Rule #1 Finance Blog
how to invest
SHOULD RULE #1 INVESTORS BUY AND HOLD INSTEAD OF BUY AND SELL?: PART II of II
Yesterday I posted Al’s stop loss study along with my response. I asked Al for a second study. Here it is: Phil: I did what you said: I…
CONTINGENT ORDERS: HOW TO CATCH THE GAPS UP
Phil Town posted the following as a Comment under this post on Monday, but I’m reprinting it here so you’ll all be sure to see it.
Question:
Using analysts’ future EPS and PE estimates, the Sticker Price of World [sic]
Foods is about the same as its latest market price. But, you still like
it. Does that mean you’d keep it if you own it, but not buy more until
its market price drops to 50% of its Sticker?
Answer:
Whole Foods is a bit of a unique case for me. But it may apply to businesses you will own in the future, so I’m going to write about my thinking a bit here.
Whole Foods is one of the best run businesses I’ve ever seen on all the levels I’m interested in.
Phil Town is an investment advisor, hedge fund manager, 3x NY Times Best-Selling Author, ex-Grand Canyon river guide, and former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence.
EBAY: IT PAYS TO LISTEN IN… PLUS THE RIGHT WAY TO READ CASH FLOW
It isn’t 9 a.m. Monday, but I’m going to post this reader mail response today because it addresses some of the conversations you’ve been having on the blog under the EBAY post. It also addresses the right way to determine Free Cash Flow.
From Daniel, who’s done some searching and has focused in on EBAY as a possible Rule #1 company that he likes and understands: [The bolded items are my emphasis.]
This is a company that I know about because
I use it from time to time. I also believe it has a brand recognition moat and
a competition moat (i.e., few if any real competitors). I also like its
philosophy of being a champion of small businesses and home businesses.All of
its growth rates are spectacular over the last 9 years or so. (I calculated on
my own without your calculators so please forgive the estimates). The equity
growth rate looks to be around 60%. Sales around 84%. EPS around 55%. Then
there’s cash. A big fat 0%. Actually, it’s lower than that. It’s in the
negative territory big time. From what I can tell, eBay has been making a lot
of big investments internationally and has engaged in some acquisitions over
the last couple of years. I am guessing that those activities are the primary
causes of its negative cash flow.Nevertheless, using the Rule
#1 number crunching of future EPS (I used the analysts lower estimate of around
30% rather than the Equity G.R. of 60%) and future P/E show a future EPS of
12.16 (up from .76 today) and a P/E of 60 (btw, the average P/E over the last 5
years is actually 133 but I used the lower default of 60). This all works out
to a sticker price of $182.4 and an MOS adjusted target price of $91.2. It’s
trading at around $34.So my question is: Does the horrendous cash flow number
really negate all the other perfect numbers and take this company out of Rule
#1 territory. Or is the MOS SO large that we can overlook the cash figure and
focus on everything else. (Also, why is it trading so low?)Also, how would you
recommend dealing with the cash flow numbers now that companies are reporting
stock “sales” to officers and directors? They’re bringing down
the growth rate because prior reports didn’t include those numbers.Thanks for taking the time
to read this little treatise I’ve sent you.Daniel
Phil Town is an investment advisor, hedge fund manager, 3x NY Times Best-Selling Author, ex-Grand Canyon river guide, and former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence.
QUESTION OF THE WEEK: WHY USE P/E?
This week’s question is from Jonathan from Cambridge, MA.
Question:
My most fundamental issue with your technique is its use of P/E to judge future valuation — do you really think this is safe or justifiable? Reading other value investing resources we often hear how poor a metric P/E can be, and how we should avoid it in favor of P/FCF or other such things. In particular, when looking at a 10-year horizon on a fast-growing company moving at 20%/year, is it really reasonable to expect the P/E to remain around 40 10 years out, when they’ve grown up toward the top of the Fortune 500, and there’s just no room left to keep rocking 20% every year?
Answer:
You have the right question — will the growth rate stay up there at 20% for a long long time? The answer is — how well do you know the business? If you don’t know it well, you can’t answer the question, can you? So the first M is very important in determining the future value of a business — does the business have Meaning to you? Do you understand it?
Let’s take Whole Foods as an example: They’ve been growing EPS at above 20% for 10 years. And the analysts think the next five years will see roughly 20% growth of EPS. So what’s the long term PE for WFMI? Depends on the long term growth rate that we expect.
Phil Town is an investment advisor, hedge fund manager, 3x NY Times Best-Selling Author, ex-Grand Canyon river guide, and former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence.
RULE #1 QUESTION OF THE WEEK: TIME OF DAY TO TRADE, + USING TRAILING STOPS
As promised, here’s a reader-submitted question for the week of April 16th. This one is a two-parter. Question: Hi Phil, I have not come across this yet on…
Some readers are having trouble navigating the search engine screens for the free tools mentioned in the book. Here is a direct link to the Industry Sector list…
YOUR HOMEWORK: PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. (PPDI)
Here’s a homework submitted by one of my long-time readers, Tom from Grand Rapids.
Hey Phil,
It’s been a while since we last chatted, mostly because my wife and I were busy welcoming the newest and (hopefully) FINAL addition into our family this past November!
At any rate, now that I’ve got yet ANOTHER college tuition to fund it’s time to get back into the swing of things. Panera (PNRA) has become one of my best "friends" over the past few months and I’m gonna stick with it for the foreseeable future. However, I realize that I need to have a few other options available in case the bottom drops out – not to mention the fact that I want to continue to sharpen and hone my "skills" so I can become an Investment Superhero someday too!
Here goes my latest catch:
Pharmaceutical Product Development Inc. (PPDI)
Phil Town is an investment advisor, hedge fund manager, 3x NY Times Best-Selling Author, ex-Grand Canyon river guide, and former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence.
Every business that has stock owned and traded publicly is required to file a quarterly statement for the benefit of its owners — the shareholders (us). The Securities Exchange Commission is one of those government agencies that is really quite important as a watch-dog to protect us little guys from lying dogs (and yet they still slip through the protective net and bite us from time to time.).
The 10K is the annual report and the 10Q is the quarterly report.
Phil Town is an investment advisor, hedge fund manager, 3x NY Times Best-Selling Author, ex-Grand Canyon river guide, and former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence.
FOLLOWING THE FLAGS: HANSEN’S NATURAL SODA (HANS)
New homework: David's applying technical indicators to HANS. Read on. [His original letter is dated March 9.]
Hello Phil Town,
I think I am getting the hang of this (Steve's post was great).
The red line is the "flag" and crossing it is the indication.
If I am correct, today is the day that all 3 red flags are up for HANS and it would be a good time to sell. After trading shows a bit of a bounce.
Oh, I went back and did the same analysis on another stock I owned (WDC) and sold for a loss yesterday (and after having a gain for a while). The lines told me to have sold on the 6th and kept my profit.
Am I on the right track here? I am using one month for the timeframe. Should I tighten that up a bit?
Preordered and waiting for your book. Thanks for teaching us.
David
My response:
Hansen's Natural Sodas has been smoking the rest of the soft drink industry.
Phil Town is an investment advisor, hedge fund manager, 3x NY Times Best-Selling Author, ex-Grand Canyon river guide, and former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence.
Phil Town got a question about Wash Sales often enough I thought I'd
plunge in and give you my humble opinion even though I'm not an
accountant… so don't take action on this in any serious way without
consulting an expert to verify.
A Wash Sale happens when you
sell a stock, take a loss and then buy the same stock back all within
30 days. Some people sell a stock to take the loss in order to
offset a gain in some other stock. The IRS is okay with
that. But if you buy the stock back right away, the IRS is
thinking you want to take the loss to offset some other gain but you
don't really want to take the loss… which is why you bought the
stock back right away. So they say you can't have your cake and
eat it too and they disallow the loss as a deduction. Is this a
problem? Read on.
Phil Town is an investment advisor, hedge fund manager, 3x NY Times Best-Selling Author, ex-Grand Canyon river guide, and former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence.