Last week, I told you about Hetty Green, otherwise known as the Witch of Wall Street, and the approach she took to building a a fortune estimated at $100 million to $200 million more than 100 years ago (equivalent to $2.25 billion to $4.5 billion in 2018 dollars).
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(If you missed that piece, you can read it here.)
If Hetty were looking at today's market, I'm certain she would be buying Honda Motor (NYSE: HMC).
I'm sure you are familiar with Honda. It's a Japanese automaker, which means its business could be threatened by a potential trade war.
How The Witch Of Wall Street Would Value Honda
As an automaker, Honda owns a great deal of land. It also owns factories and inventory. In fact, the company owns a great deal of tangible assets. Its balance sheet shows more than $177 billion in assets, according to its latest financial statements.
Not all of those assets are real items. About $6.6 billion are classified as "goodwill/intangible assets," which could be the result of acquisitions or other accounting requirements. I believe Hetty would remove these assets from her calculations.
Next, I believe she would look at the company's liabilities. For Honda, liabilities are about $104 billion. To make the analysis simpler, I looked at the amounts per share. Subtracting intangibles from total assets and then subtracting out the liabilities, I found that Honda is trading for about $0.79 for every dollar of tangible book value.
That's a bargain. But, the company needs to be able to grow in order for the stock's price to move higher. To assess Honda's growth potential, I again turned to Hetty.
Hetty valued cash, and I believe if she were using modern accounting tools she would focus on cash flow from operations. This is the cash that a company's management must allocate by reinvesting in the business, making acquisitions, repaying debt, or rewarding investors with dividends and buybacks.
Cash flow from operations has grown by 15% in the past 12 months, and the company has reported steady growth in this metric over the past seven years. This indicates management is making decisions that benefit shareholders.
Like many companies outside the United States, Honda pays a dividend based on its profits. This means the amount could vary from quarter to quarter. Specifically, the company says its "present goal is to realize a return ratio (i.e. the ratio of the total of the dividend payment to consolidated profit for the year attributable to owners of the parent) of approximately 30%."
Management expects to pay about 27 Japanese yen each quarter this year, or about $0.24. The exact amount will be announced near the end of each quarter. The dividend, which offers us a steady income, would make the stock even more attractive to Hetty -- and it should make the stock extra enticing for the "bonus dividend" strategy we use in Maximum Income.
How To Trade HMC
The combination of a bargain price, strong cash flow from operations, and steady income make Honda attractive as an investment for those who are looking for rare value-plays in today's market. But rather than simply buying the stock, waiting for the dividends, and hoping for the best, my subscribers and I have a better plan...
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Now, you should know that this strategy involves using covered calls -- one of the safest, most conservative methods for earning extra income to be found in the market. By using this strategy, we can reduce our cost basis for this already-cheap stock -- and earn even more income (using what I like to call "bonus dividends") than the stock already pays.
If everything goes according to plan, my subscribers and I will earn 4.9% in "bonus dividends" in 137 days. That's more than the stock pays for an entire year. What's more, if we can repeat a similar trade every 137 days, we'd earn 13.1% on our capital in a year.
All that has to happen is for HMC to trade for $30 or less by January 18.
If HMC trades above $30 on January 18, we'd keep the income we received from selling the call and collecting the dividend, but we'd have to sell HMC at $30 per share.
In this case, we'd realize a profit of 5.2% in 137 days. If we can repeat a similar trade every 137 days, we'd earn a 13.8% return on our cost basis in 12 months.
Not bad. In fact, it's about as close as you can get to a win-win when it comes to investing.
Want to know more about how this works? My research staff and I have prepared a detailed briefing that explains everything you need to know. Simply click here to get started on collecting your first "bonus dividend" within as little as 48 hours.