Friday, August 6, 1999

What I Think I've Learned So Far


Warning!!! The following paragraphs are based on current knowledge. The statements are forward-looking in nature and your results may differ materially. The statements should be read in conjunction with the idea that the author is a novice and any ideas expressed or implied here are of his own choosing and do not necessarily represent the views of management (whomever that may be, and what do they know anyway?).

I have only been Foolish for a few months now and during that initiation period I have had some bumps and bruises. But have also gained some knowledge and insights. I thought I'd share some of the things I think I've learned along the way.

I've learned that just because a stock was once at $150 and now has dropped to $90 over the past few weeks doesn't necessarily make it a good buy.

I've learned that even though a company may have spectacular earnings, it's price still can drop... because it might not have met expectations.

I've learned that even though a stock doesn't meet the Fool-8 screen, it still can meet the Fool-8 screen. OK, I guess I need to explain this one.

I had started to investigate a company (from the Ups/Downs page of Investor's Business Daily). The company, Cost Plus (Nasdaq: CPWM) had shown a +25% increase in earnings per share in the most recent quarter vs. the same quarter from a year ago. I had put this company on a list of companies to look at, but I didn't do anymore with it until a few months later when I heard a guest on Wall Street Week (the Rukeyser show) mention it.

Now, just because the company was mentioned on WSW didn't do much for me. Plenty of companies are mentioned on the show. However, the guest then said that Cost Plus was going to be opening 25 new stores in 1999. My ears perked up a little. Then they really perked up with her next statement. She said the company was financing all the openings through cash flow. Wow! Very impressive, if true. In other words, the company was generating enough cash through operations, that it didn't have to borrow money to expand.

I started to dig into the company further using the F-8 screen first and found that it was good on almost everything except net profit margins, which showed an annualized margin of 4%, way below the minimum 7% of the screen. Hmm... what should I do? Is it a throw out? Should I move on to another company?

I liked this company, so I decided to look a little future. I noticed something unusual in its quarterly statements. For three quarters of the year it seemed to make very little money or sometimes lost money, but in the fourth quarter it went like gangbusters. Very confusing to me. I looked further.

I pulled down some of the SEC filings and found the management discussion very enlightening. In one of the quarterly reports it said that the company makes all its money for the year in the fourth quarter (which is the Christmas season for the company). That explains the skewed quarterly earnings.

Now I reasoned since the company is only operating on "all cylinders" during the fourth quarter, isn't it reasonable to say that the fourth quarter is more representative of what the company can do overall? What do you think? When I looked at its fourth quarter net profit margin it was over 10%, well over the F-8 minimum.

This was impressive to me also, since most retailers try to increase business during the Christmas season by having sales, and thus having lower margins, while this company was actually able to sell items that had higher margins. Based on this, I felt it passed the profit margin parameter. If I had been in a hurry and just gave a cursory glance at the numbers without knowing what was "behind" them I would not have passed up the company on profit margin.

All this research took place over a period of a few months (hey, I'm a regular working guy with a wife and kids so time is limited). During that time, the price has gone from $28 to $50 (as of this writing)! Have I missed a buying opportunity? Is the price now to high? Should you buy a good company at any price? What do you think?

All the above statements are based on one person's opinion and have not been verified for truth, accuracy or anything else you'd like to throw in there! Thus, there are no guarantees, warrantees, or golf tees either expressed or implied. Batteries are not included and, as always, taxes, title, and destination charges are extra. Have a great day!

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