Rule #1 Finance Blog

With Investor Phil Town

4M’S: CHICO’S (CHS) AND GARMIN (GRMN)

In a comment under yesterday's post, Larry asked me to take a look at Chico's and Garmin (CHS and GRMN), which also dropped suddenly a couple of days ago, to see if there were indications that would have gotten him out of there before taking the hit. 

Larry, if you were my buddy and we were talking about this over dinner, the first thing I'd ask you is why you are investing in CHS and GRMN — and I'd expect a good answer. 

We're both Rule #1 investors so we both know that we NEVER invest in businesses we don't understand, that don't have a good Moat or that don't have good Management.  And we never invest at retail prices.  So I have to think, if you are telling me you got burned, that you think all 4Ms are good to go on both businesses. 

So are you saying that, my friend?  Is Chico's still a great business that's on sale?  Is Garmin?  So let's take a peek, shall we?

GRMN 4Ms:  

Best GPS company, with secrets and brand moat, with awesome Big 5 Numbers (except watch Free Cash) and great management. 

But NOT on
sale.  Worth about $57.  Selling pre-drop for $55. 

Note (see
GRMN chart below) that following the Tools you should have sold mid-Oct at
$49.  The next entry point 4 days later would have put you in at $53,
well within the 20% danger zone of buying without a large enough Margin
of Safety. 

Garmin_example

No way could you buy this back without having lots of
potential to violate Rule #1. 

Remember the three most important words
of investing are "Margin of Safety".

We require that because we aren't
geniuses and we can't possibly price a stock's retail value perfectly.

Our MOS rule requires that we start out investing with around a 50%
discount to the Sticker Price and buy in and out until we get into the
danger zone — within 20% of Sticker. 

We do NOT buy back in that zone.
We wait until the stock has backed down far enough that the Big Guys
begin to feel there is a bit of discrepancy between the Price and the
Value and they begin to buy it back. 

That certainly was not the case
here.  You can love this business, but patience, my friend.  It will get
cheap again, and then you can jump back in there.


CHS 4Ms:

Retail clothing stores that the CEO is having trouble
integrating.  Great Big Five Numbers indicating a big brand moat
historically, but the last four quarters the growth rate of sales is
only 3%. 

OH OH.  Problem here.  Red flag.  Warning.

And then the CEO
fired one of his top guys and is telling analysts that they are having
some problems. (Don't forget to keep up by listening to the quarterly
report to analysts that is posted on their website.) 

And all this came
out of nowhere, and that really pissed off the Big Guys and they just
DUMPED.  Even though, based on the lesser of historical and analyst data,
the MOS is gigantic. 

I'm getting an $86 Sticker with a market price of
$20.  Based purely on price, CHS is a HUGE opportunity to profit IF IF
IF IF you understand the business well enough to KNOW that whatever
difficulties they are having are not going to poison the well. 

Larry.
Do you know the women's clothes industry?  Are you a shopper at CHS?
Do you have a deep personal connection with this business?  Would you
be happy knowing that this is the only business you own to feed your
family for the next 10 years?  You MUST answer that question with a YES
or you can't invest. 

Assuming you did answer it YES, you got out at
$23 in mid Oct. (see CHS graph) and you shouldn't have gotten
back in because you only got two greens (Stoch was a phantom and a
green MACD.).  The price was going sideways to down.  That is a RED.
You didn't have three greens, buddy.  You had two. 

Chs_example

Don't feel bad.
I've done the same thing a dozen times, at least, because I don't like
missing the run up of an undervalued business. 

I got burned, too, and
that's how I learned.  I wrote the book because it's a lot cheaper to
pay $26 for a book than $26,000 for a mistake. 

Which is also why I want you guys to do this a whole bunch of times
with paper money.  It's nice to get the kinks out without violating Rule
#1.

Now go play. 

(And here's my Paper Trading Journal, which you can download to help you practice:  Download rule1papertrading.xls.)