A number of my magic formula stocks have been on fire. Through tweaking over the years, I have been able to pick winners at an alarming success rate. I will go into details at the end of the month but one of the main reasons is buying what I already know. Thank you Peter Lynch.
Peter Lynch was infamous for going to the mall and observing potential buying opportunities. Of course, before he established an equity position, Lynch would do some basic security analysis and focused on balance sheet items such as cash and debt. Not only have I used this approach when exploring potential buys, but also with the current economic environment.
In the first half of 2008 the price of oil escalated to about $150/barrel. Gas prices in Southern California hit north of $4.50/gallon. Ouch. Everyone and I mean everyone, around me started cutting back on discretionary items. The higher gas prices also meant our family business’s fuel expense tripled. I knew this would not continue so I simply sold anything and everything that was related to energy.
A bit of history
In 2007, my then boss, decided to sell the manufacturing firm her father built. My father had been working there for about 30 years and she offered to sell the business at a very low price as she was moving up north and had a striving business in the “psychology” field. To put it in one simple sentence….we bought just as housing prices peaked. We mainly cater to paint and chemical companies that rely heavily on the housing market (Vista Paint, Life Paint, Poly One , Scotch Paint, etc.) are some customers people in Southern California or across the nation might be familiar with. Anyway, I was shoved put in a managerial position as my father had no business experience and I’m the “educated” one. I have taken about a dozen business/financial courses and let me say one thing, there is no comparison between textbook and real business. As a matter of fact, I had to unlearn some academic stuff. Anyway, to keep in line with the whole pay attention to what’s going on around you theme, through this business I have been able to get a real feel about how the economy is doing. I stated last year, “something happened between October -December that has caused business to deteriorate dramatically’. Every company that has come out with earnings has said something along the lines of “the economy deteriorated in the 4th quarter” “Economic conditions accelerated in the 4th quarter”. I told you before they did! Do I have access to numbers? No. Do I have a degree in economic? No, I currently have a “C” in economics and I hate it, but I have to take it. I’m I related to Bernanke? I saw it before him because I am in the trenches.
Where are we now..
Before we can even think about the economy heading in the right direction, we need to get banks lending to businesses. Of course, other factors play a role like stabilization in the housing market, unemployment decreasing, etc. but I will save that for later. In January, we had our worst month ever. What made it worse, the freakin phone didn’t ring. I would call my own number to make sure it still worked. I called every customer I knew and had a quick conversation about how they were faring. Some questions I asked were (answers in parenthesis) :
1. How is business? (real bad, not expecting anything)
2. Outlook for 09? ( down x%, we will make changes as conditions changed, if they do0
3. Are you working 5 days/40 hours? (currently working 4, will be laying off and cutting to 3 days)
4. Is your bank lending to you? (No and if yes, a ton of paperwork required)
Fast forward to February and the phone is ringing !!! Customers are now asking for quotes and are requesting repairs for machine and equipment that were simply shut off. Cash is also coming in. I had a nice backlog of receivables (and bills ) that I had accumulated due to customers not having access to credit. Finally, I now have customers requesting machinery. Now, you know while I have people calling me, i’m going to have a quick conversation about the economy. So I ask the same questions and here is what they are saying:
Banks are lending again. Obviously, not like before, but definitely a step in the right direction. One of my best friends (and mentor) has a daughter who works for Ford and she has confirmed things at Ford are looking better. They can now finance purchases and have more people walking in and looking at their new line of cars due to the numerous deals they are offering.
The worst might be over and businesses now have “an idea” of how 2009 will play out. For example, I have a customer with roughly 4 million sales last year. With the way things were going, he honestly thought his business would be down 30-35%. I had a 15 minute conversation with him and he’s estimating sales around 3.75-3.85. Thus, he doesn’t plan to layoff anymore workers or cut anymore hours ( Currently working 35 hours). As a matter of fact, he is planning to hire people in the summer as business picks up around that time.
Interest rates are low. I have personally started a business and have spent about two grand on software, marketing materials,etc.. to get the business off the ground. My monthly payment? Less than $30/month. I’m not the only one. Students at school are starting businesses left and right. I have a friend who is using low rates to expand. Our country has a history of businesses/individuals prospering in tough economic conditions, do not be surprised if history repeats itself.
Finally, the tax-cut no one is talking about, gas prices/materials are low. There is simply no other way to put it.
I’m I calling a bottom? No. I’m simply stating that there are signs that things are improving or at least not as bad as before. I have noticed that consumer confidence is still low. The presidential speeches are nice, but until people actually see a future, they might start spending. I have no access to numbers. One thing I am looking at is the greenback (U.S. Dollar). It has seen a nice rally, which will end when those billions/trillions of dollars start flowing in the system and thus causing it to drop. Finally, there is that ghost out there that might freeze the markets again and we might have to print out more money, that we do not have.
Alex Garcia
www.contrarianvalueinvesting.com
Peter Lynch was infamous for going to the mall and observing potential buying opportunities. Of course, before he established an equity position, Lynch would do some basic security analysis and focused on balance sheet items such as cash and debt. Not only have I used this approach when exploring potential buys, but also with the current economic environment.
In the first half of 2008 the price of oil escalated to about $150/barrel. Gas prices in Southern California hit north of $4.50/gallon. Ouch. Everyone and I mean everyone, around me started cutting back on discretionary items. The higher gas prices also meant our family business’s fuel expense tripled. I knew this would not continue so I simply sold anything and everything that was related to energy.
A bit of history
In 2007, my then boss, decided to sell the manufacturing firm her father built. My father had been working there for about 30 years and she offered to sell the business at a very low price as she was moving up north and had a striving business in the “psychology” field. To put it in one simple sentence….we bought just as housing prices peaked. We mainly cater to paint and chemical companies that rely heavily on the housing market (Vista Paint, Life Paint, Poly One , Scotch Paint, etc.) are some customers people in Southern California or across the nation might be familiar with. Anyway, I was shoved put in a managerial position as my father had no business experience and I’m the “educated” one. I have taken about a dozen business/financial courses and let me say one thing, there is no comparison between textbook and real business. As a matter of fact, I had to unlearn some academic stuff. Anyway, to keep in line with the whole pay attention to what’s going on around you theme, through this business I have been able to get a real feel about how the economy is doing. I stated last year, “something happened between October -December that has caused business to deteriorate dramatically’. Every company that has come out with earnings has said something along the lines of “the economy deteriorated in the 4th quarter” “Economic conditions accelerated in the 4th quarter”. I told you before they did! Do I have access to numbers? No. Do I have a degree in economic? No, I currently have a “C” in economics and I hate it, but I have to take it. I’m I related to Bernanke? I saw it before him because I am in the trenches.
Where are we now..
Before we can even think about the economy heading in the right direction, we need to get banks lending to businesses. Of course, other factors play a role like stabilization in the housing market, unemployment decreasing, etc. but I will save that for later. In January, we had our worst month ever. What made it worse, the freakin phone didn’t ring. I would call my own number to make sure it still worked. I called every customer I knew and had a quick conversation about how they were faring. Some questions I asked were (answers in parenthesis) :
1. How is business? (real bad, not expecting anything)
2. Outlook for 09? ( down x%, we will make changes as conditions changed, if they do0
3. Are you working 5 days/40 hours? (currently working 4, will be laying off and cutting to 3 days)
4. Is your bank lending to you? (No and if yes, a ton of paperwork required)
Fast forward to February and the phone is ringing !!! Customers are now asking for quotes and are requesting repairs for machine and equipment that were simply shut off. Cash is also coming in. I had a nice backlog of receivables (and bills ) that I had accumulated due to customers not having access to credit. Finally, I now have customers requesting machinery. Now, you know while I have people calling me, i’m going to have a quick conversation about the economy. So I ask the same questions and here is what they are saying:
Banks are lending again. Obviously, not like before, but definitely a step in the right direction. One of my best friends (and mentor) has a daughter who works for Ford and she has confirmed things at Ford are looking better. They can now finance purchases and have more people walking in and looking at their new line of cars due to the numerous deals they are offering.
The worst might be over and businesses now have “an idea” of how 2009 will play out. For example, I have a customer with roughly 4 million sales last year. With the way things were going, he honestly thought his business would be down 30-35%. I had a 15 minute conversation with him and he’s estimating sales around 3.75-3.85. Thus, he doesn’t plan to layoff anymore workers or cut anymore hours ( Currently working 35 hours). As a matter of fact, he is planning to hire people in the summer as business picks up around that time.
Interest rates are low. I have personally started a business and have spent about two grand on software, marketing materials,etc.. to get the business off the ground. My monthly payment? Less than $30/month. I’m not the only one. Students at school are starting businesses left and right. I have a friend who is using low rates to expand. Our country has a history of businesses/individuals prospering in tough economic conditions, do not be surprised if history repeats itself.
Finally, the tax-cut no one is talking about, gas prices/materials are low. There is simply no other way to put it.
I’m I calling a bottom? No. I’m simply stating that there are signs that things are improving or at least not as bad as before. I have noticed that consumer confidence is still low. The presidential speeches are nice, but until people actually see a future, they might start spending. I have no access to numbers. One thing I am looking at is the greenback (U.S. Dollar). It has seen a nice rally, which will end when those billions/trillions of dollars start flowing in the system and thus causing it to drop. Finally, there is that ghost out there that might freeze the markets again and we might have to print out more money, that we do not have.
Alex Garcia
www.contrarianvalueinvesting.com
