This week focus is to learn from Sir John Templeton

I will add 10-15 links of various interviews of John Templeton. It is good advice to read and get insights from these interviews. It is incredible based on this inteview, John Templeton was able to see mortgage crisis way before. Some quotes I like

- To be successful you need to keep changing your ideas and some times more than once a year.  You should still have the same frame work but ideas need to be changed. This is the same lesson once peter cundill said about he was not flexible enough. Personally I was doing lot of net nets from last two years but I need to move on because net nets do really well when economy is in recovery mode
- "I have observed in 92 years that the people who are most diligent in working do live many years longer than those who are lazy," Sir John says.

- Do the Opposite of the Crowd: My job was being paid by wealthy families to help them choose stocks and bonds. And my results were much better when I was working from here than from Manhattan, Radio City and Rockefeller Center. I had good results in New York. But when I came here, I had better results. The secret, I think, is that in order to buy stocks at a bargain price, you have to do the opposite of the crowd. When you're going to the same meetings with the other people in Manhattan, it's hard to be different.

- Templeton does not base on his investment choices based on country growth prospects. His decisions to allocate money are dependent on where he can find the lowest valuations. He thinks there are many opportunities in the United States.

- At 84, he says one need to be industrious, he is more busier, enthusiatic, happier, joyful than ever in his life. Post world war II, most of the investment ideas are in Japan. Japan was 1/10 of the price of similar businesses. One of the basic principles to buy where ever it is cheaper and this is only when one is selling. People were selling in Japan after world war.

- Couple of days when hitler invaded poland. There were 104 companies that went below 1 dollar a share.  John templeton asked to buy everything that is selling for less than a dollar and 37 of them are in Bankruptcy. He says those are the best of all. One outstanding once was missouri pacific railway, it gotten down to 12 cents a share. Railroads come back in war. He got 40 times what he paid for.

- 1/3 of the time all my investments are wrong. So please do not worry you can still make around 13% in the long run

- Benjamin Franklin is one person who has influenced him the most

- When there are no bargains, the key investment strategy in this environment is to go long on 10 well managed solid stocks and short on 10 that are in similar industries that do not posses the qualities of favorite
10.
- If we are increasingly humble about how little we know, we may be more eager to search

- Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria

- The four most expensive words in the English language are "this time it's different"

- Investments are different, if you go to 10 doctors they prescribe the same medicine, if you go to 10 engineers, they prescribe to build in similar way and if you go to 10 investment specialits and if they all prescribe the same stock, you need to stay away from it

- Stock price fluctuations are proportional to the square root of the price.  When your method becomes popular, switch to an unpopular method. Stay flexible. No asset or method is forever. In the long run, stock index prices fluctuate around the EPS trend line

- Templeton's tip for bond investors: Focus on countries that have both trade and budget surpluses. Russia and Canada fit the bill.


- In 2003 "Every previous major bear market has been accompanied by a bear market in home prices. ... This time, home prices have gone up 20%, and this represents a very dangerous situation. When home prices do start down, they will fall remarkably far. In Japan, home prices are down to less than half what they were at the stock market peak." Sir John adds, "A home-price decline of as little as 20% would put a lot of people in bankruptcy.


http://www.sirjohntempleton.org/articles_details.asp?a=9

http://www.lanczglobal.com/SirJohnInterview.htm
http://www.charlierose.com/view/interview/5555
http://chinese-school.netfirms.com/Sir-John-Templeton-interview.html
http://chinese-school.netfirms.com/abacus-Sir-John-Templeton-interview.html
http://www.gurufocus.com/news.php?id=82503
http://www.youtube.com/watch?v=EjINZszzYDs
http://www.sirjohntempleton.org/articles_details.asp?a=14

Sold -1-800-Flowers @2.85 - 54% in 4 months with annualized return of 162%

Today I sold 1-800-flowers at 2.85. We bought this on sep 27 for 1.85, a 54% gain in four months. There might be further upside but I am happy with this return. We cannot hold these cigar butts for a long time.  With out a strong competitive advantage in the business, we need to get out of it. After further research, I was not too comfortable with the management team also.

Bought Cache @ 3.99

Company (Cache Inc – Bought at $3.99, 52 wk range – 3.86 – 7.25, P/B – 0.81, Market cap - $51MM)


Profile: Cache owns and operates more than 270 women's-apparel specialty stores. The company's stores are concentrated in large metropolitan and suburban areas across the United States, often in shopping malls. Merchandise sold includes sportswear, eveningwear, and various accessories. The company purchases approximately 98% of the goods it sells from domestic vendors and about 2% from foreign investors

Story: The story is very simple. This company currently valued at $51 Million. It has $25MM cash and $2.23MM debt. Basically 50% in cash. So the business is selling for Enterprise value of $29MM. Before 2008, it used to trade close to $18 dollars. The average cash flow was close to $1.00 from 2002 excluding 2008, 09, 10 and average earnings was close to 60 cents. Obviously they did not do well in last three years in this market. Will it do well in next three years – I do not know. We all know how competitive a retail business is. This is not a good business but selling very cheap. I think the downside risk is very low

Catalyst: Why suddenly interest in this company. Most of you might not know who Seth Klarman is - but he is a legend in value investing. Michael Price is guru of Seth Klarman. He owns 15% of the stock. Recently company started deleveraging. In a recent call, the CEO was excited to reduce their inventory. They are not madly expanding and they are closing unprofitable stores. The best part was that there are more than 25% of stores that are coming up for lease renewals. I think they will renegotiate some of them and close the unprofitable ones. What Michael Price can bring to the table is – he will make sure the management does not squander cash and might bring a potential deals to the table

Upside / Downside: If it generates $1:00 cash flow like what it did historically, its value should be $10 with P/E 10 multiple. With additional $2:00 in cash, it should trade close to $12. Obviously the downside is close to $2:00 in cash. Do I think will it trade it at 12:00 in next 1 yr? Maybe not. Will it trade at $8:00 - $12:00 in 3-5yrs, yes I think it is possible. Please note that this is again not a good business but it has cheap valuation. You should not invest more than 1%-2% of your portfolio. Group of cheap companies will do fine in the long run and one should never concentrate in one single stock

Lessons learned from my 32 bagger - GGP - General Growth Properties

Finally I sold my General growth properties last week. I bought it around 67 cents and finally sold it around 21 dollars. As many of you know that General growth propertie is second biggest mall owner is US. It has liquidity problem in 2009 and the stock tanked from 60 dollars to 67 cents. While I was searching for deep value, I found GGP. When Bill Ackman  explained that it will go to atleast 15 dollars, stock started rallying.

Here are few learnings

- you will always find buyers for good business
- In a restructuring game, hedge fund titans like Bill Ackman can really change the game. He really helped the stock price by not selling this cheaply to Simon propery group
- you could also buy the bonds (probably was a safer route). I did not use that strategy
- Finally patience and it almost tanked 50% couple of times and you need to have a strong stomach
- Understand the valuation so that you don't need to sell when it is a two bagger or 3 bagger and wait until it reaches if fair value
-  Only when there is a lot of uncertainity in market, you will find good values

I am totally spoiled now and I hope I will find atleast a 10 bagger in next 5 years

Bought SKX at 21.80

Skechers - 01/04/11


Summary



- Skechers designs and markets Skechers-branded contemporary footwear for men, women and children under several unique lines. Skechers operate 235 retail stores and 40 international stores. Core consumers are style-conscious 12 to 24 year-old men and women attracted to our youthful brand image and fashion- forward designs. Skechers best-selling and core styles are also developed for children with colors and materials that reflect a playful image appropriate for this demographic. Brand recognition is an important element for success in the footwear business. Skechers basically designs shoes and outsource all their manufacturing to china using third party vendors

Latest Story Line:

Recently the stock price tanked from $44 to $20.57 as of yesterday in the last six months. Its market cap is 1.0B and Enterprise value of $731MM. It recently fell pretty hard due to its inventory problems and market believes that its recent “Shape UP” line could be fad. There are even couple of lawsuits that their advertising is false. Recently Nike did not even design shape ups thinking it is fad.

The most important question whether this is a short term problem or fundamentally much deep rooted problem. Before we answer this question, let’s look at the DNA of this company.

Skechers was started in 1992 by Robert Greenberg. Let’s look at the career of Robert Greenberg (Career: Talk of the Town, 1962–1969, owner; Wig Bazaar, 1965–1968, owner; Wigs 'n Things, 1968–1970, owner; Europa Group, 1970, owner; Europa Hair, 1971–1974, owner; Wild Oats, 1974, importer; Removatron, 1977, investor; Roller Skates of America, 1979–1983, owner; L.A. Gear, 1983–1992, CEO; Skechers USA, 1992–, CEO).

Obviously plenty of experience in Hair Products and Shoes. Both of them have a touch of fashion and fickle minded customers. To provide some ammo to the shorts, the earlier business he started was L.A.Gear (which capitalized on the aerobics craze of the 1980’s.). By 1990, L.A.Gear had $820million in sales and no.3 retailer behind Nike and Reebok. It took a loan amount of $360MM from a consortium led by Bank of America and one of the covenants stated that if L.A.Gear lost money in any quarter they would pull the line. Obviously they lost money in one quarter and the rest is history and it filed for BK in 1998. In a way this is good as he obviously learned his lesson as Walter Schloss said in Rule no.16 - “Be Careful of leverage as it can go against you”. The good part is that he has plenty of experience in Shoe business and he has learned his lesson related to leverage. No wonder, SKX has $249 MM in cash without any debt.

If you look at Shoe industry, it is very sensitive to fickle mindedness of the customers. As a value investor why would you bet on this kind of business unless it sells very cheap. Obviously the recent hot product “Shape Ups” could be real disaster but if you ignore this product, it was still selling close to $1.5B in revenues in the last two years. I think the core earnings are in line and even if you assume they do not make a penny on shape up’s, they have strong operating leverage going forward.

It recently started going into two most populous countries in the world (China and India) and also in Brazil. International whole sale business is up by 26% for Q3 and 36% for the first 9 months. Most of the subsidiaries had double digit growths for the first 9 months. They currently have 43 stores in Asian Region and point of sales to 375. Let’s look at last quarter numbers. Sales were $554MM. Domestic whole sale is 56%, International whole sale is 22% and Retail is 20%. The domestic retail grew by 14% and international retail grew by 52% Even if you assume that 25% ($500MM) from toning sale is zero value add, still the stock looks cheap. You also get a free option for BRIC/toning play/retail improvement in 2011/12. They just opened 4 Skechers stores in Mexico.

Obviously we cannot compare these three businesses but let’s look at a few numbers for SKX, Nike and Crocs.

Skechers

P/B – 1.12

P/S – 0.52

P/E (TTM) – 6.25

Forward P/E – 8.75



Nike

P/B – 4.41

P/S – 2.2

P/E (TTM) – 21.75

Forward P/E – 17.18



Crocs

P/B – 4.16

P/S – 2.04

P/E (TTM) – 29.93

Forward P/E – 18.46



I think even though they messed up these designs and the inventory is bloated, if you have long term horizon this should do fine. It has lot of other designs. I think they could easily get to $2.0B in sales in next three years and have a margin of 5% - 7% and this could earn up to $100MM - $140MM. . I think this would mainly come from growing internationally. Currently 22% of sales are coming from international sales and this could go easily up to 40% sales. With a $249MM in Cash and this could easily grow to $300MM by Q2’10. Then the enterprise value will be close to $700MM and a potential earnings yield of 14% - 17% on Enterprise value in next 2-3 yrs.



Obviously lots of assumptions go into this estimate but here are few things that can throw a curve ball into these estimates.



Design failures

Unable to pass the increased cost of goods due to inflation

Most of the manufacturing is in China and with strong renminbi, this could be an issue

Currency Translation


If you look beyond four quarters, I think this should do well unless they really mess up their process but without any debt and potential strong international expansion, I think it will be a decent business with intrinsic value between $32 - $36.

But for next two quarters, you will see plenty of bad news when they start writing off their inventory.

You should have a strong stomach to hold this business. But with longer time lines and you can make decent money on the wall-street short sightedness.