Garmin, Ltd.
GRMN - Analyst Fun!

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By jimgillies
April 29, 2005

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Hi, Just my attempt at an amusing aside in this otherwise dismal week. (Could be worse - we could be BWLD investors!) Noticed today, that GRMN got themselves an analyst downgrade from Needham & Co. Now these guys have had a history of moving GRMN up and down, so let's take a look.

   Date      Action     Rating   Stock Price
Apr 28/05   Downgrade    Hold      $40.57
Oct 28/04   Upgrade      Buy       $49.50
Mar 26/03   Downgrade    Hold      $36.07
Dec  5/02   Initiate     Buy       $24.16

I thought it might be interesting to follow the strategy of buying when they say buy, and treating the "Hold" rating as a tacit "Sell" (or if you're not a shareholder "Don't Buy"). So below, are the returns offered to shareholders who follow Needham's ratings. (In calculating returns, I'm ignoring dividends, transaction costs, and capital gains taxes).

Scenario 1 - Buy GRMN at initiation of coverage. Ignore and go away. CAGR = (40.57/24.16)^(365/875) - 1 = 24.1%

Hmmm...buying and holding would seem to have paid off. Of course, we wouldn't have needed to worry about capital gains taxes and selling commissions since we're still holding. Nice that dividends received have paid off the buying commission.

Scenario 2 - Buy GRMN at Buy/Upgrades, and sell at Hold/Downgrades. Three holding periods returns  (HPR):

Period 1 - (Dec/02 to Mar/03)
Period 2 - (Mar/03 to Oct/04) - assume money held static, waiting for the next upgrade.
Period 3 - (Oct/04 to Apr/05) HPR1 = 36.07/24.16 = 49.3% HPR2 = 0 HPR3 = 40.57/49.50 = -18.0% CAGR = (1.493)(1.000)(0.820)^(365/875) - 1 = 8.8%

Oops. We've cut our annual returns by almost two thirds; AND we've had to pay more fees, as well as those capital gains we paid back in 2003. At least we have a captial loss to apply against other gains, right?
Well, it's probably not realistic to assume the money just sat around doing nothing. What if we assume we invested in the S&P500 Index during the time that Needham felt GRMN was not worth owning?

Scenario 3 - Buy GRMN at Buy/Upgrades, and sell at Hold/Downgrades. Money invested in S&P500 Index fund in interim. Mar 26/03 - S&P500 - 869.95 Oct 28/04 - S&P500 - 1127.44 HPR = 1127.44/869.95 = 29.6% CAGR = (1.493)(1.296)(0.820)^(365/875) - 1 = 21.2%

Well that's a bit better. We're still not making what the buy and hold strategy does, and we've had to pay more commissions and pay more capital gains taxes (I suppose that's a good thing), and those would cut into our actual returns.

So what's the point of all this? Well, admittedly, it's a bit arbitrary in terms of it's start date, and it's only a sample of one analyst, but I think it illustrates the power of a buy and hold strategy in a high quality stock. (Of course, you have to decide for yourself if GRMN is one of those). Now why don't analysts advocate buy and hold? (Hint - Warren Buffett estimated in 1999, that investors in the Fortune 500 spent more than $100 billion annually in frictional costs). Cheers, and courage - there are better days ahead. Jim

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