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Common Stocks and Common Sense by Edgar Wachenheim III

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10 WHIRLPOOL CORPORATION

Once we became excited about the probable recovery in the housing market, we decided to invest about 20 percent of the funds we managed in stocks that should benefit from the recovery. Lowe’s was our number one pick. After researching a few dozen other companies, we purchased a medium-sized position in Whirlpool Corporation and small positions in The Home Depot, Lennox International (a manufacturer of air conditioners and furnaces), and Mohawk Industries (a manufacturer of carpets and other flooring materials). Why was Lowe’s our number one pick and our largest position? Simply, Lowe’s appeared to be materially more undervalued than Home Depot and the other larger capitalization stocks we researched. Home Depot had made a number of excellent merchandising decisions and was operating on eight cylinders. Lowe’s was sputtering some, and the price of its shares reflected the sputtering. In 2011, Lowe’s had revenues of $50 billion and a market value (the price of shares times the number of shares outstanding) of only about $24 billion. Therefore, an investor received about $2.08 of revenues for each $1 of market value. Home Depot had revenues of roughly $70 billion and a market value of $56 billion. Thus, an investor received only $1.25 of revenues for each $1 of market value. The comparison of revenues to market value was one of many comparisons we performed. All the comparisons clearly showed that, if Lowe’s engine revved up and purred, we could make far ...

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