I talk a lot about finding great companies in which to invest my hard-earned money. But today I thought I’d talk about how I decide when a company may not be a great idea.
The Idea
Whether it’s an article, podcast, TV show…ideas come from anywhere. I wrote recently about Bank OZK (was Bank of the Ozarks). I invested in 2022 and have done pretty well on capital gains, and very well on dividends. OZK has a 3.39% yield.
I saw a Bank OZK branch as my wife and I were driving through Florida. At the time, we were watching Ozark on Netflix.
I didn’t hop on my phone right away and buy shares, but I did start to look into the company and I liked the high yield, the low p/e, and while I’m afraid of the big banks – they are in so many different businesses that it’s hard for me to evaluate them, but a nice small regional bank???
So I bought a few shares, sold some covered call options, and enjoyed the dividend.
You’ve heard similar stories in dozens of my posts.
Today
Today was different.
I read
I’ve looked at Union Pacific before. I like transportation and a merger sounded interesting.
Here’s what my brokerage says about UNP
8.3 is a good aggregated analyst rating. That’s a good start.
I like the 2.4% dividend yield.
Valuation looks OK – I wouldn’t be over-paying. Earnings quality compared to peers is high. Moderate growth, but it’s not an AI stock, so that’s OK. Decent financial health, but not great.
And I remember that my investing news letter recommended UNP a while back. I checked back. That was 2018, but it’s still on their buy list.
At this point I’m getting ready to pick up a few shares.
Hold The Phone
While things look pretty good after 10 minutes of poking around, as well as reading a few recent articles, I wanted to dig into some of the analyst reports.
I’m not an expert in the industry so I like to read what the folks that have Harvard MBAs and who cover the companies in the industry have to say.
I like an analyst report with some text. Some are just tables with numbers, but I’m a word guy. Zacks investment research is usually my first stop.
Suffering big time. Not a good start.
I skip down to the reasons to buy and sell and see this in the sell section.
- Persistent Demand Erosion: A Grave Concern:
- High Debt :
There is some text to go with this, but do we need it?
When you think about inflation and tariffs, you can see why demand erosion would be a problem, and there is really no clear end to either.
High debt is cancer. Some companies can prosper with high debt, but it is tough. Interest rates are high, they may come down, maybe not. This is a warning sign.
Don’t Buy (Today)
I remain interested in the company and I’ll keep an eye out. I like how Zacks put it in the summary:
Considering all these factors, investors are advised to wait for a better entry point. Our thesis is supported by the Neutral recommendation on the stock.
Wrap Up
Today’s lesson is How to Not Buy A Stock.
This is easily as important as any lesson on how to buy a stock.
For most investors, ideas show up all the time. We’re interested in companies, so we see lots of great ideas out there. That’s OK, but we need to be cautious and skeptical as we perform our due diligence.
Sometimes, I like to assume it’s a bad idea and try to prove to myself that it’s actually a good idea.
Union Pacific does not pass that test today.
There are enough positive signs to merit a small investment, but there are also enough negative signs that tell me it’s not a screaming buy opportunity and that there may be a better price point around the corner.
There are thousands of publicly traded companies. Is Union Pacific the best place for my money? Or is it at least likely to beat the market? Will it pay a safe dividend for years to come? Maybe not with that high debt load. And the merger sounds like a positive for the business, but merger costs could require a dividend suspension.
I can’t find a compelling reason to buy today. I’ll keep watching, but keep my cash in my pocket.