"Price is what you pay. Value is what you get." – Warren Buffett
When I drive down the street to the supermarket or a friend's house, I make a habit of looking forward. That is, through the windscreen.
If I didn't, there's a fair chance I'd crash.
I'm sure you do the same thing.
But for some reason, whenever we make investments in the stock market it seems everyone is driving through the rear-view mirror. They look at what the company was. What it did yesterday, last month or last year.
However the share market is forward looking. The market's prices are based off future earnings potential.
History shouldn't form the basis of your investment case. If it does, chances are, not only are you assuming way too much, you're also likely overpaying for the stock.
Contrarian investing isn't something for the feint hearted but it's quite possible Coca-Cola Amatil Ltd (ASX: CCL) ("CCA"), Rio Tinto Limited (ASX: RIO) and QBE Insurance Ltd (ASX: QBE) could be better investments than the big banks over the long term, at today's prices.
In the past year alone, the share price of each company is down 30%, 2% and 22%, respectively, compared to a 4% return from the S&P/ASX 200 (INDEX^: AXJO) (ASX: XJO).
CCA is due to update the market on its strategic review tomorrow. CEO Alison Watkins wants to strip $100 million of costs from the business in the coming years and return the company to sustainable earnings growth. If she can deliver on her strategy, today's share price will likely prove very cheap.
It's a similar story in the boardroom at Rio Tinto. Except the miner's management is seeking ways to counteract a rapidly falling iron ore spot price, which has already pushed some Australian iron ore miners out of the market. Commodity cycles are long and volatile. Indeed, many believe it will be some time before boom prices return. Be prepared.
Lastly, long-term shareholders of QBE Insurance are continually hindered by the empire-building mindset of former management. QBE's exposure to foreign markets is extremely complicated, competition is fierce and despite management's best intentions, the corporate culture of yesteryear may go on to haunt shareholders for some time.
Buy, Hold, or Sell?
The fact of the matter is, very few insurance businesses in North America can consistently draw meaningful profits from their insurance operations and thus they rely heavily on the performance of their own investments. QBE could be a great turnaround story over the ultra-long term, but I think it's probably best left on the watchlist.
Rio Tinto is also facing a number of risks and uncertainties outside its control, but there are a number of reasons to be bullish on the company in the medium term. For example its exposure to copper, uranium and bauxite could provide a healthy boost to earnings, although that won't be enough to completely offset falling iron ore prices.
Lastly, if you believe Australians will still be drinking Coca-Cola and bottled water in the same quantities they are today 10 years from now, then CCA is worthy of further consideration.
