Phil Town

CTSH: GOOD NEWS, OR BEAR TRAP?

Here's an interesting question:

Phil:

Most days I am so thankful that I went to that "Get Motivated" Seminar in Cleveland and heard you speak on investing because I did not understand it at all and you gave me a direction to go.  After that I got your book when it came out, read it at least six times (I'm a slow learner), convinced my brothers to join me in getting an Investools account, and I have been paper trading since May.

However, there are days I think, "What did I get myself into?"  I'm not embarrassed to admit (yes I am) that I'm feeling a bit overwhelmed because there is so much information out there about investing and trading when you start looking for it.  Investor's Business Daily, Wallstreet Journal, CNBC, Motley Fool, PBS Nightly Business Report, theStreet.com, Jim Cramer's radio and TV show, etc.  I get a headache trying to make sense of all the things I hear and read.  To that one might say, "Just focus on following the Rule Number One way of investing." I'd like to, but being so new at this I'm afraid I'm going to miss something!  I can't believe I'm the only one who feels this way.

That said, it is pretty cool following the arrows and knowing that you got out of Panera well before it tanked!  I do think this is an excellent time to be learning to invest.

So here is my question:

I got my last green arrow for Cognizant Technology Solutions Corp. (CTSH) last Friday and I bought a position on Monday.  They are releasing earnings this Wednesday.  Is it more likely that:

a) The stock price has moved up over it's 30 day moving avg because of good news coming out when earnings are released.

b) Crafty institutional investors are ready to spring a bear trap by "pushing" the price over the 30 day moving avg, getting more investors to buy, and then selling short when bad earnings news is released.

or

c) Dude, you are thinking way too much about this. Get in when the arrows are green and get out when they turn red.

Thanks for the insight!

Dean
RIT - Rule #1 Investor in Training

FREE CASH FLOW ON MSN: WHERE TO FIND IT (UPDATED TO REFLECT MSN CHANGES)

Several readers have written in this week to let me know that MSN Money has rearranged its interface a bit. Free Cash Flow is no longer found at the bottom of a pull-down menu, though it's still basically in the same place -- Research > Financial Results > Statements (using WFMI as an example).

To calculate FCF, take the line that says Cash from Operating Activities (sometimes referred to on other research sites as "Net Cash Provided by Operations") and subtract from that number, the number immediately beneath it -- Capital Expenditures.  The resulting number is your Free Cash Flow number.

I'll go back and change the wording in the old posts too, for those of you who comb through the Archives for reference materials.

Now go play!

Phil Town

RULE #1 QUESTION OF THE WEEK: TWO GREENS OR THREE?

Here's a quick, general Q&A about the Tools.

Q:  OK… Say I’ve done all of my homework, found a wonderful company. I look at the charts and have two green & one red indicator. Do I:

1. Just wait for that last green?
2. Wait for everything to go red, then to green?

A: Wait for three greens and unless you are used to this, wait for the 30 day MA.  I've seen too many of you jumping the gun in this market by triggering on the 10 day.  Let's slow it down a bit and not get too impatient.

• A reminder to those of you who are new to the Rule #1 blog -- you can search through old posts by Category by visiting the Archives.  You can also get to the Category list by looking at the right-hand sidebar on this page.  The Three Tools index is a popular destination full of useful info.

GUITAR CENTER FOLLOWUP

Here's a Guitar Center followup from Jonathan:

OK Phil Town

Here's a little more on guitar center.  When I dug into the cash flow I found where in 05 they spend 74 million from cash on additional inventory for the new stores.  Is it good for them to spend the cash on that, or should they be getting that money from somewhere else? 

Anyway, when I added the capital expenditures back into the cash flow numbers things got a lot better.  So much so that I question doing this right. 

They also talk in the reports and conference calls that I listened to that the cash flow in general has been up and down due to aggressive expansion.  And they want to expand even more than ever before in 06, so I would guess that the cash flow numbers are going to continue to be all over the place. 

THE TOOLS AND VOLUME

Craig has a good question - read on.

Phil Town,

Loved your Rule #1 book!  I  have been utilizing Rule #1 investing for about 3 months now, first on paper than with real money.  I am holding my own during one of the most bearish markets in recent history, so I am very pleased with how well Rule #1 investing works.  You saved me a bundle by motivating me to move out of non-Rule #1 companies, and then wait to buy Rule #1 companies until the indicators say "go".   I lost a fortune in the tech bust of 2001, and those "buy and hold / diversified portfolio" strategies got me nowhere in the past 5 years.   I have identified several solid 4M companies, and track them daily using the tools you suggested on MSN Money web site.

My question is regarding the 3 technical indicators you recommend (Moving Averages, MACD and Stochastics).  You explain in your book that we utilize these indicators to gauge whether the institutional buyers, who control the majority of shares in the market, are moving in or out of a particular stock.  If so, why do none of these indicators utilize trading volume data, which is a key indicator of institutional participation in any market movement?  It seems to me that if you really want to track what the big boys are doing, you need to track volume as well as pricing data.  Any thoughts on this?

Feel free to post this on Phil Town blog, which I read weekly, and really enjoy!

Many thanks,

Craig Behrman

WHAT TO DO WHEN EARNINGS GROWTH AND EQUITY GROWTH DON'T MATCH

Here's Allen's second submitted question.  Yesterday we talked about whether or not he should consider dumping his Disney shares.

Hey Phil Town,

I would like to know your thoughts on selecting a growth rate when the earnings growth, (and analysts estimate of earnings growth) vary widely from equity growth. (In Disney's case, the historical PE's tend to be much closer to 2* earnings growth than 2* equity growth).

Thanks--Allen

A QUICK LOOK AT DISNEY (DIS)

Allen from Moorpark, CA had a couple questions worth sharing with other Rule #1 readers.  I'll answer this one today and his other question tomorrow.

Hi Phil Town,

What *DO* you do when the growth rates are all over the map? For practice, I'm trying to analyze Disney, which is *NOT* a Rule #1 company, but we have a zillion shares from when my wife was a little girl.

The 9, 5 and 1 year equity growth rates are 5.7%, 2.8% and 0.1%, but analysts forecast 12.15% earnings growth, and actual 9, 5 and 1 year EPS growth is 7.4, 16.8 and 10.7%.

So the EPS growth is there, but the equity growth doesn't support it. Since sales growth and ROIC are weak, and long term debt is 5 years of free cash flow, I'm not thrilled. But the problem with selling, of course, is the *BIG* tax bill that we'd be hit with. Am I missing anything? Any thoughts?

Thanks so much for reading this, and have a good weekend!

Allen

MORE ON CHIPOTLE (HOW TO REQUEST FINANCIAL DATA FROM A COMPANY)

Here's another update from Lee re: his Chipotle research:

Thanks for the feedback as always, Phil Town. Here's what I'm up to.

I requested the information from Chipotle Investor Relations (email below). I also looked at McDonald's annual report, since they are/were a major investor. Chipotle was part of "McDonald's Ventures", along with Boston Market. So, a way for McDonald's to use their money in other segments of the market.

A recent announcement said that McDonald's is ending some benefits to Chipotle (as planned) because their ownership is decreasing. This has apparently pushed the stock down, but I view it as good news. Just waiting for the green arrows now at a lower price.

DOUBLE CHECK YOUR NUMBERS

Ray from New York makes an interesting observation about data when he noticed that different sites had different numbers for YHOO EPS.   See below:

Hi Phil Town,

I have a question regarding EPS. For "yhoo" the EPS on finance.yahoo.com says 1.24, but finance.google.com says 0.54. On the other hand businessweek.com says 1.25 and nyse.com says 0.54.

So which number do I go by?

Thx,
Ray

The answer:

BusinessWeek and Yahoo Finance are correct.  The TTM EPS is 1.24 per share.  Investools has it right, too.  I checked into it and could find no obvious explanation for why the others are wrong.  Just a bad number.

And the lesson is that before we use real money, check the real SEC docs on the biz.  Always read the 10k and 10Q of any biz you are going to buy just as you would if it were the only business you were going to own for your family's financial future.

Now go play!

Phil Town

QUESTION OF THE WEEK: STICKER PRICE ALL-TIME HIGH

This week's question comes from Jerry in Orange Beach, Alabama:

Q:  Is it unsual for the Sticker Price of a stock to be higher than it has ever sold for over a 10 year period? If this occurs, would it be better to use the highest ever price or stick with the Sticker Price? In this case, the MOS would be dramatically higher in one case and would appear to have more risk.

A: It's not unusual for the Sticker to be higher than the selling price at any given time.  But remember, the Sticker price is going to increase over time as the earnings grow -- so it's not surprising that the Sticker today is higher than the the price has ever been over ten years. 

Still, I'd be curious whether I'm inputting the right numbers to get the Sticker.  Double check that you are using the lower of the historical growth rate or the analysts' growth rate and the lower of the historical PE or 2X the growth rate.  And make sure that you've got a business that can be priced!  If it isn't consistent over long time periods then it isn't something you should play with.

Now go play.

Phil Town