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Author: woodstove Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 1933  
Subject: Re: Financial stocks Date: 4/29/2005 4:17 PM
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Hi Steven,

HDI looks like a very good business from the numbers you present. I've
never looked into them so have no comments about their financials, etc.
A documentary I saw on TV, about development of a new motorcycle model,
suggested a fair bit of depth to their design people and management,
and many of them showed pride in their products and their business.

Honda used to be more of a motorcycle firm. Also true of Suzuki maybe?
The potential for HDI is not necessarily limited by motorcycle buyers.
Especially with emphasis on fuel economy, and people looking for
vehicles which have efficient engines but still enough power to haul
the shopping.

One of the things I like to do, in the abstract anyway, is find a firm
which is in a good line of business, with reasonable future for demand,
and which has a management which has the right attitudes - emphasis on
being rational, profitable, sustainable, continuous improvement in the
business operations and re costs, and is honest towards shareholders.

Then trust the management to make good decisions about the details and
to safeguard my fractional interest in the retained earnings and other
benefits from being part-owner of that business. It is impossible to be
as up to date on the monthly financials and sales prospects, or other
opportunities which arise, as the people who are day to day managers.

One I recently bought into a bit more was Norbord (NBD on TSX - don't
know if they are also NYSE) who make oriented strand board. They seem
to have a good appreciation of how to balance cash generation with the
need to keep up on business opportunities. Right now may be a cyclic
peak, but I'm willing to trust those guys to do their best to maintain
the present dividend and deploy excess cash productively or return it.
The stock has dropped the past two days because it went ex-dividend
on a special dividend. Personally I would rather buy ex-dividend and
avoid paying income tax to retrieve my original investment capital.

I forgot to list my little GRY experiment in the financials I have in
the portfolio. A small thing anyway. Not unrelated to Norbord maybe.

I agree with you about the possible opportunity to buy cheaper later.
It seems to me that rather than waiting for a general discouragement,
it makes more sense to wait for sectoral discouragement. That was the
case 3 years ago with telecomms, and it may be getting that way with
forestry products companies. Though I have still to get serious about
Abitibi or Tembec. Those firms have the potential for big trouble,
though their managements are capable and committed to the business.
It is a time to be developing some familiarity with the candidates.
But until some firms go under, it will not be real industry distress.
And - back to trusting managements - the management of a competitor
with ample liquidity may be able to take advantage of an opportunity
better than an individual investor.

In the auto sector - getting back to HDI perhaps - I've arbitrarily
set a criterion of passenger car sales getting down to about 65 pct
of prior peak, before there is sufficient distress to produce plenty
of bargains. But there can be selected good firms that are being
underpriced, tarred with the same brush as the rest of their industry,
even now. I think I've found one of those, but it may sell for less
in future. A smallcap and I don't want to pump it, so no name here.
But that, for instance, may be the same argument as justifies HDI
even if consumer buying outlook is getting weak and most investors
are shying away from the related stocks.

Back in 1999-ish, I looked seriously into Winnebago, but never took
action. An error in retrospect. It was clear they were doing things
right and management could be trusted to run the business properly,
and the valuation vs price was advantageous. HDI (without any work
done personally looking into the details) may be a similar situation.

So... Good luck!

Woodstove
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