How to Buy Dollars for Pennies
My Challenge to Readers: Do You Have the Guts to Buy This Incredibly Undervalued Stock?
Well, well, well…
You showed up.
If you’re here this morning after reading my last post, I commend you.
Last week, I put a challenge to my readers…
“Show up on Monday, and we’ll find out just how badly you want to improve your financial future.”
And here you are, modern-day Joans of Arc, clad in iron and kneeling before me ready for battle…
Painting depicting Joan of Arc, or Jeanne d'Arc. Painted by John Everett Millais in 1865, oil on canvas.
I spend a lot of time on this little blog harping about the myriad of ways to build wealth yourself.
On Friday, I explained the power of investing in great companies when their prices become “disconnected” from their value.
In other words, when they become “undervalued.”
I also promised to reveal to you one undervalued stock you can buy today. Which I intend to do.
But first, I want to address an obvious objection you may have at this point, which is this…
Over time, value investing, as this strategy is called, has proven to compound enormous amounts of wealth for those who have the courage to buy stocks when they’re “down.”
So if value investing is so great at making money and so no-brainer to do, why doesn’t everyone do it then?
Value Investing Takes Guts… But Also Knowledge
Value investing is not as simple as buying stocks that have gone down in price.
Notice in the line above: I said we must buy great companies...
To know what type of companies to buy, we have to look at the actual company, evaluate what the company is worth, and then finally examine what the company might be worth based on its future growth potential.
Determining the value of an asset might seem easy when that asset is just $100 in an envelope, as I explained last week…
But what happens when we’re talking about a more complicated array wrapped up in a single asset?
For instance, what is the combined value of $100, £10, 1 Bitcoin, $100 of treasury bonds with a 2010 issue date and a 30-year maturity date, 100 Emirati Dirhams, a promissory note from a customer for $300 payable in 10 years, and a 16 gigabyte SD card with a patented, proprietary schematic for a revolutionary new 3-dimensional integrated circuit that can theoretically outperform all existing DRAM chips?
In order to properly value the things in the above envelope, it requires multiple mathematical models, each of which is riddled with uncertainty, assumptions, and flaws.
Honestly, how do you value a chip schematic that hasn’t been proven yet? How do you calculate the present-day value of money you’re supposed to be paid in the future? How do you factor in risk and volatility and uncertainty into the total value of this asset?
This is where value investing breaks brains. And it’s why the vast, vast majority of people putting money into the stock market are gamblers and traders, rather than actual, serious investors.
It’s very easy to look at price charts and say, “The line that made this pattern before meant this price went up before, so maybe it will happen again!” It’s also very easy to lose money this way.
On the other hand, it is very difficult to estimate the value of a company’s future cash flows based on historical and economic and market trends.
But adding in that “meta layer of difficulty” to investing tends to produce the best long-term gains. And this approach is exactly what you’ll find in my Living Rich Monthly newsletter.
Now let’s go back to a chart I shared with you last week…
Of the stock that was crashing over 30%…
This chart belongs to the company I’m recommending you buy today.
Disclaimer: This company is not exciting at first glance. It primarily makes barcode scanners and cameras for factory robots.
But here’s an investing rule I want you to write in your Notebook of Important Investing Lessons That Will Change My Life: Boring businesses often become big businesses.
This company controls 30% of the entire market for 2D vision systems and 20% of the entire market for factory automation. One out of every five factory robots has a scanner built by this company inside of it.
It’s also making huge gains in the logistics, 3D vision, and life sciences industries.
Now, I want to show you the same chart I showed you before, but I want to show you a few other things overlaid on it:
At the same time this stock’s price was dropping -30% between late 2017 and late 2018, its revenue was trending up and its free cash flow was generally stable.
[Free cash flow is the amount of cash a company has left over after expenses, taxes, reinvestment, and debt payments. This is the money it has left over to save or return to shareholders in the form of dividends or buybacks.]
Now let me ask you this…
Does it make sense that a company making 12% more revenue was now also suddenly “worth” about 30% less?
No!
But if you’re an investor who’s just looking at price alone, you’re missing out on crucial information about the health and viability of that business.
You might have missed that the company’s price and its actual value seemed to be disconnected.
And if you were a shareholder of that company, you might have been scared about the price of your stock investment plummeting.
But if you had a sense of the company’s real-life value?
You would have held on and experienced a tremendous gain. You might have even bought more shares of that company when they went on sale… and before price came roaring back.
This company’s free cash flow grew and its revenue stayed pretty much flat. But when this “disconnection” resolved, the stock grew by 122%.
Compare that with the second chart I introduced to you…
That was the chart for the company Zillow Group.
You’ve probably heard of Zillow before. It’s a real estate advertiser, and it’s the leading online platform for researching homes for sale or rent in the United States.
The company wanted to grow by expanding into home transactions as well, capturing a larger share of the $1.9 trillion market that entered a bit of a bubble.
But you didn’t really need to know much about Zillow to understand that the company’s price did not reflect its underlying value or potential in February 2021, when the price spike on its chart occurred.
The company is not consistently profitable. And it was hemorrhaging money on risky, speculative business operations.
And had you invested? You would have seen your investment give up all its gains.
Its valuation is one of the reasons why Zillow might have been an unattractive investment at its peak price…
Much in the same way today’s company was attractive during its price dip.
Price is simply what you see…
But if you put on your X-ray goggles by looking into a company’s actual financials and results… you can see through to what you actually get when you buy an investment.
Value is what you get.
That’s exactly why today’s company interests me again this very moment.
Computer Vision
Take a look at the image below and see if you can tell the difference between the face of a chihuahua and a blueberry muffin:
This was probably pretty easy for you, correct?
See, humans are excellent at visually distinguishing objects almost instantaneously.
But computers are astonishingly terrible at this. In fact, computer vision is one of the most difficult computational problems that scientists are currently working on (language recognition is another).
For example, with the images above? A computer vision program recognizes several of the blueberry muffins as stuffed animals.
Research out of Brown University in 2018 shows that computers fail miserably at a task children excel at: Determining whether two shapes are the same or different.
One team from Stanford University made news because they were able to develop a computer vision algorithm that accurately recognized objects in photographs a miserable 60.2% of the time.
These shortcomings occur due to the limits imposed by a simple, little-known fact about computer algorithms: Most computer algorithms can learn. But they don’t understand.
This isn’t necessarily a problem if we’re talking about blueberry muffins.
But it certainly is a problem if we’re talking about an autonomous, self-driving car distinguishing between a paper bag or a rock in the street!
Or, in the case of today’s company, distinguishing between a faulty medical device and a usable one.
That’s why one of the pioneers of AI, Dr. Fei-Fei Li, says “Computer vision is the key enabling technology for all of AI.”
Today’s company is one of the companies at the forefront of computer vision, and has been working in this particular field since 1981.
The Company That Helps Robots “See”
The company I want you to invest in today is called Cognex.
Cognex produces the best-in-class deep learning-based image analysis software designed for factory automation.
One of the systems Cognex builds is quality control and inspection. Cognex’s systems are able to inspect products with a consistency and speed that aren’t possible with human inspection.
Simply put, Cognex is at the forefront of a major technological development and has already proven, for decades, that it can create systems better than a human.
As the world economy grows and the need to computer vision grows, so too will demand for Cognex’s products.
And since the stock has once again dropped about -40% this year, the company looks increasingly undervalued.
How do I know that? Here’s how.
Valuing the Maker of Machine Eyes
One of the ways to value a stock is by comparing it to its historical P/E and P/S ratios. This is where my paid content goes a little mathy. If this part does not interest you, feel free to skip it. (Don’t worry, I won’t judge you. You can still do your part of honoring today’s challenge by taking the recommended action at the end.)
[The P/E or price-to-earnings ratio tells investors how much a company is worth based on its current price and profits. By dividing the price by earnings, it tells investors how much they are paying for each dollar of profit the company earns. The P/S or price-to-sales ratio tells investors the same information, but uses revenue instead of profits.]
If we compare this method of valuation to the price of Cognex, you should notice a pattern:
The yellow line, the historical valuation, tends to follow the purple price line.
When the yellow line goes higher first? The stock appears undervalued and the price tends to follow it upward.
When the purple line goes higher first? Then the stock appears overvalued and it tends to drop shortly after that.
Based on these historical multiples, it looks like Cognex is undervalued and worth about $47.50 per share. (As I write, the stock is trading around $45.)
But there are other ways to value a stock.
For instance, Wall Street analysts have an average price target for Cognex around $52.
The investment platform GuruFocus gives Cognex a value of $81.
And if we use one of the formulas created by the father of value investing, Benjamin Graham, we get a value for Cognex at nearly $55.
But one of my favorite ways to value a stock is to combine a stock’s earnings and dividend growth to determine what the present-day value of all that growth could be.
And with Cognex? We see massive growth potential over the next 10 years:
My “Do You Have the Guts” Challenge to Readers
If we bring all the earnings and dividends mentioned above back to the present day, we get a value per share of $51.72 for Cognex.
All of these findings put the company solidly in “undervalued” territory at the time of this writing.
This leads us back to my original intent of showing you all this to begin with…
I want you to think about why you keep showing up to these pages.
What problem is it that you are trying to solve?
If part of your problem is “I feel out of control of my finances and I’m afraid I’ll always have to slave away for the man my whole life, never being able to feel what it is to be truly free”… then I’ve gotta be honest with you…
You’re probably feeling that way because you’re taking all the wrong actions… and none of the right ones. Including what I’m telling you to do today.
I started this blog back in 2020 because I wanted to teach people the tremendously powerful wealth-building secrets I learned from my surrogate father figure and mentor, Mark Ford — the inspiration behind DIYwealth. What I learned from him changed my life forever.
There’s no reason why this information can’t change yours. Unless you want that reason to continue being: you’re standing in your own way.
So my challenge for you today is this:
ACTION TO TAKE: Buy Cognex Corp. (CGNX) under $52.
Take this first step in building your wealth.
And if you want to make an even greater commitment to yourself today…
Sign up to get this pick and my entire Living Rich Monthly growth portfolio. Following along on my monthly updates. Start doing what I tell you to do.
There aren’t many guarantees in life. This is one of them: Start taking the right actions for yourself, and inevitably, you’ll end up exactly where you want to be.
