Update of Portfolio: True Religion (TRLG)

Over the next few posts, I will be reviewing the various stocks that I have in my holdings, since they all have reported on their 2010 Q4 results.  For now, you can check what my trading activity has been.  Clicking on "Felix's Trading History" at the top right will bring you there as well.

I will be starting with True Religion (Ticker: TRLG), the highlight of the week.  If you have been following this blog for the past year, you would know that I have been accumulating this stock.  I started buying the stock in April of last year, at $29.  I started with a small amount and planned to "scale" into the stock (as Jim Cramer would call it).  In essence, if I wanted to buy $10000 worth of a certain stock, I would buy, say $2000 worth each time.  If the stock dips, I would buy more.  If instead the stock rises, then good for me, I've made some money, but I wouldn't not buy until it dips.  The stock got punished, in my opinion, unfairly, over the course of the last 10 months and bottomed at $17.50.  I continued to buy as it went down.  The stock started out making up about 3% of my portfolio to being more than 20% now.  I even started to sell naked put options because I was getting bullish about the stock and wanted to make good use of my margin account.

Yesterday, I was rewarded.  True Religion reported Q4 earnings that beat estimates and the stock rose by 19% in a single day, to $25.07.  My average cost was $22.55.  A few lessons learned (even though there surely will be more lessons ahead): i) if you are fairly certain of your analysis and prognosis, then trust it, even when the market says otherwise, ii) accumulating a stock is a sure way not to miss a big jump in a stock, iii) the market is sometimes not very logical.

Let me elaborate on lesson #iii.  First, the Q4 press release was not stellar.  The results were good, but guidance was a little soft.  In 2009, True Religion made $1.92/share.  In 2010, that number dropped to $1.86/share.  They forecast $1.80/share for 2011.  The trend is definitely not something an investor would like to see.  But the stock got bid up 19% anyway.  Of course, earnings is not the whole story, and for True Religion, it isn't, but usually, the market should have reacted opposite to how it did.  So, this reaction has not been expected.

But was the reaction a correct one?  Was the 19% jump justified?  Absolutely!  The stock had been hammered for a long time and it was much undervalued.  Remember how I got in at $29?  I thought $29 was undervalued; imagine what I felt at $17.50!!  I believe a lot of the investors saw the revenue growth, which was by leaps and bounds ($311 million in 2009, to $364 million in 2010, to projected $405 million in 2011), and same store sales growth of more than 7%.  The expansion plans look good with 23 new stores opening in 2011, most in the US and a handful in international cities.

The only "bad" number in the report was that SG&A was up, which hurt earnings and will continue to hurt earnings in the coming year.  This is the cost incurred by setting up stores and offices in international locations.  These are growing pains, which are necessary to ensure sustained growth.  I like how management is "biting the bullet" and would rather take an earnings hit now, than to sacrifice growth potential in international markets.

I've embedded a Rule #1 analysis spreadsheet for True Religion below.  The sheet does not reflect Q4 numbers, but is close enough to give a somewhat accurate sticker price.  I've assumed a P/E ratio of 20 in calculating the sticker price.  The stock is still undervalued!

Figure 1: Rule #1 Analysis of True Religion (TRLG)

Since True Religion already makes up a good chunk of my portfolio, I do not plan on adding to my position.  I will be in a holding pattern for the stock in the coming months, and potentially be selling more put options.  I particularly like selling options for True Religion because the options are priced fairly highly compared to the stock price, which is due partly to the high volatility of the stock.  For a Rule #1/value investor, volatility is actually a friend.  One would buy at dips and sell at peaks.  For me, I would also sell put options at dips.

In short, the company is in good shape.  It's selling products at high margins, has a good expansion plan, and its stores are far from saturation in the US, and especially in international markets.  Best of all, the stock is priced nicely, where you can still get some margin of safety.

Rule #1 Analysis Spreadsheet: Updated with Auto External Data Import

My cousin, Kelvin, works a major Canadian bank.  So, he's used to working with automated spreadsheets with VB scripts, etc.  So, when I sent him my manual Rule #1 spreadsheet, he mocked at how rudimentary it was.  So, thanks to him, I've decided to educate myself on how to further automate my spreadsheet.  I already knew how to pull external data from websites, but didn't know how to dynamically update the query when I changed the stock symbol.  The solution was simple: use the record macro function on Excel.  What I did essentially was record how I would manually change the web query and modify the code that was recorded.  It actually took about 10 minutes to make the change.  I wonder why I didn't do that earlier!

So, with all its glory, I present to you my automated Rule #1 Analysis Spreadsheet!  With this spreadsheet, you really only need to look at 3 tabs.

1. Go to the "Stock" tab.  Fill out the 3 pieces of information there.  Click on "Refresh Data" and wait for Excel to update the data from the web.
2. (Optional) Go to the "Sticker Price" tab.  Change the growth and P/E numbers if you want.
3. Go to the "Summary" tab.  Look at the results.  Voila!

The previous spreadsheets weren't bad.  One would need to spend about 2 minutes populating the data by copy and pasting.  Now, you can save about 90 seconds every time you use the sheet!

The story with Kelvin didn't just end here.  I sent the spreadsheet to my friends (thanks Jit), including Kelvin, for some real-life stress testing.  The sheet worked perfectly, for all of them...except Kelvin.  D'oh!  I use Excel 2007 and he's got 2003.  I believe that could be the root cause of the problem.  Since I don't have Excel 2003 on my computer, I couldn't do much debugging.  I've given up!

Instead, I realized that there could be potentially a better solution: I moved to Google Spreadsheets!  Now, investors, take note.  This is a classic example of how Google continues to draw user base from Microsoft, and how cloud computing is starting to take hold.  Mind you, I'm almost always an early adopter in technology...In any case, I'm now working on a Google Spreadsheets version of the Rule #1 spreadsheet.  I have it running already, but there is some fine tuning to be done.  If you want to check out the current version, it's here: http://goo.gl/goru5.  You'll need to log into your Google account and make a copy of the file in order to actually use it.

Give me some feedback, on either version of the sheet!  Enjoy!

Update December 3, 2011: I've updated the sheet.  Go to the Investing Resources to download the latest sheet.

Economy Today: The 70s Redux?

When I was doing research for my Coca-Cola post, I came by an article written by Muthar Kent, CEO of Coca-Cola.  It's somewhat a sales pitch for Coca-Cola, but there are some truths in it that I found interesting.  He starts off by talking about the 1970s, when he first started working at Coca-Cola, and I quote:

When I first went to work for Coca-Cola in the late 70s, the mood in America was pretty somber and anxious. Fuel prices were spiking. A recession was draining our confidence. There was widespread fear that we were losing our global political and economic leadership. Many people feared that a surging Japan would cripple American industry, jobs and the U.S. economy. Even greater numbers of people were worried about their jobs being replaced by technology.

There were many striking parallels to the situation we find ourselves in today. But the system didn't collapse, did it? In fact, America got stronger ... much stronger ... and that's because this great nation did what it has always done best -- America innovated and reinvented itself. And we can learn from history -- the past is indeed prologue.

Kent described well the sentiment of the 70s.  This sentiment was either part of the cause or the result of the stock market's performance.  In Figure 1, we see the performance of the S&P 500 index in the 1970s.  It started off in the 90s and by the end of the decade, had only risen to 110 pts.  That is a 22% gain over 10 years, or around 2% growth per year!  Wow, that's worse than bond yields!

Figure 1: S&P500 in the 1970s

Then, what happened?  The market exploded in the 80s and by the end of that decade, the S&P 500 had risen to 350 pts, a 218% growth in 10 years or 12.2% growth annually.  That's more like it!  You think you've seen market explosion?  Check the 90s!  The S&P 500 grew from 350 pts in 1990 to 1400 pts in 2000.  If you had invested in an S&P 500 index fund in 1990, you would have had annual returns of 14.8% in the 10 years following!

Figure 2: S&P500 in the 1970s-80s

Figure 3: S&P500 in the 1980s-2000

What am I trying to say?  The 2000s could very well be the 1970s redux.  It's now being called the Lost Decade.  The stock market has essentially stood still for 10 years.  What Kent and I are saying is that the (North) American economy cannot stand still for a very long time.  There's tremendous potential waiting to be unleashed.

The West is still leading the world in many fronts.  The newest technology front, the smartphones and mobile computers (tablets), are led by two of the greatest American companies, Apple and Google (Android).  RIM, the maker of Blackberries and still the king of the corporate smartphone world, is a Canadian company.  Nokia may be the market share leader of the world, but it is a follower.  Apple and Google are the true leaders.  In any case, the West is not going anywhere any time soon.  We are still the innovators of the world!

Yes, China is on the rise, but we are living in a global economy now.  If China does well, America will do well.  In fact, we should welcome the emergence of countries like China and India.  Kent has proof that demand in China results in jobs in the US.  He says he is optimistic about America, and I don't doubt him.

The pessimists talk about the risk of a double dip.  Don't worry about it...it's already happened.  The first dip occurred in 2003 and the double dip was the 2009 crash.  I'm not lying, just look at Figure 4 and you'll see!  The signs are pointing to a better tomorrow.  How do you take advantage?  As always, find great companies selling at a discount.  Are you ready for it?  If not, you better start getting yourself ready.  For starters, see where I have my money.  But don't trust me, trust the numbers.  Check out my Rule #1 analyses.  Lastly, continue reading this blog, or better yet, subscribe to it!

Figure 4: S&P500 in the 2000s

I'm Still Alive!

Just in case any of you was wondering what happened to me...I'm still alive!  I was on vacation in Cuba last week.  I hope to be catching up on some writing later this week.  Please stay tuned!