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The BMW Method

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By TwinDeltaTandem
February 15, 2007

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I realize I've been, well, prolific lately. That's because I've had a few days at home and I've wanted to put some serious focus into finally getting fully invested. For one thing, we're moving about a mile down the road over the weekend and into next week, and after that I'll be pretty busy with work.

I'll have about a fourth of my portfolio turning into cash over the next three months, but for now at least I'm fully invested. Which means it's probably time to short the Dow.

I just wanted to take a moment to thank all of you on this board. Several of you have been particularly influential in helping me to develop a much more rigorous and, I hope, disciplined approach to investing than I've ever had in the past. That's actually fairly shocking, since I've been active in the market since the late 70's. I've been very lucky.

Time will tell whether I've made good decisions or not. But I thought some of you might be interested in my method (or is it just madness?).

So here's what I done (spoken with my best Larry the Cable Guy voice):

1. Identified potential buys using the BMWm, especially Mike's Charts, as whittled down by my list of "All the BMW Stocks in the World."

2. I then looked through the 35-year SRC charts to find those stocks with the most consistent fundamentals history, and low P/Es.

3. After getting the list down to C, HD, JNJ, MMM, PFE and WMT, I printed out a complete deck of M* data on each of these companies and started reading filings, listening to conference call recordings, and reading through each company's MF board. I was particularly looking for recent dividend and earnings announcements, and any nastiness.

4. I compared consensus earnings projections to EPS histories. I began to develop a 3-year projection for each company's earnings and future dividend payments. I was as pessimistic as I could reasonably be during this process.

5. I built a spreadsheet in which I projected a future stock price based on earnings projections, and future dividend payments based on the stock's history of dividend increases. Each of these companies had remarkably consistent histories of dividend (and EPS) growth.

6. I compared the expected 3-year CAGR from the above analysis to a 3-year CAGR based on a return to average price CAGR, and came up with a range of possible future returns.

Based on all this, and after sleeping on it a few times and pacing around the house for the past week or so, I pulled the trigger.

I already had positions in each of these companies. I decided not to buy any additional PFE--although I already own some PFE and am happy to hold it, I think too much depends on unknowns at this point. The company must rebalance its funds slated for R&D versus acquisitions in order to replace lost revenues due to drugs going generic. Although PFE had the greatest potential of the list, it also had the greatest risk. I'm risk averse.

After adding shares to the other stocks, I have the greatest holding in MMM, followed by JNJ, WMT, HD and a much smaller stake in PFE. Of these, I suspect WMT has the least upside potential barring great irrationality in the market, but also is the most certain to turn around.

I would, of course, like to have paid less for all of these. However, my objective was to get out of cash. I believe that these companies each represent 15% future CAGR on the low side. If any of them drop (and I think JNJ is the most likely of the group to see another pullback), I'll be prepared to buy more.

Although I've got quite a bit of exposure to retail and drugs, overall my port is still widely diversified. Hopefully over the next few months we'll see some new sectors pop up on the BMW screens.

OK. I'll quit writing 10 posts per day for a while. It's a beautiful day out--65 and sunny--I think I'll go ride my Mountain Bike.

John

 


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