FOOL ON THE HILL
The Star Wars Investment Club

How do the universe's heroes invest? They sell when a business changes for the worse and isn't likely to improve. They sell when they have a better place for their money. To know these things, they read SEC quarterly filings for all their holdings. And they watch the free cash flow. How Foolish they are!

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By Tom Jacobs (TMF Tom9)
May 16, 2002

It was another boisterous meeting of the Star Wars Investment Club, with many agenda items competing for attention. It's never easy to keep to a monthly schedule, what with intergalactic battles to save the universe, Republic, whatever.

"Come to order?" Acting President C-3PO said with trepidation, desperate not to incur anyone's disfavor. While the ever fawning R2-D2 beeped encouragement, the din died down. The shiny C-3PO introduced the first item, a possible sale.

This pleased Club Secretary Obi-Wan Kenobi. "Indeed, we have tabled for too long the decision whether to sell our stake in Jabba's Huts (Ticker: FATT)." Heads bobbed in agreement. "Despite the company's formidable consumer brand, the infamy of its founder inhibits successful franchising."

"Not to mention that he serves up whoever displeases him each night," added Princess Leia.

Mis and leading indicators
Rushing in late and fluttering, Watto snarled, "Eh, what do the analysts say?" A nervous silence greeted him.  

"In grave danger you are!" warned Yoda, "if you follow Wall Street analysts. Buy? Accumulate? Hold? Dangerous and disturbing this puzzle is."

"Well, I'm certainly not going to read those gnarly SEC filings myself!" Watto responded. "Where's the percentage in that?"

"Then you jolly well deserve what you get," said C-3PO, then shuddering at his aggression. "At minimum we must read the cash flow statement. And we see declining free cash flow at Huts." He looked around for support.

"And what about those off-balance sheet partnerships?" queried Princess KennethLaya, quickly adding "No offense, Chewie," to calm her furry Wookiee friend, who was recently defamed.  

"But I love my Huts," intoned Anakin Skywalker, selfless, kind, gifted and brandishing his Lightsaber. "Why should we sell?" 

Queen Amidala answered, "It's dangerous to fall in love with a stock, Anakin. And are you allowed to love? I thought that was forbidden for a Jedi." Everyone laughed -- except Chewbacca, of course, who roared. 

C-3PO impatiently rapped his water glass with his index finger. "First, we see some deterioration in the business. Expansion is slowing, and same-hut sales have fallen off the, the --

"Grandstand at the Mos Espa Arena?" suggested Anakin, remembering the pivotal pod race of his earlier youth.

"Uh, yes, quite. Thank you." C-3PO cleared his metal trap. "And we have any number of promising places for our money. I especially like two excellent stock ideas we picked up from this month's issue of The Motley Fool SelectSalvage Droids Inc. (Ticker: JUNK) -- no offense R2 -- or Han Solo's defense firm, Gungan Din (Ticker: BLAST).

Yoda observed, "Good it is to see such a man prosper. Good government contacts he has."   

Proving that child is father to the man, Luke Skywalker chimed in. "Can't we come up with a more scientific test for these choices? Something less subjective?" With that, a chill swept the room. Luke heard, or imagined he heard, heavy breathing from a dark corner.

Then a deep voice. Could it be Darth Trader who intoned, "Use the charts, Luke!"   

Only Luke and Obi-Wan heard it. He stage-whispered, "No, Luke. Use the Force of fundamental analysis!"

Yoda sighed, "Begun this investing war has."

"Would you two boys care to let us in on your private conversation?" asked C-3PO.

Better place for our money?
Obi-Wan blushed. "I was just saying that we need to compare the future potential return for Jabba's Huts with that for our other possibilities and choose the one that provides us with the best opportunity to make money over the long term. Even I hope for a secure retirement someday." (Perhaps he should consider The Motley Fool's Rule Your Retirement online seminar, starting next week!)

Watto flew close to the Jedi master. "I want to make money now! None of this long term stuff. Long term we're all dead! Now, now, now, now, now!"

Yoda commented, "Life an illusion is. Money too."

"Then what in heck are you doing here?" Watto sputtered.

Delphic, Yoda only smiled.

Princess Layoff said, "Well, Jabba assures me that his reorganization plan means cutting staff and introducing a new menu item, Cloneburgers. That might reduce customer fear."

She continued. "On the other hand, Salvage Droids has a steady, dependable business, with 10%-15% growth in revenue, no debt, and regular share buybacks. Its sales have risen steadily through thick and thin, and an analyst downgrade has pushed the stock to an astonishingly low enterprise value to free cash flow ratio of five! Every household needs droids, and used ones do well in any economy -- even if we do face an Attack of the Clones. That's the kind of business Jedi Warren Buffett loves."

She paused. "But I'm a little concerned about Gungan Din's cash-to-debt ratio, even with the coming increase in defense spending. The company  took on a lot of debt when intergalactic peace led Supreme Chancellor Finis Valorum to cut weapons budgets."

At the mention of the great leader, there was a reverent silence. Then in unison the assembled raised glasses in a toast, "Ad Valorum!"  

In the following pause, C-3PO felt eyes upon him. "Is there a motion?"

R2-D2's head spun around and he beeped. C-3PO said, "Well done! Ar Too moves that we sell half our Jabba's Huts. Lucky for us, we've held the position long enough to qualify for long-term capital gains tax rates. He says to keep half because there's a decent possibility of a turnaround. Then use the sale proceeds to buy shares of Salvage Droids, a nice business we think is currently undervalued versus its steady free cash flow generation and rock solid business. Any second?"

The meeting erupted with seconds, and the deed was done.

C-3PO examined his PDA to schedule the next meeting, but he stopped as a chill returned to the room. This time, he heard the heavy breathing. No, he would not schedule a meeting. There was no telling how many months would pass before they would again have free time.

But at least their investments would not require constant attention. They would read each company's quarterly SEC Form 10-Q during battle breaks, downloaded from the IntergalacticNet, and that would be enough. Now, off to save to the galaxy!

Tom Jacobs (TMF Tom9) owns shares of Gungan Din. He also has a bridge for you. To see his stock holdings, view his profile, and check out The Motley Fool's disclosure policy.