Investing in stocks is really exciting even it seems "boring" when you're following a strategy like mine. I don't buy very often and I'm searching for good companies at a bargain or fair price. When I find one, I invest heavily. I have a list of criteria a company must meet before I purchase the stock.Â
However, in October of last year, I broke just a few of my ground rules.This time, I researched less on a stock I purchased in Foot Locker Inc. (FL, Financial). It was what Monish Pabrai calls "Head I win; tails, I don't lose much!"
Why Foot Locker
I was reading about a group on Facebook. Yes, I often read Facebook because you never know where you can find some good ideas. A member of the group, let's call him, "Jim," talked about an attempt to value stocks. He bought Foot Locker based on a system he used. However, he was skeptical because the stock has lost a lot in 2017. Its price felt from around $75 in March to around $32 in October.
Jim was of the opinion that Foot Locker could be a good purchase based on his research, but the decrease of the share made him hesitate. So, Jim asked the group for input. That made me curious, especially because Jim said that the company seemed to be in a good shape and he didn't understand why the stock price lost half its worth during the year.
People's opinion
One member of the group who responded to Jim's inquiry said the company's last quarter had been terrible and that's why the stock lost so much. But that didn't explain the decrease since March.
Another member of the group mentioned an article that provided an evaluation of the company. Certainly, I read it because I wanted to know what this member thought about the company. In short, the member saw risks and opportunities but was convinced of the fundamentals and believed that the stock price would increase again.Â
My little research
Two issues caught my attention. First, some people thought the fundamentals of Foot Locker were OK. Second, the share price had decreased over 50% in six months.
With this in mind, I started my own research on Foot Locker. I read some articles about the business model and its difficulties regarding online competition. One was about the decline of shopping malls that affects sales at the stores. I wasn't really satisfied about what I found and somehow I didn't felt like reading more about Foot Locker.
But what I wanted was to take a look at the financial reports and the fundamentals. So I did. I visited Morningstar and finanzen.net (a German website) to get an overview. This overview aroused my interest because the fundamentals seemed to meet my criteria for an interesting company. When a company makes it over that hurdle, I look at it more closely.
I opened the website of the Securities and Exchange Commission and my numbers sheet and started to fill in the numbers of the financial statement for the last 10 years. I always transfer the numbers into my own sheet. It's a bit work, but it keeps me focused on the numbers and their relationships. I get a much better impression by transferring the numbers rather than by reading them. Moreover, I check the accuracy of the ratios when I calculate them myself. And this is very important to me.
What the numbers told me
As I said before, I have a list of criteria that the numbers must meet. Thanks to the modern era, the calculation is automated by computer. So, when I fill in the numbers of the financial statement, the computer shows me if they meet my criteria. The fundamentals of Foot Locker showed me that the numbers mostly met my criteria..
Here are some examples that will drive it home. Gross margin was 34%, which was below my limit. The same applied to the net profit margin and the geometric return.
However, equity ratio was way above 50%, which is what I'm looking for. Current ratio was at 4.3. That's the way I love it. Return On Investment was 10% on average over the last 10 years. Not really great, but OK. But Foot Locker increased its ROI over the last 10 years by almost 24%. Current ratio has always been good. The same applies to equity ratio.
Why I bought Foot Locker Inc.
Although it did not meet every criterion, Foot Locker seemed healthy enough to make it through the stormy weather. Because of the decrease in 2017, the price earnings ratio was 6.3, hence really cheap. But to be honest, I don't use the PE as a yardstick. As a value investor, I look at intrinsic value. And my calculation said that Foot Locker was undervalued. The share price was around $30 and my calculated value was over $50. So, I had a decent margin of safety. I could not imagine that Foot Locker would not rise again. Regarding the fundamentals, I had an opportunity lying before me that met Pabrais "Head I win, tails I don't lose much!" That's why I skipped researching more about the company. This time, I didn't wanted to hold the shares for too long. I sold out when the priced its value, which happened at the end of January.
On Jan. 25, the share price was around $52 a share at nearly my calculation of its intrinsic value. So I decided to sell Foot Locker again.
Why I sold the shares
I would like say it was a brilliant move but it would be a big lie. I didn't know the price would start decreasing in February. It was just luck that I hit the high. I'm not always that lucky. Besides, it could have been that the price would increase further. When I made the purchase, it was absolutely clear that I would sell the shares when they reached intrinsic value.
But the share price was only near intrinsic value, you might say. Know what? That doesn't really matter. Sure, I perhaps could have gotten $2 more a share. But, I also could have gotten a lot less than I actually got.
What's important is that I didn't know where the price would go. Nobody knows. And to insist that the price would rise a bit more would have been a bet. And I'm not betting or speculating. I invest in companies like many others do. I'm searching for bargains and I'm happy when I find some. And to make a decent profit, I stick to my strategy. Sure, I changed it up a bit before buying Foot Locker, but I stuck to the changes until I sold the shares again. I kept to my objective to sell at fair price and that's what matters.
What we can learn?
Foot Locker is a good example why value investing is successful. That's why I'm tell you about my experience. It's not about being brilliant.
It's also not about making fast money. It's about looking for great or good companies at a bargain to intrinsic value and knowing they will reach fair price again. That's what Benjamin Graham taught us so that ordinary investors can be successful, too.
In the words of Warren Buffett: "You don't have to be extraordinary to achieve extraordinary results."
So if an opportunity comes along, a chance where you win or don't lose much, you should "put out the bucket, not the thimble," as Buffet also would say.
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Disclosure: I hold Foot Locker shares. I bought again after the decrease. This is no advice to buy or sell Foot Locker shares or any other product related to them or to Foot Locker Inc. A little tip: Don't buy and sell and buy and sell. I normally don't do it. But Foot Locker made me doing something unusual.
