Rule #1 Finance Blog

With Investor Phil Town

Rule #1, REITs, and PVH

Here’s a question that came in after the CNBC program, from Ben:

Hi Phil Town,

Great showing on the CNBC special Millionaire Inside! I have some questions based on the stocks you mentioned on the show. Maybe I am reading Rule #1 wrong and would love to have your feedback and clarification.

I did a quick scan of the selections using Investools:

GGP – The 2/9 phase one, Big 5, and current price vs. sticker – do not make this a Rule #1 pick.

TCO – The 4/5 phase one, Big 5, and current price vs. sticker –  do not make this a Rule #1 pick.

COH – Meets Rule #1 criteria.

GRMN – Meets Rule #1 criteria.

PVH – This one is a bit mixed, The 7/1 phase one is great, Big 5 are great for 4 out of the 5, but it is not selling at a discount – do not make this a Rule #1 pick.

Nike and Ralph Lauren you already mentioned were not on sale.

So my real question is, do you value and use different criteria for REITs to be a Rule #1 candidate?

Your insight is always appreciated!

Thanks,
Ben

My response:

Hi Ben,

You are exactly right about the REITs, except they are a special case.
You can’t look at the Big Five the same way as you would with a
business since they are not businesses.

REITs are real estate deals.
More later on those someday.  Suffice it to say that both TCO and GGP
are excellent real estate trusts, but neither is on sale right now, and I
wouldn’t buy them at these prices.

I have to take exception to your valuation of PVH.  If you take
Investools Valuation tool as gospel you are going to be misled from
time to time, particularly with regard to the PE it throws up there as
the ‘average PE’.

Always look for yourself to see what range of PE a
business gets over time. 

You can do this on Investools by looking at
the Financials page at the bottom.

On MSN Money go to Financial
Results / Key Ratios and click on Price Ratios.  You’ll see the highs
and lows over the last five years.

What we want for a PE ratio is a
likely multiple of the earnings growth rate since PE’s are all about
what the stock buyers expect for the future growth of that business
(and those expectations are notoriously short sighted.)

My default PE,
the Rule #1 PE, is always two times the expected growth rate that I
come up with.

In this case, PVH analysts are projecting 17%, and I’m
happy with that because it’s a bit lower than the 18% that I get
historically.  That puts the multiple that I want to use to value the
business out ten years at 34 (2 x 17%).

That ’34’ needs to be in the ball park
of the historical range that this business gets.  And it is pretty
close.  The high over the last five years is about 31 to 34 depending
on which website is calculating the data.

That gives me a $100 stock
selling for under $60.  Which is why I said that PVH is on sale.

And
it doesn’t hurt to note that the overall return since 2000 is over 900%, and the compounded annual return for those 7 years is over 35% per
year.  Same with Coach.  Same with Garmin.  Get returns.  Great
businesses.

So should you run out and buy them now?  They are all three on sale.
They are all great businesses.  They have different moats, though.  And
Moat is where the rubber meets the road once you know you like the
price, because here’s the question:  Which of these, if any, will be
around in 20 years for sure?

Answer that, then you can go buy the thing you said yes to.

Now go play.

Phil Town