Summary
- SWK reported Q4 and FY2018 results on January 22, which were not well-received by the investment community.
- SWK has navigated its way through several challenging political and economic environments in its 175+ year history.
- SWK is profitable, generates strong Free Cash Flow and is shareholder-friendly, thus giving me confidence that management will deploy earnings in the most effective manner possible.
- Opportunities to acquire SWK shares at the current attractive valuation do not present themselves all that often.
Introduction
In my recent If It Looks Too Good To Be True It Probably Is article, I expressed concern about investment recommendations being made on a widely followed website. Following that article I notice further higher risk companies have been recommended; I highly suspect some readers will look solely at the dividend yield and will pay little heed to the following:
- Shares are thinly traded with some having an average daily volume of under 50,000 shares/units (fewer than 5,000 shares traded hands on January 22 for one particular recommended company);
- Market cap is typically under $1B with one recently recommended company having a market cap of under CDN $173 million;
- Dividend yields are in the high single or low double digit range. Upon closer analysis some of the dividends consist of a return of capital;
- Minimal growth in the dividend. In some cases there has been no growth in the dividend over a period of years;
- Several of the recommended companies have negligible Free Cash Flow.
I fully recognize we have our own goals and objectives and risk tolerance, but I suspect many investors who act on these recommendations do not truly understand the risk they are assuming by investing in these companies.
I am of the opinion that investors should be dialing back risk, and a similar sentiment is expressed by Ray Dalio.
Even Stanley Black & Decker’s (SWK) CEO commented on the January 22ndanalyst call that:
