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Do you buy the burning car or a BMW when the economy is bad?

by , 23 May 2014

On Thursday 22 May the South African Reserve bank kept interest rates flat. But in the same speech the reserve bank governor, Gill Marcus, warned everyone…

She said they expected the worst quarterly GDP figures for the South African economy since the 2008 recession.

And with platinum workers still striking, around R10 billion worth of their wages alone have disappeared from our economy this year. Add in all the other people that are indirectly affected by these strikes and it becomes clear why our economy could even slip back to a recession this year.

So, when the economy gets tough investors need to ask themselves: “What should I invest in and what not?”

And that brings me to the subject of my message today, “Do you buy the burning car or a BMW”?
The story of the burning car

In November 2013 Tesla Motors share price tanked around 20% following a bad earnings update and then news reports that its ‘cars were burning’.

But if you’ve heard of Elon Musk and Tesla you’ll know there’s a lot of hype surrounding them and their electric cars. So much so, that Tesla’s share price jumped 42% in the last year.

Right now, Tesla’s PE ratio is around 1000. And forecasts are that it’ll be around 2000 for 2014.

Then, if everything goes right and there aren’t more fires plaguing the company and its cars become mainstream and really, really popular its PE might drop to around 84 by 2015 as the company increases profits.

The story of the BMW

We all know BMW. It’s a household name in South Africa, the world to speak the truth.

The company’s been around for ages, but there’s nothing spectacularly exciting about it. Yes the cars are fast, they’re luxurious. But you won’t rush to the phone and tell your mates about this ‘HOT SHARE with ENORMOUS growth potential’ right?

But the thing is, BMW is on a PE of 10.7 and it pays a healthy 2.91% dividend.

The JSE Top 40 index in contrast is on a PE of 19.52 and has a dividend yield of only 2.61%.

And the company is growing pretty well; especially on the back of its successful financing business.

What you decide today will determine if you burn or not      

Now simply look at these two examples above and tell me what are you going to do?

Buy the HOT growth stock or the boring old value stock?

Before you answer me just think about this:

If the economy took a turn for the worse and the market crashed tomorrow which stock would be affected the worst?

A seriously overvalued company, that sells around 20,000-30,000 over-priced cars a year (the cheapest one sells for over $1 million), and doesn’t pay investors a dividend at all...

Or a decades-old company with a household brand name that consistently sells around 2 million cars a year - And awards investor with an above market average dividend?

Even if both shares were to take a knock in a market crash, I’m sure you know which one will come down the hardest…

Don’t pay any price for an investment – look for real value

So what I’m really saying is – Don’t buy a hot stock just because it’s what the masses are doing.

There are plenty of opportunities to buy sensibly priced, value shares with large margins of safety on the stock market instead of the need to buy shares at multiples much higher than market average, without dividends and with years of ‘blue sky’ growth already priced in.

If you’d like to learn how to identify opportunities like this I’m hosting an event where I’ll share my own value investing strategies that have helped me find 114%, 205% and 221% winners in the past.

Here’s to unleashing real value

Francois Joubert

Do you buy the burning car or a BMW when the economy is bad?
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