Greedy When Fearful

Just purchased DreamWorks Animation (DWA) at 1.43 Billion, right near their all-time low. This is my wife’s pick as she loves watching their movies with our son and thought the stock looked cheap. I confirmed the valuation analysis to decide on size of position and read their latest 10-K. We decided to go with a large position, 7% of portfolio, because of how ridiculously cheap it is. Yes, never in the company’s history has the stock been so low. Trading at book value (what the company is worth if it was liquidated), these are Warren Buffet prices.  Facebook just paid 1 billion for Instagram. Dreamworks Animation is only slightly more than INSTAGRAM? YES!

DWA is just a baby and getting in at the beginning is how fortunes are made. It has only been public since Spielberg and friends spun it off in 2004. They have only released 21 films, which is amazing considering they are now on a release schedule of 5 films every two years. Racking up intellectual property with hits like Kung Fu Panda, Bee Movie, Puss In Boots, Shrek, How To Train Your Dragon and this company is just learning how to walk.

Stocks are always cheap for a reason. Physical sales of home entertainment have been declining since 2005 due to the increased popularity of streaming/renting/piracy.  3D mania has finally settled now that the industry has finally realized over-priced tickets with glasses are not the future, it was just Avatar. DWA also just paid a massive 289 million to a previous stock holder due to a one-time tax benefit change.

My biggest concern is the home entertainment decline and the future of theaters in general. When people have wall-sized screens at home and quit going to the theaters, my bet is they will have a business model figured out. With a low valuation, no debt, and 116 million in cash I think it’s a good time to bet on the future of our families and their massive amount of children.

Can you imagine a world where our children don’t watch cartoons? I can’t. Playing with toys that aren’t based on movies with brain-washing amounts of commercials and product placements (a la McDonalds)? If this isn’t the future then I’ll be a lot more concerned about being a slave for our alien overlords than losing money in an investment.

Monty

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Every year I always have at least one investment that doubles. More often than not, this is a turnaround story.  Today’s losers might be tomorrow’s winners. Here are the three steps I use and some examples of the companies it’s worked on:

1)      Make a shopping list of your favorite companies.

2)      Spend a minute each day at market close browsing the 52 week low lists (NYSE and NASDAQ). When any of your favorite companies hits a 52 week low find out why.

3)      Is it a short term problem or a permanent problem? If it’s a permanent problem, sell. If it’s a short term problem (10 years or less), buy! Diversification is crucial here. Lots of swings will lead to a home run.

Some examples from my personal portfolio are:

Ford (F): Bought at $2.56 a share on April 2009 when Mitt Romney was saying the auto companies should go bankrupt. Everyone thought they would. Ford did not declare bankruptcy. By August 2009, Ford hit $8 a share. More than a 300% gain in four months.

Mako Surgical (MAKO): Bought at $22.43 a share on August 2011 during the American debt downgrade panic which took everything down with it.  MAKO is now trading at $42.12 a share. Almost a 100% gain in nine months.

Netflix (NFLX): Bought at $77.58 on October of 2011 during the Quickster debacle. Netflix now trades at $106. Almost  a 40% gain in six months.

Now, this system isn’t perfect by any stretch. Step 3 requires great judgment. It is what separates Warren Buffett from us mere mortals. I bought GM with Ford, and GM went bankrupt. I’ve been buying National Bank Of Greece (NBG) for 2 years waiting for it to turn around with the Euro crisis. Time is your biggest asset. This is great for keeping you engaged and excited. Also, it will just help you find a double from a potential bottom on one purchase. I bought Netflix as high as $205 a share. Picking tops and bottoms is impossible. However, by increasing the amount you invest as a stock falls you lower your cost basis as you wait for the turnaround. Like a pyramid, as you get to the bottom your purchases grow in size. Though I started out with a cost basis of $205 with Netflix, my average cost is now half that. This strategy is more of a way to use a Thor sized hammer on your favorite investments. “Thor, Might God Of Thunder! Hammer thy average price into thee ground!” (I’m really excited for The Avengers).

At market close yesterday, Electronic Arts (EA) hit the 52 week low list. This is one of my favorite companies and a major player in our video game investing basket (Currently Activision Blizzard (ATVI), Electronic Arts, Nintendo (NTDOY.PK). That covers step 1 and 2. What about 3? Well, the video game industry is in a period of decline, a period of major transformation. Facebook and  other mobile gaming from companies like Zynga and iTunes have lowered the profits and increased the competition. Can the legendary EA survive and thrive within the next decade? Or, will they fall the way of Atari, Sega, Midway, etc.? The video game industry is incredibly difficult. But, with 1.5 billion war chest of cash and 500 million in debt from buying  Zynga (ZYNGA) rival PopCap,  I think so.  They hold some incredible franchises (Madden, The Sims, Mass Effect) and are strongly moving into social network games through PopCap (Bejeweled, Plants Vs. Zombies). My old class mate Evan Bell even worked on their latest hit Star Wars: The Old Republic and invited me to be a beta tester. The game looked absolutely incredible but my slow computer couldn’t handle it.

Today EA is losing the stock market war against Zynga.  With a current valuation that’s almost half of Zynga (5 billion vs. 8 billion), I think they will be tomorrows winner.

Will EA be my 2012 double?

Monty

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My Investing Wall Of Fame

As Warren Buffett recently mentioned, the current value of the entire world’s gold is 7 trillion. The current value of all the farmland in the US is 2.5 trillion. What would you rather have, all the gold in the world or all the available land in the US with  4.5 trillion of spending money? This is a no-brainer for me as I could care less about shiny things.  Though, my one year old son seems to prefer shiny things over farm land.

The problem with buying land is it’s very expensive, and I’m still “a million dollars short of being a millionaire!” (R.I.P. John Candy). Thankfully, you don’t have to be a millionaire to own land. REITs are investing vehicles that allow you to own a portion of real estate for the cost of going out to dinner. The beauty of REITs is they have to pay out at least 90% of their earnings to shareholders as dividends. So, not only do you get stake in a piece of land, you immediately get the earnings it generates.

I have a fanatical interest in amusement parks and would buy one if I had the cash. So, when I learned (thanks Cramer!) that Cedar Fair (owner of eleven amusement parks) basically works like a REIT (it’s a Master Limited Partnership which is incredibly close) and is currently yielding a massive 13% I jumped for joy! I can own land with rides and waterslides on it? YES! Here are 3 reasons why I think an investment in FUN is better than investment in gold.

1)      Gold is a luxury. Land is a necessity. This is why I will always purchase land over gold.

2)      With FUN’s historical and current massive yield, the investment will double every 6 to 8 years even if the stock is flat. Over a 30 year period, I’m betting FUN will increase 5 fold. I don’t think gold will hit $8,000/ounce by 2050. Going back to 1933 using Global Financial Data’s numbers, gold has averaged a 4.7% annual return and has been 20% riskier than stocks as a whole. Going by those historical numbers, that means gold will only triple in 30 years (putting it around $4800 an ounce).

3)      Amusement parks have two huge “moats.” The first being their land and when they purchased it. Amusement parks typically start out on inexpensive, unwanted farm land. If the park succeeds, the land around it becomes very valuable. When Walt Disney just announced the development of Disney World in Florida, real-estate values practically tripled over night. The second is they are extremely immune to becoming obsolete from technological competition. It’s going to take Matrix-like, jack-the-brain in virtual reality technology to get the amusement park experience at home and make them obsolete. Kinnect Disneyland Adventures is incredible, but it’s still not preventing me from going to Disneyland next year. If anything, it’s making me want to go there more. Like an incredibly immersive commercial.

Parks run on discretionary spending.  If America and Canada go bankrupt obviously gold will be the better investment. But, I’m betting that’s not going to happen. Wait, did I say Canada?

Started in 1987, Cedar Fair owns eleven amusement parks, six outdoor water parks, one indoor water park and five hotels. Owns thousands of acres of land. The amusement parks include: Cedar Point, located on Lake Erie between Cleveland and Toledo in Sandusky, Ohio; Kings Island near Cincinnati, Ohio; Canada’s Wonderland near Toronto, Canada; Dorney Park & Wildwater Kingdom (“Dorney Park”), located near Allentown in South Whitehall Township, Pennsylvania; Valleyfair, located near Minneapolis/St. Paul in Shakopee, Minnesota; Michigan’s Adventure located near Muskegon, Michigan; Kings Dominion near Richmond, Virginia; Carowinds in Charlotte, North Carolina; Worlds of Fun located in Kansas City, Missouri; Knott’s Berry Farm, located near Los Angeles in Buena Park, California; and California’s Great America (“Great America”) located in Santa Clara, California. Additionally, the Partnership has a management contract for Gilroy Gardens Family Theme Park in Gilroy, California.

Not only is the geographic diversity here amazing, Cedar Fair has also been paying a dividend since 1988 that typically ranged from 6-13% depending on the earnings power that year.  It was cut in 2010 but is now back with a massive 13% yield. Management expects to keep the dividend around 9%. If you want to see an investment absolutely kill the market and grow massive wealth, take a 6-13% yielder and reinvest those dividends for 30 years in a tax deferred account like a Roth IRA or ESA. That’s what I’m doing with Cedar Fair. Ever just make the minimum payment on a credit card and wonder why the balance always stays the same? Be on the other side of that card. I get the benefits of credit card like interest rates with the fun of learning and following the amusement park business.

I also am starting a new tradition with my son. Basically, every time we buy a stock (he owns FUN along with Disney in his ESA), an item representing the investment goes up on a cork board (as seen above). This is a reminder that these aren’t just pieces of paper, these are actual slices of ownership in a living and breathing company. Buy enough slices and you can own the whole pizza!

Monty

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Qwikster is gone. The classic is back!

SNL attacks Netflix. Netflix falls 54% in one day because they lost 800,000 subscribers last quarter.  Time to panic? No, time to celebrate! I’m now dancing in my Netflix red colored pajamas this morning as this is exactly the jolt needed after a long 22 hour shift yesterday. Just got greedy and doubled down on Netflix AGAIN. If it halves again, down to 2 billion, I’ll double-down AGAIN. Here’s my investing thesis: Qwikster is gone and the classic is back.  Everyone is going to need to charge more for higher content costs, this is not unique to Netflix as prices are set by the movie studios. Customers just aren’t aware of this yet. Netflix customers will be back, eventually. Where are they going? Redbox? Blockbuster (I have seen a record amount of commercials lately)? Pundits are wrong that say yes on those two. Long term I’m worried about Google/Apple/Amazon but I don’t know anyone that has switched from Netflix to one of their services. If that changes, I’ll re-evaluate. But for now, in 2014, I’m betting Netflix will be worth 15 billion. That will be a 7 fold stock increase from today’s prices. Increased position from 4.5% of  portfolio to 9.1%. “Be fearful when others are greedy. Be greedy when others are fearful.” – Warren Buffett

Monty

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Non-financial news talking about the major declines in the market.

Market volatility is how the rich get richer. Buffett calls this being greedy when others are fearful. Hedge fund managers call it buying the dips. Market panics are going to happen just like the sun shine will eventually turn to rain. You don’t need to know when if you always have an umbrella nearby. Follow that rainbow afterwards and you will find a pot of gold.

With the Dow down 3.5% today, I thought this would be a great time to explain my latest purchase and the strategy behind Headline Crash Cash. This strategy is a hybrid of my favorite investors (Buffet, Lynch, Gardner, Cramer).

The first rule of headline crash cash is you must always have cash available to buy stocks during a major panic.

The second rule of headline crash cash is you must ALWAYS HAVE CASH AVAILABLE to buy stocks during a major panic.

Not investing cash that is already in your brokerage account is like trying to keep a really awesome Tyler Durden secret to yourself.  It takes discipline just to let all that money just sit there, “doing nothing.” Think like a Vulcan. Warren Buffet always keeps 30% of his wealth doing nothing so when the world melts down he can loan it to Goldman Sachs or Bank Of America.  I came up with a similar strategy that has been working quite well for me and keeps me disciplined. Here is my system:

1)     Any deposit you make into your brokerage account, flag 25% as HCC. Track it in a spreadsheet with three columns. The date, the total deposit amount, and the 25% HCC. At the bottom of the spreadsheet, have a “Headline Crash Total” to keep an ongoing tally. Never touch this money unless…..

2)     Non-financial news is talking about the major declines in the market. For example, the front page of MSN says “Dow off 400 on recession fears.” A local talk show host, Doug Wright, opens his show with how bad the markets are today. The markets will be down huge, somewhere between 3-6% just in one day.  Pictures of terrified traders will be everywhere. Your crazy uncle is telling you to buy gold and guns.

3)     On market close (2pm MST where I live), browse the Nasdaq 52 week low list and the NYSE 52 week low list. Write down any companies on this list that strike your fancy.

4)      Next, find which of those companies are the furthest away from their 52 week high.

5)     From that list, find out why they are hitting a 52 week low. The best investments are great companies that got pulled down with the bad (bathwater AND baby) from panic selling or great companies with temporary problems.

6)     Use 1/4^th of your money from step 1 and buy anywhere from one to a “basket” (equal shares) of these companies.  In the past 50 years, the Dow has closed either up or down 4% only 76 times. Five of those times occurred this year. By only deploying a 1/4^th, you will be ready for 3 more melt-downs. I usually buy after-hours in events like this or do a market order at the next day’s opening. This is because these stocks usually rally a bit the next day (though you might as well just flip a coin or ask your eight ball). The prices are already so low don’t argue about pennies with limit orders.

7)  Rinse and repeat until retirement.

This works best if you are buying individual stocks. If it’s an index fund or ETF, you probably just feel like you are riding a roller coaster. Individual stocks do not move together. For example, I bought Mako Surgical (MAKO) on August 8^th 2011 during the S&P 500 American debt downgrade panic. With today’s panic, that investment is still up 62%. I keep a wish list of stocks I want to own, and today FedEx (FDX) struck my fancy (though Pepsi, UPS, and Disney sure looked hot too).

FedEx dropped 8.17% today. Down 32% from its 52 week high, where it was just three months ago. FedEx hasn’t been this low since October 2003, or  August 2009. A high quality company selling at a bargain basement price, my favorite. This is a Porsche selling for the cost of a Ford. It’s down due to  the temporary problem of the world not buying things because they are afraid.

My investment thesis: People will eventually buy things again and Tom Hanks will be doing the delivering.

Monty

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With a Roth-IRA, you can withdraw $10,000 tax free for your first home purchase.

I was originally going to write an article called “Banks are un-investible. Time to buy the banks.”  Jim Cramer was telling people to stay away from the financials almost daily. The Motley Fool analysts on Market Foolery were just as negative.  Just last week, my investments in financials were down huge. Wells Fargo, down almost 20%, JP Morgan Chase, down  15%, Bank Of America (BAC), down 50% (78 billion)! I started buying the major banks in August 2009 so this is from those levels. Remember how great things were during the boom times of August 2009? Exactly. Gold just hit a new record of $1900/oz (gold currently trades to a ratio of fear). Yes, the market is that fearful right now.

There were only two people that I followed who were making sense. Warren Buffet was adding to his position in Wells Fargo. Warren Buffet is Wells Fargo’s biggest shareholder (owning 7% of Wells Fargo, and making up 20% of Berkshire’s entire investing portfolio), and the stock was trading almost exactly at Warren’s cost basis! Then, the Motley Fool Money Podcast sound engineer, Steve Broido bought Bank Of America because he “Thinks it will still be around in 5 years.” Steve joked about it probably continuing it’s free fall as everyone else in the room laughed but I thought “Steve, this one will probably work out for you, it’s just way too cheap here.” My plan was to add to my bank basket (which is way more fun than a financial ETF) and buy more WFC, JPM, and BAC. I knew that BAC had the most upside but it also has the most risk. They just announced up to 10,000 layoffs, they are being sued by AIG for 10 billion for massive mortgage fraud. The market is questioning if they are even solvent.

Then, Warren Buffet announced a 5 billion dollar investment in BAC. This is 10% of Berkshire’s cash, a major investment. Warren wanted to inspire confidence in the market, and he sure did with me. But, I wanted BAC to pay for it’s (Sleazy)slegal ways. Main Street runs parallel to Wall Street. If you own who you pay, you add balance to the system.  My family is young (we can wait decades), and we can handle a lot of calculated risk (we can wait decades). I recently read about people foreclosing on BAC. All this news lead me to the idea:

What if I could get Bank Of America to pay for our down payment on our first home purchase? The irony would be great!

With a Roth-IRA, you can withdraw $10,000 tax free for your first home purchase. With this in mind, I doubled down on our BAC investment at the price of 78 billion bringing it from 5% back to 10% (since it fell 50%) of our portfolio. Banks typically trade above book value, and for BAC, book value is 200 billion. If it makes it back to book value, it will be a 150% gain. That’s Bank Of America paying a huge chunk of our down payment. Now, the pros will say don’t follow Buffett because I’m not getting the same deal he is. Warren is getting a 5% yield, I’m not. But, I’m not here for yield. I just bought Waste Management a month ago for the 4.68% yield, not hard to find big yields right now. Warren has warrants for $7.14 that expire in 2021. What that means, is within the next 10 years, Warren has the option (but not the obligation) to buy 700 million common shares of BAC at $7.14. So, if in 2015 BAC trades at book value, 200 billion (or $20 a share), Warren can buy the shares at $7.14 and they would immediately be worth $20, a 200% gain. The pros talk about how sweet the warrants are but they are only sweet if they are exercised. I’m making a 10 year bet that Berkshire exercises those warrants at least at book value. If BAC goes bankrupt, I’ll lose. But, Warren would lose his sweet, sweet warrants if that happens and his 5 billion in preferred stock investment. By listening to the pros you would think Buffett’s preferred stock is shielded from loses and there is no risk. Not true.

The mortgage market used to be the most stable investment out there. People used to make their mortgage their #1 obligation. They would rather pay than be homeless. What madness! With BAC owning the majority of the mortgages, I’m betting the future rhymes with the past.  I’m betting on the side of the greatest investor of all time and plan to profit right along with him.

Monty

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From This

I love cars. I nostalgically remember drooling over my former employer’s 1997 Corvette. Like most teenage boys, I had pin-ups of sports cars in my room next to the hot chicks and posters of Depeche Mode, U2, and NIN.  I had a miniature model of a Porsche Boxster on my dresser.  I still long for the day when I can own a 1950s Cadillac.  So, when I heard of a company going public in April called ZipCar, I laughed at how stupid it was. American’s “sharing” cars? Zipsters? In Europe, sure. But not AMERICA! Then, the following happened:

1)  I was dropping off some papers at the University Of Utah and noticed a car sharing automobile parked in the stall. It was U-Haul’s version, but it was still the first shared car I have seen.

2)  The Motley Fool recommended it as a Rule Breaker  in June so I added it to my watch list.

3) I read about how car sharing can be used for company fleet vehicles. This was such a great, money saving idea I talked to one of my clients about it.

Then it clicked. This contrarian idea may not be stupid at all. It could be revolutionary. It could be the future.

Two weeks ago, ZIP reported massive revenue growth of 34% and an increase of its members by 29%. Yet yesterday, it hit a 52 week low (25% decline in the past 5 days and 39% drop since its peak! When it recovers, it will be an easy double).  Great company, broken stock. My favorite.  So, I just started a partial position (my wife said “It’s not done falling.” which I responded “Exactly. Wide scales!”) in ZIP at 684 million (market cap).  I’m an optimist, but I’m not stuck in the past. This is why I’m betting America’s auto love affair peaked in the 1900s:

1) Cars are uglier than ever. They remind me of the toy cars at our nearby theme park, Lagoon. If we loved our cars, would we really drive a Smart Car?

To This

1) The middle-class is shrinking and the cost of gas is increasing. People are driving less because of the cost of gas. According to AAA, the average person spends $10,000 a year for the privilege to drive (add up your car payments, insurance, repairs, and gas costs. What do you pay?). More people are car-pooling and taking public transportation.

2) Renting music, movies, books, and houses is more popular than ever. Unless you’re rich, owning is becoming passé.  The green movement is stronger than ever (each Zipcar shared takes at least 15 personally-owned vehicles off the road.)

3)  Dean Kamen, inventor of the Segway, once mentioned in an interview that it’s stupid to move a 200lb person with a multi-ton machine. That point has stuck with me. So has the thought that we dedicate huge portions of our houses to storing these beasts.

4) Anyone who has traveled to France will most likely testify to the efficiencies of the Metro and how nice it is to not have car. On my last trip I felt this exact same way, except when I went grocery shopping. ZipCar is perfect for this situation.

5) Ever borrow a pick-up from your parents? I did last week. You can reserve pick-ups or a swanky BMW without the bother or the budget.

Then, I realized Zipcar has my favorite type of business model, subscription! Members pay an annual fee of $60 and around $8 an hour (which includes insurance, cleaning, maintenance, AND gas!) when they are driving. You swipe the windshield with a smart phone or ID card to get into the car. Instead of being like Hertz or Enterprise, this business model could be more like Costco or Netflix. Costco makes almost all their money from membership fees, not product sales (which are sold almost at cost). Ever pay an annual fee to rent a car from Enterprise? Me neither.

I posted a Facebook update about car sharing, and only one person responded. I’ve only seen one car-sharing automobile in Utah. Zipcar isn’t in Utah yet, it’s still a baby. Buying babies and holding until adulthood is how you get rich. In the US (they own UK’s version called Streetcar) they are only in 14 cities and 230 universities. A decade ago I was testifying to friends and family about the revolutionary iPod and the game-changing Netflix. Investing in strong trends early is key to building wealth. This may be the next strong trend.

Zipcar has built their own new world and it could easily implode. This is an extremely risky investment. Alternative energy or cheap gas, a rising middle-class, population shrinkage, cultural trends, flying cars, competition from the big boys, etc. Also, you still have to get TO the car. Right now, this model works much better in Manhattan than in Texas. But, when companies invent their own world take a look at your feet, you may be walking on a yellow brick road.

Monty

Since my last post, I also did the following (you can always follow along with every buy/sell on Facebook)

5/16/2011

Sold entire position of #VITA @ $3.82. After terrible sales of Cortoss, last August, Jedi David Gardner said sell. I agreed but wanted to sell into strength. Today Stryker announced they are buying VITA. I held VITA for 1 year and 3 months. A 40% one-day increase is the moment I have been waiting for.

6/1/2011

*click**click* RELOAD of #UA @ $65.64 (5% of portfolio) and @LULU @ $89.49 (5% of portfolio)

8/8/2011

Taking advantage of the S&P USA downgrade. Picked up #MAKO @ $22.43 making it 1.6% of my portfolio. MAKO Surgical has been delivering on their promise to change the world through robotic knee and hip surgery and is the 905 million little brother of Intuitive Surgical. Picked up #WM (Waste Management) @ $29.14 making it 1.7% of my portfolio. With a 4.68% yield and decades of trash to come I love picking this up at a 52 week low. MAKO reports earnings tonight. Normally I wouldn’t buy right before earnings but MAKO sold off almost 10% today making it worth the risk IMO. August 9^th, Got really LUCKY here! MAKO closed up 35% from yesterday after blowing away earnings. That’s a record for me! Usually 1 billion companies never have days like this. WOW.

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Note: This applies to my limited interest in trading, not investing

Peter Lynch describes buying a plunging stock as trying to catch a falling knife. I know exactly what he’s talking about as I’ve bought stocks on their way down to zero. I was hoping for a recovery, like in the case of my five-bagger with Ford (F), only to be greeted with bankruptcy. For every Ford I find I can have four losers and still break even. Not bad. But, these losers can take years to turn around (like my current trade with National Bank Of Greece (NBG)) and take nerves of steel.

I’ve got a new strategy I would like to try for my trades (I still love buying falling stocks for my 30 year investments). Buying The Right Of The V is an attempt to buy a recovery story near the beginning of its recovery. The advantage of buying a stock on its way down is its always on your radar. When good/bad news hits the stock, you know, because the stock will swing in double-digit percentages. With this new strategy, I’ve created a watch list called “Bankruptcy Watch.” In this list, I keep track of turnaround stories I’m interested in. The trick here is when a stock gets hammered, I edit the cost basis on my watch list as if I were doubling down on the stock. If a $5 stock rally’s 50% to $7.50, that’s a huge move and probably means the fundamentals have improved. If it was on my watch list at $10, it would look like a 25% loss. A loss might slip under my radar, but, a 50% gain? I won’t miss that. Adjusting the “virtual cost basis” on the way down is a crucial component to this strategy. Another crucial component is to find out what caused the massive move. I’m waiting for the moment the fundamentals change. Stock price alone won’t tell you this, but it’s a great alarm system.

**ALERT** **ALERT** SVU IS LESS BAD THAN IT WAS A YEAR AGO **ALERT** **ALERT**

I’m trying this strategy today with the hated, worst-of-breed discount grocer, SuperValu Inc. (SVU). You probably know them as Albertsons, Cub Foods, Jewel-Osco, Save-A-Lot, Shoppers, or Acme. Since 2007 their sales have been on a steady decline, and their debt increased to a massive 7.4 billion. The market has punished SVU with a 80%+ decline which is why it’s been on my “Bankruptcy Watch” list for the past 8 months. But, I think the stock bottomed in January because things are getting better. SVU beat analysts’ expectations and gave positive 2011 guidance with their latest quarter. They are paying down another 500 million in debt with their improved cash flow. SVU is less bad than it was a year ago and was rewarded with 55% increase in share price since it’s January bottom. Motley Fool Hidden Gems analyst Seth Jayson 8 months ago mentioned this story and its been on my radar ever since. He has recommended it and purchased it three times already for his Hidden Gems service. I have been watching and waiting for that quarter that signals SVU is off life support and ready to fight. The one major disadvantage of waiting for the company to improve is you miss the bottom and some of it’s easy money. But, Seth Jayson is a brilliant analyst, and extremely conservative. He thinks SVU can reach at least $16-$20 a share by just becoming mediocre. I agree with his logic.

Even though I missed the first 55%, I think I can still land a double-bagger trade here with less risk because the fundamentals are finally starting to improve after 4 years of pain. I’ll be selling SVU after a double. I typically avoid grocers like the plague and only like this company as a recovery play. That’s the strategy of Buying The Right Of The V.

Monty

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Anyone who invested $1,000 in Nike (NKE) in 1980 would be sitting on at least 120 times their money ($120,000, not including dividends). Any parent who would have purchased just $100 worth of Nike stock with their kid’s $100 Air Force 1 sneaker would be sitting on $12,000 for college.

Nike was born in 1964 and was a household name in 1980. I’m sure many people thought they already missed the Nike train in 1980. But, “Nothing succeeds like success.” Only investing in the cream after it’s risen to the top has proven to be a great investment strategy over the decades. Look up the charts from the companies that made your favorite products when you first discovered them and you may be surprised at their massive gains.

Since Doc Brown hasn’t invented the Flux Capacitor to send me back to 1980, my strategy is to find the next Nike, and invest like it is 1980.

Only about 1/8^th the size of Nike’s market capitalization, Lululemon Athetlica (LULU) and Under Armor (UA) are both 13 year olds that look like they might grow up to be Nike some day.  Jim Cramer would say I should only own one to stay properly diversified. But, when trying to predict the next 30 years, I have no idea which one will do better or even exist in 30 years. Great investors sketch the future, bad investors try to photograph it. I’m going to sketch the future by buying both.  

Lululemon Athletica

This is a company I didn’t even know existed a month ago. My wife confused it with Gap’s Athleta brand when I asked her about it. Jim Cramer mentioned it a couple of times on Mad Money. Then, Motley Fool’s David Gardner suggested it as not only a Rule Breaker but a Rule Breaker Core. Rick Aristotle Munarriz called it “The Hottest Retailer in 2011.” Lulu launched their first store in 2003, IPO in 2007, and their online store in 2009. No wonder I haven’t heard of Lulu, she was just a baby!  OK investing universe, you have my attention. I LOVE babies.

Though plenty of Americans still tie their ego to the price of a product, most men I know follow Tyler Durden’s advice (“You aren’t your f$#@% khakis”) when it comes to gym clothes. I wear the same decade old t-shirt and shorts to work out. Women are the polar opposite in this category however and that’s what gives Lulu an edge over Under Armor. Lulu was created to fill the void in athletic wear for women. Do you think of women when you think of Nike or Under Armor? Me neither. Lulu has invented a world where women rule the gym. When companies invent their own world take a look at your feet, you may be walking on a yellow brick road.

$350 for True Religion jeans, $200 haircuts at Lunatic Fringe, and shopping 399 hours a year is why women rule the shopping universe. Lulu is bringing Women’s fashion to the gym and now they’re sweating gold. Net revenue increased from 40 million to 459 million from 2004-2009, an astonishing 60% compound annual growth rate. They increased cash from 3.8 million in 2006 to 159 million in 2010. No debt. 31% growth in comparables in 2010. Lulu only has 100 US stores, only a few per state. They plan on growing to 300 US stores. If they can successfully execute growth to 300 stores expect the stock to soar. As Cramer says, “Growth is rocket fuel for stock price.”

A primary concern of mine is the mainstream appeal of exercising. With record obesity rates in America, exercising isn’t trendy like it was in the 80s (Thanks Schwarzenegger and Stalone!). I also typically avoid retailers like the plague as most middlemen can be easily replaced. They have no moat. However, when the retailer makes the product they are selling, brand loyalty becomes their biggest asset (think Victoria Secret, Starbucks, Apple).

In my next update, I’ll cover why I like Under Armor. Here are my purchase stats for both stocks:

I also purchased more NFLX @ $205.00 because I think the fears of Facebook and Amazon are over-blown. Doubled down on BYDDY @ $9.06 to turn a -28% loss into a -12% loss. Only 3% of China owns cars and I think China’s biggest home grown automaker will eventually be able to compete with GM and Ford. View the entire portfolio here:

Off to the gym….

Monty

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