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Author: earslookin Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 41627  
Subject: The BMW Screen...er, Method Date: 12/15/2006 9:30 AM
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This may sound like trashing. I prefer to think of it as demystifying. By the way, I sometimes use the BMW screen...er, method.

The BMW method consists of three steps:

1. Find stocks where the current price is at or below the historically low CAGR line and calculate buy and sell prices.

2. Do your due diligence.

3. Cash out when you reach your previously calculated sell point.

Of these three steps, number two requires the heavy lifting. There are few people on the planet who are skilled at assessing the likelihood, magnitude, and longevity of future cash flows. But there are many who either think they are skilled at doing this or who underestimate its difficulty.

This is why Greenblatt, with his Magic Formula method, advises a mechanical buying and selling approach for most investors after getting the results from his screen. He says if you are one of the few who are very, very good at assessing future cash flows, then go ahead and just cherry pick from the Magic Formula screen based on your due dilligence. However, for the great majority he advocates a mechanical approach because most investors are just not very good at doing this due diligence step.

BMW's worthy contribution here is to the practice of screening -- finding that subset of stocks worthy of further action together with an understanding of attractive buy and sell prices. To make more of it than this is dangerous to your investing health.
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Author: abFatPitch Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18534 of 41627
Subject: Re: The BMW Screen...er, Method Date: 12/15/2006 9:38 AM
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BMW's worthy contribution here is to the practice of screening -- finding that subset of stocks worthy of further action together with an understanding of attractive buy and sell prices. To make more of it than this is dangerous to your investing health.

Man, are you in for it : )

ab



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Author: Jim2B Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18536 of 41627
Subject: Re: The BMW Screen...er, Method Date: 12/15/2006 9:58 AM
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Earslookin,

Another way to apply the BMW method is to pre-identify great companies that you *want* to own but don't want to over-pay for their stock (e.g. MMM, GE, JNJ, etc. for me).

Then use the BMW method to determine good prices for their stock.


Why is my method different then yours? Well I'd say that many people could name 10 great well-run companies likely to continue growing into the forseeable future. So put those on your watch list and wait for buying oppotunities, it reduces the "heavy lifting" required.

More heavy lifting is required when you use the method to find buying opportunities for smaller, less well known companies (e.g. SSD).

Some of the BMWm can be used for non-BMW stocks (e.g. BWLD). As long as their earnings keep growing you can use BMW like charting to determine good stock price entry points.

I imagine there are many other ways to apply the BMWm and I hope others will post their ideas.

Jim

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Author: captainccs Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18540 of 41627
Subject: Re: The BMW Screen...er, Method Date: 12/15/2006 11:46 AM
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There are few people on the planet who are skilled at assessing the likelihood, magnitude, and longevity of future cash flows. But there are many who either think they are skilled at doing this or who underestimate its difficulty.
earslookin


While in theory it is perfect, in practice I find DCF to be perfectly useless. For background info only I want to say that I have been trained as an accountant, I was a management consultant and I used to be a wiz Excel programmer. I know how to calculate DCF and I know how to prepare feasibility studies and other kinds of forecasting reports. The problem with DCF is GIGO (Garbage-In, Garbage-out). All the numbers you stick into a DCF calculation are guesstimates at best and wishful thinking otherwise.

Take 3M, they are creating new products all the time and discarding bad ideas. How do you know what they will invent tomorrow or introduce next week? How sure are you of the risk-free rate five years down the road? The chain breaks by the weakest link. By the time you are finished sticking all those uncertain numbers into your DCF formula you are assured of Garbage-Out. So, yes, I agree with you, very few will get their DCF right. Then why use it at all? The main reason is because an "authority" said so. Who would dare say that Graham and Dodd are not the be all and end all of investing. Actually, Warren Buffett is one who says that while he learned cigar butt investing from Ben Graham he has since been influenced by Fisher. I have yet to hear Peter Lynch relying on DCF. Louis Navellier relies on back-testing (What is working on Wall St.).

I would like to hear a better defense of Greenblatt's Magic Formula method vis a vis the BMW Method before anyone makes a move from one to the other. You dismiss due diligence as difficult because you equate due diligence to DCF. Let me assure you that after experimenting with DCF for a while, I don't even think about it anymore and much less rely on it to buy or sell securities. There are many ways of doing due diligence and if you go through the 18K BMW posts you will run into many of them.

Denny Schlesinger

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Author: BuildMWell Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18543 of 41627
Subject: Re: The BMW Screen...er, Method Date: 12/15/2006 12:18 PM
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"Of these three steps, number two requires the heavy lifting. There are few people on the planet who are skilled at assessing the likelihood, magnitude, and longevity of future cash flows. But there are many who either think they are skilled at doing this or who underestimate its difficulty." - earslookin

Personally, I have never looked at future cash flows. I do not even know how to do that. I apply the BMW Method to the yearly historical financials...net income, shareholder's equity, and earnings per share. I merely look for an imbalance due to Mr. Market's irrational pessimism.

This is not hard to do nor does it take much time. I do my due diligence on a typical stock in about twenty to thirty minutes. If you are doing all sorts of future cash flow calculations, please share them with us here. They will help me in seeing this your way.

The only thing I look at into the future is the slope of the CAGR curves and the professional analysts estimates for next year's earning. I like to see if they are seeing what I am seeing.

I also plot the prices from the options chain at BigCharts.com. That often leads me to by the LEAPS in lieu of the stock...or both the stock and the LEAPS.

I agree that due diligence is a key part of the stock selectiuon process, but I do not agree that it must be time consuming or difficult. People have made investing much more technical than it needs to be...that is how lots of people keep their jobs in the business.


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Author: earslookin Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18546 of 41627
Subject: Re: The BMW Screen...er, Method Date: 12/15/2006 12:57 PM
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Personally, I have never looked at future cash flows. I do not even know how to do that. I apply the BMW Method to the yearly historical financials...net income, shareholder's equity, and earnings per share.

Help me understand your approach. How do you use these historical results?

...and the professional analysts estimates for next year's earning. I like to see if they are seeing what I am seeing.

You mean what you are seeing for future earnings?



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Author: mklein9 Big gold star, 5000 posts Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18549 of 41627
Subject: Re: The BMW Screen...er, Method Date: 12/15/2006 2:22 PM
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Hi Ears!

2. Do your due diligence.

...

Of these three steps, number two requires the heavy lifting. There are few people on the planet who are skilled at assessing the likelihood, magnitude, and longevity of future cash flows.


As BMW and Denny have said, I think one of the really good principles behind the BMW Method is that the DD is greatly simplified. You start with companies you are pretty sure are going to be doing the same thing they've been doing, have already proven themselves over many years, and can be reasonably expected to continue growing.

Here's the big advantage with the BMW Method: the whole DCF calculation and everything that goes into it has already been done for you over the last 20-30 years. The price paid for the stock over the long term already reflects all those people doing all those calculations... and the occasional mania or depression thrown in. By taking a long enough view of this market activity, I think the Average CAGR is a better valuation than all the DCFs you can throw at a company.

Now you just need to make a reasonable judgment that nothing fundamentally different is happening to the company in the next few years. That is a whole ton easier than trying to estimate earnings, backing out depreciation and one-time events, estimating CapEx and discount rates and terminal growth rates and all that other stuff.

-Mike

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Author: BuildMWell Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18554 of 41627
Subject: Re: The BMW Screen...er, Method Date: 12/15/2006 2:58 PM
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"Help me understand your approach. How do you use these historical results?" - earslookin

When I am drawing my charts, I am already on the BigCharts.com site. Under the choices for my chart, I call for the historical "Rolling EPS" and the P/E Ratio. Thus, I have two things to graph right away. The P/E Ratio is just there for reference...not for graphing. Often, I can explain a lot of the history using the past P/E performance. For instance, try this with Home Depot. You can easily see that the investor was paying way too much for the stock in 2000 when the P/E was at 70:1. Since then, the ratio has slowly declined to the present level.

However, the EPS of HD has steadily grown over the same time span. So, we have a double change taking place. The price is declining on improving earnings, which is not rational. Well, except for one thing, the price was too high in 2000.

Now, I can quickly go over the books to see if the earnings picture is going to change drastically and I can read about the analysts opinions. They are paid to understand those things, aren't they? As I said, "...and the professional analysts estimates for next year's earning. I like to see if they are seeing what I am seeing."

To which you asked, "You mean what you are seeing for future earnings?"

No, I have not looked at the future earnings, I have merely persuaded myself that the future earnings will be there if history continues to repeat itself. All that Home Depot needs to do is to continue growing at about the same rate as in the past. Why should it suddenly change direction?

But, what has been happening with HD since 2000 is important from another standpoint. The financial press has continued to carp at the price drop. The investor has become more and more discouraged because his asset value in HD is going nowhere but further down. The brokers play on this emotion and talk more investors into getting out...and the price goes lower. Negativism rules the day.

By 2006 the stockholders are ready to lynch the CEO who has actually grown HD's earnings at a very respectable clip since he was hired. Instead of doing some due diligence to discover the truth, they decide to blame the one person who should be praised. The CEO knows the score, so he tells the shareholders off. The stock plummets on the news headlines that say the CEO is heartless.

Patience is what was lacking....plus a lack of rational thought. The BMW Method cuts through all of the BS and gets to the bottom line. I wanted to own Home Depot below $35/share. I wanted even more at $33. I could easily see exactly what had happened using my simple little charts. My chart was my due diligence. My official due diligence was checking the books to make sure I was not missing something important...and I wasn't.

So, today HD is at $40/share and I am still wanting more for the shares I own. I am up 20% in a matter of months and I feel very good about my position.

So, what was wrong with the way I approached this? I am afraid that I cannot see it. That is why I started this board...I want you to show me where I have missed the big picture.

In the last




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Author: earslookin Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18555 of 41627
Subject: Re: The BMW Screen...er, Method Date: 12/15/2006 3:11 PM
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Hi Mike,

Now you just need to make a reasonable judgment that nothing fundamentally different is happening to the company in the next few years. That is a whole ton easier than trying to estimate earnings, backing out depreciation and one-time events, estimating CapEx and discount rates and terminal growth rates and all that other stuff.

Looks like when I said "assess future cash flows" that you, and Denny and BMW took it to mean doing DCF calculations. I apologize if I misled you all.

I was referring to assessing future cash flows in the wider sense -- understanding the extent of a company's competitive advantage, whether and for how long it would continue, and how well management translates into cash for investors. I submit that this is what you are really doing when you say that all is needed is a reasonable judgment that nothing will be fundamentally different the next few years (that for very large ships they'll maintain the same course). Where we might part is in our opinion of the degree of the skill and effort it takes to make this reasonable judgment.

- Bill





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Author: theGreenMartian Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18558 of 41627
Subject: Re: The BMW Screen...er, Method Date: 12/15/2006 3:44 PM
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As BMW and Denny have said, I think one of the really good principles behind the BMW Method is that the DD is greatly simplified. You start with companies you are pretty sure are going to be doing the same thing they've been doing, have already proven themselves over many years, and can be reasonably expected to continue growing.

ok - I think I understand a bit, but isn't it a little weird that BMW is using HD - saturated store base and all - as an example of a company where he doesn't need to check any further how HD will continue to grow? HD is saturated. Period! They've admitted it. The law of large numbers has taken over. Are you and others suggesting that simply ignoring the fact that HD is saturated is the best way to approach this stock? Confused...

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Author: TwinDeltaTandem Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18560 of 41627
Subject: Re: The BMW Screen...er, Method Date: 12/15/2006 3:55 PM
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Bill,

I think you're overlooking a fundamental difference between Joel Greenblatt's frame of reference versus what the BMWm is trying to do. Greenblatt is coming to his MFI approach from the perspective of someone who has started with Piotroski and tried to simplify it. Like many other mechanical value screens, Piotroski works (way) best for companies with no analyst coverage. Although he doesn't say as much, I get the impression that Greenblatt's DD discussion is within this context--developing pro forma financials for relatively small, non-covered companies. [Now here's the chink in my argument--Greenblatt himself seems to favor very large, highly covered companies, e.g., WMT, ARO, AXP, AZO, LYV and LEA. But the MFI approach has nothing to do with Greenblatt's personal approach to managing funds.]

To beat the market you need to have an advantage--some overlooked aspect of buying and selling securities. The premise of the BMWm is that the tenacity of a company's long-term CAGR is something that is generally overlooked when evaluating a stock's current price.

Given this, as BMW and others have said, DD does not require a tremendous amount of pro forma work. If the underlying fundamentals are historically consistent, and if the price has consistently demonstrated a reversion to its long-term CAGR (as supported by these consistent underlying fundamentals), then a negative deviation from the long-term CAGR constitutes an actionable datum. The DD required to establish both of these facts is not that difficult.

Take WMT:

http://charts.grahaminvestor.com/WMT.php

The underlying fundamentals are rock solid. The only reason that the stock price isn't a perfect log curve is due to inefficencies in the market. Our DD focuses on whether we can trust the numbers and whether WMT today is the same as the WMT that produced the fundamentals in the past.

On the other hand, consider DRL:

http://charts.grahaminvestor.com/DRL.php

At first glance, this looks like a BMW stock. However, the underlying fundamantals have a problem. Not only that, but we find through DD that the historical data is suspect. Therefore, this stock becomes a speculative play rather than a BMWm value stock.

Furthermore, unlike WMT, DRL is a very small company. Unlike Piotroski, Greenblatt the value guy, et. al., BMW is primarily looking for very large companies with very, very long histories of stalwart performance.

Greenblatt's comment that few people could/should execute DD should be limited to its intent. I think his intent was to point out the difficulty of predicting the futures of companies like DRL rather than those of very large, established companies like WMT, MMM, LM, or even HD. For such companies, the past is far more predictive of the future.

John



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Author: theGreenMartian Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18561 of 41627
Subject: Re: The BMW Screen...er, Method Date: 12/15/2006 3:55 PM
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I think I understand a bit, but isn't it a little weird that BMW is using HD - saturated store base and all - as an example of a company where he doesn't need to check any further how HD will continue to grow?

no - sorry - check this. BMW said: My official due diligence was checking the books to make sure I was not missing something important...and I wasn't. Which must mean he isn't as concerned about store saturation as some might be. Ok, no problem...

(sorry about that - didn't read carefully enough)


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Author: theGreenMartian Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18563 of 41627
Subject: Re: The BMW Screen...er, Method Date: 12/15/2006 3:58 PM
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Although he doesn't say as much, I get the impression that Greenblatt's DD discussion is within this context--developing pro forma financials for relatively small, non-covered companies.

fwiw, I think supported by the fact that the Magic Formula website won't allow you to put a valuation greater than 2b in the screen

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Author: TwinDeltaTandem Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18565 of 41627
Subject: Re: The BMW Screen...er, Method Date: 12/15/2006 4:03 PM
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fwiw, I think supported by the fact that the Magic Formula website won't allow you to put a valuation greater than 2b in the screen

Yes...and not only that, but Greenblatt goes out of his way to show that the MFI even works for large companies.


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Author: ferjen Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18571 of 41627
Subject: Re: The BMW Screen...er, Method Date: 12/15/2006 7:05 PM
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greenmartian wrote:

ok - I think I understand a bit, but isn't it a little weird that BMW is using HD - saturated store base and all - as an example of a company where he doesn't need to check any further how HD will continue to grow? HD is saturated. Period! They've admitted it. The law of large numbers has taken over. Are you and others suggesting that simply ignoring the fact that HD is saturated is the best way to approach this stock? Confused...

and then wrote:

no - sorry - check this. BMW said: My official due diligence was checking the books to make sure I was not missing something important...and I wasn't. Which must mean he isn't as concerned about store saturation as some might be. Ok, no problem...

This is part of the reason why BMW looks at the earnings CAGR. HD did not just suddnely become saturated. It's been happening for some time now. Yet, all the while, Nardelli has been growing those earnings, diversifying the business, and expanding globally. I guess I'm trying to say that well run companies will find a way to continue to maximize their earnings CAGR and their stock price CAGR's should follow. We are generally looking for those temporary imbalances between the two for exploitation.

ferjen
who is so pleased with the BMW Method he cancelled all of his MF newsletter subscriptions


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Author: captainccs Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18572 of 41627
Subject: Re: The BMW Screen...er, Method Date: 12/15/2006 7:07 PM
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ok - I think I understand a bit, but isn't it a little weird that BMW is using HD - saturated store base and all - as an example of a company where he doesn't need to check any further how HD will continue to grow? HD is saturated. Period! They've admitted it. The law of large numbers has taken over. Are you and others suggesting that simply ignoring the fact that HD is saturated is the best way to approach this stock? Confused...

theGreenMartian


I passed on HD for the very reason you state. I also passed on MSFT a few months ago at $23.50 and today it is around $30.00, up around 28%. There seems to be something quite powerful in this "reversion to the mean" thing.

http://finance.yahoo.com/q/bc?s=MSFT&t=2y&l=on&z=m&q=l&c=

Denny Schlesinger


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Author: ibarz Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18576 of 41627
Subject: Re: The BMW Screen...er, Method Date: 12/15/2006 7:47 PM
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HD is saturated. Period!

Hi GMartian,

When you said saturated, do you mean locally (US based locations)? Or does this also include global markets (at least feasible ones, bigger cities, etc).

Thanks,

ibarz

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Author: DanPoz Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18577 of 41627
Subject: Re: The BMW Screen...er, Method Date: 12/15/2006 8:07 PM
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ferjen
who is so pleased with the BMW Method he cancelled all of his MF newsletter subscriptions


Wow! I've considered it but will keep hidden gems just to keep up to date with some of the boards.

BTW, it's easy to get all the newsletter picks without subscribing, you do however miss out on the reasoning and discussion boards.

Dan

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Author: theGreenMartian Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18579 of 41627
Subject: Re: The BMW Screen...er, Method Date: 12/15/2006 9:13 PM
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When you said saturated, do you mean locally (US based locations)? Or does this also include global markets (at least feasible ones, bigger cities, etc).

Sqft growth was 6% yoy in the past quarter. The 05 annual mentioned that they would open 400-500 stores in the next 5 years. Take it out 3 years, for example, and you are looking at 80-100 stores on a base of 2300, or ~4%. No amount of international expansion, unless something miraculous happens, is going to accelerate this growth rate on a base of 2000+ stores.

A small point on HD - sure, the stock price has risen from the low 30s to 40. You can make a convincing argument that the valuation was understated as indicated by the BMW method or whatever method you want to use. Still, what's happen to cause that rise? Did HD report positive same store sales comparisons in Q2 and Q3? No - in fact, SSS were down 5% in Q3, with Oct the weakest month in the quarter (down 8.7%). So did HD predict a SSS turnaround in Q4? No. So did HD report strong Q3 earnings growth? No - EPS was up 1%. So was average ticket up or was some other metric favorable? No.

Clearly the compression of the sqft growth rate is largely responsible for HD the stock's issues for quite some time because as noted Nardelli and team has successful raised margins to peak levels. So - did the company simply reach a bottom based on valuation and a happy market - and this market has been very happy - moved it higher regardless of the news? Or is the market suggesting that HD's new growth plans are going to be successful, that margins won't fall from the current high levels, that same store sales will re-accelerate next year? Perhaps. However, this is a hard sell.

So, does this invalidate the gain that anyone had buying at $33 or $35 with the stock at $40? Nope. Still - you can't argue that there is a convincing change in the fundamentals, and since everything has been happy lately can you really attribute a modest ~15% gain to anything other than fortunate timing? Don't know - but I wouldn't. That doesn't mean I'm right or anything, but it is nice to have an obvious confirmation in the evidence.

If it matters, I am long HD but have been peeling back mainly because I don't feel like I can adequately evaluate the company anymore since they are going into non-store growth areas. This is less a reflection of the company's ultimate success than my own analysis inadequacies, but there are other stocks one can buy so...

Just make money though...(my last post - enjoy this board very much)

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Author: Jim2B Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18580 of 41627
Subject: Re: The BMW Screen...er, Method Date: 12/15/2006 9:43 PM
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but isn't it a little weird that BMW is using HD - saturated store base and all - as an example of a company where he doesn't need to check any further how HD will continue to grow? HD is saturated. Period! They've admitted it. The law of large numbers has taken over. Are you and others suggesting that simply ignoring the fact that HD is saturated is the best way to approach this stock? Confused.

HD has good management and good management looks for a way around hurdles like this.

Recently HD purchased a chain store in China. If HD is able to crack the China market (admittedly a BIG "if"), then they have plenty of growth opportunity. Also HD is trying to break into other markets locally.

Jim

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Author: mhm6487 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18581 of 41627
Subject: Re: The BMW Screen...er, Method Date: 12/15/2006 10:40 PM
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The problem with DCF is GIGO (Garbage-In, Garbage-out). All the numbers you stick into a DCF calculation are guesstimates at best and wishful thinking otherwise.

Amen, Denny. I saw some DCF models used during the bubble years to justify stock prices of $60/sh on companies with no earnings.


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Author: BuildMWell Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18584 of 41627
Subject: Re: The BMW Screen...er, Method Date: 12/15/2006 11:17 PM
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Talking about Home Depot, theGreenMartian said, "...does this invalidate the gain that anyone had buying at $33 or $35 with the stock at $40? Nope. Still - you can't argue that there is a convincing change in the fundamentals, and since everything has been happy lately can you really attribute a modest ~15% gain to anything other than fortunate timing? Don't know - but I wouldn't. That doesn't mean I'm right or anything, but it is nice to have an obvious confirmation in the evidence."

I cannot answer your questions, but I will comment on the part about fortunate timing. I tend to think the BMW Method makes that "fortunate timing" work in our favor over and over again. I do not argue with results. Stocks reach their historical low CAGR and they rebound rather consistently...especially the solid, blue chips. We talked about 3M here in the summer and I bought the shares below $70 knowing that a rebound was imminent. Obviously, I would not have bet my life on it, but I knew it well enough to plunk down a load of my cash to buy the shares and to pay $17/share for the $60JAN09 LEAPS. Sure enough, the share price was above $80 several days ago. The stock was up 17% and the LEAPS were at $23.50...a 38% pop. Since then the price has pulled back to under $79/share, but I will be waiting for a higher price based on the historical movement of the stock. 3M is like a well oiled machine and the chart is very well defined. Why would I not rely on it?

I did the same with MSFT, INTC, WAG, CHS, SDD, and several others. If I was getting this wrong 10% of the time, I would tell you. But, it just doesn't stop working.

At the recent BMW Method conference in Ohio, I asked the group to tell us of any stocks that had failed to perform based on the BMW Method. I believe we had enough folks there that at least 100 examples would have been tested. There were no horror stories. I mentioned that Sara Lee had failed to rebound and had grown on it's low CAGR. And, of course we had a good laugh about Doral...our favorite non-BMW Method stock.

I have been doing this since around 1998 on a regular basis. I have used the method on about 80 stocks and have made great returns. During the market correction from 2000 to 2003, I had a personal CAGR of 25% to 40% on every stock I bought. They are all documented here on the boards. Check Haliburton at $11 in 2002, DUK @ $13 in 2003, CAT at $17(post split)in 2000, M0 at $18 and RJR at $8.50 (Post split) in 2000.

Of the DOW 30, MO and CAT were obvious buys in 2000 based on the BMW Method. No other method picked just those two. The Dogs of the Dow and the Foolish Four both included them, but the DOD/FF also included EK, SBC, and DD. Those three went down...my two went up 400% each.

I finally bought DD last year at $38/share...it is now at $49/share and paid a nifty dividend during the last year. I recall mentioning my pick of DuPont at the 2005 BMW Conference at Charleston and I got a lot of confused looks. I do not think anyone else thought DuPont was a good idea. But, in a year it is up 29% plus that 4% dividend. DuPont shares were selling for $52@ in 2000 when it was a DOD/FF pick. Timing is everything...but they say you cannot time the market.

The time to buy is at a stock's low CAGR. At least, that is what works for me.





The story that was sold to drive the price down had to do with lower film sales due to a lower than expected sales of HDTV's for the World Cup. The share price plummeted on that silly story and offered up a huge buying opportunity...if an investor could just see the long-term growth patterns.

You call it fortunate timing...I call it the BMW Method.



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Author: ferjen Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18586 of 41627
Subject: Re: The BMW Screen...er, Method Date: 12/16/2006 8:29 AM
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Jim,

Check Haliburton at $11 in 2002, DUK @ $13 in 2003, CAT at $17(post split)in 2000, M0 at $18 and RJR at $8.50 (Post split) in 2000.

Amen Brother...FWIW, I did not get into DUK until November of 2005 at $26.25 a stub but still am sitting on a CAGR of 27.3% including the dividend. Based on the following chart, your bottom was the lowest of the lows so your CAGR must be considerably higher. I caught that other low after the 2005 line:

http://invest.kleinnet.com/bmw1/stats20/DUK.html

I must profess though that I did not use the BMW Method to find DUK but have used it to keep DUK.

I finally bought DD last year at $38/share...it is now at $49/share and paid a nifty dividend during the last year. I recall mentioning my pick of DuPont at the 2005 BMW Conference at Charleston and I got a lot of confused looks. I do not think anyone else thought DuPont was a good idea. But, in a year it is up 29% plus that 4% dividend. DuPont shares were selling for $52@ in 2000 when it was a DOD/FF pick. Timing is everything...but they say you cannot time the market.

I wish I would have been at that conference. I still found DD but did not get into it until $43 a share. Nonetheless, I'm sitting on a 15.3% CAGR since November 2005 (that must have been a good month to buy) including my dividends. That's definitely nothing to sneeze at but I could be up much more substantially had I bought double shares in the $38-$39 range. I had several opportunities:

http://moneycentral.msn.com/investor/charts/chartdl.aspx?Symbol=DD

But alas, it does take some confidence and I wasn't REAL confident with DD at the time. That's not to say DD will not give me juiced returns as we move forward as it seems to be breaking out of its funk lately.

http://invest.kleinnet.com/bmw1/stats30/DD.html

Looking at Mike's 30-year chart above, it looks like a return to average CAGR would put the price north of $70. I'm not real sure of how your slice and dice technique works, but visually the average CAGR line on Mike's chart fits pretty good as the low CAGR from about 1987 to 1997. So, I'm thinking that $70 share price might be attainable within the next couple of years. Heck, it could happen next year but it would take a big move to get there and DD does not strike me as a big move type of stock.

Does that $70/share target make sense?





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Author: JJMSpartan Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18587 of 41627
Subject: Re: The BMW Screen...er, Method Date: 12/16/2006 8:37 AM
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It is always interesting to me when I see someone who doubts the success of the BMW Method come in here and try to poke holes in it. There is a lot of theory tossed around, and a lot of hot air wasted, but little ever comes of it.

With all that said, I will reiterate what BMW has asked in the past. If you know of an instance where the BMW Method has failed, PLEASE bring it to our attention!

GreenMartian and earslookin, you will have a much easier time coming in here and suggesting that the BMW Method isn't what it's cracked up to be if you actually provide something that shows that it doesn't work. I don't believe that anyone on this board will reject criticism if there is proof that the method has failed. The problem is that we have no such evidence. So please, do your homework, and show us an example of where the method has gone wrong. And please pay attention to the discussion on this board so you don't try to use a company like EK as an example.

We're waiting...

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Author: theGreenMartian Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18589 of 41627
Subject: Re: The BMW Screen...er, Method Date: 12/16/2006 8:52 AM
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GreenMartian and earslookin, you will have a much easier time coming in here and suggesting that the BMW Method isn't what it's cracked up to be if you actually provide something that shows that it doesn't work.

And you'd have an easier time understanding my posts, if that matters one iota, if you actually read them. I made no criticism of the BMW method. What I wrote was:

I'm not an expert on BMW and wasn't exactly welcomed to this board last time I visited but I will make one small comment here that you might wish to completely ignore - namely, what is the STORY behind your stock picks?

BMW writes:

I cannot answer your questions...

Well, there's an honest response. Enough said!

(off to other boards!)



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Author: ferjen Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18590 of 41627
Subject: Re: The BMW Screen...er, Method Date: 12/16/2006 8:54 AM
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It is always interesting to me when I see someone who doubts the success of the BMW Method come in here and try to poke holes in it. There is a lot of theory tossed around, and a lot of hot air wasted, but little ever comes of it.

With all that said, I will reiterate what BMW has asked in the past. If you know of an instance where the BMW Method has failed, PLEASE bring it to our attention!

GreenMartian and earslookin, you will have a much easier time coming in here and suggesting that the BMW Method isn't what it's cracked up to be if you actually provide something that shows that it doesn't work. I don't believe that anyone on this board will reject criticism if there is proof that the method has failed. The problem is that we have no such evidence. So please, do your homework, and show us an example of where the method has gone wrong. And please pay attention to the discussion on this board so you don't try to use a company like EK as an example.

We're waiting...



TheGreenMartian aka ArrogantDonkey aka DerangedMonkey aka BeatlePaul aka IllustratedMan aka FlyingDutMartian aka SpocksBrain aka Watubi aka ThorbyRtns aka ObliqueApproach aka greenmartian2 aka CitizenThorby aka greenmartian1 aka Nomorepost aka GreenMartian aka tislynch

....whew, did I get them all....is a money manager. So, I imagine he'll be a little tough to break. But, if he sticks around long enough and doesn't change his screen name again, we'll have a decent chance of bringing him around. : )

Seriously, dude? What's with all the screen name changes? Five in just the last year...are you being stalked or something? Witness protection program? What gives?

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Author: earslookin Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18592 of 41627
Subject: Re: The BMW Screen...er, Method Date: 12/16/2006 9:15 AM
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BMW said: So, what was wrong with the way I approached this? I am afraid that I cannot see it. That is why I started this board...I want you to show me where I have missed the big picture.

BMW,

My intent was not to show that your approach is wrong or that you missed the big picture. That is why I started my original post with the words “This may sound like trashing…” and to point out that I sometimes use your screening technique. The purpose of the post was to describe what I saw as the strengths of your approach and what I think are its limitations for some people.

If anyone missed anything, it was me. As Mike pointed out, I completely missed how you apply due diligence and how you link that to screening for prices at or below historical CAGR.

From your explanation, I think I have a better grasp. If I've understood you correctly, your approach to due diligence is focused on the past. It is geared to very large companies with a well-documented, long history of good behavior. You spend about 20-30 minutes to see if anything has changed with the story. Unless you spot a red flag, why should anything be different going forward?

To use an analogy, it is like a huge ocean liner on its 500th cruise to Bermuda. How's that going to be different from the 387th trip, as long as you check that everything on board seems ok, no problems since we left port, seas are calm, and forecasters confirm your observation that everything is clear for at least the next day or so? Now if folks in Las Vegas for whatever reason are betting that the ship is going to have a much slower run this time, or is going to crash, why not take advantage of that? You've checked the facts, and there is nothing to indicate the 500th trip is going to be any different than all the previous trips.

Please let me know if I've misunderstood what you said.

My notion of due diligence differs from yours (assuming I've described yours correctly above). It is focused on behavior going forward. When I said "assess future cash flows" that was my shorthand way of saying that I want to understand a company's competitive advantage period and management's ability to translate that advantage into either cash for investors or for reinvestment in the business at attractive rates of return -- I wasn't referring to DCFs -- no matter what the company has done in the past, even for very large companies.

So we part ways on our concept and use of due diligence. However, my belief is that there are a number of successful investing strategies and the key is to find one you are comfortable with and then employ it consistently. To me, your approach to due diligence is not *wrong*, it's just different. You use it consistently, you are comfortable with it, and you have been very successful with it. Others have too. It's reproducible. So I can't say you are wrong or that you've missed the big picture.

Now if you told me the BMW method is the only discipline that works, or that it works for everyone, or that it works for other than very large companies with long histories of performance -- well, that would be another story.

- Bill


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Author: BuildMWell Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18593 of 41627
Subject: Re: The BMW Screen...er, Method Date: 12/16/2006 9:17 AM
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"Amen Brother...FWIW, I did not get into DUK until November of 2005 at $26.25 a stub but still am sitting on a CAGR of 27.3% including the dividend. Based on the following chart, your bottom was the lowest of the lows so your CAGR must be considerably higher."

http://invest.kleinnet.com/bmw1/stats20/DUK.html

My CAGR on Duke Energy is about 28% right now. The CAGR since I bought is 28%, but you bought on the same curve. What juices my CAGR is the $1.10/share dividend which was at a yield of 8.5% when I bought. Since then, DUK raised the Dividend to $1.26...a 9.8% yield. Thus, my total return is about 38%/year. The key is to buy at the low historical CAGR. Your personal CAGR will follow the rebound curve...as you have just shown.

I have found many stocks that offer a yield of over 10% at the low CAGR. That is where a really good look at the Free Cash Flow is key. That fat dividend is worthless if they cannot pay it. Even when I determinet hat the FCF is fine, the company may cut the dividend anyway...see Tampa Electric (TE). That still was a nice stock for me, and the dividend cut should speed the recovery in the share price.

Ferjen asked if I thought $70/share for DuPont makes any sense. DuPont is a funny stock. If they can get their act together, $70/share is reasonable, but can they? I am not sure how this link will come up, but I will try to show DD's BigCharts data as I use it:

http://bigcharts.marketwatch.com/advchart/frames/frames.asp?symb=DD&time=&freq=

DuPont's earnings are very erratic. If they start to show some consistent growth, I expect the company's shares will react accordingly. Lately, the P/E has been beaten down because everything is so iffy. Right now, I am very encouraged by what I see happening at DuPont.

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Author: JJMSpartan Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18596 of 41627
Subject: Re: The BMW Screen...er, Method Date: 12/16/2006 9:31 AM
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And you'd have an easier time understanding my posts, if that matters one iota, if you actually read them. I made no criticism of the BMW method. - theGreenMartian

Sorry if I tend to read every response of yours in multiple threads and then post a single reply in only one of those threads. This board isn't about flame wars, and I'm particularly averse to get into them. But here are a few select comments of yours...

still, I'll say this - voting for willful ignorance seems like an odd approach but whatever works for you is ok with me
http://boards.fool.com/Message.asp?mid=24938679

I just don't understand why one WOULDN'T want to know, for example, that Lipitor is going off-patent in 2010, especially when all it involves to know is to read the 10K. None of the things mentioned were particularly difficult to collect - read the filings is all you do in most cases. So I'm not sure what you are suggesting - not to read them?
http://boards.fool.com/Message.asp?mid=24938895

since everything has been happy lately can you really attribute a modest ~15% gain to anything other than fortunate timing?
http://boards.fool.com/Message.asp?mid=24939854

Lets see, you call the BMWM 'fortunate timing', indicate that you believe that a posters DD is 'willful ignorance' because you haven't read it, and imply that people around here don't do DD?

This isn't the best way to get people on your side of a discussion.

namely, what is the STORY behind your stock picks?

That is why we read this board. Many intelligent, rational people discuss their stories about their investing ideas on this board every day. If you go back and read the board, you'll find lots of stories about individual stocks, and lots of analysis. There is a story for nearly every pick made by members of this board.

And we're still waiting for someone to discuss a pick that hasn't worked.


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Author: BuildMWell Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18597 of 41627
Subject: Re: The BMW Screen...er, Method Date: 12/16/2006 9:38 AM
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"BMW, My intent was not to show that your approach is wrong or that you missed the big picture. That is why I started my original post with the words “This may sound like trashing…” and to point out that I sometimes use your screening technique. The purpose of the post was to describe what I saw as the strengths of your approach and what I think are its limitations for some people." - earslookin

I hope that I was not guilty of the un-hearty welcome you received on your earlier visit. This time around, I did not take your post as "trashing." I understand your concerns and I appreciate the fact that I am not the best at detailed due diligence. I am an engineer, not an accountant.

To your cruise liner example. I agree 100% with it. If the liner has made 499 successful voyages, I would bet heavily that the 500th will repeat that success. Then again, we have "unsinkable ships" like the Titanic that went down on the very first voyage. It happens.

I think your approach is a great compliment to the BMW Method, and vice versa. My successes have come by using the BMW Method in conjuction with some other method. For example, I came to buy MO and CAT in 2000 because of the Foolish Four and the Dogs of the Dow. Now, the foolish four had me throwing out MO because it was too cheap. I just could not do that. So, I tossed out the FF. The DOD allowed me to keep MO, but they had me buying EK, SBC, DD and several others that the BMW Method told me were too expensive...and they were.

One thing about the BMW Method that no one can argue about is it finds the low price at the right time. Now, we can discuss the merits of that stock to beat the band, but we can all see where the price is versus history. I think that is a very important factor that all other methods miss. Seeing the CAGR over time puts buying stocks on the same level as buying a CD or having a savings account. Most folks can relate to that.

The point is, I appreciate your constructive comments. Please pick the BMW Method apart and put it to the test. That is what we are all doing here.

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Author: BuildMWell Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18599 of 41627
Subject: Re: The BMW Screen...er, Method Date: 12/16/2006 9:43 AM
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I am not sure how this link will come up, but I will try to show DD's BigCharts data as I use it:

http://bigcharts.marketwatch.com/advchart/frames/frames.asp?symb=DD&time=&freq=

NOPE! It did not work. Please go to "indicators" on the left side and click on "Rolling EPA" and for the second indicator ask for "P/E Ratio". Then call for "all data" and "monthly" for time frame. THat will give you the chart that I start with for my analysis.

Look at the earnings for DD. If I am seeing this correctly, they are beginning a steady upswing with a CAGR that should help to define the share price in the near future. They have a long way to go to justify $70/share again...but I believe they can do it.

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Author: theGreenMartian Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18601 of 41627
Subject: Re: The BMW Screen...er, Method Date: 12/16/2006 10:16 AM
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Lets see, you call the BMWM 'fortunate timing', indicate that you believe that a posters DD is 'willful ignorance' because you haven't read it, and imply that people around here don't do DD?

JJM, there is no point to this. Whatever works for you is good for me, period. End of story.

That said, I do think you are parsing me a bit roughly! For example:


...since everything has been happy lately can you really attribute a modest ~15% gain to anything other than fortunate timing?

was actually


...since everything has been happy lately can you really attribute a modest ~15% gain to anything other than fortunate timing? Don't know - but I wouldn't. That doesn't mean I'm right or anything, but it is nice to have an obvious confirmation in the evidence.

Puts a wee bit different slant on things. The others were direct responses to comments made by other posters (who never responded, so there is no need to prolong those discussions).

In short, I wish to vacate the premises now. Good luck with your investments.


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Author: DanPoz Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18611 of 41627
Subject: Re: The BMW Screen...er, Method Date: 12/16/2006 2:35 PM
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HD has good management and good management looks for a way around hurdles like this.

I tell you, the main thing that worries me about HD is the quality of their stores. (But I was in there this morning anyway) The stores are a mess. Items are not where they are supposed to be, empty boxes on shelves, mixed items, mismarked items, missing etc.... ZERO customer service. The quality of employees has been getting worse over the last few years in my opinion as well as the stores. That worries me and keeps me from pulling the trigger on HD.

All that being said, I still shop there cuz I know how to find what I need without trying to deal with the employees.(Ironic?) If it's something more complex, I go to our local real hardware store(now affiliated with Ace) or Lowes.

Dan

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Author: desertdaveataol Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18619 of 41627
Subject: Re: The BMW Screen...er, Method Date: 12/16/2006 6:31 PM
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The stores are a mess. Items are not where they are supposed to be, empty boxes on shelves, mixed items, mismarked items, missing etc.... ZERO customer service. The quality of employees has been getting worse over the last few years in my opinion as well as the stores.

Been there, done that, got the T-square, but at Lowe's!

The clerks at our local Lowe's has mixed attude/expertise. I'd shop at HD but it's on the other side of town.

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Author: Jim2B Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18626 of 41627
Subject: Re: The BMW Screen...er, Method Date: 12/16/2006 9:51 PM
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One thing about the BMW Method that no one can argue about is it finds the low price at the right time. Now, we can discuss the merits of that stock to beat the band, but we can all see where the price is versus history. I think that is a very important factor that all other methods miss. Seeing the CAGR over time puts buying stocks on the same level as buying a CD or having a savings account.

For me part of the due diligence is comparing the CAGR to the earnings growth (and any expected affects upon that growth). If the price is dropping but the earnings haven't (and aren't expected to) AND the PE ration is reasonable, then price drops are over reaction to some news.

I realize that all of those caveats seem unlikely to happen to in our "perfect" market. And yet look at MMM last summer. The price dropped >12% on news that the flat screen films didn't sell as well as predicted during the world cup. I don't recall my exact numbers but the short fall in earnings expected from that short fall came to ~2% of MMM's earnings.

Heck, chart MMM PE over time for the summer. In may it was 20 PE, by mid-August it's PE had dropped to ~15!

If that's not market over-reaction then I don't know what is. Sure if the market for flat screen films dries up, it'll hurt MMM's performance. However, MMM sells a lot more than flat screen TV films and their R&D department will come up with something else.

The whole thing was clearly charted on the BMW charts and any Fool could easily see the stock price drop was a HUGE over reaction to the expected earnings shortfall.

Jim

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