Author: expectingalpha

Coach (COH)

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Coach (COH) is no stranger to our community of investors, currently ranked #18 in the MANIFEST 40. The projected annual return (PAR) is 18.6% with a top-shelf quality rating of 93.6.

Coach has grown from a family-run workshop in a Manhattan loft to a leading American marketer of fine accessories and gifts for women and men. Coach is one of the most recognized fine accessories brands in the U.S. and in targeted international markets. Premium lifestyle accessories are offered to a loyal and growing customer base and provide consumers with fresh, relevant and innovative products that are extremely well made, at an attractive price.

Coach’s modern, fashionable handbags and accessories use a broad range of high quality leathers, fabrics and materials. In response to customer demands for both fashion and function, Coach offers updated styles and multiple product categories which address an increasing share of customer accessory wardrobes. Coach has created a sophisticated, modern and inviting environment to showcase product assortment and reinforce a consistent brand position wherever the consumer may shop.

Coach utilizes a flexible, cost-effective global sourcing model, in which independent manufacturers supply products, allowing a broad range of products to market rapidly and efficiently.

Business Model Analysis

Starting with the top line (revenues or sales) the long-term trend is very steady for a specialty retailer. There’s a slight disruption during the 2008-2009 Great Recession but less than many retail companies. The regression shown here suggests a long-term sales growth forecast of 12-13%

The current Value Line low total return (LTR) forecast shown here is 12%.

Profitability Analysis

Historical net margins for Coach (COH) have ranged from 19-25% and the impact of the 2008-2009 Great Recession is clear. Based on the trend shown here, we’re using a projected net margin of 20.5% for the long-term forecast.

The EPS stability ranking of 83 is actually pretty high — considering the industry and competition faced by Coach.

Valuation & Return Forecast

The P/E ratio for Coach has ranged from 11-26.5x with the 11x experienced on the “tail” of the Great Recession. Value Line has a 3-5 year projected average P/E of 18x and the consensus P/E that we’re using is 18×. The return forecast (PAR) is 18-19% based on these growth, profitability and valuation assumptions.

Coach has been a frequent selection over the last several weeks for the Core Diem Demonstration Portfolio.

Market Mystery Solved!

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As the year winds down — and we get this blog launched — we’ll be going back to a number of our favorites, a few oldies-but-goodies.  Some will share fodder for investment-related and life-related pondering.  Others will convey research methods and findings, but they’re all intended to help you (particularly if you’re new to Manifest Investing) to get to know us better.  This was written after attending a Martina McBride concert this summer — and it’s clear that the stock market does behave very much like a teenage daughter, sometimes.

Benjamin Graham had it all wrong.

I’ll let that heresy sink in for a minute.

I ain’t complainin’, but I’m tired.
So I’m just sayin’ what I think.
And if we’re being honest,
Then honestly I think [we all] need a drink.

Graham — hailed as the father of fundamental analysis and value investing — often used a characterization for the stock market by referring to it as Mr. Market.

Graham’s favorite allegory is that of Mr. Market, a fellow who turns up every day at the stock holder’s door offering to buy or sell his shares at a different price. Rarely, the price quoted by Mr. Market seems plausible, but most of the time it is ridiculous. The investor is free to either agree with his quoted price and trade with him, or to ignore him completely. Mr. Market doesn’t mind this, and will be back the following day to quote another price. The point is that the investor should not regard the whims of Mr. Market as determining the value of the shares that the investor owns. He should profit from market folly rather than participate in it. The investor is best off concentrating on the real life performance of his companies and receiving dividends, rather than being too concerned with Mr. Market’s often irrational behavior. [Wikipedia]

That’s all well and good — but wrong. There’s nothing about the vagaries of following a “Mr. Market” and the peaks and valleys of a male-based gender emotional excursion that could fully explain overall market tendencies.

And that’s where Martina McBride has one over on Ben. Because the market is a teenage daughter.

Eddy’s Guide to Cliff Diving

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I think it’s a symptom or manifestation of perceived attention spans these days. The 365.25/24/7 news cycle has led to a sound bite-ification all around us.

And to me, the fiscal cliff is the latest example.

We face a number of challenges in this country (and all across this planet.) They’re real and they don’t get any better in ostrich imitation mode. That’s part of the problem with the fiscal cliff.

1. It’s self-inflicted.
2. There’s a chance it’s a form of choreographic license.
3. It seems like we can’t get anything done without creating/imagining a crisis.

And that’s a large part of the problem. Effective management often includes the recognition of pending challenges and developing threats. And it’s done best when at least part of the challenges are anticipated and averted. When it takes a crisis to get anything done, it’s pretty clear that none of the parties involved are very good at what they’re supposed to be doing.

During our educational sessions this past weekend, a number of people mentioned the fiscal cliff. In other conversations, we talked about and yearned for days of yore when people like Louis Rukeyser put things in context — and in most cases, provided solid reminders about long-term perspectives. From this vantage, challenges can often become much more manageable and understood.

Regular readers know that we’ve mentioned the virtues of one Eddy Elfenbein on these pages before. Eddy writes a blog, Crossing Wall Street.

Eddy’s message from November 30, 2012 is particularly helpful as we debate the fiscal cliff and try to come to a better understanding. See: “Don’t Fall For The Fiscal Cliff Hype.” For more, check out a recent post by Barry Ritholtz on the same subject: Fiscal Cliff: Much Ado About Little I don’t know who “today’s Rukeyser” is … but Eddy (and Barry) are steadying and thoughtful voices — with the aforementioned focus on the long term.

Jos. A. Bank. (JOSB): Buy One, Get a Cell Phone & A Ginsu Knife

In his 11/30/2012 narrative, Eddy questions the ability of Jos. A Banks (JOSB) to be successful when they seem to be giving out not just the kitchen sink, but the bathroom sink, a couple of hoses, a cell phone and a sack full of ginsu knives with the purchase of every suit these days. He is not alone in his skepticism.

The stock price has dropped from $55 to the low $40s recently.

The Value Line low total return forecast checks in at 8.5% — and we build a return forecast of 11.8% based on a sales growth forecast of 10% and a net margin approaching 10% also. We’re using a projected average P/E of 12×.

Here’s a look at the business model analysis:

I think margin compression has an uncomfortably high probability — and this probably has a lot to do with the preliminary bearish rating on JOSB at stockcharts.com (PnF). And if that materializes the EPS trend/forecast will be impacted. The price has tracked a little above the earnings trend shown in the visual analysis … and it’s feasible to expect something not dramatically different from the $60-90 price range suggested by Value Line.

It doesn’t matter if Eddy is a modern day Rukeyser (yet). He certainly belongs in the club.

VL Low Total Return Screen (12/7/2012)

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Why do we pay attention to the Value Line weekly updates? Because a number of highly successful long-term investors cite Value Line as one of their favorite trusted resources.

“I don’t know of any other system that’s as good… The snapshot it presents is an enormously efficient way for us to garner information about various businesses… I have yet to see a better way, including fooling around on the internet, that gives me the information as quickly.” — Warren Buffett, Berkshire Hathaway, 1998 Annual Meeting speaking about The Value Line Investment Survey.

“[Value Line is]…the next best thing to having your own private securities analyst.”
—Peter Lynch, One Up On Wall Street

In our case, we’ve found the low total return forecasts for all companies to be among the most compelling opinions/forecasts while we either (1) search for opportunities or (2) practice effective stewardship when it comes to staying vigilant about our current holdings.

Materially Stronger: None.

Materially Weaker: Finisar (FNSR), Walter Energy (WLT), OM Group (OMG), Denbury Resources (DNR), Chesapeake Energy (CHK), Inergy (NRGY)

Bullish Sentiment (Positive Price Pressure): Murphy Oil (MUR) and Hess Corp (HES)

Successful Investing: The Role of Diligence

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Image

One of the most powerful nuggets of the modern investment club movement is the stock analysis method.  Individual investors (and groups known as clubs) are guided through a series of milestone judgments while forming a long-term expectation (return forecast) for the companies we study.  The result is a long-term forecast that can be used for discovering high-potential stocks to buy and we leverage this directly into portfolio design and management.

This is not “just for clubs” and it is not your grandfather’s investing black box.

You’re invited to our webcast covering the key influences and some favorite resources.

Date: Saturday, December-01-2012

Time: 9:30 AM ET

Registration: http://tinyurl.com/c3qxqyp

Methuselah & The Lottery Ticket

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The lottery winners hail from Arizona and Missouri. They’ll be splitting a $550,000,000 jackpot — probably choosing the lump sum payout, with proceeds to both of them estimated at $200,000,000. The event is inescapable on the news and it’s ubiquitous in all forms of media.

But it comes at a gut-wrenching expense. The reality is that it’s a tax (75-80% of all lottery proceeds go to the lottery crack dealers who skim some off the top and dole out the balance to government accounts.) A friend shared an observation this morning that as he bought a ticket for the fun of it last night near Philadelphia, two ladies clothed in rags — potentially homeless — skipped at least one meal to purchase $40 worth of lottery tickets. To me, that qualifies as a gut-wrenching tax.

Let’s compare the prospect of netting a winning lottery ticket to sitting down at the roulette wheel. You place your $2 wager on black. 18 of the squares are black, 18 of the squares are red and two are green. You get double your money if a black square is the result. There is a 47.4% chance of black (18/38) with every spin of the wheel. (There’s a 52.6% chance that your $2 will vanish — on every spin.)

No problem. Spin. Black! You now have $4. “Let it ride!” How many spins would it take to reach $550,000,000? You would need to “hit” black 28 times in a row to reach the Lotto payout. Now that doesn’t sound so bad. It’d be like flipping a coin, hoping for heads 28 times in a row. How long, on average, would it take to be successful? With a spin of the wheel every sixty seconds, the average roulette champion would need 2276.43 years to come up “black” 28 times in a row.

I’m thinking Methuselah had better things to do for approximately 2000 years.

But it gets worse. Every two minutes or so, you’re going to hear “red” or “green” and your pile of winnings is going to vaporize. You’d need a fresh $2 to start over. So Methuselah ends up not only bored, but with some seriously empty pockets.

Incidentally, by the time the average wheel spinner is successful, those $2 refreshers would add up to $629,784,804 — rather defeating the purpose of pursuing $550,000,000 in the first place.

Sure … somebody could sit down and experience 28 straight “black” results and do so on their very first try. It’s possible. We call those people lottery winners.

Maybe they can track down Methuselah and see if they can’t fund a few $2 rounds?

By the way, $2 invested in Select Comfort (SCSS) on 12/19/2008 is now worth $283. ($1000 invested would now be worth $141,316!) From $2 to $283 in a little less than four years. I think Methuselah would be far better served hanging around with a community of like-minded long-term investors, many of whom refrain from buying lottery tickets.

I’m not a curmudgeon (at least not very often) and I enjoy recreation as much as the rest of you. And I understand the part about “free country.” But in the final analysis — our nation simply ought to be ashamed of itself.

Lincoln: Reminder to Read. Rinse. Repeat.

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“Investment in knowledge pays the best interest.” — Abraham Lincoln

This Thanksgiving season, I was intrigued by a few conversations that covered the complete spectrum of the investing experience.

One discussion revolved around getting started. The individual happens to be stationed in Afghanistan with some time on his hands and is wrestling with where to start. I believe I convinced him that he was already ahead of the challenge. Why? Because he’d already begun imitating a sponge — absorbing everything that he could get his hands/eyes on. Read. Rinse. Repeat.

http://www.fool.com is a valuable resource for getting started and referred him to their broker smorgasbord and commentary on how to choose one.

The second discussion involved someone very close to me who is now actively funding a 403(b) and is giddy about the potential. We look forward to watching the account balance grow in much the same way that Tin Cup (our retirement plan model portfolio) continues to entertain us.

The third is actually a blend of a couple of separate conversations. One long-time subscriber called me to let me know that she’d no longer be subscribing. She’s 80 years old, for one thing. But she wished us well … a joyous holiday season … and then gave us an early Christmas present. “God bless you and your family and all of the Manifest Investing staff and community. It’s not that I’m not investing anymore — but I have reached ‘critical mass’ and I really want to thank you. I have a collection of high-quality stocks at Fidelity and Ameritrade … but I’ve reached the point where you’ve taught me how to watch them — and even more importantly, because of what I’ve learned, I have no trouble sleeping at night. In fact, I’ve slept well for a long time. Thank you.”

No. Thank you.

We’re humbled and grateful.

My wife and I and my parents went to see Lincoln this weekend. (1) Daniel Day-Lewis clearly knocks it out of the park and will be nominated for an Oscar, and is a likely winner. (2) If you’re going to see the movie, I’d recommend googling or spending a few moments with Wikipedia and the setting, characters and situation surrounding the passage of the 13th amendment. Tommy Lee Jones as Thaddeus Stevens is also worth the price of admission and a true courageous pioneer. (3) If you believe that partisan rancor and disagreement is something new on Capitol Hill, you’re wrong. Go see the movie.

Read. Rinse. Repeat.

Lincoln was voracious reader. There’s also a poignant scene in the movie where Lincoln urges simplicity while pondering a major decision. He shares “Occam’s Razor according to Euclid” with a youthful engineer and the telegraph operator, a powerful reminder that sometimes the best solutions are the glaringly simple.

And from a couple of young people getting started to a group of experienced long-term investing advocates who sleep pretty well at night, we’re grateful for the reminder.

And the optimism about what the future holds.

“I am a firm believer in the people. If given the truth, they can be depended on to meet any national crisis. The great point is to bring them the real facts — and some beer.” — Abraham Lincoln

Screening Results: Best Fundamentals AND Technicals

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Fusion screen ltr vs fvr 20121127

This week we take a look at the candidate companies from our “fusion screen.” At Manifest Investing, we start first and foremost with the fundamentals and focus on the return forecast (PAR) and quality rating. Subscribers recognize the combination of these two primary characteristics as our Manifest Rank. For the fusion screen, we add a dab of technical analysis — seeking not only companies with the best Manifest Rank — but those that also have bullish sentiment and positive momentum. That short list of companies is shown here. (CVS Caremark was selected for the November Round Table based on these results)

The Value Line low total return forecast is shown on the left. Reinforcing opinions (based on fair value according to Morningstar and S&P) are shown on the right. The Fair Value Ratio (FVR) is the comparison of the current price to the fair value. A negative fair value RATIO indicates an opinion that the stock is undervalued. Conversely, a positive FVR suggests an overvalued opinion. Resource Connections (RECN), Molson Coors (TAP) and Intel (INTC) are the best current values according to Morningstar. S&P favors Walgreen (WAG), Masimo (MASI) and CVS Caremark (CVS). Mesa Labs (MLAB) is compelling and is not covered by any of the three research services. The return forecast shown here is the MANIFEST PAR. MLAB was one of the most compelling companies in last month’s Forbes Best Small Companies for 2013.

Turkey Turbulence … Better Days Ahead

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Turkey Turbulence

This year — and every year — our thoughts go out to our community of like-minded investors. As we gather around the Thanksgiving table, we’re thankful for all of the wonderful moments we’ve shared over the last year and for the ideas and exploration that you’ve all encouraged all of us to pursue. We count many blessings and are grateful for all of you and your companionship on this journey.

Share. Share your optimism and dreams. We believe that we collectively have the requisite courage to create better worlds and days to come.

The current challenges will pass. And formidable challenges-yet-to-come will take their place. A few of you have noted the alarming recurrence of None when it comes to Materially Stronger companies in recent updates. (And the gut-wrenching extensive lists of Materially Weaker at the same time.)

I’m not sure whether (or how many) turkeys would follow lemmings off a financial cliff given the opportunity. But taxes are likely to increase. And the January Effect is probably well underway and something to consider. There are likely to be many small companies with attractive return forecasts between now and the end of the year and most likely, well into the first quarter of 2013. Shop prudently while keeping your portfolio centered on an adequate blend of faster-growing and slower-growing companies.

Jeremy Grantham’s latest quarterly message is pretty dire. (You can retrieve your own copy at http://www.gmo.com — but wait until after Thanksgiving Dinner and a suitable number of pie slivers before doing so.) We love Jeremy and his outlook. We’ll chalk this curmudgeonly tirade up to a grumpy spasm … realize and acknowledge that it is ALWAYS a good idea to heed and consider his words … and continue to seek opportunities as GMO and Jeremy always do — with an emphasis on QUALITY.

We’ll leave you with the words of Phillips Brooks:

Stand up, on this Thanksgiving Day. Stand upon your feet. Believe in man. Soberly and with clear eyes, believe in your own time and place. There is not, and there has never been, a better time, or a better place to live in.

Brooks is known as the man who wrote “O Little Town of Bethlehem”

And we’ll add one extra Thanksgiving wish this week … that being a profound hope that the launchers of Gaza either run out of rockets, or matches, SOON.

The Difference Between Tricks & Treats

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ImageIt’s that time of year again.

Forbes.com is out with their annual list of spooky small companies, the Best Small Companies for 2012

This year’s headliner is SolarWinds (SWI) — a company that we’ve featured and tracked at Manifest Investing for the last several months. In fact, we discovered it on this list last year and SWI has proceeded to gain 103% over the last twelve months — leading last year’s selections. We’ve been meticulously adding shares of SWI to our Core Diem demonstration portfolio over the last week.

But they don’t have to be scary. As we’ve hunted down buying opportunities from this annual listing over the last several years, we’ve discovered that the best returns tend to come from the entrants with the highest quality ratings.

We obviously like to talk about the companies featured in 2008. These are the selections we bring up at the hair salon or barber shop. There are lessons to be learned (and celebrated) in companies like Neogen (2006), DXP Enterprises (2007), Stratasys (2008), Middleby (2008), Dril-Quip (2008), Boston Beer (2008), Bio-Reference Labs (2008 & 2011), Buffalo Wild Wings (2007-2011), FactSet Research (2008), Peet’s Coffee (2009), Portfolio Recovery (2010-2011) and SolarWinds (2011).

And there are also lessons to be learned — along with the potential for patience for works in progress — from the educational services stocks like Strayer and Capella in recent years … and Quality Systems (2006-2008,2010-2011) — a multiple selection that’s done considerable damage to the all-time results.

All in all, the outperformance accuracy is 50% (3-for-6) and the relative return since 2006 is -1.9% (8.8% vs. 10.7%). But the road ahead is bright, the average overall PAR for the six portfolios is 11.0% vs. MIPAR at 8.9%.

The Good Old Days

I noticed that Forbes had released the 2012 listing on Saturday morning.

Going back over ten years or more, we’ve dissected the list, seeking opportunities for deeper dives. In the good old days, we’d divide the list up among 8-10 people and go about studying and raking — building results to share over a period of several days.

Fast forward to today. Our own Kurt Kowitz has changed all that. Instead, Kurt has liberated us — allowing us to concentrate on auditing the core characteristics and substantiating our milestone assumptions and forecasts. How?

From the time I noticed the listing on Saturday morning, it took all of fifteen minutes to produce the following dashboard: Forbes 100 Best Small for 2012

(Most of the 15 minutes involved looking up ticker symbols.)

It took a little longer to cover the (10) uncovered companies and refresh the database, but we’re now able to isolate the highest quality faster-growing companies with superior return forecasts in another 5-10 minutes.

Copy to Worksheet … sort by quality … and start hacking the companies, reducing the list down to the screening results shown here: Forbes Best Small for 2012

The difference between tricks and treats? Quality.

Thanks, Kurt!

Forbes best small mini-dash 20121026