Phil Town
Phil Town

Another great homework of sorts from someone using the INVESTools software. (Not a true homework, as he's already bought the company I break down for him after his letter.)

Hi Phil,

I really enjoyed your recent presentation in Cincinnati.  I am also really looking forward to your book coming out in March.

I took your advice and purchased the professional investing tools from success magazine and have started to put the information into practice.  I only purchased the 1k program so I will stick to buying stocks for now (the other programs offer the options course for big $$).

I recently purchased OIS for my first stock. 100 shares at $34.90.  Has appreciated a little so I will continue to sit tight and let the arrows be my guide.

I have just a couple of questions for you if I may.  When you go to the "valuation analysis" on the website to find the target price so you can look for stocks at least 50% of that number.. the site has a built in "discount rate of 15%" on the far left.  Is that number supposed to be 15% becasue I know you can change that field? If not 15%, what number should be used?  Also, can you buy small cap nasdaq with the same rules and still be a prudent investor or is it best to stay with the NYSE?

I really appreciate any insight you can provide.  Thanks so much!

GregDayton, OH

PS Can you recommend other good reading material until your book come out in March?

Here's what I had to say:

Hi Greg,

Read The Future For Investors by Jeremy Siegal.  Good stuff. 

And read my blog!

The valuation tool at Investools is set up to default to 15%. That is my minimum rate of return.  If you put in any other number, what you are telling the computer is to figure out the price you should pay to get that return.  I want to buy for half the price that it tells me.  I use 15% and then buy a lot cheaper than that.

Let's look at OIS:

1.  Meaning: Do I know what they do?  Sort of.  Drilling stuff.

2.  Moat: They are #1 in a bunch of segments in the oil patch (got that from their website presentation in September to Lehman.  Just download it off their website.).  Rule #1 businesses tend to have big Moats.  How about the numbers?

            ROIC: 10%.  Not wonderful but not horrible for an equip. co.

       Equity Growth rate:  Insanely great:  About 40% a year and straight up

       EPS Growth rate: Huge: 2 doubles in 5 yrs.  About 28%

            Sales Growth rate:  Huge.  Doubled twice in 4 yrs.  36%

Cash Growth rate: Op cash is same as EPS but Free Cash bouncy.

Conclusion on moat - they're riding the oil wave and it's a bouncy ride but their numbers are awesome.  Growth rate is about 28% a year or better.  Analysts say next five years should grow at 31% so we'll use 28% since it's lower

3.  Management:

     Repurchasing shares because they think it's cheap in the $30's.

     Douglas Swanson is a disciplined manager who focuses on return on capital.

     He's getting paid about  $800,000 a year.  Modest.

     Not much else out there about him.

4.  MOS: Price $35.  Value:  $70.  Nice.  Based on 28% growth 15 PE (cyclicals get lower and that one is historical) I'd have to buy this at $70 to get 15% if everything works out.  But since I can buy it at $35, I have a big MOS.

All in all, nice work, Greg.

Just one problem: It just did its IPO about 4 years ago, so this is a very new business.  It's cyclical and goes with the oil prices.  If drilling slows down for any reason, so will their growth.  This one has no certainty of short term growth but long term looks quite good given the energy needs of China and India pressuring world oil.  Bottom line, I'd be interested in this one in my Risky Biz portfolio.  I'm going to do some more digging and get to know them but this does look good.

HOWEVER!!!! You MUST watch the arrows and get out with the big guys because this stock could trade at a whole lot lower if things slow down.  On the other hand, if things go well for oil, this is a winner. Could do 30% per year returns for us.

Good job, Greg.  Hopefully you got in at $34 with the arrows?

Now go play!