Footprint In the Farm

Current Holding:

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Stock Ticker  Capital Gain%    Dividend Yield%      Holding Period/Months

COH                            101                         1                                   10

GE                                32                         8                                     7

???                               10                        10                                   10

????                              41                        20                                    9

???                                 9                          0                                 0.5

USG                             -69                          0                                  24

BNI                               18                          4                                   18

????                              22                          8                                   11

MO                                 4                          4                                     2

ENR                              29                          0                                     4

000651                         83                           2                                   18

600036                         33                           1                                     6

3968.hk                        60                           2                                     5

?99?.hk                         73                           0                                     5

0330.hk                        17                            ?                                     5

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Obviously, Coach's recent quarterly result sligtly beats the market expectation. But what really moves the price today is the initiation of dividend. Well, a $0.30/year is such a small dividend and in my opinion, it shouldn't change the valuation of COH too much. If it does change the valuation, the valuation should be less. Because for a growing company, paying a dividend is not so clever, it compromise the growth rate, and it hits the investor with a tax on dividend. The market is always a little crazy.

 

In the last post I said, any price under $20 dollar is a great entrance price, how about now? Well, the risk certainly went higher, but not buying into it now might be a greater risk of opportunity cost. Who knows? I will hold onto mine until it reaches $50. You will decide whether to put your dollar into this. Good luck!

A few friends that I talked to very frequently know that I am buying this stock, so I feel obligated that all my friends deserve an equal treatment. I view you as future partners.

 

This stock is Coach Corporation, (ticker: COH)

 

In warren buffett's 2007 annual letter to Berkshire Hathaway shareholders, (http://www.berkshirehathaway.com/2007ar/2007ar.pdf)he said See's Candy is his prototype of dream business. And why? First comes the brand recognition and loyalty. Second is its durable competitive advantage built by See's family over a 50 year period. Third, the quantative part, the business is earning 60% pre-tax on invested capital, and capital expenditure is extremely low. Fourth, the purchase price of Warren is 0.83X sales, and 5X pretax earning.

 

OK, now a little analogy is required. Coach's brand recognition is great (I am no woman, but you can tell me). It is originally founded as a family-run workshop in 1941. A site for its company history is here:http://www.fundinguniverse.com/company-histories/Coach-Inc-Company-History.html The business is earning 60-80% pretax on invested capital, capital expenditures is roughly 15% of its pretax earning. It is now trading at 1.7X sales and 4.5X pretax earning. Return on average equity is above 40%, and still very little long term debt is on the book. On last annual report, the total long term debt is 3million, compared to 699million cash and 1195million pretax earning. Therefore the chance of going under in this possible long recession is nearly zero. The profit margin is 74%, which gives protection for its earning power in a period of great inflation. The company didn't pay dividend, but it consistently repurchase outstanding shares to reduce its equity bases. This is actually prefered by common shareholders, because dividend means tax. And by repurchasing, the earning is transfered to its shareholder, not to IRS or others. (Read early essays by Warren Buffett for detailed reasoning on this.) The company now sees its growth opportunity in China, and here you can get a rough idea how its product is received by Chinese customers: http://msn.bbs.yoka.com/z/coach/index.shtml Remember that there are two kind of things that are easy to sell in China, the very cheap ones, and the very expensive ones.

 

Every company or stock has its drawbacks, and here are some for COH. First it is a cyclical business. Which means the earning at a bad economy will be much worse than in a good economy. However, the stock price is also over-punished in a bad economy. If you long a stock for 5-20 years, now it is high time to buy cyclical business. Second, its product is not consumable. You can drink up a Coke but you can not torn your coach bag. However, by constantly introducing new styles, the old product become old-fashioned pretty quickly. Now try answering this question for me:" Given unlimited resources, how many coach purses does a woman need?" It might be a very large number. Third, severe competition in luxury markets. Coach handles this by pricing its product in the affordable luxury category, targeting a different customer base.

 

I originally begin drafting this post when the stock trades around $11, given my laziness and reluctant to share, now it is trading at $16.5. Forgive me this if you can. Nevertheless, any price under $20 is a great buying point. I am estimating the fair value is around $50. However, given recent surge in stock market, short term return can be uncertain, and I do not intend to guess the stock price in the next day, or next month, or next year. I am talking about 5-20 years from now. BUY THIS STOCK AT YOUR OWN RISK!!!

 

Yes, I do hold other stocks, but I do not want to share every one of the other five. Especially some of them are micro capital stocks (daily volume less than 1k shares). By disclosing these stocks, chances are, there will be competitions in buying these stocks, and it is certainly not a win-win situation.  Good thing about these little stocks is, the Efficient Market Theory certainly don't apply here, and sometimes (e.g. one in last December), temporary arbitrage opportunity exists. But if you want to know these opportunities, consider to partner with me.

 I buy stocks just like I buy groceries. I felt it annoying when gasoline price went up, when the rice price went up, and much in the same way, when the stocks went up. Today, major indexes jumps more than 7%, although I am fully invested, trust me, it is not a good day for me.

I would like to share a few perspectives about investing. Nowadays, everybody is searching for safe haven investments. But where are they? Our assets generally have four places to go:

 

1. Cash: They will be the worst investment in next 20 years. The devaluation of dollar is linked to national debt's increase, not to mention that the present economic stimulus will definitely result in hugh inflation. From year 1980 to 2000, the equivalent buying power of dollar has decreased 50%, see here: http://en.wikipedia.org/wiki/United_States_dollar , over the next 20 years, the declining will be accelarate.

 

2. Gold: Some will argue that since the dollar is declining, the gold must rise. And all fiat currency will be replaced by gold coin. Recent published "War of Currency"<货币战争〉is an advocate of this idea. In my opinion, gold will never ever return to its currency status. It is an irreversible process. Of course, this is really a political issue, in which i have no insight. However, Gold's market price is determined by its supply and demand. Contrary to other metals such as platinum and silver, gold don't have much industrial usage, except in jewelry and dental clinic. So the demand really depends only on psychological safety people feels when they held gold. Gold can not be consumed, so all gold that has been mined ever since human history, still exists. Remember the old the saying "Everything is for sale when the price is right". So overall, the gold has a strong supply side and vulnerable demand side. There is no gurantee that gold will outperform cash in the next 20 years, because now, it is the time when demand of the gold is highest ever since. An inflation adjusted gold price chart can be found here: http://www.gold-eagle.com/editorials_05/images/laird021506a.gif

 

3. Other Commodities except gold: This category include crude oil, metals other than gold, agriculture products, and so on. This category is promising to outperform cash and may give enough returns to beat inflation in the next 20 years. Here is why. Supply over the world has been stagnant for a long time. But the demand increase as the population grows and per capita consumption increases. There is a huge gap between the supply and demand. The only solution is to drive the price up, so that farmers, miners, have more incentives to produce. This argument is widely accepted at the beginning of 2007, and so far, the supply part hasn't changed. The demand side, due to this historical recession, is down. This created an excellent buy-in chance. Once the economic shows its positive side, which I don't believe will come very soon, the profit in such investment will be handsome. Jim Rogers has promoted such investment, and I think he is right. One drawback of commodites is that they won't grow exponentially, once they are expensive enough, they will drag down the economy, and then the demand vanishes, and the price of commodities will drop. It is pendulum with its own perodicity.

 

4. Equity. This category include stocks, index funds, both in stock market and in private equity or start up business. Over the years, this category provides exponential growth opportunity. Careful chosen stocks, are the best way to beat inflation. The reason is simple. Stocks are pieces of business, and by buying into business, you are not entering a zero-sum game. As these business grow, the investors share the profits. Although investors as a whole will make money, doesn't mean individual investors will make money. Short term traders often spend too much on their brokerage fees. Long term value investing proved to be superior in terms of long term capital gains. The year of 2009, is an once in a lifetime opportunity, to buy high quality business but paying reasonable prices.  

 

5. All other "investments". Including fixed incomes (Annuities, bonds), real estate, arts collections, ancient antique, stamps, etc. If you found any one of them attactive as an investment, please inform me. By investment, I mean an minimal 10% gain averaged annually for the next 20 years. With simple math, this translate to 5.73 times gain over original principal inflation adjusted, or 15.4 times gain given 5% annual inflation.

 

Given all investment mistakes one could make, the biggest among them will be, to not invest.

Dear Friends:

 

8 days ago, I advise you to buy WFC at after-market. It was trading somewhere about $14.40 a share then. Since then, the stock is jumped 47% and now trading after-market at 21.19. If you want to lock in a short term profit, I think this is the time to do it. Otherwise, even you hold it for long term (10+) years, I think that you will be amazed by the results. Happy Chinese New Year, everyone!

 

P.S. Here is what I have traded:

Jan 20th,2009

1. Bought WFC at $14.40

2. Bought call option .WFCBE (strike price $25, expire at Feb 21) at price of $0.15

Jan 28th, 2009

3. Sold WFC at $21.19, a 47% profit in 8 days.

4. Sold .WFCBE at $0.65, a 333% profit in 8 days.

 

It could be lucrative if you check my blog regularly.

This is my first ever market call.

"The world's safest bank" is now trading at its book value. With dividend yield of nearly 10%, and nearly return on equity of over 13% for many years, this is a decent deal.

Being fearful? Have you heard the saying "too big to fail"?

I hereby advice all my friends to allocate their resources here. And this is my gift to you for Chinese new year.

BTW, I have put all my cash into this, and I think you should, too.