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Published: November 11, 2010
The super-rich
aren't like you and me. They can't invest a little here and a
little there and hope to make serious returns. They have to bet
big on particular investments to really get a payoff. And with
such big bets to make, you can be sure they do lots of homework
and then vet their ideas with the investment world's leading
thinkers.
So when Bill Gates -- one of the country's wealthiest citizens
-- makes repeated investments in an automotive retailer, my ears
perk up. He's bought three large blocks of stock in the past 10
days, even as shares power higher to new 52-week highs. Is he
crazy, or does he know something the rest of us don't?
The limits on insiders
Bill Gates already owns more than 10% of automotive retailer
AutoNation (NYSE: AN), well above the 5% threshold that
qualifies him as an insider (in this case he's deemed a
"beneficial owner"). And like all insiders, he can only buy and
sell stock during certain trading windows, such as after an
earnings release. His latest moves came after the company, which
operates 250 car dealerships in 15 states, reported third
quarter results. In three separate filings, Gates acquired an
additional 159,000 shares at an average price of $24, pushing
his total ownership to 12 million shares -- worth $288 million.
AutoNation's quarterly results
were a mixed bag, highlighted by an impressive +4% jump in same
store-sales, but offset by higher operating expenses that led
the auto retailer to slightly miss profit forecasts. Gates
likely figured that the sales trends were the most important
metric to watch, and not quarter-to-quarter expense trends.
That's what sets big picture investors like him apart from the
analyst crowd. (Sure enough, AutoNation's October new car sales
figures, which were released last Thursday, were up a healthy
+15% from a year ago, slightly exceeding broader industry
trends).
Analysts simply look at current trends and derive a target
price. For example, UBS rates the shares a "sell" with a $20
price target (down from the current $26 share price), believing
the stock is only worth about 13 times their projected 2011 EPS
forecast of $1.55. Analysts at Buckingham Research predict
shares will fall all the way to $18, citing tepid profit
margins. If you looked at AutoNation's recent growth rates and
profit margins, that price target makes sense.
But that's not a wise way to look at this stock. Instead,
longer-term focused investors note that the U.S. auto and truck
market has shrunk from 17 million vehicles in 2006 and 2007 to
around 11 or 12 million these days. In the next few years,
though, industry volume is likely to rebound back to the 13 or
14 million mark. And if that happens, Auto Nation's per share
profits are likely to surpass $2 or even $2.50 a share. If the
industry sells 15 or 16 million vehicles by 2014 or 2015, then
the EPS math changes to $3 or $3.50. And that's likely how Bill
Gates views this story. With potential earnings power like that,
this $26 stock could easily approach $35 or $40, representing
nearly +50% upside.
Action to Take --> This increasingly large bet
from Bill Gates highlights the difference you should notice
between the near-term analysts and long-term investors. While
analysts incrementally raise and lower their estimates and
target prices, big picture investors like Bill Gates can afford
to look much farther out. And in this instance, he sees a pretty
sunny view for AutoNation, and you might do well to follow his
lead.
-- David Sterman
Staff Writer
StreetAuthority
P.S. -- There's an
analyst with a track record you need to see. She has an 89% win
rate -- remarkable for this market. And she just keeps picking
winners. One of her recent picks shot up +18.2% in just 13 days.
Go here for the details... |
