After Thursday — one of the best market days this year — my recommendation of Daimler (DDAIF) in the Best Stocks of 2013 contest finally popped above the 50% mark for the first time this year, including dividends.
For a stodgy, old German automaker, that’s not a bad return at all. It’s proof that you don’t necessarily have to take wild risks or dabble in illiquid microcaps to generate high returns. Buying an undervalued blue chip at the right price can deliver attractive returns … without the heartburn.
Of course, the key words here are “at the right price.”
Daimler stock has been able to deliver market-crushing returns this year because it entered 2013 trading at 8 times earnings and sporting a dividend yield north of 5%. But this barely scratches the surface. When I recommended Daimler back in January, it had €46 billion in cash and short-term investments … against a market cap of just €44 billion. The cash in the bank was worth more than the entire company!
And Daimler still remains a buy.
I should be clear that I do not expect the next three quarters to give us comparable returns. We’re not getting the crisis pricing we enjoyed a year ago. But I do expect Daimler to at least match the S&P 500 and probably outperform it by at least a small margin.
Let’s take a look at the numbers:
Daimler stock — trading at 1.6 times book value, 0.54 times sales and 9 times earnings — cannot be considered expensive. It’s broadly in line with the valuation given General Motors (GM).
Yes, these are cyclical stocks, and the “E” part of the P/E ratio has a way of being volatile. And yes, DDAIF just announced its best sales month in history in September, based on strong demand from China and the United States. But earnings would hardly appear to be near a cyclical peak given that Europe is only now emerging from recession.
And on this side of the pond, Daimler is actively mulling expansion in the United States. The company is already bumping up against capacity constraints at its Tuscaloosa, Ala., plant. This follows plans to set up a new plant outside of Sao Paulo, Brazil, as well.
All of this expansion spending probably will take a toll on margins in the coming one to three years … but I would consider that a high-quality problem!
Will Daimler stock take the crown in this year’s Best Stocks contest? That remains to be seen, and we still have two-and-a-half months left in 2013. Anything can happen.
But I continue to recommend DDAIF in growth portfolios and highly recommend buying it on any dips.
Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he was long DDAIF. Click here to receive his FREE 8-part investing series that will not only show you which sectors will soar but also which stocks will deliver the highest returns. The series starts November 5 and includes a FREE copy of his 2014 Macro Trend Profit Report.