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.
Hansen's Natural Sodas has been smoking the rest of the soft drink industry.
Hopefully you got in at a great price. Before we even talk about the
signals, do you like the Moat and the Management? (I assume you love
Assuming you've done your homework and want to own this business, let's
talk about the price. What's this thing worth today?
Well, we have to
see if it's a predictable business, right? Or we can't even price it.
And after looking at the sales, earnings, equity and cash flow, I'd say
it's fairly consistent over the last ten years. It has some flat spots
and cash gets bumpy, but overall not terrible. I can see this thing
continuing to make headway in the cola wars. But at what speed?
going with equity growth since it's most consistent over the years and
the best predictor. It's growing at about 20%. Now I look at the
analysts projections and the one person covering this stock is
estimating 20% as well. So let's use that.
Now we look at historical PE. VERY interesting. The range for Hanson
is from 4 to 21. And that's in one year! Crazy! While I'd like to
put a Rule #1 PE on this (2 times the growth rate of 20 is a 40 PE),
with those historical PE's I just can't. Obviously the buyers out
there are discounting the future. Probably because it's up against Coke
and Pepsi. Crossing those moats can be hazardous.
So what number to use to know the price? Let's use 20 and expect that if things go well, we'll see the PE rise over time.
And the TTM EPS is $2.14, So we're going to double it 3 times in ten
years (Rule of 72). So 2 to 4, 4 to 8 and 8 to 16. Then apply the 20
multiple and we get $320 for a price in ten years.
So if I know I can
sell in ten years at $320, how much should I pay today? If I want a
15% return I should pay one quarter of $320. That's $80. And that is
the Sticker Price.
The Margin of Safety Price for a new entry into this business is half of that or so. About $40.
And it's selling for $110. Hmmmm. If we buy today and things work out
as planned and we sell for $320, our return on our investment is going
to be kind of anemic. About 11%. And that's if all goes well.
So, David, either you have to have a very strong opinion that the
analyst is wrong about the growth rate or you have to believe that the historical PE is
going to move up quite a bit — which, by the way, could easily happen
in this case as the business makes the big guys believers.
I think in
this case the growth rate is quite good. 20% is nothing to sneeze at.
And if it sticks the growth rate, the PE will rise at least into the
If we go back and play with that number we get a future price of $480 and a Sticker of $120 with an MOS of $60.
Dang it. Seems like this business is already priced up to retail, doesn't it?
Okay, now we can talk about the "flags". In this case, you are outta
there my friend. Just put Hansen on the watch list and wait patiently
for the inevitable return to a big MOS — and then step in and buy it when
the big guys are moving back in. Which does bring us to the "flags" at
I'm looking at MSN charts for HANS about 3 days ago, right? Here's
what I see: The Stochastic went red. During the trading day the MA
went red but by the end of the day it was back above the 10 day MA
line. And the MACD dipped but never actually crossed the red line.
(One of the reasons I prefer to watch these signals when the market is
I have a 50 day MA up on my MSN screen to go along with the 10 day
because what I really want to use is the 30 day but MSN won't give it
to me. So I kind of interpret between the two. Especially in a stock
that is trending up like this one, I want to get out slower and get in
faster so I tend to give it some room to recover from a dip by watching
the 30 or 50 if that's all you have. So in this case I would have
And that is assuming that I rode this up from a great MOS, which means
I'm playing with house money and can afford to be a bit slack. I'd be
basically waiting for the stock to hit my Sticker Price (somewhere
right around here best case) and then I'll stay with it as far as it
wants to run — then get out on the flags and stay out until I get at
least another 20% MOS. Then I can pop it again. Meanwhile, I'm
looking over my watch list to see if there is something going green
that has a big MOS.
And that's how you use the "flags".
Now go play!
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.