Rule #1: Phil Town on Investing

Your Homework: Game Stop (GME)

Take a look at GameStop (GME) with Juergen (see letter below) for the last year.  Assuming he's right about the 4Ms and the price being at or below MOS, how would you do trading it?  The price dropped from $55 to $30, a loss of 46% if you bought and held.  Instead, moving in and out, you would have done pretty okay.  Not great, but a whole lot better than a 46% loss. 

Time to Back up the Truck on ACF?

You pay a hefty premium for a cheery consensus.  And you get a hefty discount for a gloomy one.  We’re a long way from a depression-era stock market, or even a recession-era market (like 1973, 1983), but in one industry we’re tapping along at the bottom and that’s where you want to be looking for a great business that is on sale.

Here’s an example for you to consider: Americredit Corporation (ACF).

It's a pretty simple business.  They lend you the money to buy your car, particularly if GMAC isn’t interested because your credit kind of sucks.  You put a pile down and Americredit puts up the rest.  They do about 400,000 a month.  You pay, everything is good.  You don’t pay, they come get your car and resell it.  Simple business.

Answers to Your DNA Questions

Well, I’ve been doing what ever I want these last four weeks.  Pretty much ignoring the market.  I was on Maria Bartiromo’s show a while back and suggested that you mutual fund buyers get out because the big guys were heading for the door.  Hope you did it.

By the way, this is one of the great perks of Rule #1 investing: doing what you want, including hanging out in cash.  You can take time when you want.  Trust me on this: It's worth the trouble learning to invest well to be able to take time with your kids, read a novel, snowboard, fly in friends and family for the holidays.

I spent part of the holidays rehabbing an injury that I got by falling off my horse.  I took Cowboy up a hill and asked him to jump up a couple of feet over embedded railroad ties onto a flat table top landing.  A dog ran under his feet on the landing, Cowboy shied to the right, and I went spinning out of the saddle.  I did manage to stick the landing like some 18 year old gymnast, but the impact cracked my L-3.  Put me in a brace for a while.

I was feeling pretty good a couple of weeks ago and Jackson Hole was getting huge powder dumps every night, so I took off the brace, got out the snowboard and went up in the deep stuff, and it was good.  Real good.  Too good.  I got carried away, popped a small jump on the Jackson Faces, and landed with my right butt cheek on a rock that was about 8 inches under the snow.  Lit me right up, but after x-rays it was nothing a shot of morphine wouldn’t take care of.  But it's still got me limping around, so here I am at home with a sore ass and time on my hands and I just don’t have any excuses left to keep me from answering all those really good questions about Genentech (DNA).  So here we go -- answers to your comments:

A Rule #1 Look at DNA

You know I want you all to invest in businesses you understand.  I'm a river guide.  What I understand well is pretty much limited to burgers and Harleys, but I do like to venture into things that have a lot of potential from time to time.  And I get tips from friends.  It's the tips from friends thing that gets me sometimes.  You know, friends who are insiders someplace or at least they know people.  My kid knows her friend whose mom used to work there.  That sort of thing.  Stuff you can really trust.  Right.  But still.

So here we go on DNA -- Genentech -- which came highly recommended by friends who built a nice life by getting DNA stock before it went public and selling a bit here and there as it went up to $100.  Now it's dropped down to $70, and unless Genetech is about to hit a wall, it's looking pretty much like a very good business that is on sale.

Here's how I looked it over this morning (and I'm using Investools here, just for time's sake):

Update on WAG

Note: I wrote this on Oct. 23 (so noted because I cite a price from the 23rd below.)

Some of you have written in to ask what's going on with WAG.  Hopefully you guys are using good tools like I taught you in Rule #1.  Those tools and price strategy will have put you in WAG at $45 and out of WAG at $41.  It's now at $38.

First question: Is WAG a wonderful business to own for the future?  You have to answer that yourself, but there is no question that it has been the best run drug store business for many years.  It has a consistent growth rate at 15% for two decades, and that is unchallenged in the industry and almost without peer in the market. 

It's got issues with generic drugs cutting into profits, but that may not be that big a deal.  You need to do your homework and decide what you think because you have to know if you can price this thing. 

NTRI's Moat

Some of you wanted to know if I'm in (or have been in) NTRI. Here's the comment I left on the blog a little earlier today:

I'm not an owner of NTRI, gang. I don't know the diet business well enough to make a call on the moat. I have students who are trading this thing and have just killed it so I used this as an example in the talk I do to show how important the arrows are, even if you think you have a wonderful business at a great price. And it really is a great example.

Are The Big Guys Moving In?: The Most Meaningful Indicator (Also: Can SBUX Keep Growing?)

This question came in the other day from Steve, in the comments:

Watching Starbucks - SBUX. Strong Big 5 numbers. Projected earnings 20+%. MOS exists now. Definitely a mote. I like the company. Waiting for institutions to start buying. What is the most meaningful indicator for you, Phil, in seeing accumulation activity?

The most meaningful indicator that something wonderful is going to happen with the stock price is one of the Big Five Numbers: Operating Cash Flow.  When it starts increasing, what usually follows is an increase in earnings.  And when that happens the institutions buy.  Watch the cash. 

In Starbucks' case, the cash is increasing even as the price goes down.  Could be the Big Guys are thinking it's peaked.  On the other hand, it's sure looking cheap if it can keep these numbers up, and it's a heck of a brand.  However, right now is not the time to guess if this is the bottom.  Watch the MACD, Stochastic and MA and when they all move up, go for it if you really think you know the business and can answer this question:

Can Starbucks sustain a 20% growth rate and continue to double its size every 3.5 years? 

Send me the answer and I'll publish it.

WAG Valuation Competition Results

Here are the results for WAG's Value as posted by the four of you who took up the challenge (if I missed anyone, my apologies):

Adolfo        $58
Doug          $42
Benjamin    $61
Frank         $39

The first thing that should jump out at us is a big WOW… that we are now able to kind of figure out the value of a business.  We might not all agree, but we're making progress.

Second, we cannot price a business unless we think it is a predictable business.  Or I should say, we won't price it.  We can price an unpredictable business but not with any kind of certainty because the current value of the business is a prediction about its future, isn’t it? 

If we don’t know what the heck the future might be, we don’t have much of an idea about its value, other than that it is probably worth something.  We don’t want to be guessing like that with our hard earned money.  We want certainty.  Fortunately, WAG has been predictable historically, so it's a good candidate for a fairly accurate valuation.

For starters, let’s set a growth rate for WAG.

Rule #1 Homework: Starwood Hotels & Resorts (HOT)

A Rule #1 Blog reader, Steve, took me up on my request for people to do Homework on Starwood.  He posted his Homework in the Comments, which you can read by clicking here.  You can also read my response, just beneath his original comment.

I'll also re-post it here:

Wow, Steve, nice job on HOT. 

As you noted, the only real saving grace on HOT as a Rule #1 stock would have to be figuring out the value of the real estate and seeing if that made it a bargain.  Rule #1 requires that we have certainty to buy.  Certainty comes from knowing the value of the business as a business... which would include its real estate... and buying it at a discount. 

Even though somehow Bill Gates and gang decided to buy Four Seasons for a premium over the already pricey stock price (which tells me that they have too much money to invest and no where to put it and are not disciplined enough to wait it out like Buffett is doing with his $46 billion in cash), we really can't use that as a benchmark for the value of HOT. 

TSM: Always Follow the Big Guys

This question came in May 8 from long-time Rule #1 Blog reader, Shane.

Phil,

I do have a question.  I have looked at TSM.  I did the analysis and everything looked good.  I got the three greens back about 3 weeks ago.  I bought at $10.94.  The stock has dropped but I do not have red arrows yet.  Should I have sold when it started dropping even though I didn't have red arrows or should I have sold it already?  I think this company is just great and plan to continue watching it but I'm afraid I am getting ready to lose some money in the short term on it.  Thanks for your advice.

My response:

Hi Shane,

I just looked at the chart and assume you got in at $11 and out at $10.75 - $10.50.  I'll grant you that the numbers are decent.  A bit scary to see the earnings growth way outpacing the bvps growth but ROIC is awesome.  And the MOS seems to be there if you believe in a 20% growth rate and an 18 PE. 

Now the question is, what's the MEANING of this business to you?