GuruFocus.com started hosting a monthly value idea contest since Feb 2011. I participated in the first month with my write up on MakeMusic (MMUS).
In May, I submitted my Cato Corp write up for the contest. I was pleasantly surprised to be notified that my entry had won the first place. See the results announcement.
Thanks for everyone who encouraged me and helped me constantly improve. I am still learning every single day and I have lots to learn.
Disclaimer: Long MMUS
National Beverage Corp. develops, manufactures, markets, and distributes various beverage products in the United States. It offers a selection of flavored soft drinks, juices and other specialty beverages, sparkling waters, energy drinks, and nutritionally-enhanced waters. The company provides its soft drink products under the Shasta and Faygo names. It also offers juice and juice-based products under Everfresh, Home Juice and Mr. Pure names; flavored, sparkling, and spring water products under LaCroix, Crystal Bay, and ClearFruit names; and nutritionally-enhanced waters under ASante name.
In addition, the company distributes energy drinks under the Rip It, fruit-flavored drinks under the Ohana, holiday soft drinks under the St. Nick’s, and powder and tablet beverage enhancers under the NutraFizz names. Further, it develops and produces soft drinks for retailers and beverage companies. The company was founded in 1985 and is based in Ft. Lauderdale, Florida.
Disclaimer: No position in FIZZ.
One of my favorite investors is Chuck Royce. He is one of the pioneers of small cap investing in the US over 35 years back. The Royce fund families have an excellent track record.
Here are some excerpts of the investment approach at Royce Funds taken from their website.
Bottom-up Stock Selection Approach
We employ a bottom-up approach to choosing portfolio holdings, one that focuses on individual stock selection. Our goal is primarily to identify promising companies that have the following characteristics:
Buy/Sell Discipline
Generally, we seek to purchase companies trading at discounts of at least 30% and preferably 50% to our estimate of their value as businesses. We will generally sell a position when the company reaches our estimate of its value.
Risk Management
Our methods concentrate on managing risk in three ways:
Business Risk
To reduce business risk, we generally look for companies that have strong balance sheets, high internal rates of return and excess cash flow. Our estimate of a company’s ability to withstand economic adversity is a significant measure of its financial good health. We want to know what the potential risk is of “permanent capital impairment,” i.e., the likelihood of a business not being able to generate sustainable returns on assets or, even worse, becoming insolvent.
Valuation Risk
We attempt to reduce valuation (or price) risk by buying stocks that are trading at what we believe are bargain prices. The price we pay for a company must be significantly lower than our estimate of its current worth.
Portfolio Risk
We seek to reduce portfolio risk by owning a wide variety of stocks, across many sectors and industries.
Company Description:
Dorel Industries Inc. (DII.B)(DII.A) is a world-class juvenile products and bicycle company. Established in 1962, Dorel creates style and excitement in equal measure to safety, quality and value. The company’s lifestyle leadership position is pronounced in both its juvenile and bicycle categories with an array of trend-setting products. Dorel’s powerfully branded products include Safety 1st, Quinny, Cosco, Maxi-Cosi and Bébé Confort in juvenile, as well as Cannondale, Schwinn, GT, Mongoose, Ironhorse and SUGOI in Recreational/Leisure. Dorel’s home furnishings segment markets a wide assortment of furniture products, both domestically produced and imported. Dorel has 4,700 employees, facilities in nineteen countries, and sales worldwide.
Disclaimer: No position in Dorel Industries.
GameStop Update after Fiscal 2011 Q1
• Total sales increased 9.5% to $2.28 billion from $2.08 billion.
• Total company comparable store sales were 5.3%, driven primarily by strong HD console sales, the Nintendo 3DS launch and a 9.5% growth of pre-owned products.
• Digital sales increased 53% over last year as each digital segment experienced strong growth.
• Net earnings increased 6.9% to $80.4 million, as compared to net earnings of $75.2 million
• Diluted earnings per share increased 16.7% to $0.56, as compared to $0.48.
Read the rest of the post here
Disclaimer: I and account(s) that I manage, have a long position in shares of GameStop at the time of writing this article. My position may change at any time. This is not intended to be used as investment advice or a recommendation to buy /sell shares of any securities discussed in this article. Please do your own research or contact your financial advisor.
In March 2010 while I was completing my MBA, I started learning about equity analysis and research. I wrote a couple of reports and sent it to a bunch of people ( all my friends and some people in the buyside). This report on GameStop (GME) was one of my first reports. Most people on the buyside did not care for the idea and they said it was a value trap and would be the next BlockBuster ( or Barnes and Noble). Only one person took interest in the idea. I don’t want to name him but he manages a value oriented mutual fund (and a hedge fund). He encouraged me a lot and asked me to continue working hard, reading a lot of 10Ks and continue to write research reports. I asked him how I could get a job in the industry and he said you need to develop some expertise in a sector ideally. He recommended me to start a blog and share my research and get feedback from others. I asked him about starting an investment advisory business and he said you need to take the Series 65 exam, register a LLC and then you can start your own business.
Its a little over a year since that meeting with him. I have tried to follow his advice as much as I could. I have read a lot of blogs, investment books, research reports. I have read 10Ks and written a bunch of research reports. Importantly, I have also invested my savings into my research because that is where the real learning comes in. I have followed the companies quarter after quarter and tried to see where I was wrong in picking a company.
I took the Series 65 exam last December, registered my company Motiwala Capital LLC, and applied for my Investment Advisor license. A few weeks back, the Texas State of Securities Board approved my registration as an Investment Advisor. I am now open for business!! While I am nowhere close to being a ‘Guru’ investor, I am certainly learning everyday and applying what I learn. It is a long road ahead.
I wanted to thank everyone who encouraged me in the journey so far.
Here is the research report that started my journey.
http://www.scribd.com/doc/56195708/GameStop-Equity-Research-Report
Disclaimer: I , and account(s) that I manage, have a long position in shares of GME at the time of writing this article. My position may change at any time. This is not intended to be used as investment advice or a recommendation to buy /sell shares of any securities discussed in this article. Please do your own research or contact your financial advisor.
I just came across an investor with the longest track record via this excellent blog. His name is Phil Carret. He died at the age of 101 in May 1998. His investment career spanned 8 decades. Mr. Carret was known as a longtime proponent of the ”value” style of investing: buying shares of companies with steadily growing earnings, strong balance sheets and committed managers who themselves owned a hefty stake in the company, and then holding onto those investments for many years.
I am taking Phil Carret’s 12 Commandments of Investing from the above mentioned blog.
1. Never hold fewer than 10 different securities covering five different fields of business;
2. At least once every six months, reappraise every security held;
3. Keep at least half the total fund in income producing securities;
4. Consider (dividend) yield the least important factor in analyzing any stock;
5. Be quick to take losses and reluctant to take profits;
6. Never put more than 25% of a given fund into securities about which detailed information is not readily and regularly available;
7. Avoid inside information as you would the plague;
8. Seek facts diligently, advice never;
9. Ignore mechanical formulas for value in securities;
10. When stocks are high, money rates rising and business prosperous, at least half a given fund should be placed in short-term bonds;
11. Borrow money sparingly and only when stocks are low, money rates low and falling and business depressed;
12. Set aside a moderate proportion of available funds for the purchase of long-term options on stocks in promising companies whenever available.
I intend to read up more about this long tenured investor and share my findings.
How much would you pay for this company?
Sales: $20 billion
EBIT: $4.6 billion
NI: $3.4 billion
Cash from Ops: $4 billion
FCF: $2.4 billion
Net Cash: $2.7 billion
The Cato Corporation operates as a fashion specialty retailer for fashion and value conscious females principally in the southeastern United States. Its stores offer an assortment of apparel and accessories, including dressy, career, and casual sportswear; dresses; coats; shoes; lingerie; costume jewelry; and handbags. As of January 29, 2011, the company operated 1,282 women’s fashion specialty stores in 31 states under the Cato, Cato Fashions, Cato Plus, It’s Fashion, and It’s Fashion Metro brand names. The Cato Corporation also provides its own credit card and a layaway plan for customers to purchase its merchandise. The company was founded in 1946 and is based in Charlotte, North Carolina. Their mission as per their facebook page is “New fashions every week. Low prices every day.”
I believe shares of CATO are undervalued. Read the rest of the report on Gurufocus.com
Disclosure: No position in CATO at the time of writing. This is not a recommendation to buy or sell any security mentioned in this article. Please do your own research or consult your financial advisor.
William John Ruane was born on Oct. 24, 1925, in a middle class neighborhood in Chicago, and grew up in the suburb of Oak Park, Ill. He graduated from the University of Minnesota in 1945 with a cum laude degree in electrical engineering. He immediately joined the Navy and was on the way to Japan when World War II ended.
After the war, he worked briefly for General Electric (GE), only to discover that he disliked engineering.
He enrolled at Harvard Business School and found his calling when a professor urged his class to read the classic textbook ”Security Analysis: Principles and Techniques” (1940), which helped him to focus his interest. Although he knew nothing about stocks, he was impressed with the approach authors Benjamin Graham and David Dodd took to financial analysis. After graduating in 1949, he went to work for Kidder Peabody, where he remained for almost 20 years.
In 1950, Ruane and Buffett sat in on a class Benjamin Graham taught at Columbia University, where they learned that the quality of earnings was just as important as growth in earnings.
Ruane and partner Richard T. Cunniff founded their investment management firm in 1969 after raising $20 million from investors. Most of their customers came to them on the recommendation of Warren Buffett, Ruane’s former classmate and a close friend.
Ruane’s Four Rules of Smart Investing
During a class he taught at Columbia University, Ruane laid out the four rules that guided his investment career:
1. Buy good businesses. The single most important indicator of a good business is its return on capital. In almost every case in which a company earns a superior return on capital over a long period of time it is because it enjoys a unique proprietary position in its industry and/or has outstanding management. The ability to earn a high return on capital means that the earnings which are not paid out as dividends but rather retained in the business are likely to be re-invested at a high rate of return to provide for good future earnings and equity growth with low capital requirement.
2. Buy businesses with pricing flexibility. Another indication of a proprietary business position is pricing flexibility with little competition. In addition, pricing flexibility can provide an important hedge against capital erosion during inflationary periods.
3. Buy net cash generators. It is important to distinguish between reported earnings and cash earnings. Many companies must use a substantial portion of earnings for forced reinvestment in the business merely to maintain plant and equipment and present earning power. Because of such economic under-depreciation, the reported earnings of many companies may vastly overstate their true cash earnings. This is particularly true during inflationary periods. Cash earnings are those earnings which are truly available for investment in additional earning assets, or for payment to stockholders. It pays to emphasize companies which have the ability to generate a large portion of their earnings in cash. Ruane had no taste for tech stocks. He stressed the importance of understanding what a company’s problems might be. There are two kinds of depreciation: 1. Things wear out. 2. Things change (obsolescence).
4. Buy stock at modest prices. While price risk cannot be eliminated altogether, it can be lessened materially by avoiding high-multiple stocks whose price-earnings ratios are subject to enormous pressure if anticipated earnings growth does not materialize. While it is easy to identify outstanding businesses it is more difficult to select those which can be bought at significant discounts from their true underlying value. Price is the key. Value and growth are joined at the hip. Companies that could reinvest at 12% consistently with interest rate at 6% deserve a premium.
