Now I’m back to posting.   Interestingly enough I’ve actually missed quite a bit while I was gone.  This ranges from apple’s stock going up (and a bit back down), acceleware’s stock moving to $1.00 (and back down) and coldwater creek’s stock taking a little rollercoaster.

Anyway, I’ll try and provide at least a ‘tri’ weekly post on this blog.  So without further ado we’ll have blog posts here eventually.

So I put in a limit order at $129.10 and left for work. Got to work and checked to see if it went through and noticed that the price had dropped to 127, doh! oh well!


To summarize my stock purchase. I bought 4 shares (yes, 4 it’s a pathetic number and the broker fees will eat a big chunk out of any profit I make. As a trade a day states, it’s a learning experience and let’s call it “tuition.” )

• 4 shares of AAPL at $129.10 = $516.40

As always I’ll be watching the technical indicators to see when to get back out. Let’s hope that those iPhone 8GB sell good in the next year.

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!

“We’ve been saying for several quarters now that domestic business will be weak until at least late in 2008,” Nichols said. “From what we have seen in the retail environment as of late and order indications, that expectation needs to be extended until 2009.”

He goes on to state that the dramatic decrease in sales is directly related to domestic growth. And a small glimmer of hope can be seen in the international market which had an increase in sales.

“Worldwide revenue and backlog are down overall on continued weakness in the domestic market, while international revenue is up albeit at a slower pace in the fourth quarter than we experienced earlier in the year.”

Anyway, it looks like KSWS has had a tough year. I’m still going to keep my eye on this stock. I don’t expect to purchase anything till the market strengthens.

It’s an interesting point to consider as a Rule One Investor. If the company did worse then last year in the fourth quarter what does that mean?

Well, obviously we need the whole year and the previous 9 years to make an appropriate statement. However, this does show that the growth rate is probably falling. A decreasing growth rate is not something that a rule one investor wants to be concerned with. It makes the business less predictable.

Does it matter that the stock price actually increased? No! It would matter if we were buying or selling the stock, however, I don’t have a position in the stock as discussed when I was selling my Lowes (LOW) stock. The price increase is simply a reajustment because of the undervaluation of the stock.

I am waiting to see the annual report to recalculate the Rule #1 numbers and see if Lowes still qualifies as a rule one stock.

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.