POST OF THE DAY
Foolish Collective
A few Companies for Teens

Format for Printing

Format for printing

Request Reprints

Reuse/Reprint

By pkrfan48
January 14, 2005

Posts selected for this feature rarely stand alone. They are usually a part of an ongoing thread, and are out of context when presented here. The material should be read in that light. How are these posts selected? Click here to find out and nominate a post yourself!

Hi!

I'll start by going a little bit OT, my name is Mike, and I'm fourteen years old.

I first got interested in investing last year when my mom and I went to a get motivated seminar (last year I was home schooled for the whole day, this year half the day half the year) at that summer, a guy came on and started talking about investing, claiming he went from rags to riches using a foolproof business week charting method, although this method is not what I use to pick stocks (thankfully), it did succeed in getting me interested in investing.

On my next trip to the library I picked up about six investing books, of the six, five of them were about day trading and the last one, The Motley Fool Investment Guide for Teens.

Again I got lucky, as I read the TMF Investing Guide for Teens first, which resulted in me declaring the day trading books, not good.

Fast forward about a year and a half to last week. I wrote the "commentary" below.

I sent it to a few Motley Fool contributors and received the following advice-
great advice on column building from babyfrog and Matthew Richey.

And expert editing from Ken, Matt1344, and Whitney Tilson. (Pretty impressive, huh?)

Well here it is, any comments would be appreciated.

We started investing in my personal money management class today. After learning about- credit cards, checking accounts and taxes I was happy to start on something that I actually do on my own time.

My mom had mentioned to my teacher that I was interested in investing had read quite a few books on the subject and was a member of the Motley Fool online community, so my teacher started the lesson by calling me the resident "expert" on investing, I wouldn't go that far, but am proud to say I was the only one who could give an example of a blue chip stock, Microsoft.

After taking a page and a half of notes we headed up to the computer lab to start the actual "buying," -- we have a program where everyone has $100,000 in fake money that they can invest in anything but penny stocks.

We were told to make a list of ten companies or products that we frequently use, as a start for investing ideas, and out of that list came some really outstanding companies, including Sony, (for their Play station 2), Yum! Brands, (because of Pizza Hut) and Verizon, because it is the type of cell phone that most of my classmates used.

Some of the companies stood out to me, and after spending some time researching these companies, I have come to the conclusion, that they would be a good buy for teenage investors looking to put some of their money into stocks.

Using the following blueprint-

1. EV/FCF/G ratio is under 1.25
2. Return on Equity is over 15% and Return on Assets is over 6%
3. Profit Margin over 7%
4. At least two times more cash than long term debt
5. And FCF growth over the past three years of at least 10 percent

I found five companies I believe will perform well over the longer term.

My favorite thing about these companies is that they are liked by teens, the very people who are staring to form the buying habits they will take with them through the rest of their lives, the ultimate long term buy and hold.

K-Swiss (NASDAQ-KSWS) - K-Swiss makes shoes that more and more teens are starting to wear.

1. A few clicks on the Yahoo finance site I revealed that K-Swiss has an enterprise value of about $885 million and FCF of about $85 million, which gives a EV/FCF ratio of about 10.5 � 1.looking at the analyst estimates, I find that K-Swiss is expected to grow at a rate of 13% per annum for the next five years, so the EV/FCF/G is .81 (10.5/13), well below the 1.25 cutoff.

2. K-Swiss has about $50 million in net income. Divide that by its $180 million in shareholders equity- and you get an ROE of 28; divide its net income by its Total Assets of about $235 million and you get an ROA of 22, again blowing away the criteria.

3. Dividing K-Swiss's net income of $50 million by its total revenue of $430 million you get a profit margin of 12%.

4. K-Swiss has $81 million in cash and no debt -- this may be the easiest criteria I've evaluated yet.

5. Ahh, the last one: if I plug in its FCF of $31 million this year, $25 million last year and $20 million two years ago, I get growth of 19 and 20 percent. If you add those two together and divide by two, you get 19.5% average growth over the past three years.

Marvel (NYSE:MVL)- Marvel created the comic book heroes featured in the movies, Spiderman 1 & 2, The Punisher, Blade 1,2&3, Daredevil these movies were generally liked by the people in my class, and soon to be followed by Electra and F4.
Here are Marvel's numbers:

EV/FCF 11.5
G 15
EV/FCF/G 0.77
ROE 22%
ROA 25%
Profit Margin 22%
Cash/Debt No debt
FCF Growth 43%

This looks very good, though FCF growth of 43%, is clearly unsustainable.

Nokia (NYSE:NOK) - Nokia makes the cell phones that a few of the kids in my class have. Although it is not growing as fast as the two before mentioned small caps, it looks to be a good value:

EV/FCF 9
G 10
EV/FCF/G 0.9
ROE 24%
ROA 15%
Profit Margin 12%
Cash/Debt 31x
FCF Growth 6%

While Nokia has $500 million of debt, it also has over $16 billion in cash so Cash/Debt of 31x absolutely knocks this criteria out of the park. Nokia's average growth of 6% in the past three years, is not great, analysts expect growth 10% per annum over the next five years so Nokia, just barely, passes the test.

Abercrombie & Fitch (NYSE:ANF) - A lot of people in my school not only wear Abercrombie & Fitch apparel, but an increasing number are starting to wear the clothes from one of its subsidiaries, Hollister Co.

EV/FCF 16
G 15
EV/FCF/G 1.1
ROE 24%
ROA 17%
Profit Margin 11%
Cash/Debt 87x
FCF Growth 21%

-Lately the stock has run up a little so its EV/FCF/G just passes the test at 1.1. Abercrombie's one-year growth is -4%, but because of the growing popularity of its Hollister brand, and even greater popularity of its Abercrombie brand, I expect that it will go back to faster growth.

Dell (NASDAQ:DELL) I picked Dell because its laptops and its Dell jukebox, an MP3 player, are growing in popularity with teens.


EV/FCF 19
G 19
EV/FCF/G 1
ROE 52%
ROA 16%
Profit Margin 7%
Cash/Debt 15x
FCF Growth 3%

No, your eyes are not deceiving you: analysts are expecting Dell to grow its EPS 19% per annum over the next five years. Dell FCF grew only 3% over the last year, so I'm skeptical the company will grow earnings as fast as analysts project, but dell should still do well.

Disclosure: I own shares of K-Swiss and Marvel

Thanks

-Mike


Become a Complete Fool
Join the best community on the web! Becoming a full member of the Fool Community is easy, takes just a minute, and is very inexpensive.