Phil Town

REFRESHER COURSE: HOW TO BEGIN IDENTIFYING 4M BUSINESSES

The following question came to me from Alex, age 16, who may be the youngest Rule #1 investor to write to me so far. He saw me speak in Boston a few months back and has been emailing me since, practicing by doing a 4M analysis on Delta. For those who, like Alex, don't know where to start when picking a company to research, read on. This is a good refresher for regular readers and a good intro for new ones.

Mr. Town,

I listened with rapt attention to your speech at the Boston seminar, but I must admit that I can't afford success magazine.com and have to use something called smart money instead (same basic idea… imaginary money, buy imaginary stock), and I have very little idea of what I am doing. And I am ashamed to concede this (I hope this doesn't reveal me as ignorant) despite your useful tips and everything, I still have no idea what companies I should be picking…

Alex

My response:

USING INVESTOOLS TO SEARCH FOR RULE #1 COMPANIES

For those using Investools to do their company research, here's a helpful exchange that shows how to use their search tools to hone in on potential Rule #1 companies.

Hey Phil,

Just curious about the "Undervalued" section of searches available on the Investools web site. Do any of those searches hinge on the numbers you are typically looking for with respect to an undervalued company?

Regards,

Tom

And I said:

Hi Tom,

The Success "Undervalued" searches are based primarily on inputs that look for a value type stock -- something that has been knocked down in price from where it was or where it should be based on historical data.

Rule #1 is not value investing, so this set of searches doesn't really do anything special for us. You will occasionally find a good Rule #1 stock in there but I can say that about almost any search... except the global search with Phase II inputs of 3.5.

START AT THE BEGINNING: LEARN AN INDUSTRY

Here's an email from Keith, who served in the Gulf War and has had some tough times since coming back. We'd been going back and forth about how to get him started in investing when he asked me the following question:

From: keith
Date: Sep 19, 2005
Subject: Weekly Tasks?

Other than the Get Motivated seminar DVD's and workbook. What do you suggest that I do each week since I am a beginning investor (this may be a good thing to put on your blog site if not already there) in the way of Stock Market news programs (such as Jim Cramer's Mad Money), magazines, newspapers, websites, etc. I don't want to analyze things to death, but in essence if I could only watch / read 2 to 3 things within each catogory each week what would they be? OR should I just solely focus on the materials (DVD's, workbook, success website) I have already?

Can't wait to get your book in March '06.

Thanks Again.

Keith

And my response:

SEARCH THE RULE #1 BLOG

OK... It's been a long time coming...

Due to popular demand I put a Search Box in the left-side sidebar for those looking to search the site. The search results are hosted on another server, but just click on any one of the result links to get back here.

YOUR HOMEWORK: SMITHFIELD FOOD CO. (SFD)

Here's a homework assignment submitted by Rick S. on September 18.

For new visitors to the blog: homework assignments are single-company analyses submitted by readers. (For rules on how to submit a homework, go here... then email me.)

Each homework attempts to show whether a company is a good buy for a Rule #1 investor -- in other words, is it a 4M company?  Is it a wonderful company we understand, and can we get it at an attractive price? (A discount to value?)

I critique students' results here on the blog to see if they're on the right track.

The case study below is a good example of a Homework.  Here's Rick's letter:

Phil,

I've been working on your formula and would like you to critique my work.

The company is Smithfield Foods (SFD). Current EPS is 2.59, Current P/E is 10.6, Growth rate – Historical = 24%, Analyst = 10%. Future EPS (10 Yr) = 6.27, Future Stock price = 125 MOS = 15.68 Currently selling for 27.39. The only variable I wasn't sure where you found it was the analyst projections. (I used the est. earnings for 5 yrs under MSN, research, earnings)

Looking forward to your response.

Rick

And here's what I told him:

Hi Richard:

Smithfield makes pork stuff and ships it all over.  People have been eating pork for about 10,000 years, so it's likely we'll continue. Gotta like that.  I like the work you did on the numbers to verify that these guys have a Brand Moat and have a predictable future, but let me take you through it again my way:

WILD HORSES (SORT OF)

One more picture for today. Go to the Flickr album for the rest.

The horse is Major.  He is a very tough mountain horse who knows how to climb so straight up that sometimes I have to hold on to his mane to keep from dropping off the back.  He's 12 and likes life best when he doesn't see me for weeks at a time because he gets to hang out with his girlfriend and run around on 200 acres pretending he's wild and still has his cajones.

ABOUT MY HARLEY

More than a few people have emailed asking me about my bike. I finally have a picture for you (click on it to see a larger view):

This was taken in Utah just west of Zion National Park, but the picture could easily have been taken in Escalante or Capitol Reef, two of the more seriously amazing places that you should try to take in someday.  The ride from L.A. to Zion was a bit of a grind, but after that it was bliss on wheels all the way to Sturgis, SD. 

I've done a lot to the bike, by the way.  It started life as a 2002 Softail Duece.  Then I tossed the engine and put in an S&S 119 in with 113 hp; tossed the rear end, wheel and tire and put on a 240 tire with a shorty fender and a sissy bar just big enough to tie my sleeping bag to.  My ground pad and a one man tent go on the 15 inch bars up front.  And I tossed the seat and tank and reshaped a heritage gas tank to blend into the custom seat.  And the pipes... fishtails and oh, they are way too loud... for safety, you know.  Black paint.  No advertising.  Just chrome and black.  Great bike for me, which is what custom bike building is all about - making it right for you.

 

DON'T FORGET THE "MEANING" PART OF 4M

A nice guy named Tim is taking the Success investor education class. He emailed me to ask me about the following. Some of the info I'm using for the analysis is time sensitive, so I'm going to post this as/is and not worry about linking to the numbers online. Everyone should know where to find them on MSN Money and Yahoo Finance by now.

The important thing to look out for here is Meaning. Make sure you understand the business: what it does and what its moat is. Good numbers at a glance aren't enough.

Hi Phil,

I've found a couple of stocks that pass both Phrase 1 and 2 and whose current price is about half of the Target price – OIS and XXIA. Plus both of these stocks had 3 greens as Friday. So, I'm planning to buy both.

My response:

GARMIN'S UP... NOW WHAT?

You all remember Mark, right? The Garmin guy? Well he left this comment on the blog a few days ago:

Hi Phil...

Just a short note to tell you that my GRMN position is up 45% as of today! How long should I ride this?

Mark

Here's what I said:

Hi Mark,

Congratulations on bringing Garmin to our attention. A lot of people have benefited because of your work on this. And now, especially if you've done a good job of finding a Rule #1 business with a big MOS, the time will come to ask, when do I get out?

First, understand that the price of a business goes up because the Big Guys, the institutions, put more money into it than they are taking out. That's the only reason the price goes up. Everything else is secondary. That means that anything can go up. Even a bad business can go up if they buy enough of it.

RULE #1 BOOK AVAILABLE FOR PRE-ORDERS

A couple things I forgot to mention when I posted yesterday:

1. My book, "Rule # 1: The Simple Strategy for Getting Rich -- in Only 15 Minutes a Week!" is available for pre-ordering.
2. If you have Gmail, you can add an RSS feed of my blog to your Selected Clips -- those brief headlines that flash along the top bar of your Inbox screen. Go to Settings, then Web Clips. Paste in my feed address by copying it from one of the options in the right-hand sidebar of this blog. This is a great way to know at a glance if I have anything new for you to read.