As I mentioned earlier in the How to Get Mentored post, I'm asking students of investing to do their homework and research YUMMMMY companies on their own... then submit their work to me for evaluation. Every so often I'll post a good example under Your Homework. Be sure to check these out -- they're the best way to learn.
This is a post from Jon Welsh. He is a former Marine Corps Sgt. He was part of a small team that did SWAT actions in Fallujah and he's carrying some scars. The man is one of our young heros. I'm hoping he doesn't go through what a lot of Vietnam vets went through when they came home to an uncaring country so I'm working tight with Jon. And he's getting on this Rule #1 stuff. These are emails from yesterday back and forth between us.
On 6/12/05, jonathan welsh wrote:
Hello! This is my homework. Well at least half of it.
Y - Yes I would like to own "the nation's leading builder of luxury homes." (Toll website). Toll Brothers builds quality luxury homes in some great areas in the U.S., and they win some prestigious home building awards.
U - They build it in 20+ states, and people buy it. In Phoenix, New York, and California, people are buying plenty of homes for investment reasons. Demand for homes is rising faster than Toll...
...Brothers can build it. Interest rates are reaching record highs and Toll is doing great anyway. CEO Robert I. Toll on CNBC pointed to their historical performance during high interest rates. Mr. Toll said the company was reaching record highs during record high interest rates. Also while the industry was yellow Toll was still performing with excellence.
M - Toll Brother's website is filled with evidence of a MOAT. They are "committed to unparalleled service and exceptional quality." That philosophy has earned them "the three awards most coveted by home builders: America's Best Builder, National Builder of the Year, and the National Housing Quality Award." This company focuses on satisfying its customers - "it's the reason…They're…the nation's leading builder of luxury homes."
Growth (on investools website): Overall the company is doing better than the industry as a whole.
EPS 5 yr. - 24.4
Co. growth ratio - 1.9
Cash flow growth 5 yr. - 25.5
EPS Growth rates
Nxt 5 yrs. 17.1%
The last five years their average sales growth has been 30.68% and 47.4% for the past four quarters.
M - Good to Great had 3 stages.
1. disciplined people
a) lvl 5 ldrshp
b) who then what
2. disciplined thought
a) confront brutal facts & prevail
b) crucial hedgehog
3. disciplined action
a) culture of discipline
b) stay on target (intersection of 3 circles)
He also mentions preserving greatness by maintaining the core ideology while stimulating change and progress, and setting BHAGS that fall in the three circles.
Today I did Y, U, and Moat. Tomorrow I will do:
M - MANAGEMENT
M - MARGIN OF SAFETY (MOS).
M - MR. MARKET
Y - YIELD
Jon!!!! Good man!
I like your work. I like Toll Brothers a lot. You've done well with this. The big question on the MOAT is how much of a monopoly do they have and what kind is it? Monopolies are key to making sure we can predict the future. There are five:
Brand, Low Price, Switching Cost, Secrets and Toll Bridge. These guys -- Toll Bros. -- build high priced homes, there is no cost to switch to a different builder next time, and there are no trade secrets. Even Brand isn't as solid as I like, although certainly they have a great name in the home market with people in line to get one of their products. So clearly a growing brand monopoly.
But I kind of like the toll bridge thing, and not only because it's their name. A toll bridge monopoly is one where you have to pay these guys to get across the river. If they are buying up the good, developable land around the cities where they do business, doesn't that create a nice toll bridge? Like, "Hey, if you want to live in this part of town, you've got to pay me because we build all the houses here." That is one of the greatest kinds of monopolies. If they have that, and if we can get this at a great price, I'm in!
So go find out if the Toll Brothers own a toll bridge company for us, will you? And report back.
Oh, and check on the 'high interest rates thing'. I'm thinking long term rates are historically really low right now and that's driving the real estate new home market. Isn't the big question what happens to Toll when the rates go up?
You've done such a good job with this that I'm going to post our conversation. Can't wait to see what you think about the CEO, the MOS, the YIELD and what MR. MARKET is going to do next with the home builders.