Rule #1 Finance Blog

With Investor Phil Town

LLY: HOLD OR SELL?

Eddie from Grand Rapids recently wrote to me to ask advice about what to do with inherited LLY shares. See below.


From: Eddie
Date: Aug 3, 2005
To: Phil

Yesterday in Grand Rapids I told you we (my wife and I) were making 47% interest this year. She corrected me last night and said on our personal portfolio with InvesTools we are making 37%. Obviously, not disappointing at all!!   😉

Question. When I returned to the hotel after the seminar my office called and said that we received a registered letter from an attorney informing us that we will receive soon $275,000 from the estate of an elderly supporter of our 501(c) nonprofit Christian ministry.

The attorney wants to know if we want it cashed out (mostly Eli Lilly drug stock), or transferred to our Ameritrade account.

All we know about the stock market is what we’ve learned from you and your program.

Question 1: Would you advise us to take stock, not have them cash it out?

Question 2: Do you have some advice on what we should do to use this "extra" income to our ministry become an income stream for the ministry?

Thanks in advance for your advice…and THANKS for InvestTools!!

Blessings,
Eddie S.


From: Phil
To: Eddie
Date: Aug 19, 2005

Okay, Eddie, I’m back from my Harley ride and getting to my most important emails, including this one from you.  First, thanks for following up on the email about your success.  I’ll use it when I can around the country if you don’t mind.  Second, you have a big responsibility to use this $275,000 in a powerful way, and the most powerful way I can think of is to make it $3 million over the next ten years and then really make a difference in some lives.  Or even use it as the base for an endowment that grows to $20 million and then pays out $3 million a year!

LLYEli Lilly stock is a wonderful example.  Let’s put this all on the blog. Without me going into the details of how I did this, can you tell me why I think the right price to buy Eli Lilly right now is about $7 per share even though it’s selling for $52?  I did the analysis in less than 5 minutes using MSN Money.  It’s a lot faster on Investools.  I repeated it there and it took 15 seconds.

Remember: for a quick and dirty look at any stock to see if you want to hold on to it, just find the current EPS, a reasonable PE, and a reasonable growth rate and you have all you need to calculate the MOS Price.  Like I said, I get $7-ish.  Isn’t that a trip that if the analysts are right and this thing grows at 10% a year, you have to buy it for $15 to make 15% a year — and your fund managers are paying 3 times that.  Why?  Because they are paying that for the other similar businesses.  No other reason in the world since they are using the same analysts we’re using.  Crazy, crazy Mr. Market.

So, Eddie, go do the work and see if you get what I get and I’ll publish your results.  If I’m right, the obvious thing to do is to … well, you tell me.

Let’s go make some money and remember Rule #1.

Phil