Tag Archives: value

Cars: Buy or Lease?

As many of us graduate over the next two years, and potentially have financial independence for the first time, we will be faced with many important decisions.  For a working single adult perhaps the most costly purchase straight out of school will be a vehicle, a necessity for commuting to work and recreation.  When it comes to purchasing a vehicle, there are three options: buy new, buy used, and lease.

CarLeasesUnsurprisingly, during the most recent recession new car sales dropped while used car sales picked up, according to the National Auto Dealers Association. Furthermore, the percentage of new car sales that were leases stagnated or even dropped during the peak of the recession.  A recent WSJ article advocates that now might be a good time to lease cars.  As the recession hit, and more people held onto their cars, new car sales dropped. But the recession’s new cars are today’s used cars.  This means that there is less supply of used car than are normally in the economy, and thus their price is higher.  Since dealerships factor the post-lease resale value of the car into the monthly payments of the lease, lease prices are lower now than normal, because resale values are higher.  In addition, the writer cites evidence that interest rates on car loans are rising, while lease rates are falling.

While conditions for leasing may be more favorable than in previous years, most analysts still insist than buying a car, even a new one, ends up costly less than leasing a car.  Although the monthly cost of a lease is generally less than the monthly payment of the loan, the other costs of leasing cars adds up.  Leasing doesn’t incur any equity into your car, so at the end of three years, you essentially have nothing more than what you started with.  The equity that you put into a car generally makes buying a better investment because the value of the car is worth my than the difference between the lease and loan payments.

We have probably all hear the the claim that a car loses a third of its value as soon as you drive it off the lot.  According the Edmunds, the average car loses about 11% as soon as you drive it off the lot, and then 15-25% each year thereafter, depending on the model of the car. One way around that is to not drive the car off the lot, but to buy it second hand.  Since the losses are diminishing (car lose less value each year), the older the car you buy, the less real dollars you will lose to depreciation over time.  Buying a used car is the cheapest option to own a vehicle, although the costs can vary the most due to more frequent car repairs.

Personally, I cannot see myself every buying a new car.  I am more than willing to save five or six thousand dollars to have a car that is a year old.  I am not a car person, so I wouldn’t get intrinsic enjoyment value out of owning a new vehicle that some people might get.  For some people, having a new car every three years might be worth more than the additional cost, and those people have every right to their own utility calculations.  I will happily buy their used vehicles and maximize my utility by saving for something else that I enjoy.

 

Can a Cup of Java Wake Coca Cola Up?

Almost two weeks ago, I was watching options activity of Green Mountain Coffee Roasters before the bell closed to try and get a gauge of where the so-called “smart money” was placing its bets before the earnings call scheduled to take place. I did not end up placing a bet of my own (a lesson I have learned by being on the wrong side of those calls one too many times in recent history, but I digress..) but a few things stuck out to me: there was outrageous options activity on both the bullish and bearish sides of the stock and there were a few very large blocks of options traded on the bullish side quite close to the end of the day. Even so, the market closed and I had my bets on GMCR missing the quarter partially due to my own knowledge of the company as well as the overall options signals. But then before the call began, something interesting happened. The stock was halted in post market trading and it was announced that Coca Cola had entered into an agreement to take a 10% stake in the company and the stock literally blew up. I had missed my chance for the initial pop, but I wondered, would Coke be a good investment at this point? Well the WSJ came along to answer some of my questions.

Coke is one of the longest standing and most valuable companies out there; worth somewhere around 80 billion. the company had been the model of growth stocks for many years– the WSJ also talks about how a single share from the early 1900’s is worth over $10m today. Recently though, it seems the company (like Buffalo Wild Wings) has been going through a bit of an identity crisis, or maybe that depends on who you talk to. You see, as much growth as Coke has gone through in the past 100 years it comes to a point where it is no longer possible — and as one of the largest if not THE largest globally recognized brands, they seem to be running out of places to go. This seems to be the ideal time where a growth stock becomes a sort of income or value stock that can be held or traded. The WSJ article shows that Coke had over an $8b cash flow last year and they have consistently repaid all of their earnings back out to investors– this is something to look for in an income stock. With the acquisition, and possibly the eventual outright purchase of GMCR I think that Coke presents an interesting opportunity; a company that consistently treats its shareholders well and returns everything possible, with a new potential growth opportunity in home consumables.

While it is definitely too early to tell what will come of this acquisition, I believe that Coke could have just bought themselves some growth. The sector of home beverage production, I think, is more than just a passing fad that should have investors salivating. I have to believe that the grand plan could be for coke to have a machine that could produce whatever drinks you want from coffee to cola in the push of a button from the comfort of your own home. This could be the turning of the tides for a sometimes glossed over stock.

A Tale of Two Identities

While sitting at the Ann Arbor Buffalo Wild Wings last night watching the Superbowl in a packed house, once again I reveled in how big of a cash cow a business like this must be. This bitterness for not coming up with the idea myself was further compounded as our waitress alerted us of the fact that someone had just placed an order for some 2500 wings and that we would not be able to get food for the time being (beer took wings place in case you were wondering). Anyhow I digress, I have thought about investing in Buffalo Wild Wings company on many different occasions via stock and stock options but the seemingly inflated price always managed to keep me away. So during a dip like this, one is always smart to make a list of names that you like but just have not had the opportunity to get into– and like clock work the WSJ had a write up on the stock that made me think about the changing identity of a company like Buffalo Wild Wings and many other types of stocks.

With annual EPS growth of 27% in the last ten years, BWLD (the ticker) is the literal definition of a growth stock:BWLD 10y EPS GRate

 

This is also in the face of chicken prices rising consistently in the same time period; an amazing feat honestly:

Chick Com Price

 

However trading at a PE ratio of almost 30 (partially aided by Chipotle’s great earnings recently) investors are placing an extraordinarily large premium on a company like this being able to continue abnormal earnings growth in the upcoming quarters and so on. I think this is where important distinctions need to be made between growth and value and when growth gets taken too far. Any sort of headwind that BWLD faces in the upcoming quarters could translate to certain figurative death for investors, and while the company says they are focused on expanding, the US markets can only grow for so long. I am not the foremost opinion on this, but loud sports watching american wings and beer does not scream investment opportunity to me.

I think BWLD is at a crossroads, where the stock will turn from a growth stock trading with a growth PE to a stock that is overpriced and begging for a beat down. Until at some point it becomes cheap enough with just enough sentiment upside that one can trade it as a value stock. I do not write a post like this lightly either, I am the number one advocate of investing in companies that you have contact with (big fan of AAPL Costco Cisco Automakers etc) and I will be honest that I have never been in a Buffalo Wild Wings that has not been packed but at some point enough is enough — just ask Amazon.