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!

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.

But what does this really tell us about the company?

Has the company released a earnings report? Are they laying off a ton of employees? Did the CEO just make some huge announcement? The answer NO.

Nothing has changed… And this is part of the learning process for me. I must realize that nothing has changed in terms of the company. The stock is reacting to things the market says. So this has brought down the stock. However, is the company still a good rule #1 company? YES.

However, after saying that I’m still watching the Technical indicators. Because if the big guys are getting out, so am I.

Coldwater Creek is a specialty retailer of Women’s clothes and apparel. With two main segments retail and direct. Let’s take a look at the growth rates numbers. The ROIC is 7% last year, which violates the 10% rule from Rule #1, however, the 5 year growth rate is 14%. The other growth rate numbers are all very high, over 20%. The equity (BVPS) has been over 20% for the past 9 years and was 26% last year (2006).

What about the four M’s?

Meaning – Women’s clothing… Not really my bag. However, it is retail.

Management – The management just recently announced (Oct 2007) they’re buying back shares. Today alone, the chairman bought 925,000 shares. This can be seen as either the board of directors trying to regain confidence in the stock. Or the management is trying to get shares back while at a cheap price.  I worry a bit about the management after reading articles like this.  However, I see the buyback as a positive boost to the stock and company.

Moat – This is the only one that really worries me. Others competitors such as Ann Taylor or Chico’s are also making a serious threat in this market. So do they have a Moat? Yes.  But it’s being / is breached.

Finally the Margin of Safety (MOS)

• Growth Rate = 20%
• EPS = 0.32
• PE = 28 (average 10 year)

This puts a Margin of Safety at $7.01.

The only other thing that worries me is that there has been lots of bad news as of late. The company announced a fourth quarter loss of $0.16 to $0.20 per share is expected. This is what has actually brought the share price down as of late. However, the company has had very steady high growth rates for the past 9 years. Can they continue these high numbers?

Would I be happy to own this business for the next 10 years? Yes!  Women love to shop and as long as they can keep a good product line then they’ll continue with good growth.  However, that being said I think watching this company and the management will definitely be necessary.

The current price is $6.42, January 31st, 2008.  If you notice on the chart below we get three green signals on January 18th.

• I purchased 25 stocks at $6.15 on January 31st, 2008.

• Equity = 14% (near typical growth rate)
• EPS = $1.98
• Future PE = 22 (historical)

This provides a sticker price of $39.92. However, the Price per Earnings ratio has been decreasing for the past 5 years. The last two years the PE has been 18 and 16 respectively. This makes me wonder if a PE ratio of 22 is too high.

Therefore, reanalyzing the PE somewhere between the current value and past values. If I take the average between 13 (current value) and 23 (average past value).

This provides a sticker price of $32 and a Margin of Service of $16.

I’ve already purchased the LOW stock at $22.30 which be at a 30% discount and not the 50% discount that we’re looking for. So, now I’m faithfully watching LOW and using my Technical indicators to see when to get out.

Let’s discuss some numbers first.

If you crunch the numbers and calculate the value of the AAPL stock or the sticker price. You’ll be happy to know that currently it’s undervalued. Apple has had an equity growth rate of over 25% for the past 5 years and an earnings per share growth rate of over 70% for the past 5 years. Calculating a value for the stock (or a margin of safety) is tricky because of such a great growth rate. Can they sustain the same rate?

However, if we calculate using a fairly conservative growth rate of 24%, EPS of $4.55 and PE of 31 (current PE) I get a sticker price of ~$300 with a margin of safety of ~$150. Apple is currently trading at $136, $14 dollars below the margin of safety! Wow, seems likes it’s now on sale.  Hmmm, let’s look at this in a bit more depth.

Meaning – Check (I own 3 iPod nano’s and a MacBook 2.0GHz Intel Core 2 Duo – White)

Moat – Check (Who doesn’t want an IPOD over some other MP3 Player?)

Margin of Safety – Check

Management – Steve Jobs is the definition of a Rule One Management running the company as if it’s his only asset.

Would I be happy to own this business and have it as my only asset? YES! (who wouldn’t?)

This is definitely a Rule #1 company. However, just because it’s a rule one company doesn’t mean you should always own the stock.

Did you get out when the technical indicators told you to get out?

Looking at the chart below we can see that there is a large drop on January 3rd to 4th. This is the time when all three indicators (MACD, Simple Moving Average and Slow Stochastic) all cross downwards: the exit point. If you exited on January 4th you would have sold at $180 per share. Between January 4th – 23rd the stock has dropped down to $135. You would have saved yourself $55 per share.

Now what? Well, it’s on the watch list and we wait till the technical indicators tell us to get in (or back in).   In the meantime we keep growing our watch list.

Looking at the chart below I’ve plotted the stock, simple moving averages, MACD and Slow Stochastic. We can see that around January 14th the Slow Stochastic was trending up. Then January 16th, the 10-day moving average and the MACD crossed up. This shows that people were starting to move more money into the stock. That’s three indicators trending upwards. I waited for an extra day and on January 17th you can see the 30 day moving average crossed through the price. I purchased the stock January 18th at $22.30.

Now I’m watching the three tools to see when they tell me to sell. It really is as easy as Phil Town says after finishing the initial analysis. Rule #1: The Simple Strategy for Successful Investing in Only 15 Minutes a Week! It’s true I just check the stock and read any information that is currently available.