The Regulator's Investment Journal

Our Ultimate Edge Pt. III

2008-09-30T15:11:00.002-04:00

"I like your threads"

Is it just me or has everyone basically become a walking billboard for clothing companies? I am not protesting by any means, in retrospect I couldn’t be happier that these companies are making the hunt even easier for me and for you. These hints have been smacking us in the face day in and day out via clothing, perfume, and other merchandise. Finding out where all your friends are buying their clothes takes absolutely no effort. If you’re coy and don’t feel like asking them, all you have to do is look at the logo on their shirt. And to top it off, most of these companies are publicly traded just aching for us to investigate them. Honestly, how much easier can these companies make it for us? How many times do you see the logo for American Eagle (AEO) or Abercrombie and Fitch (ANF) simply by walking around campus or anywhere in your college town?

During my four year tenure at USF (University of South Florida), I attempted to become involved in the athletic community. By this, I mean, I started to workout (or tried). At one point, I was hitting up the gym on almost a daily basis. This gave me a lot of exposure to the REAL athletic community. From what I saw, all of the gym enthusiasts had something in common, bulging muscles aside. They all had at least one clothing item of Under Armour (UA). Whether it was a skin tight shirt, skin tight pants, shoes, hats, duffel bags, water bottles, you name it, they had it. Eventually, I started asking myself, “How far can this Under Armour thing actually go?” Well, I was about to answer my own question just by doing my everyday collegiate activities.

College football season was starting and hopes were high, at least for its students, for the USF Bulls. What college football season would be complete without college gameday wear? This led me to visit the on campus bookstore, where there is an abundance of school apparel. I was browsing, as I normally do, when I stumbled upon a specialty USF Under Armour shirt, which did not completely rape your skin, it just hung comfortably. I also found that Under Armour also made a specialty USF hoodie. After further investigation, I found that like the gym, the items were endless of Under Amour brand USF items. I decided to take a look online at the Under Armour website and I found that it was the same case for many other schools. It seemed Under Armour had become more of a fashion statement and was not just limited to the gym.

If this was evidence enough to start investigating, I had another run-in with the UA fever and this one was the absolute kicker. While I was shopping for groceries at Publix, a popular supermarket in the south-east, I saw twin six year old kids totally decked out in Under Armour and they were not the last. I thought this was hilarious, but that’s when I knew I had to look into this thing further.

And whatever happened to Under Armour? UA’s IPO (Initial Public Offering) was scheduled to be released in November of 2005 at about $13 per share. If you were lucky enough to grab onto some shares, like in the case of Chipotle, they would have nearly doubled on the first day. If you thought the fun was over, they doubled again in less than a year. Again, if you thought the fun was over at that point, you were dead wrong, because about a year later they almost doubled again! Granted in the next few months after that huge run, Under Armour had a pullback. Though Under Amour had lost some of its gains, you still would have made nearly 150% of returns and at one point over 300%.

The moral to this story is to invest in what you’re already familiar with and understand! If you are a regular customer at a restaurant, you probably know the products better than the employees. Some people might tell you to invest in a carbon fiber or fiber optics company, but I know absolutely nothing about these businesses and I am willing to bet money that the average college student knows absolutely nothing about these businesses either. In contrast, what is there to know about the burrito business? I mean, besides the traumatic bathroom appearance that occurs shortly after consumption. The people who tell you to invest in fiber optic companies are probably just trying to sound smart. They refuse to degrade themselves by investing in quaint little burger or burrito joints. I suppose I never got that memo, because my father always used to tell me, “When it comes to making money there is no pride.”

Our Ultimate Edge Pt. II

2008-01-05T14:26:00.001-05:00

“We are all amateur food connoisseurs”

Most people don’t realize it, but we are all amateur food connoisseurs. Eating out is a timeless tradition that all college students glorify. You would think since eating out is so popular among college students that some would raise questions about the company. I mean after all, these companies have been playing momma bird since we set foot on campus. How many college students actually stop while eating their burgers or burritos and think to themselves, “I wonder how McDonalds stock is performing?” Sometimes to find great investments, all you have to do is follow your mouth.

What really hits the spot for you? What makes your mouth water? Where’s your favorite restaurant to dine at when you have the drunken munchies? For the longest time, my weapon of choice was and still is the delectable burritos served up by Chipotle Mexican Grill (CMG). I still remember my first Chipotle experience like it was yesterday. The burritos were huge, the taste was great, and the line was long.. real long. From the looks of the restaurant, everything appeared to be relatively low in cost (the tables were a simple stainless steel design; the floors were cement; it did not take an army to run the place). When a restaurant can skimp on interior design and still bring in a monstrous crowd, this equates to a very good sign. This sign was so blatant and powerful; it was time to investigate further.

The moral to this story is to invest in what you’re already familiar with and understand! If you are a regular customer at a restaurant, you probably know the product better than the employees. Some people might tell you to invest in a carbon fiber or fiber optics company, but I know absolutely nothing about these businesses and I am willing to bet money that the average college student knows absolutely nothing about these businesses either. In contrast, what is there to know about the burrito business? I mean, besides the traumatic bathroom appearance that occurs shortly after consumption. The people who tell you to invest in fiber optic companies are probably just trying to sound smart. They refuse to degrade themselves by investing in quaint little burger or burrito joints. I suppose I never got that memo, because my father always used to tell me, “When it comes to making money there is no pride.”

And whatever happened to Chipotle? Quite a fairy tail actually. The IPO (Initial Public Offering) was released in the winter of 2006 at a price of $22 per share. If you were lucky enough to grab onto some shares on its IPO release date and held on for a year and a half, you would have made more than five-fold. Not bad for simply following your mouth, right?

I am trying to reiterate how easy these investments are to find. Just by participating in your daily activities, from when you wake up to when you go to sleep, you can find these beasts.

Another high performing company in recent years has been McDonalds. What normal college student, hell, what normal American isn’t familiar with McDonalds’ products? If someone were to tell me they aren’t familiar with their product mix, I would call erroneous without hesitation. This one has been under our nose since we were born onto this Earth. Since 2004, McDonalds has been giving back an average return of about 23% per year, partly do to international success. Nonetheless, we should have gotten a few hints to investigate since there is a McDonalds on every street corner. The average return of 23% brings us to another question: How do I know if I am making a “good” return for the year? In my opinion, if you get a better return than the S&P 500, which returns about 10% per year on average, you are in good shape, but we’ll discuss this later.

Some of you might be thinking McDonalds is already so established that there is no way you could get great returns. Some might also be unhappy with a 23% return; after all, I was just discussing Chipotle, which gave a 500% return in less than two years. You must remember that 23% is better than any savings account or CD, it is even better than most mutual funds and the S&P 500. That aside, finding the Chipotle’s are quite rare and take a bit of luck, though you being in the college environment will increase your odds of finding these. You must remain humble with your gains. This is a marathon, remember? And besides, you could have lost money instead, either by spending it or by investing in a fiber optics company.

Things Remembered

2007-12-27T00:20:00.003-05:00

This is yet another continuation of our discussion on over excessive PE Ratios. I have been backing Chipotle (CMG) since their IPO (Initial Public Offering) in January of 2006. I still remember the first time I ate at Chipotle (I fell in love). Chipotle is by far my favorite place to eat. I would actually like to take this opportunity to make a note to my readers:

When I die, please, someone put a fajita burrito with steak from Chipotle in my coffin.

Though I love Chipotle more than anything in the world, I cannot continue to support the stock. Notice I said, “stock” and not “company”. Believe me, there’s a difference. Why can’t I support the stock anymore? Chipotle is boasting a PE ratio of almost 80 and a next year PE of 56, which means it is becoming quite expensive and overvalued. Yes, they have 26% growth for the next five years, but hey, look what happened Crocs (CROX), Blue Nile (NILE), and Jones Soda (JSDA). These are all great companies, but I think the investors get a little ahead of themselves. I predict Chipotle will come down a bit, not as significantly as Jones Soda did, but enough to make me not want to be invested in them at the moment. Lately the stock has been doing amazing, so I am taking these opportunities to sell little by little. Peter Lynch always emphasized in his writings that a majority of investors are constantly feeling good and bad about companies at precisely the wrong times. By this I mean, when everyone seems to think a certain company is solid, something happens and the stock takes a U-Turn. Of course, this is not always the case, but it’s something to think about when looking at how well Chipotle’s stock has been doing as of late.

Though it pains me to write this article (it feels like I’m disowning a son), I am trying to take this as a sign that I am growing as an investor. Rule #1: Never fall in love with your stocks. Also, when Chipotle comes down a bit, I will be the first one to start buying this wonderful company again.

Regards,

- Matt

Our Ultimate Edge

2007-11-09T00:38:00.000-05:00

“A pleasant surprise”

It was about 11 o’clock when I heard my cell phone vibrate on my fat wallet. Already so dazed, I struggled to manage a clear path to my phone, once and for all to end the annoying tremors. I did not know this at the moment, but this phone call was worth thousands of dollars. After clumsily stumbling over my 10$ Target (TGT) beanbag chair, I managed to answer my cell. To my pleasant surprise, it was my ex-roommate who we’ll call, ‘The Rascal King’.

“Black, I’m on my way back to Tampa! I’ll be at your apartment in ten minutes!”, Rascal excitedly exclaimed.

“I don’t know man, I’m kind of tired”, I mumbled exhaustedly.

“I have Blue Moon”, Rascal stated.

“I’ll unlock the door”, I replied without hesitation.

After patiently waiting, Rascal finally arrived and was setting up camp in my living room. Rascal then started pulling out his “supplies” from his backpack. “Cell phone, check; Cell phone charger, check; Blue Moon, check; Well, I have everything!”

It wasn’t the Blue Moon that caught my eye, but his sleek ‘Blackberry Pearl 8100 Smartphone’. I began to indulge in all of his band new cell phones’ features and was thoroughly impressed. While I was having my revelation Rascal was ranting about all his cell phones’ features, the voice activated dialing, Blackberry Maps, its’ two gigs of memory. I previously knew Blackberry cell phones, which are made by ‘Research In Motion’ (RIMM), as being specifically for businesspeople and only being popular in the business world. What was Rascal, a 20 year old alcoholic/stoner, doing with the top of the line business cell phone? Were these now acceptable for anyone, businessman, alcoholic, or college student to own?
If that was not enough, a few weeks later I was visiting my parents house when my parents reported to me that they had purchased brand new Blackberry Pearls for my older brother and younger sister. It then became apparent that these cells phones were indeed for everyone, which at the time was a beautiful hint to investigate further.

The moral to this story is you can find hints to great investments by being observant, especially around college students. I mean after all, a large portion of college students are innovators who stay ahead of the latest technologies, fashions, and trends and most don’t even realize it. From the clothes we wear, to the places we eat, we are all material boys and girls. No matter what the situation is, walking around campus, having a drink or two at the bar, practicing in illegal drug use with your friends, there are an abundance of opportunities just waiting to be discovered.

And whatever happened to Research In Motion? Last year, a share of Research In Motion was worth about 40$ per share (adjusted for splits). Today, one share of RIMM is now worth 130$ per share or a 225% return. According to McNeese State University, the average college student spends $466 per year on alcohol making a full four year trip worth $1864 in alcohol consumption. If you were to invest $1864 in RIMM last year, it would now be worth $4194. Or if you were willing to take a risk with some of your loan money and invest $5,000 last year, it would now be worth $11,250. Now that’s one hell of a kegger.

The Absolute Beginner

2007-08-23T00:19:00.000-04:00

"Beginners need lovin' too"

Before I delve any further into my ‘Education’ segment, I want to catch those up who I have dubbed, “The Absolute Beginners”. These are the people who know absolutely nothing about the stock market, which is fine (there are millions who know absolutely nothing about the stock market). Hopefully, this article can catch these beginners up so they can understand the ‘Education’ segment.

What are shares?

When you own shares of stock, you own a part of the corporation. The sale of stock by a corporation is a way for them to raise income. This is done when a company releases shares in its initial public offering (IPO). After the IPO is released, shares are traded (Sold and Bought) amongst investors.

Which companies are traded publicly?

From the burger you ate earlier today (McDonalds), to the shirt you have on your back (Ralph Lauren), to the very computer you are reading this article on (Dell). These are just three examples. There are way too many companies to list (thousands!). If you enjoyed a restaurant you dined at the other night, see if they are publicly traded! If a certain brand of clothing fits and looks better on you than others, see if they are publicly traded! You can usually find this by looking them up on a search engine or just click this link and entering the company’s name.

I found the company I was looking for!.. What are all these numbers?

If you look at Starbucks’ Yahoo Finance page you will stumble upon two columns that consist of numbers. What do these numbers mean?

Column 1:

Last Trade: The current price of one share

Trade Time: Don’t worry

Change: The increase or decrease from the previous trading day

Prev Close: The price of one share the previous trading day

Open: The cost of one share at the start of today’s trading day

Bid: Don’t worry

Ask: Don’t worry

1y Target Est: The price analyst estimate one share will be worth in 1 year

Column 2:

Day’s Range: The high and low of this current day

52wk Range: The high and low of the past 52 weeks

Volume: The number of shares either bought or sold in today’s trading day

Avg Volume (3m): The average daily volume from the past 3 months

Market Cap: The total value of the company’s outstanding shares

P/E: Price to Earnings Ratio (Wrote a previous article explaining this)

EPS: Earnings Per Share

Div & Yield: The amount of dividend given per share

What else should I know?

- There are 4 quarters in a year. In each quarter the company reports its earnings.

- Yahoo finance is an investor’s best friend.

I know this was brief, but hopefully this might answer some questions for the ‘Absolute Beginner’. Read some of the other articles and put the pieces together! If you have any questions feel free to leave a comment.

Im a beginner and/ or a poor college student.. Which online broker is right for me?

2007-08-22T22:46:00.000-04:00

There is only one online broker for beginners and/or poor college kids and that online broker is Scottrade! At Scottrade, it’s only $7 a trade, they have 306 local branches, and is only $500 to open an account. At an online broker like TD Ameritrade, it'll cost you about $10 a trade, and you must put in a $2000 minimum to open an account! I don't know about you, but Im a poor college student (I CANNOT AFFORD THAT). TD Ameritrade also has hidden fees that'll bite you right on your keester!

Here's how you open an account:

1. Have a checking account handy (cannot pay cash, check ONLY)

2. Have $500 in your checking account or more depending on your fiscal situation. (Remember, $500 is only the minimum)

3. Find your local Scottrade office (no, you cannot sign up online, but this is your future we're talking about, get off your lazy ass and do it!)

4. Wait a day for your funds to get into your account

5. Start investing!.. Wisely of course.

Final Thought: I am dubbing Scottrade the official online broker of the beginner and/ or poor college student! At only $7 a trade and $500 min. startup, you cannot go wrong.

http://www.scottrade.com

Check back tomorrow! Before I continue with the rest of my 'Education' segment, I will be addressing the 'Absolute Beginners' and hopefully catch them up.

The PE ratio

2007-08-20T21:29:00.001-04:00

Education Pt. II

I cannot stress how important it is to educate yourself before taking the plunge into the stock market. If you do not care about educating yourself, it will be more like taking a plunge into shark infested waters. You WILL get eaten alive! This is why I am continuing the 'Education' segment today with the basic practices of the PE ratio along with a few tricks I have learned. The PE ratio is just one of the many weapons we investors have to judge a company. The PE ratio is a very good indicator of whether a company is over or under valued (hopefully you now see why this is so important).

But what is a PE ratio?

The PE Ratio or the Price to Earnings Ratio is the price of a company’s share divided by the company’s earnings per share (EPS). Say a company has a share price of $50 and an EPS of $2; this gives them a PE ratio of 25. Ideally, you want a company with a low PE ratio. The average PE ratio for an S&P 500 company is about 15. Though you want a company with a low PE ratio, a higher PE ratio does not mean the stock price will not go up.

Is their PE ratio too high?

If the company is a fast grower (+25% growth for the next 5 years) it is acceptable to have a higher than average PE ratio. If you thought Chipotle’s (CMG) PE ratio was too high at 30, which is a bit overvalued for a restaurant, you would have missed out on the 100% return the ensued. Another example is Starbucks (SBUX). Until recently, they were usually boasting a PE of about 40, which is a bit above average for their industry, but take a look at their chart since their inception in early 1990’s. I think we can both agree that they did better than okay.

Is it too high yet?

When the PE is high enough for you to drop your jaw, like in the case of Jones Soda (JSDA), and the growth and earnings guidance is not there to bail you out, run. Jones Soda had a very impressive run that shot from $12 a share to more than $30, only to come crashing straight back to reality. When their stock price was more than $30, they were hauling around a PE of more than 300, with a next year PE of 90. One of their nearest competitors, Hansen Natural (HANS), is still in the growth stages of their company and ironically shares almost the same 5 year growth of about 30-35% as Jones Soda. And what was Hansen’s PE during all of this? Their PE was and still is a very sustainable 40 with a forward PE of 20. What gives Jones Soda’s stock the privilege to be valued more than 7 times as much (according to the PE ratio) as a successful company such as Hansen? This formula, along with shrinking guidance, equated to Jones falling right back to where they belong. The same goes for Blue Nile (NILE), which sports a PE of almost 90 and a forward PE of 60. I was backing this company when it was worth $30 a share with a PE of about 30 and it is now at $80. It's time to let go (Pigs get slaughtered)! Blue Nile will not have the same catastrophic crash as Jones, because their PE is not as outrageous, but I am looking for a bit of a pullback.

Final Thoughts:
- Use the PE to let you know whether the company is overvalued or undervalued.

I want to start investing!.. Where do I start?

2007-08-19T19:17:00.000-04:00

Education

“The best investment one can make”

Before you start investing your hard earned cashed blindly, whether it was from working, inheritance, or theft, remember that obtaining those dead presidents was the easy part. If you are not willing to learn the fundamental part of the game, you might as well buy a lottery ticket, or put your money in a mutual fund.

Here is a quick review of how to see if a company has good fundamentals or not. Most of this should make sense to you.

Income Statement - Apple's Income Statement

- Examine the company’s ‘Gross Profits’ year over year. The company’s ‘Gross Profits’ should be growing every year. (Who wants to invest in a company that has lower profits year after year?)

Balance Sheet – Apple’s Balance Sheet

- Examine the ‘Total Current Assets’. The total current assets should be rising every year like the ‘Gross Profits’ in the Income Statement.

- Scroll down to inspect the ‘Long Term Debt’ and to a lesser extent ‘Short Term Debt’. The company should have enough ‘Total Current Assets’ to cover all of the ‘Long Term Debt’, but in Apple’s case, they have 0 debt. (We check this to assure the company is not a candidate for bankruptcy.)

Analysts Estimates – Apple’s AE

- Look at the ‘Earnings History’ and see if the company’s earnings have been beating estimates. Though earnings can be unpredictable, I have found that a company that beats their earnings regularly is a very good sign.

- It is important to check the ‘EPS (Earnings per Share) Trends’. See if the estimates have been rising or shrinking. If the ‘EPS Trend’ has been rising, this is considered a good sign.

- Scroll down to ‘Growth Est.’ and look at growth for the next five years (we’re thinking long-term here). If the company has +20% growth, we’re dealing with a fast grower, which usually give you the best return over time.

Now, just because a company doesn’t have high growth does not mean it has poor fundamentals. For example, look at Coca-Cola’s AE. Notice that they only have about 9% growth. Though coke is what we would consider a ‘slow grower’, they have done quite well this year (up about 22% since the same time last year). You can use the company’s five year growth to determine what type of company you’re dealing with (whether it’s a fast grower, slow grower, stalwart, etc.), but we’ll talk about that later.

By looking at these three pages you can get a basic understanding of what kind of company you’re dealing with and its financial shape. This is just scratching the surface in analyzing a company, but it’s a good start.

Recommended Reading:
'One up on Wall St.' by Peter Lynch
'Beating the Street' by Peter Lynch
Here is a link for some other good suggestions.

Check back tomorrow! I will discuss the P/E Ratio in part II of this 'Education' segment.