Newbies: Be Patient! (PSUN)
I got this email recently from Arthur, a self-described "Rule #1 Newbie," and thought I'd share our exchange with readers.
Mr. Town,
I saw you at the Atlanta Get Motivated Seminar (I was the guy cheering for the AMG Mercedes instead of the pickup truck), and read your book the next day. I've been following your rule one blog entries, and I thought you may be interested in the thoughts of a newbie to investing.
Over the past few weeks I've pieced together a watch list of good companies. I quickly realized that it's easy to become discouraged when I spend 20 to 30 minutes on preliminary research and calculating the four M's, only to realize the stock I like is trading near it's sticker price (no margin of safety).
Having done most of my homework on PSUN I'm leaning toward it and carefully watching. ROIC 18 and 12%, Equity 20,20,22,21. EPS 34,25,36,21. Sales 28,19,18,13 and Cash doesn't seem to be a problem. So at a current EPS of 1.67 and a growth rate trending at 21% (I used analyst's estimate of 16%) and a PE (historical) of 20... I'm coming up with a MOS price around $18.50.
Although Seth Johnson, the CEO, is not the company founder, he does have a lot of experience in the industry with other decent companies. I like the fact that the board members are required to own 5 times their annual retainer in stock. Insider trading is small, but last year they bought at prices as high as $22.
The stock is around $19 now, and I'm waiting on the indicators. Of the 20 or so stocks on my watch list this is the only one near MOS.
Thanks for all you do.
Regards,
Art
My response:
Hi Arthur,
Way to go for the Merc! PSUN is slipping its growth a bit and before you jump in there you should review your numbers. Try a 15% growth rate with a 20 PE. That's what I see the analysts are doing, and 20 is the historical PE. It can be higher, but it's been lower all year. That gives us a value of $21 selling for $19. No MOS. It's fully valued and right at the value.
I know this can be frustrating. But if you notice, PSUN was selling for a huge discount just a few months ago. That's when we want to be a buyer.
While you are being patient, study the companies as if you were looking for something that you were going to buy lock stock and barrel. Ideally you should know them that well. Buffett does that and then just hangs out waiting patiently until something causes the stock price to crater, and then he's ready to step in. It can take years. But so what? Keep loading the watch list with good ones in various industries in the market and you'll soon discover that something will be buyable and green, and then let the games begin.
Now go play.
Phil
