PHIL TOWN

THE GHOST OF CEZAR CHAVEZ AND INVESTING IN FARMS IN THE CENTRAL VALLEY

The Secretary of the Navy, Ray Mabus, announced last week that he plans to name a Navy ship in the T-AKE class (cargo ships) after late labor leader, Cesar Chavez.

Cezar Chavez was a civil rights leader in the Central Valley of California, likely a marxist and certainly a guy who tried to make a difference in the lives of migrant crop workers by unionizing farm workers and fighting to restrict the flood of illegal Mexicans who undercut farm worker wages and conditions. 

Back in the 1980’s I invested in several farming operations (and I’m thinking its time to do so again).  All of these farms used migrant labor to pick the crops so I was well aware of Mr. Chavez’s unionizing activity. 

One of the farms I owned grew canning peaches.  A can of peaches sold for, say, $1 in the grocery.  As a peach grower, I got paid $0.05 for the peaches in the can.  The rest of the cost of the can of peaches came from packing, shipping and retailing.  Since there were almost always more peaches grown than could be used by the canning houses, and since peaches were not different on our farm than on other farms, the canneries didn’t care where the peaches came from.  They only cared about the price for a certain quality.  That put farmers like me at a great disadvantage in negotiating the price nearly every year.  Essentially, the canneries dictated a price that just barely allowed us to stay in business.  This fact of the business meant that any edge I could get in terms of lowering my cost per peach could make the difference between being in a miserable money-losing business and a mildly profitable one.  (And now you know why I insist on a Moat in any business I buy.)

Chavez was lobbying for unionization of our labor force – the peach pickers.  He wanted to raise my labor costs.  You might be surprised to learn that many farm owners and peach producers, including me, would have been okay to pay these tough, hard-working migrants more money AS LONG AS ALL MY COMPETITORS HAD TO DO THE SAME. 

However, if other peach farmers could hire illegal, non-union workers and pay them less, they could sell their peaches for less and still make a profit.  That meant that the canneries might buy all of my competitor's peaches and only buy mine if they ran out of the cheaper ones. 

Chavez was a smart guy.  He knew these were the facts and that the only way to protect the wages for union labor was to stop illegal immigration.  Amazingly, Democrats and Republicans back in those days acted just like Bush and Obama have for the past ten years.  They did nothing about the border, the illegals swarmed in to take the jobs, farm owners had to hire them or go out of business and Chavez and the farm labor unions lost. 

In 1995 Eric Schlosser wrote in Atlantic Monthly about the extreme poverty of California’s strawberry pickers (e.g., hundreds were living in caves outside Salinas).  Schlosser said Philip Martin, a UC Davis ag econ professor, believes that as long as the US tolerates the employment of illegal immigrants in agriculture, the farm-labor market will continue the endless cycle in which farm workers quit for better jobs and illegals arrive to replace them.

The irony is that the impact of doubling the wages of farm workers on my peach business would have been nil as long as everyone had to do it.  The price we got for the peach in the can was five cents.  Of that we had less than ½ cent of profit and about three cents of labor cost.  Double my labor costs to six cents and I have to sell the peach for eight cents.  And the cost to the consumer for the same can of peaches goes up from $1.00 to $1.03.

Unbelievable, isn’t it, that we continue to screw over an entire workforce of some of the hardest working people in America so we can save the consumer a 3% rise in the cost of peaches?

Chavez was right.  The growers who opposed him were wrong.  The idiot politicians who wouldn't close the border are wrong.  And today Dr. Martin believes there are around 900,000 illegals working the central valley of California, about 4 times what there were when Chavez was trying to unionize the valley.

If ever there was a case for unionization, its there.  The farmers can’t individually raise wages.  The legal workers can’t strike to get a wage raise across the industry.  And its all because misplaced political correctness among voters puts people in office who care more about the millions of illegals than they do about the conditions of the hundreds of thousands of migrant workers who are already here.

I’d love to invest in the central valley.  I think prices of food are going up.  But I don’t want to be an owner faced again with such a moral peril as I dealt with 30 years ago.

And I'm glad Chavez has a cargo ship named for him.  He deserves that and more, even if he was a marxist.  Right is right even if it comes from the left.

 Now go play.

 

TWO GREAT STOCKS THAT I CAN'T BUY MAYBE EVER

Shuki Sasson took a shot at a quick Rule One analysis on Amazon (AMZN) and Apple (AAPL).  There is a lot to like and a few things missing.  Here is Shuki's view:

AMZN and AAPL analysis... AMZN has many MOATS Brand Moat, Toll Moat since it takes Billions to build the distribution centers and last and not least it has Price Moat since it can sell cheaper and there is no need to pay sales tax. AMZN has space to grow it is the 1/3 of the market capital of WMT it has more space to grow. Due to their substantial MOAT protection they will most likely be here for many years. It also has excellent management (Jeff Bezos). Unfortunately it is fully priced... AAPL has a huge Brand MOAT and also secret MOAT on top of that the AAPL echo system (iTunes and APP store) is starting to create a clear switch MOAT... AAPL is excellent company that is going to be around for many years to come. Tim Cook is an excellent manager and the economic prospects are excellent. Mr Market is concerned because Steve Jobs left the CEO post to Tim Cook and sell AAPL on the cheap... Tim Cook is a very good manager too and he makes sure the same innovative culture is kept. Lately the Analysts updated the forecast growth rate from 16% to 18%... With average PE of 25 I get: MOS $339 Sticker $678 Folks, AAPL is selling for 1/2 the price! This is a screaming buy for me...

One way to think of Moat is to ask this Warren Buffett question: If I spent the price of this business on building a new business from scratch, could I compete?  For example, if you had the money it would cost to buy Norfolk Southern, could you build a thousand miles of railroad track and compete? No, you can't because you can't get the right-of-way.  That's a Toll Bridge moat.  Agreed Amazon has multiple moats including Brand (I think internet purchase, I think Amazon), Toll (distribution centers make it possible to get what I bought faster than any other way - that is a Toll Bridge Moat), and maybe Price.  And Bezos is amazing.  So great company?  Sure.  But at what price?  If we assume a long-term 18% growth rate, here's what the TownToolbox sets the value at:

Its worth about $117 per share if the estimated growth rate is right and if I insist on a 15% compound rate of return.  Its selling for almost $200 per share.  Buying at that price works out for an investor if the company grows a lot faster than 18% per year for the next 10 years or if the investor doesn't mind an 8%-10% annual return.  Fund managers hope for the former and settle for the latter and will continue to bid this up.  Its not likely a Rule One investor is going to get a chance at Amazon.

Apple?  Well, I love Apple products and think it could take over the world.  Here's the Moat and Management numbers.  All green.  All awesome.  

 

But I've worked with Steve Jobs.  He is a one-of-a-kind genius about consumer products.  I don't think I agree that Tim Cook can take Steve's place.  I don't think anyone can take Steve's place.  I just hope for his sake and Apple's that no one has to.  I hope the guy lives for another 50 years and continues to steer the ship.  If Steve keeps the business on track, I'm an Apple fan.  If he isn't there, I'm not so excited about it.  Never forget - this is a tech company.  It has to innovate or die.  It has huge moats but they are under constant attack.  A great test of how solid an investment this is is to ask, "Is this a business I am willing to put ALL my money in if I know I can only make one investment the rest of my life?" That question will help you avoid making a mistake.  But assuming you've answered Yes to Apple, here's what it looks like for value IF the growth rate the analysts estimate turns out to be right long-term:

Notice that today's price is quite good based on these assumptions.  It has a nice MOS and will produce an 8 year Payback Time.  So buy it?  Well, there's one more issue I think is important to consider: How big is too big?  The current market capitalization is $310 billion.  It gets harder and harder to grow fast when you are already the 2nd most valuable business in the world.  Can they really double their size in 4 years?  And double it again in another 4.  And again in another 4?  In 12 years they'd be selling for $2.4 trillion.  Ummmm.  That's asking a lot.  Which means that 18% growth rate is suspicious.  Which means our Margin of Safety is not, perhaps, so large as 50%.  

Another look at value with a more sustainable long term growth rate of 10% produces a very different answer about what Apple is worth today.  

I don't know which of these two values is right.  If I knew I'd either go long or go short.  That's the problem with tech stocks, isn't it?  It is so difficult to know.  And if you take seriously the idea that you don't buy unless you do know, you will have trouble buying tech.

Here's another test: Imagine putting 25% of your net worth into Apple at $335.  Now imagine that Steve retires and the price drops to $200.  Are you thrilled and putting another 25% in or are you freaked out and trying to decide if you should sell it?  If you aren't thrilled at the notion of the price of Apple dropping like a brick, you shouldn't be buying it.  Not if you're going to be a Rule One type investor.

Now go play.

 

 

UPCHUCKING WHOLE FOODS JUST IN TIME – HERE’S HOW

A reader writes:

“Hey Phil, I have read your Rule #1 and have been looking at the previous history of the tools for several companies just to understand what you have taught us, and I just don't understand the enter and exit strategy so I went back to one of your post on WFMI about exiting on 10/24/2006, your explanation makes sense, the problem that I am having is that I don't see a proper entry place in order for you to be in a position to exit on 10/24/2006, the only entry I see before that is 9/11/2006 with an exit of 9/29, and after this exit, I don't see an entrance that would have put you in position to exit on 10/24/2006 this is of course when you were using the 10 day moving average so that;s what I used when I looked at the chart. I am really trying to understand your thought process on the entrances and exits. Any help will be much appreciated. Thank you”  -- raowens

 Here’s a chart of WFM at that time.  You can see the three greens in September, 3 reds out early Oct and then the three greens he didn’t see just a few days later. 

 

When your stock price is running up the top of the Moving Average like an escalator be looking for confirmation for a buy.  You will likely find it quickly.  In this case, if the MACD is being a tad understated you can still see it went positive - above 0.  That's a green.  If it were green all alone, its not a go to buy this.  But its there with a blasting MA and a very clear Stochastic signaling ‘GET IN’.  That was the entry point.

By the way, this was a key trade.  In at $58, it makes a nice return and has a clear signal out at just under $62.  The signals to get out light up right before WFM gapped down to $45.  I was listening to the CEO say that future growth was going to slow from about 20% to single digits.  It was definitely time to leave because that change in growth changed the future cash flows so significantly that the company was instantly worth about $38 but selling for $64.  When that happens we be gone .  Just jump on the bus, gus, no need to be coy. 

After the stocked gapped down, I remember my brother, Steve, calling me in a bit of a panic asking, “Bro, are we still in Whole Foods?”  I got to make him very happy when I told him we’d been out for ‘days’.  Well, 2 days is ‘days’ isn’t it?  Close only counts in grenades and horseshoes.

This was the beginning of the end of the beginning of Whole Foods.  They'd been straight up for years and suddenly it was all straight down. Their stock dropped to about $8 and then it was time to buy.  The only problem was that there were so many other investments in March 09 that were even better. I missed the latest run up from $8 to $50, sadly, but I suspect Mr. Market is preparing a meltdown sometime in the next few years that will rival 2007-2009.  Let's be ready to protect ourselves and make money.

An advanced technical trading course might be just the thing for you if these subtleties are escaping you. 

Now go play.

 

INTEL COULD BE A GO INVESTMENT RIGHT NOW IF...

INTC:  Intel is the big dog in the semiconductor industry.  It competes with AMD, Samsung, TI, Toshiba and STMicroelectronics.   If I can’t tell you who makes what and why Intel is going to stay on top for 20 years, I can’t buy it.  The reason I can’t buy it is that I have no rational basis for deciding what its worth because I don’t understand the business Intel is in.  That said, I’ll assume the analysts know what they’re doing and run a valuation analysis on it.  The first part is to look at its long term history to see if its got a consistent past.  Here’s what that looks like:

Management and Debt are green.  Good management.  Moat numbers are a mixed bag.  My tools give it a medium to low score (lots of yellow), which indicates a middling level of consistency in the past.  Its not bad enough to disqualify the business but it raises issues about how well I understand the industry since I have to predict the future from a wobbly past set of numbers.  If I had to guess a growth rate, I’d probably use 9-10% based mostly on the Book Value +Dividends growth rates.   Which is nice since that’s what the analysts are estimating, too.  From that I can derive a value:

 

The stock price, $23, is below the Sticker (intrinsic value) Price of $28.  But its not anywhere near the Margin of Safety price of $14.  Still, the Payback Time price - $27 – is quite near the current price of $28.  [Payback Time, for those of you who haven’t read Payback Time, is the amount of time it would take us to get our investment back from earnings if we owned the whole company.] That makes INTC marginally buyable.  IF if if if if – can I be more emphatic about this? – IF you understand the business.  If you like the 10% growth rate.  Big if.  Don’t be trying to put values on things you don’t understand.  That’s where you can get smoked.  

So how much credence should you give this valuation?  About as much credence as you give the average Intel analyst.  

Would I invest in INTC after a 3 minute look at the Moat, Management and MOS?  Not a chance.  But if you dig in on this, it might have some potential.   Just be sure and do your homework.  That way, if you buy it at $28 and it goes to $14, you'll be excited to buy more, rather than feeling like you totally screwed it up. 

And that, my friends, is the difference between investing and speculating.

Now go play.

 

3 HOT COMPANIES TO NOT BUY

Here are a few thoughts on three hot companies that I'm not buying right now:

LULU: Lululemon Athletica is a rapidly growing clothing store anchored in Yoga gear.  It’s priced at $5 billion right now. The biggest company in its industry is Ralph Lauren at $10 billion. One double. It has great numbers.

 

At the pace it’s growing, it will be there in 3 years. Then what? I buy companies with a view to hold forever. LULU is more likely a short term shooting star at a too high price.

 

MRO: Marathon Oil is a solid oil company with pretty ok Moat numbers. It’s well managed. Good ROE and low debt.

 

What's the value? Growth rate of 10% a year (analysts est 2%). I want a minimum 15% return per year and an 8 year payback time for my investment so its probably worth about $50 right now and its selling for $50.

   
 
 

There isn't much margin of safety. BP might be a better value.

 

BIDU: Baidu is the Chinese Google.  First thing I want is to know is whether this business will still be growing 20 years from now. And I want to know it for sure. No doubts. 2nd thing is I want to totally trust the numbers. Baidu is 0 for 2. I'm not saying it isn't great and that the numbers aren't good, I'm just saying who knows.

   

Remember Puda Coal. Here today, gone tomorrow. If I did trust it, what's the value? Its $50 billion market cap. If I grow it at half the analyst estimates, it will be a $800 billion company in ten years. If they're right it will be a $3.2 Trillion company. Well…. The biggest company in the world is Exxon. $400 billion. What I'm saying is, even if its all true, BIDU might be a tad pricey for a Rule One investment.

Now go play