Wednesday, October 8, 2008

The best investments you shouldn't make.

I started thinking about yesterday's post, and started thinking about the lunacy behind knowing there are great investments but being unable to make them. My fidelity to value investing won't let me turn cheap companies away in any environment. I started thinking about my best investment idea that would be a terrible one to implement now. In other words, the watch list.

Target (NYSE:TGT) - Target is cheap, but sucks anyway. This company was cheap at $50, and now it is $39. This will be a great investment in two years. Today, you'd be buying a fantastic company at a cheap price, and you'd be making a stupid investment at the same time. Retailers are going to get nailed, especially as YoY (that's year-over-year) comparisons come in for the next 12 months. People no longer have discretionary income, and as a result all retailers will suffer. Their real estate is worth like $45 per share even with depressed real estate prices, so you're actually buying land and getting the whole store thing for free, but the two worst investments going forward are real estate and retailers and this happens to be a play on both.

Chipotle (NYSE:CMG-B) - This is an awesome company. It is a McDonald's spinoff that is simple and cheap to run, or at least it was before the cost of ingredients went up like 300% along with every other basic food product you can think of (corn, soy, milk, eggs, etc). Plus, as people go broke, they start thinking maybe they should buy fewer $8 burritos. This company still has yet to expand into much of the U.S., so the growth potential is enormous, but to quote one of the more famous home builder CEOs, "next year is gunna suck." This company is probably my most likely one to be a huge purchase in two years. I mean big. Like most of my portfolio big. But for now I wouldn't buy it while same store sales decline. (Nasdaq: BIDU) - Wow, what a company. They are Google, only in a nation three times bigger than ours. In China, people don't "Google," they "Baidu." Baidu is only just getting going in a meaningful way, and the Chinese - with a per capita GDP of like $1,000 the last time I checked - are only just now starting to get into computers for people beyond the aristocracy. Baidu is similar to Google in a lot of ways. They don't have to manufacture stuff. They constantly work on achieving monopoly. But despite all of this, China's stock market got ridiculously out of hand, and as that market and economy tank, so does ad revenue and computer use. This stock was $429 last year. Now it is $212. You'll also notice it was down 6% today. A fantastic opportunity, but one I'm still not going to touch. I'll come back next year when the Chinese are finished panicking and swearing off the stock market forever. That's when I buy.

First Cash Financial Services (Nasdaq: FCFS) - They own pawn shops. I've been watching this company since I was 18 years old. I even owned it for awhile in college (it was one of my very first investments). A year ago it was trading at $26 per share. That's when they got stupid and bought an ultra-low-end car dealarship (as in, selling cars that are just above salvage value). The purchase also came with a financing operation. You can see where this is one is paying back their car loans. That's why the stock dropped down to 7 bucks a share a few months ago. Today we trade around $15. They've scuttled (I learned that word from "Hunt for Red October") the car business and are going back to making money hand-over-fist with payday loans and pawn shops. I actually think this is the company most likely to hold its value over the coming insanity, but it has that scary word "financial" in the name, and it loans people money. I'll wait until people have absolutely left "all that stock market casino b.s." for good, and then I'll probably buy.

The best short position you should not make:
Zap, Inc. (OTC: ZAP.OB). This is an outright scam, through and through. They pretend to make electric cars. I put the odds at 2-to-1 that they contact me for this post and threaten a lawsuit. We had a Zap dealership open up right here in downtown Austin, and everyone was so excited. People went to go check out the grand opening, and there was no product. The store was empty. Their website lies about all the products they're never going to make. The franchisee here in Austin slowly figured out the whole operation is a giant scam to steal investor money, and he had to close his empty dealarship, losing his life savings. You'd think a company that is the joke of the market would lose value, but there it sits; trading for the same price it did two years ago. The second smartest investor in the world is Berkshire vice-chairman Charles Munger, and he has this phiolsophy that goes like this: If someone was able to take his company public, get a lot of investor money, and continue to release earnings reports, he's probably very good at running a fraud. You'll be sitting there making margin calls while he wallows around in your money. The bottom line: he can remain fradulent longer than you can remain solvent. That is the case with this company. They'll get theirs in the end...but it won't be while I'm shorting the stock. I wouldn't touch this thing with a ten-foot pole.

So there we have it. Five investment ideas that I think are fantastic...and that would also be money losing mistakes at the same time. Let's revisit this list in 18 months and see where we stand.


Anonymous said...

Great post Rick. I am continually impressed with your clarity in observing what I can only describe as chaos in the markets these days.

Sincere thanks for your input.


Dusty said...

I couldn't say I know much about the other companies, but I agree with you about Chipotle. In Atlanta, we have Moe's Southwest Grill and Willy's Mexicana Grill (both of which most I know think are better than Chipotle), but the fast food burrito is a great fast food concept which is easy to understand.


Dusty said...

On another note, have you noticed the carnage in Chesapeake Energy and Dawson Geophysical (there's been a lot of carnage to notice as of late)?

Rick said...

Hi Dusty,

Great question, and yes, I sure have noticed the carnage. Dawson is one company in particular I am watching, because they are an oil company that isn't really an oil company. Once oil is above a certain threshold, it makes sense to buy services from Dawson. Whether oil is $40 or $140 isn't as meaningful to Dawson as it is to Exxon. Despite this, the stock price tends to loosely follow the price of oil. I plan to continue to watch Dawson while commodities prices deflate. We may be able to grab a fantastic value here, but I think right now as oil is dropping would get jumping in too soon.