Nicholson’s Triple Play

Cover Story, by Mark Robertson, Managing Partner


Posted on July 31st, 2016


The triple play possibility occurs when you find a stock that is very depressed in price and also appears to be on the verge of substantially boosting its profit margins.

We’ve long believed that the collection of findings and recommendations in the Individual Investors Manual (1984) shown here represent the wisdom of 50 years of successful investing with much of the content supplied by George Nicholson. He is regarded by many as the grandfather of the modern investment club movement and the inspiration behind the analysis methods used nearly 80 years later. This excerpt provides a preview of two more pages from our developing Handbook during “construction.” From the Sources of Ideas chapter, Triple Play stock study candidates can be PRICELESS. Top 16 screen for 7/31/2016 included …

“Occasionally, investors can find a stock where a TRIPLE PLAY can be made.” — George Nicholson Jr. CFA

Nicholson selected Coca-Cola (KO) as a Triple Play stock in September 1974. Coca-Cola outperformed the Dow Jones industrial average during 1974-1994 … some of it was quite sudden.“[The early days of 1975] illustrate what an advancing market can do to suddenly change paper losses into paper profits.” Coca-Cola suddenly gained 80% while the market advanced 30-40% during early 1975 …” – Better Investing, March 1975.

The triple play possibility occurs when you find a stock that is very depressed in price and also appears to be on the verge of substantially boosting its profit margins. The triple play effect is possible in that:

(1) The depressed price of the stock can return to normal levels;

(2) increased profit margins can produce increased EPS and a higher price;

(3) may also cause higher P/E ratios, or P/E expansion.

Triple Play Checkpoints. (1) Long-term return forecast elevated. In this case the low 3-5 year return forecast is 20%. The average company is ~5-6% (7/31/2016). (2) The current P/E (11.7x) is less than the long-term projected average P/E. (15.0x). (3) The current margin (3.7% for 2016) is less than the long-term net margin forecast (5.2%). Source: Value Line Investment Survey

“I have been investing proceeds in Triple Play situations during 1973-1974 in preparation for the next bull market. If past performance is any guide, the performance should exceed [stock market returns] by a wide margin. Such stocks are most frequently found at the end of a long bear market.” – Nicholson’s World, Better Investing

Investors can perform a quick Triple Play analysis using the pages of the Value Line Investment Survey. I can easily imagine Walter Schloss licking his finger … turning the page … and persisting until he found a candidate worthy of study. It’s likely that Nicholson’s recipe would have been quite palatable.

The accompanying table provides a listing of the top sixteen qualifying companies on 7/31/2016. 102-of-2259 companies passed the three-part test. Source: Value Line Investment Survey 

Triple Play Qualifiers: July 2016. Our monthly Round Table webcasts often (usually) include screening results. Sometimes it can be a smorgasbord of “These Are A Few Of Our Favorite Screens” and the Triple Play has long been one of the favorites of these parades. The companies displayed here passed the following tests: (1) Low total return forecast greater than 10%. (2) Projected profitability (net margin or ROE) greater than current profitability. (3) Projected average P/E ratio greater than current P/E.

As suggested, our experience has been that there are more robust opportunities after the market has been in corrective or bearish mode for a while. That said, the merits of this “domino effect” on the overall potential of any stock are valid at any time.

As a case in point, we presented the following companies (5-year annualized total returns in parentheses) at a 4/2/2009 investment conference: Mettler-Toledo (30.5%), Franklin Resources (22.3%), Amgen (20.5%), Lowe’s (19.9%) and Varian Medical (19.0%). This is but a sample. The average 5-year actual annual returns from the stocks presented was 18.3%.

Triple play candidates can offer exceptional opportunity.

A Guide to Sound and Time-Honored Investment Principles. Introduction: Super Investors of Nicholsonville
Role of Quality: Invest In The Best
Imagine: Building and Maintaining Expectations
Portfolio Design & Mgmt: Diligence and Vigilance
Gone Fishing: Favorite Sources of Ideas
Making Buy, Hold and Sell Decisions
Common Ground Investing

Designed to provide the individual investor and/or investment club partner guidance in the selection of securities and the management of an investment program.

Excellent Investing

We’ve cited the 1984 Investors Manual in the past. There’s a reason that it forms the outline for our educational series that we’re currently building.

The heritage of the modern investment club movement and the methods described in this series will likely be unlike any stock study book or curriculum that you have ever seen. You will discover how, as an individual, you can take the vast amount of investment information available and convert it into a simple picture that will tell you a great deal about the investment potential of a company. You will be reminded and guided through what really matters, the characteristics that deserve your attention and focus.

Excellence. In at least two dimensions. Our emphasis on superior returns delivered by owning world class enterprises defines the mission. Focus on the important influences. Discover and own the best investments — for as long as it makes sense to do so. Centering on the core ideas based on 50 years of successful investing is a pretty good idea … and Nicholson’s Triple Play is an example of a pretty good idea deployed. Stay tuned.

Mark

Mark Robertson

Mark Robertson is founder and managing partner of Manifest Investing, a source for research and portfolio management focusing on strategic long term investors.

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