The Prudent Investor


Thoughts On Selling, Part 2
May 17, 2007, 8:07 am
Filed under: Uncategorized

Last post I talked about how I do not believe in strict sell rules for positions as determined by the stock’s drop of a specific percentage. I do, however, take note and take action.

The most important thing in this situation is to understand the reasoning behind the drop in price. This has always been a problem for me with very small companies. For instance, one company I own is Ondine Biopharma (OBP.TO on the Toronto Exchange). This is an excellent company with a great product, but the company’s stock price can act like a roller coaster without any real significant new available. One reason for this could be the fluctuating currency exchange between the two companies, but a lot simply remains a mystery.

When a reason is found then one needs to decide whether or not the reason is worthy of a sale. Obvious reasons like a company having to restate its earnings due to accounting regularities, or a pharmaceutical company not getting a patent approved for an important drug kick me into sell mode. However, other reasons deserve careful consideration.

Since I am a long term investor, my questions go to the long term capabilities of the company. Will the problems affect the bottom line over the course of years? Is this something that can be corrected? Is this a one time happening or something that will occur over and over again? These questions lead to the most important question of all, “Is this a reason to sell or buy more?”

In the case of SJW Corp., as noted in a previous entry, the reason for the downturn was the weather, which is always going to be a major factor in a water utility. This is simply part of the cost of doing business, and for SJW Corp. this means that over the next few quarters they will not make as much as they would have if it had rained more. In my mind, this does not warrant a sell, and since the problem will show itself over the course of several quarters, there is no rush to take advantage of the lower price because I will be making regular purchases during the normal course of building the position.

So the course of action here is not to alter the course. I still see SJW Corp. as a strong company with a bright future, and this current downturn of price as an opportunity to continue building the position.

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Thoughts On Selling, Part 1
May 15, 2007, 2:51 pm
Filed under: Uncategorized

I remember reading a “rule” quite some time ago that when one has a loss of 10% then it is time to sell.  As far as I was concerned, this fell into the same category as other “rules,” such as to set a stop at 10% below the purchase price and never to buy high P/E stocks.  It hadn’t taken too long in my time investing before I realized that the latter two made little sense, after all, stocks quickly fall and recover, leaving one with a sale at a low point, and stock’s P/E should always be seen in comparison to its industry.

I don’t remember where I read the 10% rule, but I made a rule myself to reexamine a stock if it fell more than 5%.  The reason for not invoking an automatic sale as determined by an arbitrary round number is obvious.  More often than not, emotion drives the market, and it is commonplace for a stock to move too quickly in either direction as the response to an event.  If one wishes to engage in short term purchases, then finding these events can be the seed for ideas of companies to buy and short.  My investing philosophy is more long term, so I leave the short term scenarios to others.  Usually.

Watching short term emotion can be a tricky thing.  I’ve recounted the story on numerous occasions of Intel’s drop a number of years ago.  When I was a writer for The Motley Fool, Intel dove drastically one particular Friday.  I asked the readers of the forum what their plans were for Intel, and the vast majority said that they were going to dive in on Monday and make a big purchase – only one respondent said that they felt that Intel was going to drop further.  That one respondent was correct, as the stock fell, and fell, and fell.  We had seen emotion drive the price, but just about everyone underestimated that emotion.

So why did I say “Usually,” as far as eschewing short term purchases is concerned?  When my plan is to make multiple purchases over a long period of time, I use a strategy called InvestMete (http://dripinvesting.org/investmete/investmete.htm).  This was something that I developed about ten years ago that assumes that one is going to purchase a quality company and take advantage of a current dip in price.  I am not going to go into the full explanation at this point, I’ll do so early next month, but it is a means of adding some risk back into a scenario where a great deal of risk has been removed.

My next post will explore how the above thoughts have shaped my feelings on SJW Corp., which is currently showing a loss in the portfolio.



Decision Time
May 10, 2007, 8:12 am
Filed under: Consumer Goods, Update

In trying to decide which excellent company I was going to add to the Prudent Investor Portfolio, J. M. Smucker Company or Corn Products International, I decided to look at the annual report for each. Annual reports are an important view to the company. The first part, which I normally skip, is filled with smiling faces and flowery rhetoric extolling the virtues of the company. There is little value here, and the real meat is found toward the end, within the management’s discussion of the quarter’s results. The Smucker report appeared as expected, with explanation of the company’s products, and nice pictures to accompany the articles.

Not all annual reports are like this, however. I recently received my Berkshire Hathaway Annual Report, which is a publication where I love to read the opening section. Warren Buffett’s writing is unique within business, and any investor would be wise to at least read what he has to say.

I certainly was not properly prepared, however, to look at the Corn Products annual report. Instead of seeing what is expected at the beginning, I read an explanation as to the strategy the company formulated in 2004, their Pathway Strategy. This tells the investor how they are planning to get from where they are to where they want to be. Most important, however, is that they established measurable goals. When was the last time you heard of a company do that? They have published a means by which one can tell whether or not they are on track.

It is not uncommon for a company to establish measurable goals, but to announce them to the world is just something I have not seen. They have accomplished four of the five goals, and expect to reach the fifth by the end of next year.

This is the sort of thing that impresses me – to see management place themselves before the world and offer a way to judge them, and this is the reason why I have selected Corn Products International as the next entrant into the portfolio.

There is good news here, as well as bad, and I’ll look at the bad news first.

On April 24 CPO filed their quarterly report before the bell and it was a “knock your socks off” report. The stock almost immediately shot up more than 8% for the day. Had I come to the conclusion of adding the company to the portfolio just a little earlier, then I would have been able to start things with a nice profit. Not much that can be done here but to move forward.

The good news, however, is more important. The biggest concerns I have had about the company has been the price of corn. With a rising demand for ethanol, the cost of corn has accordingly risen and I would not expect to see it fall any time soon. According to Chairman and Chief Executive Sam Scott, the key to the strong report was not only strong North American business performance, but also the company’s ability to pass the increased cost of corn to customers in international markets. It appears to me that my biggest concern may not be much of an issue.

So later today I will make my initial purchase of Corn Products International.


Update: I purchased 12 shares at $40.59, and have updated the Portfolio link to the left.



Two Companies Are Eliminated
May 8, 2007, 7:18 am
Filed under: Consumer Goods, Update

I know that one should never fall in love with a company. I have made that mistake in the past and it has reduced my gains. Nonetheless, there are times when I will root for a company and of the four companies remaining in the list to be considered, the two companies I was rooting for will be removed.

One of the best books I’ve read about equity investing was written by James P. O’Shaughnessy and is titled What Works on Wall Street. You should be able to get a copy in your library, or use the link in the last sentence to get a copy through Amazon.com. He looks at numerous factors that affect a stock’s price and although a combination of factors is best, the single most important number to examine is the Price to Sales ratio.

When I look at the four companies in contention, PEP, MKC, SJM, and CPO, I see P/S respectively as 2.96, 1.82, 1.4, and 1.0. The two above the 1.5 mark are PepsiCo and McCormick, so I have decided to remove them from consideration.

My daughter holds a small stake in PepsiCo, which I gave her when she graduated college. I purchased shares of the company long ago and the proceeds contributed towards helping with her college tuition. Pepsico has an excellent DRiP, and I would like to choose a company with a DRiP to be used as an example in this portfolio, but am seeking the best companies for the portfolio I can, and Pepsico does not fit the profile I am seeking.

A wild card in this is that according to Keith Mcarthur, McDonalds is beginning taste tests with Pepsi. This could simply be a way of putting the squeeze on Coke to lower their prices, but if McDonalds is actually considering switching then that would be huge. That knowledge is being left on the table, and I will keep watch over what happens with this.

The other company I would have loved to choose was McCormick. As one who lives near Baltimore, this company has regional relevance to me. Not only that, but I am friends with someone who works for the company as a taster – imagine that, getting paid to taste things.

In another portfolio any of these four companies would be very welcome, and any could successfully be chosen for this portfolio. However, I’ve got to make a decision somewhere along the line, to these two excellent companies are being dropped and next post I will decide between the J.M. Smucker Company and Corn Products International.


Yesterday I made my monthly purchase of three shares of SJW. You can follow the progress of this portfolio, including all of the purchases, by clicking on the Portfolio link to the left.



How Flowers Foods Inc. Makes Its Money, And Wrap-Up
May 3, 2007, 7:39 am
Filed under: Consumer Goods

The smallest company under consideration is Flowers Foods Inc.

Flowers Foods is involved in the production and marketing of bakery products in the United States. Major brands include Flowers, Nature’s Own, Whitewheat, ButterKrust, Sunbeam, and Roman Meal.

The company expects to see a 5% growth in sales this year, which is on the low end of what I would like to see, and about half the sales increase seen in the past two years. For this particular portfolio, this company is just too small. There is a real reduction of risk over time when a company offers a diversity of products and markets, and the narrow focus of each do not make it suitable for this portfolio, so I will remove it from consideration.

To recap the overview of the seven companies with which I started:

Removed from consideration:

  • Unilever NV (UN)
  • ConAgra Foods Inc. (CAG)
  • Flowers Foods Inc. (FLO)

Remaining in consideration:

  • Pepsico, Inc. (PEP)
  • McCormick & Co. Inc. (MKC)
  • The J. M. Smucker Company (SJM)
  • Corn Products International Inc. (CPO)

As I write this I have no idea how I am going to compare the giant Pepsico with the other three small companies. However, next post I will momentarily pause to not only find a reasonable answer, but also to return to SJW, the water company in the portfolio. A few weeks ago I received the company’s annual report, so I will report the information found within. I have long been a proponent of owning no more companies that I can keep track of, which means that I need to be able to at least look over the annual report and quarterly reports. I also like to read news articles about the companies I own and will report anything of significance in this regard as it concerns companies within the Prudent Investor Portfolio.



SJW Update – First Quarter Report
May 1, 2007, 7:35 am
Filed under: Update

SJW Corp., the single holding in the portfolio at this point, fell significantly following last week’s quarterly earnings report. These reports should always be read to ensure that an understanding exists as to what is going on with the company.

First quarter profit came to 11 cents per share, as compared to 23 cents per share for the same time period last year. These two numbers are at the top of the report, but it needs to be understood that last year’s numbers included the sale of property that constituted 8 of the 12 cents difference. Apples to apples, this was about a 25% drop. Operating revenue increased about 16%, due to cumulative rate increases, increased customer demand, and new connections.

The crux of the drop in profits was explained by W. Richard Roth, “Rainfall to date in our watershed in California has been a little less than half of normal levels, and this could mean continued increases in purchased water and groundwater production for the next few quarters.” The key is “the next few quarters,” indicating that the remainder of the year could well see a decline in profits for each quarter. Weather is a major component of water utilities, and when it doesn’t rain then water must be purchased elsewhere. The key will be to pass the increased costs to the consumer.

I see nothing here to concern me. As it is the intention to hold onto this stock for the next five years unless I see a reason to sell, if a drop in precipitation is to happen then it is best to happen during the inital purchases planned for this company. I will make the regular purchase on the 7th of this month.