Phil Town

Phil Town Question of the week

A lot of Rule #1 readers are writing in with variations on the same question:   if the MOS is good but the tools say Sell, now what?

Here's how Steve worded it:

Question:

Hi Phil Town,

RULE #1-Great book. I'm still going thru it and have a question about when two factors collide. For example, I'm running the Big 5 numbers for NBR and they all look really good. Using your calculator, the MOS is really, really high, but I think my last calculation had the MOS around $450+ and the stock is under $40. This seems like a really good buy, but when I look at the chart tools, many of the signals are saying SELL (e.g. MACD just turned negative, RSI is approaching the 50 mark, moving averages are about to cross, STO going below the 80 line).

So my questions:

Is my MOS incorrect?

What to do when two factors collide?

Thanks for any input,

Steve

Answer:

The big guys -- the institutional investors -- control 85% of the money in the stock market, and they don't play the game the way we do.  The game they play is "How did I do this quarter compared to my peers?"

For that reason, they may sell a stock that is well under the Sticker simply because others are selling it... and someone started the run just because they wanted to take profits to make the quarter look better.

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 Question of the Week: When Do I Re-Do My Sticker Price?

Welcome back!  I hope you all had a wonderful holiday.

I've looked through the reader mail, and have noticed a lot of folks asking questions that can be answered from items in the Rule #1 blog Archives.  One of these questions is:

Q: How do I know when my wonderful company has become un-wonderful?  How often do I have to re-do the Big Five Numbers and Sticker Price?

A:  The short answer is "Quarterly".  To read the long answer, go to When to Re-Do the Big Five Numbers.

Rule #1 Question of the Week: Choosing PEs and Growth Rates

With all the new readers visiting the Rule #1 blog, it's time for a recap of a couple commonly asked questions about the valuation process and determining Sticker Price.

Q:  What is the best way to choose a PE for a company?

A:  Read this past post about how to best arrive at a reasonable historical PE.

Q:  How do I know when to use a growth rate based on past performance and analysts' expectations, and when to listen to the CEOs predictions for growth instead?

A:  Read the past post on the very same topic, called Nailing the Growth Rate.

Rule #1 Question of the Week: How Do You Know When a Company is "On Sale"?

A lot of people who saw me on CNBC's "The Millionaire Inside" (next episode: June 9) are writing in to ask this question: 

Q:

Hey Phil Town, How do you know when a company is on sale?

A:

[From my FAQ.]

First off, we (Rule #1 investors) make a list of wonderful companies that have Meaning to us-that is, we find companies that we understand and that have proven, durable competitive advantages (Moats). These Moats ensure their long-term survival and profitability.

We then conservatively estimate each company's future earnings and work backwards to arrive at a fair value for the company today.

Because the stock market can be highly volatile in the short run, sometimes it prices companies below their intrinsic value.

To get a 50 percent discount, Rule #1 investors wait patiently for these market fluctuations to bring us wonderful companies at attractive prices.

To use a metaphor, we get a $100,000 Mercedes for $50,000. The key to making money is to sell this Mercedes later at its value-$100,000.

If we wait to buy wonderful companies at attractive prices, we know we're going to make money, because eventually the same market that priced them too low will correct itself and price them at (or above) their actual value. (Nobody's crazy enough to leave a Mercedes worth $100,000 at $50,000 forever!)

This is when we sell and make money.

Warren Buffett has been talking about this for years and a lot of investors out there do it. It isn't hard to do; it just takes patience and the knowledge of calculating value. [A process I describe in depth in my book, and in many examples on this blog.] Anyone can learn. Phil Town

Rule #1 Question of the Week: PVH's ROIC

This week's Question comes from Mitra, who references my mention of PVH on "The Millionaire Inside" on CNBC.

Q:

Phil Town,

Great book!  I really enjoyed reading it.  Because of you, I watched the program too... I have a question regarding PVH.  In your book, you said we should not buy any stock if the company's return on capital is less than 10.  I checked PVH.  These are the numbers:

Return on Capital 9.6
Return on capital (5 year) 6.3

Would you please clarify this for us too.

Thanks,

Mitra

A:

I am definitely getting taken to the woodshed about recommending a stock that has less than 10% ROIC.  I'm glad you guys are on top of this because ROIC is critical.  It's the single most important number to tell us that the management is using the resources of the business well and that they haven't become traitors by trading lower ROIC for size and power. 

So let's look at this shirt company - Phillips Van Heusen - to see what we think about this ROIC problem.

First glance at the long term numbers tells me that this company has been just slugging it out for years, until about 4 years ago - when it started to get traction and the numbers turned up solidly.  Before that they were not particularly interesting or, more importantly, not good enough to make any kind of prediction. 

The fact that these numbers are turning good so recently immediately should tell you that this business cannot be in our regular portfolio...  So if we want it, it's got to fit in the Risky Biz portfolio, like a Google.  The Risky Biz portfolio is where we take a bit of a risk.  This isn't license to take wild gambles...  It's just a place where we can fit in the occasional fun business that looks like it's really turning itself around.

Now go play!

Phil Town

Rule #1 Question of the Week: How Does Today's Market Affect Rule #1?

Here's this week's Question:

Q:

Hi Phil Town,

I saw you on ‘The Millionaire Inside’ on CNBC and I’ve ordered your book.  I’m in my 50’s with a little over 100k to invest and obviously need to make double digit returns to have any kind of serious cash for retirement.  The question I have is whether you see an imminent correction in the DOW, or does it matter to your way of investing?

I’ve not been successful with investing, but I’m looking forward to learning from you… thanks for being there!

Shelly W.

A: 

Hi Shelly.  We don't consider the market.  Only the biz.  For more on this, read the post Bear & Bull Market.  Now go play! Phil Town

Rule #1 Question of the Week: Malkiel vs. Buffett

First of all, thanks to everyone who tuned in to CNBC to watch The Millionaire Inside this weekend.  If you're new to Rule #1 investing, try taking a look through my FAQ to get familiar with the concept of buying $1 for $0.50 (buying companies on sale, as I discussed on the show).

This week's reader-submitted Question of the Week comes from Alex. It's a long one about EMT (Efficient Market Theory), which I talk about at length in the opening chapters of Rule #1.  [Edited for length.]

Q:

Dear Phil Town,

It just so happens that malkiel's book is my favourite investment book. i think his idea that novices should buy cheap index funds & be done with active mutual funds is sound. After all some indexes, especially of emerging markets, make more than 15 per cent in the last couple of years.

Rule #1 Question of the Week: Opening Price vs. Closing Price

Q:

Hi Phil Town,

I have a simple question. The software I am using lets you set the moving average based on the opening  price or the closing price or the high or the low for the day. Which one do I select?

Peggy

A:

Peggy's investing software for Tools gives her four choices for price input to the Tools from the market.  The high price, low price, opening price or closing price.  So if you have a similar choice, which one should we choose? 

The simple answer is usually best:  choose the closing price.

Rule #1 Question of the Week: The Arrows on WFMI

Last week someone asked me the following question:

Dear Phil Town,

I am having the most difficulty in exiting defensively (as opposed to a productive exit when target price is nearing or reached).

Using the Prophet chart, I tried to re-create your exit strategy for the WFMI last fall, and was unable to recreate your exits using three red arrows.

Followed settings in your book
MA to 10 day
MACD 8-17-9
Stochastics at 14,5,0
9 months time frame to get back to last October

This makes you look as if you are reading minds. On Oct. 24 when you exited [see this post.], there is nothing but a red arrow on MACD and REDUCED volume. Stoch is even climbing a bit.  So what are you seeing that tells you the big guys are sneaking?

Red arrow on MA shows up two days later. Volume is selling, but at the same volume as the buying volume the day before. No extra alarm there.

Finally the third red arrow shows up on November 1, a week AFTER you were out. The open is $64, but of course we don't have the arrow at the beginning of the day. Checking after the market is closed, as you suggest and I do, means that I would have placed my sell the next day, November 2, where WFMI opened at $62 which was the highest price that day, and THIS is the first day of a sharp volume rise.  It does precede the freefall by one day, but I'd rather do it your way and be safely out a little earlier, not to mention $2 a share richer.

Can you please share what else you are noticing that I am missing?

Thanks,
BJ

Here's my response (with a graphic):