Wednesday, November 26, 2008

Harley Davidson in a Different Light

HOG closed on Wednesday 11/26/2008 at $17.06. Based on that close the Market Capitalization is 3.97 Billion. If I could convince everyone that owned the shares to sell me theirs at that close I could buy HOG for 4 billion dollars.

A lot of money for sure but let's look at a few other numbers before we make our decision. The company had sales revenue in millions of 6,143.04, 6,185.58, 5,673.83 and 5,320.45 in 2007, 2006, 2005, 2004. So 6 billion, 6 billion, 5 billion and 5 billion during its most recent fiscal years. Sure their sales could drop and probably will in most recessions but they will also go back up. How many 40 year olds, 50 year olds, even 30 year olds do you see on crotch rockets? If I bought a bike I'd buy a Harley and so would you right.

The whole company is selling for less than their yearly revenue the past 4 years! It gets better.

HOG made the following in millions (NET Income) in 2007, 2006, 2005, 2004: 933.84, 1,043.15, 959.60, 889.77. So they made about 1 billion, 1 billion, 1 billion and 0.9 billion during the past 4 years.

So for our 4 billion purchase of Harley we get 5.5 billion in sales and 1 billion of income using the past 4 years numbers. Again, in a recession these numbers are going go down. But by how much? Are older men and women that can afford and want a motorcycle going to disapeer? Are they going to swith to crotch rockets? Harley is an American Icon!

If you got an extra 4 billion laying around I say lets do it. If not buying small pieces of the company at these low prices looks like a bargain to me. What do you think?

Monday, November 24, 2008

New Investments

I bought 4 positions on Friday 11/21/08. I figured with the large drop in the market on Thursday 11/20 it was time to start buying. The general market had a large rise in the afternoon but I bought these stocks in the morning.

I used 2 basic criteria to make these decisions.
1. Low Price to Earnings Ratio.
2. High Dividend Yield.

My 4 stock picks are:
1. Harley Davidson (HOG)
2. General Electric (GE)
3. Dow Chemical (DOW)
4. Alcoa (AA)

All 4 of these companies have PE rates below 10 using average earnings over the last 10 years (although with the current share price for GE the PE rate rose above 10). All 4 companies have dividend yields over 8% (again with the current price for Alcoa the yield dropped below 8%). As long as these companies stay below these 2 criteria I would say they are priced right.

My thinking on these picks comes from The Intelligent Investor by Benjamin Graham. Paying a low price for established succesful companies and diversification.

Any thoughts?

Thursday, November 13, 2008

Value Investing

The copy of The Intelligent Investor that I have is the 4th Revised edition, Copyright 1973. In the appendix is an article by Warren Buffett called The Superinvestors of Graham-and-Doddsville. It's a great article and if you get a chance check it out. There is one simple and powerful message that really stood out to me and basically summarizes Value Investing. If you could pay $.40 for $1 would you do it?

Simple right but why is it so hard to apply in the stock buying universe? I think my biggest problem in the past trying to understand the concept was trying to value a stock based on the future expectations of a company. If sales and income are going up 100% or whatever #, then a stock selling at a high Price to Earnings ratio should make sense to buy. My experience buying these companies is generally the future expectations do not work out like planned so the high P/E ratio becomes excessively high and the stock price soon drops. So how do I pay 40 cents for a dollar bill?

The first criteria I came up with is low P/E ratio based on average earnings for the last 5 years and the current stock price. I defined low as P/E around 10. So to use some simple numbers, if a stock sells at $10, the average earnings for the last 5 years should be around $1. My thinking goes like this: I'm receiving $1 in earnings from this company for every $10 I'm investing. If the company is running its business well some of those earnings will come back to me in dividends and some will be reinvested to build the business so it can earn even more money for me in the future.

Here's what i'm trying to say using big fancy words. I want to buy stock in companies with higher intrinsic value than market capitalization value. One simple criteria to begin identifying these companies is by using the P/E ratio.

Thursday, November 6, 2008

Wednesday, November 5, 2008

What is Cauliflower Ear?

I train in Brazilian Jiu Jitsu (BJJ), Mixed Martial Arts (MMA), Muay Thai Kickboxing (Kickboxing) and American Collegiate style Wrestling (Wrestling). I've been training in these Martial Arts since March 2004. I am a Purple Belt in BJJ, 1-0 in MMA. I've won several BJJ and Submission Wrestling Tournaments and placed in the top 3 in all Tournaments I've competed in. I've won cash and prizes at several tournaments.

One of the results of training and competing in these Martial Arts is called Cauliflower Ear. Imagine taking a piece of cauliflower, removing a persons ears and putting the chunks of cauliflower on the persons head. Some people hate it and some people love it and wear it like a badge of honor. The reality is if you compete and train for long enough you usually get it. In some ways it is a reflection of commitment, intense physical training and experience. It's the price we pay to gain skill in these Martial Arts.

How does this relate to investing? I've tried investing in the past and had mixed results. My initial experience was during 1991 to 1993. I was in the US Army in Panama and I started investing in growth mutual funds. I stuck with large succesful fund families like Janus and American Century (then called 20th Century). I had good returns and was generally satisfied with the results. I stuck with growth mutual funds over the next few years.

My next experience was during 1999 to 2000. I was excited by the boom and wanted to buy individual stocks. I chose companies I thought were succesful, would be considered growth companies and I thought would provide better returns than the mutual funds I invested in previously. I bought Microsoft, Labor Ready and a few smaller companies. My theory was buy succesful companies regardless of share price and my investments would be succesful.

How did it work out? I bought at almost the peak of a bull market and my stocks lost value as the market turned. I sold all my stocks at losses. I made the classic mistake of buying when the prices were going up and selling when the prices went down.

During the 2000's I've bought and sold shares in several companies including Berkshire Hathaway and Harley Davidson. These investments actually made a little money but I sold all the shares for different reasons. The good thing to come out of these investments was receiving the Berkshire annual report which led to me finding the other available reports on the Berkshire website. Warren Buffett is obviously an investing genius and his writing is an excellent source for investing knowledge. Learnig about Buffett led to me learning about Benjamin Graham and his books.

So my long winded post is designed to say that I've started the path to earning my Cauliflower Ears in investing. I plan on sharing my journey hear as I try to apply the lessons and principles taught by Benjamin Graham in his books titled The Intelligent Investor and Security Analysis.