed by Benjamin Graham
and Dr. Wilson Payne, Nu Skin scores high in almost all rating
I double-check my ratings and estimates with the leading
research services to make sure my underlying data is accurate. Nu
Skin's high quality rating in the Ben Graham system is derived
from the company's balance sheet, which contains low debt and
lots of cash ($6.20 per share) and from Nu Skin's record of
steady sales, earnings, and dividend growth during the past
decade. My high quality rating is supported by Standard &
Poor's quality rating of A-, S&P's third highest ranking.
Nu Skin is undervalued. Its stock price is currently just
above my Maximum Buy Price of 40.34 and below Standard &
Poor's discounted cash flow value of 51.40.
Nu Skin's high growth rating is bolstered by the company's
steady 10% sales and earnings growth during the past decade. The
future looks even brighter: I project EPS growth of 15.7%
annually during the next five years. My favorable growth rating
is reinforced by IBD's (Investor Business Daily's) Growth Rating
of 99, IBD's highest score.
NUS's stock price performance has been disappointing during
the past six months. Worries about the company's new product
development in China and Japan led to a 20 point drop in NUS's
stock price five months ago. However, Nu Skin successfully
launched its suite of AgeLOC products in China in April, which
boosted sales significantly in the second quarter. Apparently,
the slowdown in Nu Skin sales in China will not materialize.
Therefore, I believe the current stock weakness presents an
excellent buying opportunity.
Sales increased 23% and EPS (earnings per share) soared 56%
during the past 12 months ended 6/30/12. I expect sales to
increase 12% and EPS to rise 14% during the next 12 months. At
12.8 times latest EPS, NUS shares are a bargain. The dividend
yield of 2.0% and Low Risk rating create an excellent investment
opportunity. I advise buying NUS at or below 40.34 which is my
Maximum Buy Price. Sell when NUS's stock price reaches my Minimum
Sell Price of 65.61 within the next one to two years.
Until next time, be kind and friendly to everyone you
Benjamin Graham Value Letter