Phil Town

Garmin Update: Is it Still Wonderful?

Many of you have been talking about Garmin and whether it's still a good buy,  especially in light of a recent sell-off that meant a loss for people who weren't watching the tools. Here's an exchange I had in the Comments with a reader of the blog who feels Garmin is still a contender:

John & Phil Town

I also got tagged by Garmin last week. But, we got tagged because of the market and the macro economic conditions. A 22% sell off in one day is a over reaction . Also, to Phil's credit, following the rule one indicaters, you should've gotten two sell signals last thursday which would of told you to get out cause bad news was a comin.

Cramer is a trader not an investor of businesses. I like his show and he does provide some insight, but he does not take a long term view approach to investing. He also trades on stocks that are in vogue.

In my opinion, Garmin is a great long term hold for the following reasons

1) #1 worldwide leader in PND
2) #no Debt which allows them to spend more on R&D
3) 40% inside ownership.
4) The company is buying the stock back, and i bet insiders will soon buy in the next few months because Garmin will exceed the bearish guidance for the year.
5) Awesome big 5 numbers.
6) GPS will become a standard in automotives.

Does it concern me about competition, inventories, and the delayed Nuviphone. Somewhat. but i assessed these risks by the following:

Setting Up Your Own Berky

This post is the Part II of Phil Town's two-part series on Berkies

Mr. Buffett’s BERKY (Berkshire Hathaway is Mr. Buffett’s Berky, for those of you who are just tuning in) gets its cash flow from businesses Mr. Buffett owns.

[I know that the cash comes from businesses that Berkshire Hathaway owns, but I’m setting this up as an analogy, so bear with me.] 

The guys who run those businesses are well compensated for passing up the excess cash to Mr. Buffett’s Berky.  In order to set the game up so that they will send him the cash, Mr. Buffett put his CEO’s on a compensation system that rewards high return on equity (ROE). 

[NOTE: Or high return on Capital, which is a bit different.  For the purposes of this post, it works better that we stick with ROE rather than ROIC, even though ROIC is better in the real business world.]

Because of the way Mr. Buffett set up compensation and rewards, the more cash his CEO’s get off their books (by sending it on up to the Berky), the lower the denominator that they are using to divide into their earnings to get ROE... thus the higher the ROE. 

Good system.  Keeps everyone working toward the same goal -- well run businesses and lots of cash to the Berky. 

You can do this, too. 

Mr. Buffett's Berky

Last post I wrote about the necessity to trade if the big guys are getting out, and waiting until they get back in to come back in ourselves.  And I also said there is another way to go.  You can create a BERKY.

A BERKY is a kind of Berkshire Hathaway -- the investment account/company that Warren Buffett uses to hold cash while he’s thinking up something to invest in. 

Mr. Buffett’s Berky is an incredibly important part of his investing strategy.  It's what allows him to accept the downs of the market.  With his Berky, he has the luxury to take a long view.  He can buy into a business even while the news is horrible and the stock is going down like a brick, because he knows that if it keeps going down, his Berky will provide him with more cash to use to buy in at the lower prices -- and he can keep on buying as long the price keeps on going down.

Retail Getting Hammered. What to Do Now?

There have been some questions from blog readers about what is causing the huge drop in Garmin (GRMN) and Coach (COH).  Here is a quote from a front page article titled "Retailing Chains Caught in a Wave of Bankruptcies" in the New York Times:

“The surging cost of necessities has led to a national belt-tightening among consumers. Figures released on Monday showed that spending on food and gasoline is crowding out other purchases, leaving people with less to spend on furniture, clothing and electronics. Consequently, chains specializing in those goods are proving vulnerable.”

Coach and Garmin both sell stuff that people don’t need.  Coach even more so than Garmin...  Well, my daughter would argue that a new Coach purse is a necessity while a GPS device can be replaced by a map and a compass, so there. 

Still, neither makes food, water or air... so in down turns Mr. Market acts like the whole world of retail is ending, and he wants to sell all retail stuff so badly that he begins to dump even the really good ones at lower and lower prices...

Garmin's Moat: Garmin vs. TomTom

In response to Phil Town's last post about Garmin, Dave H had two concerns about its moat:

I used to love Garmin, However I'm concerned about the moat for 2 reasons.

1. They don't own the software (recent battle with Tom Tom)

2. All cell phones will soon have GPS. Leaving only the Auto/Aviation/Marine business at low margin negotiated prices with those manufacturers.

How do you see the moat?

Thanks.

Here's what I think:

Dave H,

Well, this is where really knowing this marketplace is the key. And I'm going to confess that I'm no expert. Still, here's my view if only to give you some things to dig in on:

1. The lawsuits are about TomTom swiping Garmin software. Both sued each other. It's a stand off. And seriously, have you seen TomTom compared to Garmin? If Garmin swiped it from them, how'd they make it so much better? This should tell you that TomTom swiped it from Garmin since the rule is that if you steal, you steal from the best. This law was set when Microsoft swiped Apple's GUI and it remains in effect.

Garmin: Much Ado About Nothing Much

Garmin keeps being such a good example that I think I’ll drag it out once more for you guys to look at. 

Right now it's selling for $54 on a long plunge down from $125.  Gotta love that stuff if you like to trade the good ones.  This year, if you use a 30 day MA, you would have bought in April for a couple of weeks (0% ROI), June and held until October (90% ROI), Oct-Nov for a small loss, Dec for a small loss and, unless you really like to buck trends an industry group sell off, you’d be done right up to now.

Overall you’d be well above 80% for the year trading this one.  Not bad for a stock that sold 12 months ago for  $53 and is selling today for $54.

And here’s the best part.

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:

4M'S: CHICO'S (CHS) AND GARMIN (GRMN)

In a comment under yesterday's post, Larry asked me to take a look at Chico's and Garmin (CHS and GRMN), which also dropped suddenly a couple of days ago, to see if there were indications that would have gotten him out of there before taking the hit. 

Larry, if you were my buddy and we were talking about this over dinner, the first thing I'd ask you is why you are investing in CHS and GRMN -- and I'd expect a good answer. 

We're both Rule #1 investors so we both know that we NEVER invest in businesses we don't understand, that don't have a good Moat or that don't have good Management.  And we never invest at retail prices.  So I have to think, if you are telling me you got burned, that you think all 4Ms are good to go on both businesses. 

So are you saying that, my friend?  Is Chico's still a great business that's on sale?  Is Garmin?  So let's take a peek, shall we?