13 Questions With James Moylan of Manhattan Calumet Value Stock Hotline

1. How did you get started investing? What is your background?

I started investing in stocks about 20 years ago. My background is not in the financial services sector, I worked as a sales associate at PetSmart in retail and as an assembler at Florida Plastics. They make menu signage for McDonald's.

2. Describe your investing strategy.

I am a value investor that specializes in stocks trading from under one dollar to $10 a share, sometimes a little higher. My strategy is to find decent companies in easy to understand businesses that have very attractive valuations (I prefer companies with annual sales of at least $100 million annually or higher) based on very low price-to-sales ratios.

The core component of my investing strategy is finding decent value stocks with very low price-to-sales ratios, at least a five to one ratio. It is the most important factor when selecting a value stock. A stock with a very low price-to-sales ratio has a nice margain of protection because the valuation of the company is so low compared to its annual sales.

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Here is an example of a company with a low price-to-sales ratio: a company does $1 billion in annual sales but has a market cap of only $100 million. Say there are 100 million shares outstanding and they trade at one dollar a share. The market is placing a value of $100 million dollars on a company that does a billion dollars in annual sales. Maybe the company is more leveraged than the average company in their sector. Maybe the company is breaking even or even reporting modest losses. Say they are in a sector that is unpopular or even hated. As long as its a halfway decent company that is not likley to go out of business or file for bankruptcy, it could be a spectacular value. If the company and the sector they are in recovers nicely over the next five years, the company starts earning money again and their profit margin goes to 5% of annual sales, that is $65 million their annual sales increase to one billion three hundred million dollars and they buyback 10% of their shares. If the stock were trading at 20 times earnings, that would put the price of the stock at $15 a share, a 15 fold increase in five years. If the company starts paying out a dividend, that would mean you are close to a 16 fold increase in five years

3. What drew you to that specific strategy?

I was listening to a talk show over 30 years ago and heard the guest, Ken Fisher (Trades, Portfolio), talk about Chrysler. He carefully explained how important the low price-to-sales ratio was in making money in stocks. The key to making money in stocks is avoiding the most popular stocks. Even though I understood what he was talking about, I did not give it much though until 20 years later.

4. What books or other investors influenced you?

I am not great for reading lots of books on investing. I think it is always very important to keep your investing philosophy simple. I do admire Ken Fisher (Trades, Portfolio) because his low price-to-sales theory really does beat the market.

5. How has your investing changed over the years?

The strategy I use today is the same as the strategy I used 20 years ago, with a couple exceptions. Owning lots of stocks when it comes to stocks trading below $10 or $5 is very important because you never know for sure what companies will perform the best or the worst.

6. Name some of the things that you do that other investors do not.

Most investors chase the hot stocks. Not me, I like a company that everyone else hates.

7. Where do you get your investing ideas from?

There is no one place in particular that I get my investment ideas from. It could be any place or time, an interview on TV or something on the internet. You always have to keep your eyes and ears open for any investing opportunities that come along.

8. Do you use any stock screeners?

When I find a stock I like, I usually check it out on Yahoo Finance.

9. Name some of the traits that a company must have for you to invest in it.

First and foremost, a stock must have a low price-to-sales ratio. Without that, a value stock is nothing more to me than a dirty rag. I like to focus on companies of the best possible quality that trade from under one dollar up to $10. The lower end of the risk spectrum, as it were. I like larger companies, companies that have annual sales of $100 million or higher. Larger companies tend to be a lot more diversified than smaller ones. A $10 million company might have just a single product or service, it is do or die. Not so much with a larger company with $500 million in annual sales.They could have dozens of products or services that are unrelated. I like companies that have a nice amount of cash on their balance sheets. That way, they can ride out the rough periods when they have negative cash flow. I prefer companies without a lot of debt, if I can find them. I try and avoid companies that are in a business that is becoming outdated, like newspaper companies. I do not invest in financial service stocks because I really do not like that sector. I would not know how to value a financial stock. I also would not invest in mining stocks.

10. What kind of bargains are you finding in this market?

Right now there are not many bargains to be had. Some of the junior gold mining ETFs were attractive six months ago, but not now. I also like investing in single country ETFs and narrow sector ETFs, like the junior gold mining ETFs, when they are attractive. Usually if they have a huge drop of about 80% off their highs.

11. How do you feel about the market today? Do you see it as overvalued?

I think the market is overdue for a correction.

12. What are some books that you are reading now?

I am not reading any books currently.

13. Any advice to a new investor?

My advice to new stock investors would be invest some money in a broad based index ETF on a regular basis. Do not put all of the money in at once - dollar cost average into the market. If you are just starting out, it is always better to keep investing simple.

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