HOW TO INVEST: ZOMBIE VALUE- TANGIBLE BOOK VALUE

Welcome to the introduction to Rule #1 course. This is Tutorial 9: Zombie Value- The Tangible Book Value of the company.

This is part 9 of a 9-part series on How to Invest using Rule #1 strategies
Part 1: Rule #1 Strategy- Overview of the Basics
Part 2: Meaning- The Three Circles
Part 3: Moat- A Durable Advantage
Part 4: Moat- The Big Four
Part 5: Management- Owner Oriented
Part 6: Margin of Safety- The Growth Rate
Part 7: Margin of Safety- Sticker Price and MOS
Part 8: Margin of Safety- Payback Time
Part 9 [You are Here]: Zombie Value- Tangible Book Value

What is Zombie Value or Tangible Book Value?

Sometimes, when we’re looking at businesses we want to look to see what would they be worth as the living dead. Most of the time, what we’re looking at in a business is what the future cash flow is and then figuring out what’s the value of that today.  That’s what we call the margin of safety analysis that you’ve already learned. We also use the future earnings of the company to figure out the payback time analysis. Future earnings are key to understanding the value of a living business, but what about a business that’s selling for less than what it would be worth if it was dead?

We call this a zombie business. The value of a business that’s dead is called its tangible book value or we call it zombie value. Zombie value is the tangible book value of the business per share. What that means is we’ve figured out what this business would be worth if the business is dead and doesn’t do anything in the future at all.  If we can buy it cheaper than that, and it’s still a good business then that would be a heck of a deal.

How to Find Tangible Book Value of Business Per Share

So let me show you how to figure that out. First, the formula for figuring out tangible book value is really simple.

Going over to the balance sheet, we find the line of equity. Then we subtract the intangibles. Then we subtract the cost in excess. What’s left is the tangible book value or what we call the zombie value of the business. If we can buy a business for the zombie value or less and it’s not a zombie, if it’s a wonderful business and it’s selling for less than zombie value, that’s a super good deal. I’ll give you an example of that right now.

We’re going to take look at Goldman Sachs.  Now we’re going to go over and see the balance sheet, you can see that it has $70 billion dollars on the balance sheet equity line. We’re going to subtract the intangibles, which are $5.46 billion. We’re going to subtract the cost in excess which is zero and what we end up with $64.9 billion. This is the zombie value of Goldman Sachs. Then, we’re going to divide that with the 485 million shares it’s got outstanding. We end up with $134 dollars of zombie value per share. Now keep that in mind, $134 dollars of zombie value per share.

Finding Zombie Value on Goldman Sachs Using Rule #1 Toolbox

I’m going to take you live on to the Rule #1 Toolbox. I’ll show you how to find that $134 bucks and then we’ll compare it to where Goldman Sachs was selling just a few months ago.

Looking at Goldman Sachs on stock at a glance, what I’m going to do is go over to the balance sheet. We’re going to go to the most recent full year, which is 2011. We want to do this right up to date, but that’s not a problem, we can just look at the SEC documents.

What we see is that there is an equity line as we scroll down and its $70.3 billion dollars.

We’re going to look for the line item under assets that says intangible assets and we can see that intangible assets as of last year are $5.4 billion. We’re going to subtract that from the $70 billion dollars of book value. We’re also looking to see if we have cost in excess and we do not. Those are the two items. They’re usually side by side on the balance sheet assets. You can see them together, but there’s nothing there for Goldman Sachs. That’s where we got our numbers and where we get our per share numbers are right here at the very bottom of that. Divide 485 million into the net of $70 billion equity minus the intangibles and you get $134 dollars per share.

Conclusion

Why is that kind of interesting? As of the day I’m doing this, Goldman is selling for $144.45 per share. Let’s go back and take a look at this for the last year, you can see at one point Goldman was selling for $90 dollars a share and that’s when we were buying. It was a phenomenal deal, if you like the idea of buying a company substantially below its tangible book value per share. That’s one more way we can get at the value of a business and whether we have a margin of safety or not.  Now your homework.

  1. Go to the Rule #1 Toolbox
  2. Enter the symbol of your big moat company, the one you’ve been working on.
  3. Click on the balance sheet.
  4. Find the zombie value, subtract the intangibles and cost in excess from equity. Then divide by the number of shares and you get the zombie value per share.
  5. Then ask yourself is the zombie value per share more or less than the stock price.

If this is a reasonably wonderful company and it would be, or you wouldn’t be looking at it and you can buy this thing for less than the zombie value, that’s a heck of a deal. That’s like a depression era deal.

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Phil Town is an investment advisor, hedge fund manager, two-time NY Times best-selling author, ex-Grand Canyon river guide and a 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. You can follow him on google+, facebook, and twitter.
  • Peter

    Hi Garrett,

    Just ran some numbers on BBBY. Maybe you can tell me how it is a Rule1 company, if in fact you think it is. The 1 year ROIC is 25.49 but then it get’s far worse. The Equity growth rate for 1 year is 2.61 and the 5 year is 9.89. The EPS growth rate for 1 year is 5.04 although the 5 year is 23.91. Sales growth rates are: 1 year 5.41 and 10 year 9.34. The MOS price is $15.14 and its currently selling for $65.52.

    Following strictly Rule #1 process (just the first book) this company at present isn’t close, correct? I wonder if you have a different opinion. Hope all is well. Peter

  • Garrett

    Rulers,

    Since there are some Rulers using “The Tools” to supplement their trading decisions, let me share with some of our Newbie Rulers how I’m looking at “The Tools” on Bed Bath and Beyond today.

    …continued…

    Garrett

    • Garrett

      well, that worked. Guess I can’t copy much text from an Email or a Word doc and paste it here.

      Garrett

  • Garrett

    Good Morning fellow Rulers!

    Let’s start this off with a “must read” abbreviated interview with Buffett’s right hand man, Charlie Munger. Here’s the link:
    http://online.wsj.com/articles/the-secrets-of-berkshires-success-an-interview-with-charlie-munger-1410543815

    It’s inevitable after reading that interview we begin to compare ourselves to the rational, patient investor Charlie Munger says successful investing requires.

    One of my Rule #1 Buddies sent me this from an investor we follow:
    “Pabrai apparently asked Munger if he would take the “buy and hold forever” approach if he were running a smaller pool of capital. According to Pabrai, Munger said that he’d do it like he did when he ran his partnership: Buy at a discount, sell at full price and then go back.”

    That’s what I find myself doing much of the time. I have a certain comfort buying John Deere, CF Industries, BP, Panera, because I’m constantly reading up on them. Rather than actively seek new opportunities, I pretty much just wait for the one’s I already understand to come back to me at a great price. John Deere is one of them right now. I STO’d covered calls near the peak and now I’m STO’ing PUTs or getting ready to buy more shares in different accounts.

    Here’s another example – Panera. I don’t own any PNRA shares right now….but I’d love to at the right price. When Panera was trading around $147, I emailed my Rule #1 Buddies that we could probably pick up a bunch of $360 Bills in Jan 2015 as the premiums on some of those lower strike prices would likely expire.

    Opportunities like that happen all the time, but I personally only like to do them on stuff I would love to own and be proud to own it – you know, great 4M, Rule #1 Companies. But you’ve got to do your homework before that happens. Be prepared. Most people don’t have the passion and discipline in Rule #1 Investing to keep at something for so long before they feel they have to do something.

    I’m 44 years old now. I’ve been investing since my first real paycheck as an Air Force pilot when I was 23 years old. Some of the most important things I’ve learned primarily over the last 10 years of investing is I do best when I’m not doing anything (in terms of investing)

    I’ve learned that I don’t like to speculate. If I can’t nail down the value of something, I just pass on it. If the Big 5 Numbers are all over the place, I skip it. If Buffett, Einhorn, Pabrai, etc…some of the investors I follow aren’t in it, I skip it. What makes me think I’m smarter than they are? I’m not. And at 44 years old, I pretty much know what I don’t know and I stick to that which I feel like I have a good grasp on understanding.

    Charlie Munger / Buffett have mentioned this repeatedly over the years – stick to your area of competence, your area of understanding.

    Over the last two years now, I haven’t entered into a new stock position other than Bed Bath and Beyond. In fact, I’ve only sold PUTs and done Covered Calls on stuff I already own. That’s about 4 to 7 companies.

    I have watched one company ride higher and higher without me that I sold out too early…Southwest Airlines – my employer. I bought around $12 last year and sold out at about $19 a few months later. Today it’s over $30.00. I could made a substantial amount of money in my profit sharing account had I held on to it. The other big oops is my wife’s employer Thermo-Fisher Scientific – had we put her 401K money into that one we would have made a killing over the last year.

    Things like that kind of tick you off until you just realize that there will ALWAYS be another opportunity. There are many, many opportunities in the markets but investing in them requires time to do the research – as Phil says, “inch wide, mile deep.”

    I’ve learned to revert to being lazy as an investor. That means I primarily just read stuff. Being on Phil’s blog keeps my head in the game and hands off the accounts where I may feel compelled to “Do Something” and buy or sell irrationally.

    Phil writes out a ton of stuff about why he’s buying something. He creates his 4M Story – Meaning, Moat, Management and MOS. Then he “inverts” and tries to blow away his supposedly rational argument for buying it. I use the blog, my friends, Guru Focus, and Seeking Alpha – the best free resource out there.

    Right now, I’m pretty much set in my ways with what I own and why I own it. I’m not looking to find anymore “Just One” companies. I’d rather just keep reading BP, John Deere, etc articles and focus on how my basis is getting lowered while Management increases my dividend and buys back shares at discounts.

    20.5 years from now, worse case is, I could have made more money. But for us the bottom line is we’ll always have enough for shelter, food and water. Sprinkle all that with a good dose of love and it will all work out.

    To Your Wealth!

    Garrett

  • Garrett

    Hi MarkVB, Peter, Newbie Rulers – Good morning!

    Yes, I’ve been in the left seat since January. Life is good.

    I’ve been trying to post something form a Word Doc and apparently it won’t stick to this blog format.

    I’m going to try again here:

    How to Setup Rule #1 Tools
    First, you must open up a paper trading account with TD Ameritrade. Go to this link:

    …continued…

    To Your Wealth!

    Garrett

    • Garrett

      – Open TOS
      – Click on Charts
      – Click on “Prophet” – TOS has two sets of charting programs. Both are capable of these technical indicators, but only Prophet gives the arrows by default.
      – Wait for it to finish loading.
      – Click on the “Studies” menu item, and then “Apply Studies.”
      – Look for “MA with Breakout Signals” and double click on it.
      – Look for “MACD Hist. with Breakout Signals” and double click on it.
      – Look for “Stochastic with Breakout Signals”
      – Now double-click on the “MA_BS” on the right hand side of the screen. Change the “Period” to 10. Click OK.
      – Now double-click on the “MACDH_BS” and change its numbers to 8, 17, and 9 for “Fast”, “Slow”, and “Signal”, respectively. Click OK.
      – Now double-click on the “STO” and change its numbers to 14, 5, and 0, top to bottom, respectively. Click OK.
      – Click “Save Study Set” as and name it “Rule One Tools” and click “OK.”
      – Click “OK” on the “Apply Studies” screen to get back to the chart.

      ….continued…

      • Garrett

        …continued…

        Things to keep in mind:
        Do not rely on it! There is potential for friction with using these tools. If you follow these tools solely, you’ll often give up some upward price movement (profit) when trying to buy in and get caught in some downward movement. This happens because the fund managers are trying to sneak out and they are successful to a point. These tools only react in response to the price movement; they are not prediction tools, they are reacting tools. They are not perfect and do not forecast the future with certainty. However, you can backtest and notice that with the S&P 500 and using a “Monthly” 10 year view, you would have been out of the market on bigger corrections.
        Combine these tools with charting techniques – looking for floors, ceilings, trend, etc.
        If the stock you’re looking at is in a major long-term downward trend, don’t fight the trend. The trend is your friend (if it’s going up!); if it’s going down, the trend is your enemy. Step back and look at the long-term trend (6-months, 1-year, and perhaps 2-years.)

        So remember….“The Tools” WILL NOT save you in a severe downward trend. You can still “die the death” of a thousand cuts. Back-test and determine what works for you, your goals and your risk tolerance.

        (If you view these tools in any other charting application, you’re looking for a “Slow Stochastic.”)

        To Your Wealth!

        Garrett

      • Ms.MP

        Thanks Garret,
        I know how to set the charts up, what I’m not understanding is how to read them together if they are for different time periods. Does that matter?
        If I’m trying to see at what point chart A is starting to turn down and where it is falling on chart B, they don’t line up because of the different time frame in the charts.

        Is there a more direct way to talk with someone to help us sort through some of these questions? The blog comments are good but sometimes it takes a long time and then back and forth with clarification. Sometimes a 5 min phone call or a direct e-mail conveys a lot more info.

        Also, does anyone use candlestick patterns to see what is going on as well? I was testing (paper trade) a company and noticed something in a chart right before a turn but the other charts didn’t signal a sell. That turned out well for me and I was thinking that would be a useful tool as well.

        • Moncho

          Ms. MP,

          All three of the tools may or may not always line up at the same time. They are based on different algorithms and therefore, you may not have three green arrows or three red arrows together. There may be times when the MACD has crossed over the mid line while the STOC is floating in the middle between the 80/20 lines. This can happen for many days. There are times when you may have two reds/one green and vice versa. It is about being patient and waiting for them to line up.

          As for using Candlesticks, that is all I use. They make it easier to see floors and ceilings.

          Moncho

          • Peter

            Hi Garrett,
            Peter here. I had similar questions as Ms MP. As I mentioned in August, I watched one or two stocks all day. I saw the price fluctuate wildly all day long, up and down constantly. Yet the 3 tools didn’t really move much. Are you saying that the 3 tools are better for long term trends? And perhaps candlestick charts for moment to moment action?

    • Garrett

      since for reasons baffling my little brain, I can’t get the link for the paper trading to post on here even when I type it all out. So instead, google “Think or Swim paper trading account” and click around.

      Garrett

  • Garrett

    Peter,

    Can you repost that question? I can’t seem to find it.

    To Your Wealth!

    Garrett

    • Peter

      Ok, I will cut and paste Ms MP’s question and then mine underneath. First Ms MP:
      “Ms. MP says:
      August 25, 2014 at 10:20 pm
      I have a question about reading the charts together. I am using MSN charts.
      The three charts seem to be running off different time frames. The SMA is one day, the Stochastic doesn’t have a label for the time, and the MACD is about 10 days.
      How should I be looking at the three to know that all are saying “buy” or “sell” at the same time? What if I change the SMA chart to 1 month instead of daily, for example, now the MACD is showing a period of 5 years.”

      And now mine, which was more of an observation than a question:
      “It’s quite possible I’m not reading the tools correctly yet. I was watching over a period of days and the tools weren’t doing much, yet the price was steadily dropping. I didn’t really expect prices to go up and down as much throughout the day. I took a whole afternoon and watched the price of BKW, and it was up and down all day, really non-stop. Not sure what I was expecting, but I don’t think I expected that. Peter”

      Thanks so much!

  • Peter

    Greetings Garrett,
    Welcome back. That all looks like good info and will help me as I learn to think like an investor. I wonder, would you take a peek at the questions (Aug 28) I posted back on an older post. entitled, “Conscious Investing” dated Aug 11? I posted a question and then I think Ms MP (dated Aug 25 regarding the charts) posted a question that actually voiced a concern that I had. If you have time; if not I understand. Thanks and hope your summer rocked.
    Peter

  • Garrett

    Hello Rulers!

    My summer is over…back to Rule #1 Investing!

    Yes, I’m looking at BP. I’ve read everything you’ve read on Seeking Alpha and I’m of the opinion that in 20.5 years when I retire, I’ll be living off the dividends. I’m stockpiling BP…been doing it for years. With a 5% Dividend Yield (if they don’t cut the dividend) this is a good one for my retirement portfolio.

    The other companies I bought over a year ago now are John Deere (DE) and DeVita HealthCare (DVA). I’ve recently added to my position to John Deere and then today, the following came from my paid subscription from GuruFocus.com regarding DE and DVA.

    Gurufocus just had a “Value Idea Contest” and John Deere won followed by my other “just one” company, DeVita HealthCare.

    Here’s some of the criteria and the winners from Guru Focus Value Idea Contest:

    “In order to encourage more idea sharing GuruFocus hosts a monthly value idea contest. We will reward qualified value idea submissions $1000 if the idea double in 12 months. Qualified authors will also receive $100 per submission. The submissions are evaluated monthly.

    These are August’s submissions and the results of the review.
    ValueStalker: Bet the Farm on Deere DE
    twcooper3: DaVita HealthCare Partners is a Great Business With Solid Growth Potential DVA
    Robert Abbott: UMBF: Regional Banking with an Institutional Investment Edge UMBF
    apolloportfolio: Adidas: A Well-Know Brand Selling At A Discount ADDYY
    Robert Abbott: Exponent: Investing in Bright People EXPO
    apolloportfolio: New Oriental Education & Technology: A 60% Upside Potential EDU
    apolloportfolio Culp: A Superior Capital Allocator CFI

    We review all the submissions in the area of business quality, financial strength, management, valuation, presentations and user comments. To qualify the award and compensation, the submission should score 26 or higher. The goal of the contest is to dig out high quality companies at reasonable prices. That is also how the scoring tilted to.”

    Right now, I think BP and DE are definitely worth considering.

    I’m looking forward to Bed Bath and Beyond’s quarterly earnings announcement on Sept 23rd. I got in on this one at about $57 and lowered basis with PUTs. Today it’s at $65.69…up about 15% since that first week in July. Sweet! In the mail today I received a Bed Bath and Beyond flyer. I looked at some of the prices they were selling and then compared that to Amazon. BBBY was the same price as Amazon or cheaper if you don’t consider the Amazon Prime Membership.

    Here’s some of the article from Gurufocus on DE…(Sorry, can’t add the graphs on this blog format)

    ———
    John Deere is just too cheap. The company trades at less than 10x earnings on the back of weaker expected agriculture sales, related to a decline in US crop receipts over last year’s record level. While North America remains Deere’s largest and highest-margin market, almost half of Deere’s revenue is earned from its international operations, which continue to grow at double-digit rates. Deere continues to prove itself to be an exceptional brand with a significant moat, as evidenced by its returns on equity, which have averaged more than 30%. Looking out two to three years, the company should earn in excess of $11 per share, which at a 15 multiple gets you to $165 per share, or a double from its current price.

    Company History

    Deere is a leading global manufacturer of agricultural and construction machinery with an operating history of more than 175 years. Consolidations over the past decades have left only three full-line farm equipment companies, of which Deere is the largest. Deere has been the world’s largest producer and seller of farm and industrial equipment for more than 50 years. Deere controls the $24 billion U.S.-Canada market for farm equipment with some 60 percent share. The global market is dominated by three major players that control north of 70% of the market (Deere, CNH, and Agco). Unlike the growth by acquisition strategies of the smaller two, Deere’s growth has been predominately organic. This strategy has provided key benefits to Deere as evidenced by its operating margins and returns on equity shown below.

    Deere’s scale in the agriculture business has provided it with an enormous edge against its competitors. Its agriculture sales were almost twice that of CNH (CNH revenue figures above include commercial vehicles) and three times that of AGCO. The company also dedicates a larger percentage of its revenue toward R&D (more than 4% of revenues), which causes the R&D gap between Deere and its competitors to increase even further. Exaggerating these effects, Deere focuses its efforts on a single brand—John Deere. The roll-up strategies of its smaller competitors have left them supporting multiple brands (for example: Agco has Challenger, FENDT, Massey Ferguson, and Valtra). The ability to dedicate a significant amount of spend to a single brand has created a wonderful positive feedback loop (Research spend improves design/fuel efficiency, which ensures market share, which provides for greater research spend creating superior products). Deere’s quality (Nothing Runs Like a Deere) has also allowed it to build significant goodwill in the form customer loyalty, with many farming families using Deere equipment over multiple generations.

    The Deere brand is also supported by a robust dealer network that would be very difficult to replicate. Deere dealers typically trade in a single brand, and these dealers are less willing to hold inventory for a manufacturer that has a much smaller customer base. Proximity to a local dealer is critical for the farmer. If a belt breaks or a tire deflates, the farmer needs instant access to replacement parts.

    Local dealer networks are critical to the success of a manufacturer, and dealers will only partner with leading suppliers. Given the exclusivity of the brand sold, Deere’s ability to attract the widest geographic spread of dealers is important. Generally, farmers won’t consider a brand that doesn’t have a dealer location within driving distance. Deere continues to maintain an unparalleled distribution network—another important element to its pricing power.

    Financial Strength

    Deere can be thought of as two businesses: an equipment manufacturing business, which produces a wide range of agricultural and construction equipment, and a financing business, which lends to customers purchasing its products. The financing business primarily finances sales and leases by John Deere dealers of new and used equipment. In addition, the financial services segment provides wholesale financing to dealers of the foregoing equipment, finances retail revolving charge accounts and operating loans and offers crop risk-mitigation products and extended equipment warranties. Deere’s financing business is exceptionally well run. The company administers a portfolio of more than $30 billion in equipment off of which it makes more than $400 million per annum. While one could argue that write-offs on the portfolio are currently abnormally low at .03%, the ten year average write-off figure for the portfolio is less than .20%.

    Deere’s financing business has skewed the optics of what is a pristine balance sheet. The company holds approximately $30 billion of debt, which seems like a relatively large figure for a company like Deere, but the vast majority (80%) of this figure is finance debt and tied to its equipment sales and is fully collateralized. Adjust for the finance debt, and the company’s debt-to-EBIT is less than 2x and net debt is zero, as the company has more than $5 billion in cash and marketable securities on its balance sheet.

    Management

    The quality Deere is expressed through the quality of its leadership. For nearly 175 years, John Deere has benefitted by strong, decisive leaders at its helm. Most recent management has proven no exception. Over the past ten years, Deere had grown revenue from $13 billion to more than $34 billion. Over the same time period, return on operating assets have improved from 10% to more than 30%, leaving its competitors in the dust. The company has also dramatically improved asset intensity by significantly reducing receivables as a percentage of sales—a key component to avoiding the additional working capital requirements of such a fast growing business. These efforts have led Deere to become a cash generation machine. Over the past ten years, the company has repurchased more than 179 million shares compared to a current base of 369 million. These moves have helped allow Deere’s earnings to grow from $1.32 in 2013 to more than $9 per share last year.

    Deere CEO Samuel Allen aims to continue this impressive run with a goal to increase total sales to $50 billion by 2018, with half from outside the U.S. and Canada (up from 39 percent today). He expects to do this while continuing to improve the company’s operating margins. In the last few years the company has finally begun to make significant gains in Brazil and other countries where its rivals—mainly Agco and CNH—have deeper roots. Twenty years ago, Deere had two tractor factories outside the United States. Today it has nine, in Germany, India, China, Mexico, and Brazil. Its sales in Central & South America have compounded at 18% per annum over the last six years, while Asia, Africa, & Middle East sales have compounded at 17%. Currently, half of Deere’s 61,300 full-time employees work outside the U.S.

    Valuation/Risks

    As with many companies in the agricultural space, Deere’s business is cyclical. Farmers typically upgrade or purchase new equipment on the back of strong crop season. Given that equipment upgrades are one of the few variable costs in the farming process, a weak farm season can result in an even weaker spend for new equipment orders. Crop cyclicality can be seen in the recent corn futures data which shows a fall in corn futures by almost 50% from last year as the record season caused more crop planting, which has led to a large expected crop forecast (the second-highest ever). While there are no absolutes in investing, one thing you can be pretty sure about is that the farming cycle hasn’t suddenly ended. Just as the record season brought more planting, this year’s weak receipt figures will induce lower planting and rotation into other crops (and higher prices). The chart below demonstrates the dips and rebounds in corn production.

    Deere’s historical financials demonstrate that its business quickly recovers after temporary weakness in the corn cycle. There have been two disruptions in farm income in the past ten years—once in 2005 and again in 2009 after the global recession. In each case, Deere quickly recovered after several weak quarters. In both cases, Deere went on to post record earnings the following year. In fact, Deere has posted record earnings in eight of the last ten years. As an investor, this is exactly the type of cyclicality one should look for when examining potential investment candidates. As noted in the chart below, while tractor expenditures occasionally decline, a bet against a subsequent rebound has never proven correct.

    Deere should trade at least a market multiple. The company is growing more rapidly than the market, it sells into an under-penetrated market that benefits from the secular trends of emerging market farmers getting increased access to credit to buy equipment, it grows organically and requires little in terms of capital investment, and returns significant capital to shareholders. Over the last ten years, the company has traded at an average multiple of around 16x. As the company rebounds from a weak crop season, revenues will approach $40 billion in one to two years. At the company’s mid-cycle operating margin expectations of 12% and a normalized charge-off rate of 20 basis points for the financial services portfolio, earnings should rebound to more than $10 per share in one to two years. If the company can maintain similar margins and get half-way to its 2018 target of $50 billion in sales, earnings will be in excess of $11 per share. Choose your multiple on these earnings, but any reasonable assumption will result in a valuation significantly above the current stock price.

    Outlook

    Looking longer term, to feed a population expected to hit 9 billion by 2050, food production must increase by 60 percent, according to the United Nations’ Food and Agriculture Organization. John Deere is uniquely positioned to capitalize on these economic tailwinds. Global macro-trends – population and income growth in developing nations – will continue to drive increased demand for agricultural output and infrastructure investment, as caloric intake increases (see chart below). Technology advances and continued shift toward credit availability in emerging markets will expand Deere’s markets, as many of these areas currently sit much lower on the technology curve. With the increasingly urban population wishing to enjoy higher living foods such as meat, which are much more grain intensive, Deere is positioned to greatly benefit from offering of products and services needed to help meet this demand.

    ——

    Again, sorry I can’t post the graphs…but perhaps this is one of many places you can begin to read up on “The Story” for DE.

    To Your Wealth!

    Garrett

    • AngelaW

      Garrett,

      Welcome back! We miss U!

      BBBY. Mmm. James Cramer had some interesting comments on this company, under the title of “stay true to your conviction”. Basically he feels going to BBBY is kind of like treasure hunt, an experience that cannot be Amazoned. He bought it Nov 13 at a good price point however, under the pressure of showing stella results for the yr, he bailed and sold the stock at a small loss. He said it was too painful he could not bear going to BBBY anymore. Lol

      DE: James feel mgmt too conservative. He likes AGCO better.

      I am not here to tout James. He and Phil are friends. I just wanted to quote somebody’s perspective for entermainment.

      • Garrett

        Howdy Angela! And fellow Rulers,

        I’m not an AGCO investor for the reasons noted in the above post. I think DE is a better 20 year hold for my goals.

        I’ve learned a lot watching Dad (and Phil) invest. My dad has ZERO market risk in some of his holdings.

        For our newbie Rulers, that means that he doesn’t really care if Exxon goes up to $110 or down to $80. Like Phil shares in his introduction to Rule #1 Investing tutorials, Dad’s basis in XOM is so low that he doesn’t care what the share price does because he’s just living off that dividend check that keeps growing each year.

        BP is like that to me. I’m willing to keep owning more shares as I save more money in my retirement account and buy more of it at great prices. I have a difficult time creating a story where BP isn’t paying me a substantial dividend 20 years from now. As investors, we “invert” as Buffett and Munger say. We try to create a rational argument AGAINST the position we are taking. It’s also a hedge against inflation and US Dollar devaluation.

        To Your Wealth!

        Garrett

        • Mark VB

          Welcome back Garret,

          How did your training go? Are you in the left seat now? You have helped more people than you may realize.

          • Garrett

            Test! Been trying to post stuff, but it’s from a Word Doc and it won’t post. It addressed some questions posted. Arrgg!

            To Your Wealth!

            Garrett

  • Angelaw

    Setting up Think Or Swim.
    So I set up under Prophet as follows.
    MA_BS (10)
    MACDH_BS (8,17,9)
    STO (14,5,0)

    Now I don’t seem to be able to make the same setup in Charts.
    Do you guys use Prophet or Charts? What’s the difference between the two and when should we use one instead of the other?
    Many thanks

  • Mike G.

    Howard Marks came out with a new memo on risk that I think is worth reading. He also did an interview with Bloomberg and a short one with the Manual of Ideas. The links are posted below if any one is interested:

    http://www.oaktreecapital.com/memo.aspx

    http://www.valuewalk.com/2014/09/howard-marks-time-seventh-inning-stretch/

    http://greatinvestors.tv/video/howard-marks-a-formula-is-different-from-an-approach.html

    4 Ideas that come to mind from what I’ve gathered…

    He believes that we are heading into the top of the 8th inning of the market cycle. Right now, we are in the seventh inning stretch.

    “Today I feel it’s important to pay more attention to loss prevention that to pursuit of gain” In other words, it might be better to put the defense on the field as opposed to the offence.

    There are many different types of risks that Howard Marks lists in his memo. Some are (in no particular order of importance): Career risk, funding risk, volatility, headline risk, loss of principal, funding risk, black swan risk, model risk, and the risk of missed opportunity.

    “That’s why Oaktree was built on the belief that risk control is “the most important thing”

  • paul myers

    it looks like a great opportunity in BP. Just sold some puts. What do you guys think?

    • Mark Vesper

      I am looking, where did you buy? Would any of our senior Rule1 folks care to point out some opportunities in BP?

    • paul myers

      I sold an oct 14 put. It looks on sale to me

  • Peter

    I did want to ask a general question. Is Phil ever on his blog, besides posting I mean? Am I assuming incorrectly that this isn’t something akin to a Yahoo group but actually Phil’s own personal blog? Just curious because I don’t really see him replying much to comments on his blog.

    • Mike Mac

      Peter,
      This is Phil’s own site and yes, he does reply to comments on occassion. Obviously he does reply to everything as that would be an all-consuming job. He does jump in to pose new questions to think about or to provide clarification when some comments are off base or potentially misleading so as no to have anyone getting led astray. Look at some posts from the old blog and you will see Phil actively engaging in the comments.

      Also, if you see what you believe to be a Rule 1 company on sale, do your own analysis and send it over to Phil. If it’s good, Phil will post the guest commentary along with his own thoughts. And this always leads to more community feedback. Its tough finding such a company right now that is clearly on sale, but i am sure there are some buys out there. I was looking at Deere again this week as well as Leucadia (LUK). I have never purchased LUK, but it has interested me for a long time. I just don’t fully get it so I have never invested in it. It appears to be trading below book value though which makes me think that it could be a good place to park some money.

      • Doug

        Hi Mike Mac and other Rulers:
        Mike, thanks for mentioning DE and LUK. Regarding LUK…..as Rulers we like low/no debt companies with a track record of success so we can reasonably predict its future. Then we buy on some event when Mr. Market panics and sets the price low relative to that value. To me, LUK doesn’t fit that description: LUK has relatively high debt, a relatively choppy history of EPS (making it hard to predict its future), and there doesn’t seem to be a recent event which spooked Mr. Market and gapped the price down. It would be great if someone did a full 4M to understand LUK’s story. Otherwise, even though the price might be below book value, it seems hard to really know the value of LUK long-term. My two-bits only.

  • Garrett

    Oscar,

    I got in touch with Michelle from Rule #1 and she said she will have Cory and/or JP get in touch with you. If you email them, in the subject let them know “Garrett from Phil’s blog and Michelle said to contact you.”

    Email: coreywood@ruleoneinvesting.com. And jpbreinholt@ruleoneinvesting.com

    I also emailed Corey and JP and told them to expect an email from Oscar.

    To Your Wealth!

    Garrett

  • Alon

    Here is a nice article on Buffett and his purchase of IBM shares. The article is educational and recommended for reading by Rule #1 investors even if you don’t own IBM shares.

    http://seekingalpha.com/article/2318995-ibm-according-to-warren-buffetts-annual-letters-to-shareholders?app=1&uprof=45

    In this article there is a link to another interesting article written by “The Brooklyn Investor” called “10x Pretax Earnings! Case studies: KO, BNI, etc.” that analyzes Buffett’s purchases. It is an excellent reading too.

    http://brooklyninvestor.blogspot.co.il/2014/03/10x-pretax-earnings-case-studies-ko-bni.html

  • Anthony N.

    Hi Phil,

    The new site and blog formats are really nice and it is great to see all the new posts.

    Thanks!
    Anthony

    Does anyone know of a way to setup the comments and posts as an RSS feed like with the last blog? I had it setup that way before and it put all of the new posts and comments in a folder that was easy to read.

  • Moncho

    Phil,

    Really enjoy the new blog, especially the fact that our posts/replies are not being lost. Whoohoo 🙂

    Humbly requesting a last 10 or 20 “Most Recent Posts” section. That would be really handy.

    Thanks,

    Moncho

  • Oscar

    Hi Garrett!

    Would you know if Michelle is still around? Or is there someone else looking after the support@ruleoneinvesting.com?
    I am trying to get updated info on the courses but have not recieved a response yet? Would you know if the support email has changed along with the website?

    Thanks Oscar

    • Garrett

      Oscar,

      Just passing through as I’m really not around until after September 8th…but I copied your post and I sent it directly to Michelle. Maybe you can follow up with another email and put in the subject “Garrett from blog said to contact you”

      I suspect they’ve been swamped with new Rule #1 Students because Phil has been working hard at his live Transformational Investing Seminars.

      I’ll be back in a few weeks to share comments and help with some questions on the blog. If you have an email you can share here, I can also have Cory or JP contact you. They work for Rule #1 and help Newbie Rulers find the best Rule #1 Course for your level of experience and time.

      Gotta go! Miss being here, but I’m having lots of fun taking time off with the family and being in the mountains backpacking, fishing, etc. We were recently driving through Glacier National Park in Montana and a big bull moose ran right out of the woods in front of our car after we were coming back from a gorgeous hike. Tried to get a picture of him, but he quickly found his way into the woods.

      To Your Wealth!

      Garrett
      PS and Bed Bath and Beyond has just been going up since we all talked about it on the blog.

      • Bradlewski

        Garrett

        Yep, Cory & JP must be busy as well because, I have not gotten a reply from them after several voice/email messages.

        I’m pretty excited that things are buzzing along at ruleoneinvesting.

        So, to everyone, be patient and never forget that we are RULERS.

        And Garrett, Glacier national park is awesome. A few years back we had a meeting there next to Lake Mcdonald. The resort we stayed at was destroyed by a fire shortly afterwards, probably rebuilt by now.
        Send lots of pictures.

        Enjoy

        Dave

      • Oscar

        Thank you Garrett! It really is surprising how fast those moose can run through a Forrest considering how big their horn racks are. I myself am coming back from Jasper National Park and Banff. It was beautiful and you just can’t beat that fresh mountain air. Someone has called me from the office. I will be getting back to them today. Thank you again! Have a good one!

  • Ryan

    Hey all,
    I came across this statement of a share repurchase program by a CEO of a company I’ve been looking into again recently. I thought it aligned with our beliefs of the way a share repurchase program should be made…

    “As we intend to make share repurchases of approximately $80 million over the next twelve months, we want to assure investors that our repurchases will be done intelligently and opportunistically with the goal of creating optimal value for our shareholders.”

    Sounds pretty darn good to me. Let me know what you all think.

    Happy Hunting
    ~Ryan~

    • Alon

      Hi Ryan,

      I’m following the same company and I liked reading the CEO statement on the shares buyback, especially that the $80 million represents ~15% of the company market cap!

      I believe that that the CEO does the right thing on the right price.

      One point to be concerned about: The company has issued a new credit line recently and the shares buyback might be done via leveraging a new debt.

      Alon

    • Shuki Sasson

      I think the company is EBIX. They has a class action suit against them that they settled that was related to inflating stock price.
      For me it is too complex business to begin with, so I’ll pass…
      Anyhow, good luck!