Phil Town

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.

Rule #1 Question of the Week: What About Apple?

This week's question for Phil Town comes from Dave, about Apple (AAPL):

Dear Phil Town,

A coworker recommended your Payback Time book to me as a smart way to get into the market.  I must say I agree with her, the book as fantastic and I've learned a lot about how things work out there. That being said, I've started analyzing some companies and one in particular has me stumped. The company in question is Apple. As for the 4 Ms, Apple has meaning for me (I own several of their products and I work in the tech industry), has a moat based primarily on Brand, has exceptional management (Steve Jobs), and appears to have a good MOS.

Here are the numbers I've gathered to this point (straight from MSN):

Rule #1 Looks at Forbes View of America's Best Big Companies

In keeping with some sort of theme here at the beginning of 2008, I took a look at Forbes Best 400 Businesses list with a focus on the ‘honor roll’ list of the 29 best.

Usually when you read about the best picks for next year, what you don’t see is something about the value of the business.  In fairness, Forbes isn’t telling us that these businesses are on sale.  Just that they are really good businesses and have performed well in the past.  Still, since we are paying for something when we buy a stock, doesn’t it seem odd that you almost never read a discussion of what the stock is worth?

This may be a throwback to a very influential old school theory of valuation that was taught in almost all business schools for thirty years… right up until recently… and it is still defended by some real old school econ profs. 

The theory is that in a large marketplace where all the information is known about the things that are on sale, the price of the things being sold is what they are worth.  The reasoning goes that since everyone knows everything, there is no reason that anyone would pay too much or take too little.  In this perfect marketplace, price equals value. 

The marketplace that was held up as the ideal market for this theory is the stock market, and the proof that it is correct is that the professionals who manage mutual funds almost never beat the market returns over any long period of time.  The logic is that since the pros can’t beat the market, the market must be pricing things perfectly. 

Good argument if it wasn’t for one small thing: the pros ARE the market. 

They control so much stock in any given investment that the price of the stock goes down when they sell and goes up when they buy.  Also, almost all fund managers own hundreds of stocks at any one time.  If you own hundreds of stocks, you are the market.

This theory is further discomforted by the fact that individual investors like Warren Buffett, Eddie Lampert, Bill Ruane, Bill Nygren and many more like them do beat the market, and not by just a little. They slaughter the market.  $10,000 invested in the market in 1969 is now worth $134,000.  The same $10,000 with Buffett in 1969 and held to today would be now be worth $44 Million. 

That difference demands that we learn what Buffett knows.  And what Buffett knows is that when you buy a wonderful business at a great price, you are certain to make money.  This is the essence of Rule #1 style investing.

So let’s take a look Rule #1 style at what look like the best businesses in America for 2008, according to Forbes.

Checking The Big Five Numbers on a Quarterly Basis

I received an email the other day from Brian, who felt that I could get into more detail on how to redo the sticker price of a company on a quarterly basis.

As Brian pointed out,

"...It completes the entire process of investing in a wonderful company at an attractive price and following the company quarterly until it is no longer a desirable investment.  Without knowing the value of a company on a quarterly basis after doing the initial research, one would be investing blindly.  Essentially, you would only be left with the 3 Tools as your only means of protection against loss until you are able to evaluate the company again.  This evaluation would only come once every fiscal year since it appears that MSN Money only publishes this data on an annual basis.  Will you help us out in determining the quarterly value of a business?"

Thanks, Brian, for staying on me to get this issue clarified.  We DEFINITELY want to keep up on the Big Five Numbers on the businesses we own or are watching on a quarterly basis.  It's just part of the homework of owning a business, gang, so get used to it. 

One of the most important things you can do as an owner is to catch problems before they bite you.  Checking the ROIC and Growth Rates quarterly is the most efficient way to see changes and challenges happening.

War of the Worlds, Part Two: Good Biz, Bad Biz

To recap: I got in a battle with a guy from Kiplinger on Maria Bartiromo’s show, Closing Bell. He said that individual investors can only succeed if they diversify (easily done with mutual funds) and hold through the drops in the market because the little guy can’t pick wonderful businesses that are on sale, nor know when to get out.  Maria was also skeptical that the little guy could successfully use technical tools to get in and out when the Big Guys get in and out.  Let’s see if we can convince our doubters, shall we?

The first step of knowing when to buy and when to sell is to know the business that you are buying well enough to be able to put a value on it.  It is absolutely basic to Rule #1 investing that the business is wonderful. 

Wonderful businesses are easily found, but you do have to know what "wonderful" looks like.  I could write a book about it.  Oh, wait.  I did write a book about it.  So read it.  But I’ll cover the main points here for you anyway.  I call the main points "The Four M’s”, the first 3 of which are all about "wonderfulness".

Rule #1 Question of the Week: Tech Businesses and Stock Options (WDC)

This week's Question of the Week for Phil Town:

Q:

Hello Phil Town,

I'm a reader of your book from Kuwait. I'm a complete novice in the stock market, I'm trying to learn while reading your book. I never seriously considered the stock market until I read your book, thank you.

I was checking out Western Digital (WDC) on MSN money and I was amazed by what I saw in the insider trading page. Is this really a good example of suspicious selling or is this normal?

TOO MUCH GROWTH?

A question for Phil Town

from Mark in Falls Church, VA:

I just had a quick question about upper boundries. In Phil Town's book you often repeat the necessity of moat numbers remaining at or above 10% but do you believe there to be any moat numbers that are too high? I've heard that in general 25% earnings growth is about the highest one should allow before things get scary.

Can there be too much growth?

Oh yes oh yes there can be too much growth.  The laws of compounding prove it.

RULE #1 QUESTION OF THE WEEK: WHAT IS A COMMODITY STOCK?

Somehow Monday came and went and I forgot the 9 a.m. post.  Here it is, with my apologies. David had a question about how to identify a commodity stock. Read on:

Hi Phil,

Here's a question that you may want to touch on in a blog entry. I know Rule #1 investors do not trade in commodities so I recently dropped UNT because it is resource based (thankfully at a small profit). I am wondering what constitutes a commodity in your eyes. I've been reading Robert G. Halstrom's "The Warren Buffet Way." He includes (p.71 ) automobiles, computers, airline service, banking and insurance as commodity-type stock. Based on Halstrom's assertion, I imagine we should stay away from Honda (HMO) or IBM even if they had excellent numbers and their share prices fell to an acceptable MOS. Would you agree?

David Brien

YOUR HOMEWORK: CHIPOTLE MEXICAN GRILL (CMG)

Hi Phil Town,

I continue to watch Chipotle Mexican Grill (and eat their food!).

Here is my take on the 4M's.

Meaning. Chipotle's concept is "gourmet fast food" - food that takes hours to prepare and seconds to serve. They have a very simple menu - burritos, burrito bowls, tacos and salads. The customer chooses from several meats, beans, salsas and other extras, resulting in thousands of variations. The food is excellent, served in under a minute, and a great value (~$6.00 for a burrito and a drink).