Here's another homework, from long time reader Michael L.
Thank you for the audio version of your book. It has been wonderful to listen to it over the past two days.
Although I attended the seminar and have been a subscriber to Investools I have made some trades that were not Rule #1 trades and did lose money. In one case, 30% in one open! Check out DESC and look at the day it dropped significantly. I have a fellow co-worker who has been in the stock since it was at 2 dollars. He convinced me to buy the afternoon before they were to give their 1st quarter results. The con-call was after the market closed and needless to say, it was not good and I lost 30% of my total value at the open. Fortunately it was not 100% as I pulled out, licked my wounds and kept my cash until I followed the Rule, all the way or no way.
Then your book came. I had some stocks on the radar, but being very trepidations about trading I wanted to read/listen first to figure out what I had been missing. One particular stock I did the 4 M's on is Jabil JBL and I was hoping you could check out my information and if you had the time, let me know what you think?
Jabil-JBL
Basic information- Jabil is an electronic products solution company providing basically electronics products to the market faster and more cost efficient by providing complete electronics products supply chain. In short, they make electronic components for items I know I use every day.
Meaning
What does that all mean to me? Well, actually very little. But, what does mean something to me is the very first picture on their annual report, an in-car DVD Player. My wife and I purchased a Honda Pilot last March because we love Honda's and my wife wanted the Pilot. The deal winner was the DVD Player for our 3 year old.
My investigation revealed that Jabil has its hands in many cookie jars. Cell phones, medical electronics, the defense department and your every day PC comprise only a few items that Jabil manufactures electronics for. Would I consider this the best Meaning possible for everyone? Probably not, but as you say in your book, you love Harleys and I am scared to death of motorcycles, so there is very little meaning to me.
Moat
Based on Investools Industry Comparison, there is no comparison. JBL is flying at almost 54 while the rest of the industry is at 14. If I am reading that correctly then that is huge.
Now, there are some major competitors in the field of chip makers, namely Intel, Texas Instruments, and Samsung. However, Yahoo Finance lists the Direct Competitors as FLEX, SANM and SLR. In comparison to each one the only one close to JBL is FLEX. FLEX has over twice the employees but their quarterly revenue growth year over year is -2.10% while JBL is + 31.10%. Net income was 252M with and EPS of 1.21 while FLEX was 172M with and EPS of .28.
Now, if I remember correctly, in your book you state that cash is very important in any business. Here are JBL's stats. 875M in cash with 326M in debt. 705M in operation cash and 306M in leveraged free cash flow, both TTM.
If I am reading this correctly then the ROIC is 12.12% which is just fine by me.
JBL has expanded its customer base while keeping its acquisition growth to a minimum.
- Patient growth that has not led to constant restructuring.
- Management has moved the product line to a much more diversified products base. It is a highly competitive field but JBL has scorched the nearest competition.
Management
Management has Aggressive Goals! – Management has outlined a 20-25% annual revenue growth and 30-35% operating profit growth through 2007. I believe JBL has superior management. Last year they added 15,000 employees to support world wide growth, but stated this in their annual report.
"We realize that our strong expansion places pressure on our human capital and so we will continue to invest liberally in training, management development and knowledge sharing to ensure the sustainability and quality of our solution."
That tells me that they are more concerned with quality than the initial quantity of employees. In other words, they want to make sure they are well trained and are major contributors in the future. They follow that with this…
"The key to our success is people and we want to have the best trained and most highly motivated people in the business."
Now Phil Town, I KNOW you will appreciate the next segment I am about to quote…
"We are keenly aware of the need for high asset velocity and cash cycle management. Over the past two years, cash flow from operations has grown over 30 percent per year, faster than revenue and earnings. Free cash flow has been over 40 percent of net income for the past two years, indicating we can generate significant levels of surplus cash in a high growth environment. Core ROIC reached 19 percent in the fiscal 4th quarter of 2005 and we expect fiscal 2006 to be our fourth
consecutive year of ROIC expansion."I find all this outstanding information! A very profitable lemonade stand, don't you think? In my research regarding the Directors, I found nothing out of the ordinary other than they all seem to have been with the company for a good while. Morean has been with them since the 70's and Main since the 80's. Morean was Elected Director in 1978 and is only 50 years old so he was rather young when he started but has some longevity.
Margin of Safety
Well, this is the easiest part as I have Investools and the Valuation Analysis has their sticker at 92.14 so my MOS is 46.
Yesterday, when I got my 3rd green arrow, it was trading at 41.00, so you guessed it I purchased it at 41.20. It is flat today at 42.75 but almost a 12 percent increase since they gave a wonderful 1st quarter report on Wednesday March 22 at 4:30 PM EST.
I would give you all the statistics but I did not see anything out of the ordinary on Investools other than the Growth rate which was 22.95 and a historical of 49.34 I used 22.95 as the PE was 38.71 and it was a better number to use.
Just a side note about when and why I decided to purchase it. Like I said earlier I chose to purchase DESC the day of their 1st quarter earnings reports. This company has NEVER made money and I decide to buy the stock. I wish you were here to smack me on the head!!
Anyway, the news was bad and I ate it!
Now, fast forward to Wednesday March 22… Like I said, I had been watching JBL for a while but after DESC, I decided that if I was going to follow Rule #1 I had to do it ALL THE WAY. I so wanted to purchase it on Wednesday at 38.24 because I was reading everywhere that the "experts" were predicting that JBL would announce they exceeded their goals. But, I did not get my 3rd green arrow and said that I did not want to violate the rules. Was I wrong there? I missed about 7 percent of the move but if my numbers are right I have a great MOS and still money to be made.
So, there it is.
Thank you for reading and responding if you have the chance. I know you are busy.
Sincerely,
Michael Light
Here's my response:
Michael,
Decent! Very decent. Of course you know I'm going to beat on you to dig into how this biz makes money and who is running it, but for a preliminary view of this baby, you did well. I would have done a couple of things before I popped money into it though. I'd read the annual reports back five years and I'd read a couple of years of 10K. I'd know I understood how these guys are going to compete and make me money for the next ten years.
I would also look at the Income Statement to see if the sales and earnings are consistent. I'd notice that they got pounded for a couple of years.
The I'd look at Equity and notice that it's steadily up, which is good, and that debt is payable out of cash flow and steady, which is good.
Then I'd look at Cash Flow and see that it's bouncy and that these guys are selling stock. Oh oh. I HATE it when my business is diluting me. There had better be one really great reason. And if I can't find it, I'm not a happy camper.
So you gotta find out what the heck are they doing? Why do they need to sell stock?
Once you get all this sorted out, you can think about the arrows.
But the short answer on whether you should have jumped in on the two greens is this: notice how volume is moving up day after day and the price is rising day after day.Good sign that the rumor for the quarterly announcement is good news. This is where really knowing your business comes in.
If you KNOW you have a huge MOS and you see this push before the report, you can move in there. But this is advanced games, folks.
Don't try this at home until you have the basics mastered and you KNOW you have all 4 Ms.
Until then, let the thing have its gap up and then go on in there. You're going to lose on some of these as they come back down but hey, the key is to be consistent and in the end you'll get your 15%.
Now go play before you pour in more money!
