The indicators I used to get out were the 20 day moving average, 50 day moving average and the MACD. I also was watching two versions of the charts the 3-month view and the 1-yr view. I’ve noticed that they provide different information and I like to have as much information as possible. I saw the 20 day moving average break through the price around November 30th, then the 50 day on Dec 3rd / 4th. The MACD was trending downward and hadn’t quite crossed but was about to. Anyway, I sold at $193.

Bought 4 shares @ 129.10 = $516.40 (February 29th, 2008)

Sold 4 shares @ $193.00 = $772

Profit = $255.60

Looking back at the trends over the past 1.5 years (chart below) I noticed that I should have sold my stocks original in July 08. Then I should have waited until March 09 to buy again. This would have been a correct Rule 1 trade, however, I wasn’t following things closely enough and missed out. This teaches a good lesson that watching the stocks does only take 15 minutes per day and you can profit greatly if you know what you’re looking for.

I am now in search of another set of companies to purchase. However, as my Rule 1 knowledge is a bit foggy I am going to re-read the book and refresh my knowledge so that I’m ready for my next set of winning trades!

As we know I’m a huge fan of Apple and the company in general as I discussed after the big Apple stock drop. I think they have everything that qualifies as a “bang on” Rule #1 Company. In fact, I think if Phil Town was rewriting Rule One he’d consider adding Apple as a example Rule One Company.

Anyway, I’ve been keeping my eye on this stock since I started trading. The stock price was either above the Margin of Safety ( back in December 2007) or the technical indicators were telling me to stay out (during the stock drop). Well, luckily for me there was a stock price drop and after the announcement today looks like the stock price could be back on the rise. Check out the image below.

The technical indicators tell us two important things

1. The Stock Price is just moving through the 30-day moving average
2. The MACD buy line is above the sell line and the average number of buyers is larger then the number of sellers.

So is the stock going to make a HUGE increase like before? Nobody can tell you that 100%. However, with consistent growth rates over the previous 9 years and incredibly good Return on Investment Capital it wouldn’t’ be a bad bet. I have a sticker price of over $200 so I see this as a steal of a deal!

What is KSwiss?

Kswiss is a company that designs, develops and markets high performance footwear and apparel. As well, they market and design casual footwear. Which is how I know KSwiss. I know KSwiss from products like the shoe to the right.

Who are the consumers?

From the company description it looks like the consumers are sports fanatics and the modern teenager to young adult. As we know these people are large consumers.
Where can I buy KSwiss?

I like to do is determine where people can actually buy the product. I find that this is especially useful for retail stocks. If you can’t get a specific brand at certain stores / locations then this shows some sort of block in the moat or management. Looking online you can buy KSwiss from Foot Locker and Eastbay.com. On ebay there are over 300 items when searching for KSwiss

How’s the Management?

This is always the toughest question. However, if we look at the annual report from 2007 we can see that the CEO seems like a straight shooter.

The athletic footwear industry is highly competitive. There are several marketers of footwear larger than us, including Nike and adidas. Each of these companies has substantially greater financial, distribution and marketing resources as well as greater brand awareness than us.

We have increased our emphasis on product lines beyond our Classic model. In the past, we have introduced products in such highly competitive categories as court, boating, outdoor and children’s shoes. See “Products.” There can be no assurance that we will penetrate these or other new markets or increase the market share we have established to date.

The principal elements of competition in the athletic footwear market include brand awareness, product quality, design, pricing, fashion appeal, marketing, distribution, performance and brand positioning. Our products compete primarily on the basis of technological innovations, quality, style, and brand awareness among consumers. While we believe that our competitive strategy has resulted in increased brand awareness and market share, there can be no assurance that we will be able to retain or increase our market share or respond to changing consumer preferences.

 

Those are the sort of remarks that I can relate to meaning, “we can’t be assured that we’re doing these things, however, we believe this approach might work.”

What about the CEO, Steven Nichols?

Well, Mr. Nichols seems like our kind of player. He’s been on the board since 1987. He also holds a LARGE amount of stocks, over 70% of the voting power stocks. In addition, he only took 1 million as compensation for his work on the board.

Finally, KSwiss has a conference call on Tuesday to report the fourth quarter earnings of 2007. This should give us a great idea of the outlook for 2008. Furthermore, it’ll show us what kind of management we have. I’ll be sure to watch carefully on Tuesday.

Anyway, in my last few articles I’ve been discussing how I am going about selecting my Rule One stocks. I’ve dealt with purely the rule one numbers, the Moat and in this article I’ll discuss the margin of safety (MOS) of the remaining stocks. Remember, these are simply my margin of safety numbers and could be completely incorrect. You should process the numbers and make your own conclusions.

• Sports
  • Nike (NKE)
    • MOS: $34.07
    • Current Stock Price: $60.59
  • Sketchers (SKX)
    • MOS: $12.15
    • Current Stock Price: $22.24
  • Deckers (DECK)
    • MOS: $92.59
    • Current Stock Price: $120.88
  • KSwiss (KSWS)
    • MOS: $17.72
    • Current Stock Price: $16.73
  • Pool Corporation (POOL)
    • MOS: $12.21
    • Current Stock Price: $19.24
  • Columbia Sports Wear (COLM)
    • MOS: $32.47
    • Current Stock Price: $43.63

As we can see only KSwiss has a margin of saftey under the current stock price.  Therefore, it’s worth taking a more indepth of the company and management of KSwiss.   My next few articles will delve deaper into KSwiss. What’s the market? Who are the consumers? What’s the future outlook?  How’s the management?

• Sports
  • Nike (NKE)
    • Moat – Definitely! Who doesn’t wear Nike nowadays.
  • Sketchers (SKX)
    • Maybe. They provide contemporary footwear for young people. I’d say yes definitely but is Sketches just a fashion trend? That’s what needs to be determined from this company.
  • Deckers (DECK)
    • Yes. They provide designer comfort shoes.
  • KSwiss (KSWS)
    • Yes, a brand moat. Lots of people are getting KSwiss footwear as it’s a good name. Only downfall is they’re competing against Nike though.
  • Pool Corporation (POOL)
    • Yes. One of the leading companies to provide pool supplies and equipment.
  • Jakks Pacific (JAKK)
    • Yes/No/Maybe. I really can’t say whether this has a moat or not. If someone can explain their moat to me I’d be more interested. However, right now I don’t know enough about this company to say yes or no to a moat.
  • Columbia Sports Wear (COLM)
    • Yes. A moat of providing mid-quality outdoor wear for the recreational outdoor enthusiast. Although, North Face and others are starting to breach the moat.
  • Dicks Sporting Goods (DKS)
    • Not really. I’m not based in the states so it’s tough to completely determine if this has a moat. I’m sure there are other stores in the states that sell sporting goods.

Here’s a few tips and tricks to ensure that you don’t give up on the rule one technique.

• Just start by looking at the stock numbers. Ignore, the other three M’s for now. Ensure that the growth rates are appropriate. This will weed out lots of companies. Then you can finish you’re four M analysis.
• Once you’ve assembled your initial stock list. Run the numbers through a Margin of Safety calculator. These calculators normally show the numbers all on a spreadsheet. From the spreadsheet, you can simply see if all the numbers are above 10%. This way you don’t go through all the necessary pages on Yahoo or MSN.
• When assembling a list of potential companies be sure to branch out. This means ensuring that you select all industries that are related. You might not have as much meaning but it should be easier to perform the research necessary later.
• Try looking at stocks that have large moats that you can simply think of a company and crunch numbers. The company might not have meaning for you but it’ll show you that these companies to exist. Coke (KO), Nike (NKE) or Apple (AAPL).

Remember. The reason the requirements for your business are so stringent is so that you don’t get a predictable company without a solid background. You absolutely NEED strong consistent numbers to be able to predict a future stock price, current evaluated stock price and the margin of safety stock price.

Either way. Don’t give up. Continue to search and follow this blog. You’ll eventually find a company worth of rule one status.

• 7 years+ of history
• 10% Return on Investment Capital (ROIC) for the 5 year and 1 year numbers
• 10% Equity growth rate
• 10% EPS growth rate
• 10% sales growth

I’m not specifically going to discuss the margin of safety, sticker price, moat or management.  As well, I’m going to be less harsh on EPS and sales growth.  I’m doing this so that I can keep these companies in my radar and have a closer look at these companies in the future.

• Sports
  • Nike (NKE)
    • Yes
  • Timberland (TBL)
    • No – ROIC 7$ last year & Equity less then 10%
  • Sketchers (SKX)
    • Yes
  • Crocs (CROX)
    • No – Less then 7 years of data
  • Deckers (DECK)
    • Yes – but EPS less then 10% last year
  • KSwiss (KSWS)
    • Yes – but EPS and sale less then 10%
  • FootLocker (FL)
    • No – ROIC less then 10%
  • Under Armour (UA)
    • No – Less then 7 years of data
  • Calaway (ELY)
    • No – ROIC less then 10%
  • Harley Davidson (HOG)
    • No – Use to be a Rule #1 stock but with diminishing growth rates the past few years it is removed from our radar.
  • Brunswick (BU)
    • couldn’t find data on Brunswick
  • Polaris (PII)
    • NO – Lower then 10% on Equity, EPS, Sales
  • Pool Corporation (POOL)
    • Yes – But Equity 1% last year
  • Jakks Pacific (JAKK)
    • Yes
  • Artic Cat (ACAT)
    • No – ROIC less then 10%
  • Columbia Sports Wear (COLM)
    • Yes
  • Dicks Sporting Goods (DKS)
    • Yes – but only 5 years of data
  • Volcom (VLCM)
    • No – but with the numbers being put up could be worth a second look as a risky business
  • QuikSilver (QZK)
    • No – ROIC less then 10%

This is considered step two of my stock selection process.  I’m left with eight potential rule #1 companies.  Now the hard work begins, determining if each of these companies has some sort of moat, margin of safety and managment.  One ‘M’ and three to go.

First off, don’t get me wrong I’d love to own Lowes (LOW) forever. However, the big guys are weary about this industry right now. This is because of the weakness in the housing market in the US. Therefore, the money is coming out (or is out) so my money is out too. As I discussed in my last post selling Lowes. I figured that looking at a chart to see if I used the technical indicators correctly would be smart. I plotted a chart with the SMA, MACD and Slow Stochastic below. This chart is from February 7th, two days after I sold the stock.

As we can see from this graph all the indicators have actually trended downwards. The MACD is just starting to cross downwards, the slow stochastic has pass downwards and the SMA has crossed the stock price. This demonstrates that I got out at the correct time, therefore, minimizing any losses and thus maximizing my gain. It could be argued that maximizing my gain would be to get out at the top of the spike but I had no sign that the stock wouldn’t rebound.

Now let’s look at my other stock trade which I discussed in analyzing coldwater creek. In this article I discussed purchasing the stock because of the low price and that the stock was under the margin of safety. Furthermore, the chairman is buying back stocks, which is usually a positive sign. So, I purchased 25 stocks at $6.20.

Upon discussing this at a forum, roicommunity.com, a poster pointed out that I might have entered too soon. Meaning that the stock might be trending sideways for a while. Therefore, I won’t see any increase in the price of the stock (possibly for a while) and therefore my money would be tied up and I won’t be able to use it at other places. By the chart posted below I can see that this poster might have been correct. The technical indicators are tough to judge at the moment as the price seems to have crossed back over the average but the MACD and the slow stochastic is under. I’m guessing this is a sign of a sideways sliding stock.

That being said, I still believe that this company has a large potential of increase and I won’t be surprised to see a $12 (or higher) price sometime this year. That would be a great return on investment. Therefore, I’m leaving my money in the stock and trying a buy and hold strategy with this stock. In fact, if it decreases below $5, I’ll consider increasing my position.

Well, it’s a good learning process so far. Now I just need to find the next undervalued company. In the meantime I’m growing my cash in order to take full advantage when I do find the undervalued stock.

• 10 day simple moving average
• Slow Stochastics
• MACD (with 8, 17 & 9 as my settings)

Looking at the chart below we can see that all three symbols are trending downward today.

So, I followed the Book Rule #1 advice and sold. I’m now waiting and watching the symbols for them to tell me when the big guys are getting back in.

• Sold – 25 shares @ $24.60 = 615 – 9.95 (trade fees) = $605.50
• Total Profit = $605.50 – $567.45 = $38.05
  

The drawback of this method is that the companies might not have any meaning to you. Thus creating more work for you when researching the company. And will create more work then the typical 15 minutes per day to keep up on the stock as you’ll have to watch the industry / company more carefully.

The advantage, however, is that it exposes yourself to many other companies. I typically find a list and then run a few (or all) of the companies through a rule one calculator. This shows me the growth rates for each company. From here I can decided whether the company has any meaning or could have meaning to me.

An example of one of these list is the following image from Minyanville. You can see the attachment below in a larger format if you click