2007 Value Creators and Destroyers -- Page 2
What were the year's biggest winners and losers?
What were the year's biggest winners and losers?
Energy and industrial materials were the top-performing sectors this year. Industrial materials and energy price gains were driven by increasing commodity prices and increased demand. Energy gains were had not only by industry giant ExxonMobil (XOM), but also by foreign players trading in the U.S., such as PetroChina (PTR) and Brazilian Petroleum (PBR), all three of which appear on our list of the top 10 value creators of the year. Industrial material gains were all commodity-driven, with steel and mining companies leading the charge. Industrial materials might have been the top-performing sector if it weren't for the residential home suppliers; the crash in the housing market cut several suppliers' market caps in half this year.
A similar story plays out for our worst-performing sector of the year, financial services. With the decline led by global banks such as Citigroup (C), Bank of America (BAC), and insurance companies like American International Group (AIG), the financial services sector lost 12% of its market capitalization during the year. At this point, we believe the market is scared, no longer rationally pricing in the risk associated with the subprime blowup and the resulting credit crunch. There are several compelling values in the financial services sector currently, and we believe it is a great time for investors to find the babies that were thrown out with the bath water.
Top 10 Value Creators | |||||
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Market Cap | Market Cap on 12-18-07 ( $MM ) | Change ( $MM ) | Change ( % ) | Change (%) | |
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China Mobile (CHL) | 171,455 | 339,856 | 168,401 | 98% | |
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Brazilian Petroleum (PBR) | 112,932 | 228,826 | 115,893 | 103% | ![]() |
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ExxonMobil (XOM) | 446,944 | 533,206 | 86,263 | 19% | ![]() |
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Apple (AAPL) | 72,901 | 157,230 | 84,329 | 116% | ![]() |
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Vale Overseas (RIO) | 68,492 | 146,335 | 77,843 | 114% | Not Rated |
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Rio Tinto PLC (RTP) | 81,024 | 156,535 | 75,511 | 93% | ![]() |
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Nokia (NOK) | 90,097 | 161,748 | 71,652 | 80% | ![]() |
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Google (GOOG) | 140,979 | 206,151 | 65,172 | 46% | ![]() |
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PetroChina Co. Ltd. (PTR) | 252,026 | 313,985 | 61,959 | 25% | ![]() |
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Telefonica, S.A. (TEF) | 104,574 | 158,542 | 53,968 | 52% | ![]() |
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When looking at individual names, we understand that our market-capitalization focus makes it impossible for anything but mega-cap and large-cap names to make this list. But, looking at the percentage changes, anywhere from 19% for ExxonMobil to 116% for Apple (AAPL), it still takes excellent performance to make the top 10 value creators list. The biggest value creators of 2007 are dominated by commodities and technology. Yet if any investor chose to haphazardly invest in any of the top-performing sectors, he or she would have had at least a 30% chance of choosing a money-loser, which supports Morningstar's bottom-up approach of investing in attractive companies rather than industries.
We note quite a bit of difference between our 2006 and June 2007 value creators lists and our current list. Only ExxonMobil has made all three lists. Apple and Google (GOOG) made the lists in June as well. However, unlike in previous years, we didn't have anyone jump from our top value destroyers list to our top value creators list. The makeup of this year's value creators list is not surprising, simply following the trends we discussed earlier. However, it doesn't appear that there is much more upside to these stocks, in our opinion. According to our fair value estimates, three of the companies (Brazilian Petroleum, Apple, and Google) are already slightly overvalued, and none of the companies are undervalued.
Top 10 Value Destroyers | |||||
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Market Cap | Market Cap on 12-18-07 ( $MM ) | Change ( $MM ) | Change ( % ) | Change (%) | |
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Citigroup (C) | 273,691 | 149,277 | -124,414 | -45% | ![]() |
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Bank of America (BAC) | 239,758 | 186,364 | -53,394 | -22% | ![]() |
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Toyota Motor (TM) | 217,700 | 172,283 | -45,417 | -21% | ![]() |
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American Intl Group (AIG) | 186,296 | 147,404 | -38,892 | -21% | ![]() |
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Mitsubishi UFJ (MTU) | 127,586 | 93,255 | -34,330 | -27% | ![]() |
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Merrill Lynch & Co. (MER) | 82,298 | 49,069 | -33,228 | -40% | ![]() |
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Comcast Corp. (CMCSA) | 88,095 | 56,441 | -31,654 | -36% | ![]() |
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Mizuho Financial (MFG) | 86,549 | 56,479 | -30,070 | -35% | Not Rated |
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Washington Mutual (WM) | 42,998 | 13,866 | -29,132 | -68% | ![]() |
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Ericsson Telephone (ERIC) | 64,900 | 36,765 | -28,135 | -43% | ![]() |
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Because we are stock junkies always looking for the next opportunity, it's the top 10 value destroyers list that gets us excited. The market is often emotional and can unfairly punish stocks for bad news. However, as long-term investors, we like the market's irrational price movements, as they allow us to buy some excellent companies at large margins of safety. Seven of our top 10 value destroyers are rated 5 stars by Morningstar: Citigroup, Bank of America, AIG, Merrill Lynch (MER), Comcast (CMCSA), Washington Mutual (WM), and Ericsson (ERIC) are all trading significantly below our fair value estimates. That said, the financial services names on this list are not without risk; we expect credit quality to get worse before it gets better. On the tech side, Comcast's stock has declined over fears that growth has slowed, while Ericsson has suffered from a projected slowdown in wireless spending. However, we believe we have adequately accounted for the downside and still find these stocks to be compelling values.
Conclusion
Despite the fact that this year may have felt particularly long (probably because I am a bank analyst), it represents a short time horizon. The paper value created and destroyed by the movement in the stock market is temporary and can create opportunities to buy cheap and sell dear, but it doesn't necessarily translate into long-term value changes. In fact, of the companies we cover, our top 10 creators saw their market caps increase by $783 billion, while our fair values suggest they created slightly more--$811 billion of long-term value. On the flip side, while our value destroyers lost $419 billion of their market caps, our fair values imply they created $32 billion of long-term value. Long-term investors can exploit these short-term market trends by adding future value creators rather than destroyers to their portfolios.
Jaime Peters does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.