Posts In:

On Thirty Interesting Stocks

I know many of you are looking for concrete analysis on blogs like this. Unfortunately, I don’t have time to discuss every interesting stock in detail. Over the next few weeks, I do hope to include some more detailed discussions of specific stocks that interest me. Even then, however, I won’t be able to touch on every stock worth talking about. So, I decided to put up a list of stocks that interest me. This isn’t an exhaustive list by any stretch of the imagination. It is, however, a starting point. Please comment on both the list and the specific stocks on it; everyone benefits from such comments and the discussions they trigger.

The similarities between these stocks are attributable to their perceived investment value. So, you will see a lot of stocks with low price to earnings ratios and/or high historical returns on capital. This isn’t the result of any one screen. It is a composite list drawn from several different pages in a notebook I carry around with me. Today, I flipped through that notebook and took thirty of the most interesting ticker symbols scribbled in the margins and put them on this list. This explains why the list isn’t in alphabetical order; I just recorded them as I came upon them within the notebook.

Like I said, it’s not an exhaustive list, but I hope it has some value as a starting point. The only requirement to make the list is to be an interesting company selling at an interesting price. As you know, I never own this many stocks. I’m also always looking at far more than thirty stocks. So, take this list for what it’s worth:

Harley Davidson (HDI), Sherwin Williams (SHW), Columbia Sportswear (COLM), K – Swiss (KSWS), Chuck E. Cheese (CEC), Gannett (GCI), Tuesday Morning (TUES), Yankee Candle (YCC), American Eagle (AEOS), New York Times Company (NYT), Building Materials Holding Company (BMHC), Jakks Pacific (JAKK), AutoNation (AN), Gap (GAP), Timberland (TBL), Journal Communications (JRN), Journal Register Company (JRC), Craftmade (CRFT), Deere & Company (DE), Energizer Holdings (ENR), Stanley Works (SWK), Lexmark (LXK), Tempur – Pedic (TPX), General Mills (GIS), Black & Decker (BDK), Take – Two Interactive (TTWO), Home Depot (HD), Liz Claiborne (LIZ), Anheuser-Busch (BUD), and Sanderson Farms (SAFM).

Happy hunting.…

On The Great Chicken Debate

Okay, so maybe it hasn’t quite risen to those proportions yet. But, if you’ve been reading this blog, or Shai’s blog, or the Value Discipline blog, you know there has been an ongoing debate about two chicken stocks: Sanderson Farms (SAFM) and Pilgrim’s Pride (PPC).

On January 5th, I suggested that investors should look at Sanderson Farms before looking at Pilgrim’s pride. Shai had invited me to put some of my stuff up on his blog. So, as this was a topic of both “Grahamian Value” and news value (on account of Pilgrim’s earnings warning/price drop), I sent the link over to Shai. He kindly ran it.

Now that would have been the end of it, but there was a comment made to the post ran on Shai’s site that prompted a post from Shai on blogging and investing. It’s a good post and an interesting topic, so I do encourage you to read it (for both posts on Shai’s site, the comments are worth reading as well). However, it really doesn’t have to do with The Great Chicken Debate.

It’s the comment itself that’s most relevant to this topic. In it, the author says a few words about Pilgrim’s Pride. Upon reading the comment, I decided I had no other choice but to take another look at PPC and SAFM (after all, maybe I was wrong). Well, I did take another good look at both companies, and decided I wasn’t wrong. So, I wrote a response to that effect.

The best part of all this was that it lead me to read some posts on Value Discipline, a blog which I am ashamed to say I was not familiar with. It’s a great blog; we need more like it. Of course, if you’ve been reading my blog, you already know that, because on January 5th, I posted a quick note mentioning this great blog and two posts about these chicken stocks.

Today, there’s a new post at Value Discipline entitled “Oh no…not chicken again!”. It’s the best thing I’ve seen written on this topic. Even I have to admit, it’s a far, far finer post than my original one.

I especially want you to note Rick’s use of the free cash flow margin (free cash flow as a percent of sales); this is an important metric, and one I have not yet discussed. It is of less utility over short periods of time and in commodity businesses. Well, that’s not exactly true. I should say it is of less utility in commodity businesses during a period of abnormal business conditions. However, it is an excellent number to use in comparing two or more competitors over a period of five to ten years.

I agree with everything in the post except perhaps with one slight omission. While it is true that interest coverage at both SAFM and PPC is ample at the moment, a review of both firms’ records will show that their …

On Chicken Stock Posts

For those interested in more info on Sanderson Farms (SAFM) there are two good posts to be found at a worthwhile value investing blog called “Value Discipline”.

On December 5th, “Value Discipline” discussed Sanderson Farms in particular.

On January 5th (today), “Value Discipline” discussed Sanderson Farms, Pilgrim’s Pride (PPC), and leg quarter prices.…

On Chicken Stocks

Chicken stocks were in the news yesterday as Pilgrim’s Pride warned of poor earnings. These stocks may appear cheap, but appearances can be deceiving. It is not a question of if margins will contract; it is a question of when margins will contract. Some value investors will take Pilgrim’s announcement as a buying opportunity. It may be just that.

However, I wouldn’t be buying Pilgrim’s Pride (PPC). When trouble comes, the much smaller, much more conservatively financed Sanderson Farms (SAFM) will be in the stronger position. Sanderson Farms has the better recent record when it comes to earning a good return on capital. On the other side of the scales, Sanderson Farms does trade at a higher price to sales ratio than Pilgrim’s Pride. In a business like this, price to sales can be an important number, because there is little reason to expect any one company to consistently maintain a wider profit margin than the rest of the industry.

I won’t pretend I understand this industry. I don’t. I won’t pretend I have any clue as to what these firms will earn over the next few years. I don’t. What I do know is that if I were looking at chicken stocks, I’d start with Sanderson Farms. I suggest you do the same.…

On Formulaic Investing

One question almost every value investor asks at some point is whether it is possible to achieve above market returns by selecting a diversified group of stocks according to some formula, rather than having to evaluate each stock from every angle. There are obvious advantages to such a formulaic approach. For the individual, the amount of time and effort spent caring for his investments would be reduced, leaving more time for him to spend on more enjoyable and fulfilling tasks. For the institution, large sums of money could be deployed without having to rely upon the investing acumen of a single talented stock picker.

Many of the proposed systems also offer the advantage of matching the inflow of investable funds with investment opportunities. An investor who follows no formula, and evaluates each stock from every angle, may often find himself holding cash. Historically, this has been a problem for some excellent stock pickers. So, there are real advantages to favoring a formulaic approach to investing if such an approach would yield returns similar to the returns a complete stock by stock analysis would yield.

Many investment writers have proposed at least one such formulaic approach during their lifetime. The most promising formulaic approaches have been articulated by three men: Benjamin Graham, David Dreman, and Joel Greenblatt. As each of these approaches appeals to logic and common sense, they are not unique to these three men. But, these are the three names with which these approaches are usually most closely associated; so, there is little need to draw upon sources beyond theirs.

Benjamin Graham wrote three books of consequence: “Security Analysis”, “The Intelligent Investor”, and “The Interpretation of Financial Statements”. Within each book, he hints at various workable approaches both in stocks and bonds; however, he is most explicit in his best known work, “The Intelligent Investor”. There, Graham discusses the purchase of shares for less than two – thirds of their net current asset value. The belief that this method would yield above market returns is supported on both empirical and logical grounds.

In fact, the NCAV strategy currently enjoys far too much support to be practicable. Public companies rarely trade below their net current asset values. This is unlikely to change in the future. Buyout firms, unconventional money managers, and vulture investors now check such excessive bouts of public pessimism by taking large or controlling stakes in troubled companies. As a result, the investing public is less likely to indulge its pessimism as feverishly as it once did; for, many cheap stocks now have the silver lining of being takeover targets. As Graham’s net current asset value method is neither workable at present, nor is likely to prove workable in the future, we must set it aside.

David Dreman is known as a contrarian investor. In his case, it is an appropriate label, because of his keen interest in behavioral finance. However, in most cases the line separating the value investor from the contrarian …