PHIL TOWN

2nd SURVEY RESULTS FOR RULE ONE WEBSITE

The second survey for the URL for my stock research website went much like the first with the hands down winner the same: RuleOneInvesting.com

Thank you all for helping us nail the URL down.  RuleOneInvesting.com will be coming your way this month, I think.  I'll let you know as soon as the guys tell me I can.

Now go play.  And thanks again.

SURVEY RESULTS IN FOR RULE ONE

Thank you all for responding so quickly to the survey.  Here are the results:

RuleOneInvesting.com got 58% (combined) votes with RuleOneTools.com in second at 23%.  

 

Meanwhile I received several more interesting potential URL names that I'd like to test with y'all.  Coming next.

 

Now go play.

IMAX AND RULE ONE INVESTING

IMAX has a what looks like a Toll Bridge Moat: If you want to see an IMAX movie, you have to go to an IMAX theater because they've the only cameras, filmstock and projectors that give that huge dome theater experience.  Unfortunately, I have no idea what its worth because it doesn't seem to be able to sustain its earnings and value, in a business, comes from what buyers are willing to pay for the future cash that comes from the business.  

In Rule One investing we don't treat a stock like a stock.  We look at it as a business and value it as if we were going to buy the whole thing. That's why future cash production is so important to us; we treat it as the most reliable way of judging the value of the business today.

Most stock investors don't really care about future cash because they know they will not own the whole business and, therefore, the future cash is only theoretical.  It will never actually end up in their pocket.  But for Rule One investors, its the most practical way to determine what to pay for a stock.  Determining the cash that will accrue to the owner of the business is the key to knowing value.

In IMAX's case, we have an interesting company with some very real protection against competition.  No one else is doing what they are doing.  (Maybe because IMAX isn't making any money.)  

But IMAX has issues.  We look hard at management to determine whether they are sitting on the same side of the table with us investors.  In IMAX's case, they are not even though the two guys who really built the company have a lot of stock in it.  What they also have is a golden parachute.  One of them already bailed and took a $14 million payday.  The other one is standing in the door and about to jump.  Not that I blame them.  They built this thing the hard way and it has to be frustrating to have a year like 2010 where Avatar brought in the cash like never before and then see it all disappear in 2011.  In the last six months they made $0.01 down from $0.60 per share the same period last year.  With a track record of earnings losses that stretches back a decade, what sort of projection can we make about the future?

The deals they are cutting today are revenue sharing deals and IMAX warns in its 10Q that these deals will depend on picking good movies to work out well.  Which means they are becoming more of a movie studio picking a slate of movies each year than an exhibitor of their own stuff.  Maybe that's the way out of these fruitless woods but how can we know?  What we can know is that the public companies that make movies are a bit up and down and very difficult to value even when they are doing well.

So while I love IMAX movies, agree it has at least a part of a Moat, its missing a key ingredient - the ability to set prices with good profit margins.  Apparently they don't have the pricing power to make a profit.  No profit, no cash.  No cash, no real value to buy.  So no deal.

Now go play.

DECK AND RULE ONE LEVELS OF RISK

I just posted a reply to Tom who took me to task about the way I dismissed Deckers as being 'not a warren buffett company'.  He correctly pointed out that neither is Buffalo Wild Wings or CMG.  Point taken.  I should have known better so let's get rational about DECK.  

The problem is the Moat.  They don't create stuff like Nike.  They buy something they think is hot, like Teva and Ugg.  In a sense, buying a piece of DECK is like buying into a venture fund that focuses on the shoe business and is very involved in the day to day operations.  That's not entirely fair either but its not a bad analogy for what's going on over there.  Their moat, like any good VC firm, is in the brains of the people who run it.  

By VC standards, DECK is a pretty good firm.  It has most of its long term numbers in the 30% range and ROE in the mid 20's.  Most VCs would be very happy with those numbers.  So can we assume they can keep this up for another 20 years?  Would size matter?  

They sell $1 billion of shoes and are growing sales at 20%.  Nike sells 20B growing at 5%.  Can DECK double 3 times in ten years and still have room to continue that level growth?  It would have revenues of $8 billion in 2021 and have to expect $16B in 2024, $32 B by 2028.  Nike meanwhile would have grown to $40B.  So that's one problem: If we project Deckers to grow at 20% or so it has to be able to become Nike.  Can it do that?  The answer to that question is an evaluation of the business capability of the management team.  Deck can't do it with what it has right now.  It has to develop lines and be successful marketing them, so much so that it dominates everything in the market that Nike doesn't dominate.  

Deck's moat is based on the people who run it being really smart.  That's always a problem for a Rule One investor because its like investing in high tech ... you just never know what's coming.  I want a business that has such a large moat that even a stupid management team can't destroy the business.  (See McDonald's in early 2000's and BP last year for examples of big moat businesses that couldn't be destroyed by bad management.)

So what's the proper valuation of a venture fund?  

The fund's require at least a shot at a 40% compounded ROI on every investment in order to hope to hit a 25% plus overall ROI for the fund given that some things are just not going to work out.  Therefore, to account for the extra risk, I'd need to see 25% a year, not 15%. Change the MARR to 25% and it puts the Sticker at $38.  Mr. Market wants $85.  

But I don't like to price in risk.  Thats what you do when you speculate, you try to get a really low price to 'account' for the really high risk.  That's what you do on a roulette table.  That is NOT Rule One investing. As a Rule One investor, I want a high rate of return with a great deal of certainty.  Deckers doesn't look like that to me and if it did, it still wouldn't be priced right.

Now go play.