Cover Image for 4M'S: CHICO'S (CHS) AND GARMIN (GRMN)


Phil Town
Phil Town

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. 

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. 

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.)