One of Warren Buffett’s famous investing sayings is “be fearful when others are greedy and greedy only when others are fearful” — or, in other words, sell when others are buying and buy when they’re selling.
But we might expect Foolish investors to know that, and looking at what Fools have been buying recently might well provide us with some ideas for good investments.
So, in this series of articles, we’re going to look at what customers of The Motley Fool ShareDealing Service have been buying in the past week or so, and what might have made them decide to do so.
Large cash pile
Over the past month the share price of Vodafone (LSE: VOD) (NASDAQ: VOD) has only increased by just over 7%, whereas the FTSE’s has risen almost 8% over the same period. Some people might take that to indicate an end of the momentum that’s seen Vodafone’s share price grow 25% so far in 2013 — more than double the FTSE’s 12% gain in that time — leaving it close to a five year high. Despite that, at least some investors last week obviously felt that Vodafone has further to go, which put the telecoms giant in the number 3 spot in out latest “Top Ten Buys” list*.
Given Vodafone’s recent announcement of its intention to purchase Kabel Deutschland, they’re clearly not deterred by the prospect of another disastrous acquisition spree. But whilst it couldn’t go anywhere near as wrong as when it bought Mannesmann in 2000 — an act of corporate folly that resulted in a colossal £28bn write-down five years later — some shareholders must be worrying about a repetition of the 2007 Hutchison Essar deal, for which Vodafone’s books took a hit of £2.3bn just a few years later, especially if the purchase-price gets inflated because of a bidding-war with Liberty Global.
Presumably those buying are hoping that the potential for cost-savings through integration and the extra revenue-generating opportunities — Vodafone has forecast a “best case” of £9.8bn in revenue from Germany if its bid is successful — will outweigh the inevitable hidden-costs of acquisition.
Perhaps buyers were also tempted by the expectation of a large cash pile when — as many now expect will happen sooner or later — Vodafone sells its 45% holding in Verizon Wireless to Verizon Communications. True, the cash could be squandered on ill-fated empire-building, but it could also be used to return value to shareholders, via share buy-backs (something for which Vodafone seems to have a fondness) or special dividends.
And there’s always the regular dividend to smooth out any bumps in the road ahead. Vodafone currently offers a juicy yield of around 5.3%, which is well above the FTSE 100 average. And whilst it’s not currently covered by free cash flow, and is only 1.6x covered by earnings, the boost to Vodafone’s bank balance that would come from a sale of its stake in Verizon Wireless could easily underwrite dividend payments until earnings and cash flow improve.
Last week’s buyers may be reassured that at least four analyst companies — Normura, Deutsche Bank, Bank of America, and Beaufort Securities — currently rate Vodafone a buy, with a target price as high as 230p (a 20% premium on the current price).
But, of course, whatever other people were doing last week, only you can decide if Vodafone really is a ‘buy’ at the moment.
A high-quality growth share
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> Jon owns shares in Vodafone.
* based on aggregate data from The Motley Fool ShareDealing Service. The Motley Fool has recommended Vodafone.