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No. of Recommendations: 6
Hi kelbon,

The offspring and their little ones are out in back spashing away in the pool, the grilling and eating are done at least for the present, and I thought I'd pop open a cool one and take a break from the cacaphony to check in at the fool for a minute. Found your posting...thanks for a much-appreciated break from an otherwise hot and noisy afternoon. Now I don’t know about the bedside manner you mentioned…surgeons don’t get much of a chance to chat with patients while they’re seeing them. And you’re right, it’s time to get down to work and find some future winners.

In your posting you wrote: “…you rely to a large extent on Morningstar's Fair Value, Consider Buying, and Consider Selling price points to trigger a buy or sell signal — or so it would seem.” I guess I wasn’t as clear as I should have been. I don’t use M*’s data as pure buy or sell signals…just signals to make me do some detailed analysis.

Regarding price as it relates to fundamentals, that's a key issue to being able to pull some profits out of the market, and here’s how I see it…I view stock price and company fundamentals as two separate issues. The fundamentals relate to the company and its business, while the price relates to the market's current valuation of the company's stock. If the company’s fundamentals are up to my standards, and if the price is low enough, then I see the stock as a potential buy. But both of these need to be true. Since you asked about FAST, let’s use it as an example:

The company itself seems to be in pretty good shape. The folks at M* seem to like it (talk about a love-fest), with superb grades for Stewardship, Profitability, Financial Health, and Economic Moat, just about anything else they can find to grade. So far so good. Also, it has enough data (15+ years) and a positive CAGR (18+%) over that time, so it meets my minimal criteria. It’s a strong player in a somewhat limited marketplace, and even with competition in its field (fasteners and other goodies) from GWW, and possibly from HD, and maybe even from LOW, it still has a strong brand recognition that seems worthwhile, and a future that seems bright. Again, so far so good. I don't find anything in the annuals or quarterlies to raise any alarms, and other analysts seem to like them as well. In all, I kind of like FAST also, but only as a potential date…not ready to ask it to the prom quite yet.

Having satisfied myself re: fundamentals, I will then need to move on to stock price itself. M* gives it a full five stars, since the current share price is some 15% or so below their “buy price” and about 27% below the fair value. OK, now this is starting to look interesting, but I need to look further before ordering a corsage for this one. So I fire up one of my trusty spreadsheets and it runs a 15-year regression analysis on the stock price. Here I find that the current share price is +0.13 standard deviations above the regression mean. (I use the excel built-in regression analysis module). A look over at the charts available on the BMW web site shows the FAST price to be right at the regression mean. (I guess our routines calculate things a little differently, or maybe the difference is due to 15 years vs. 16 years, but the result is nearly the same and certainly close enough.) So here's the big "Oops"….even with five stars and a nice discount below the M* fair value, the price is still not nearly low enough relative to its past to warrant a further look from me. In order for me to get interested the price would have to be at least -1.0 sd below the regression line, and also at a point which is (on a relative basis using the regression CAGR) as low as the lowest price drop in recent history. This occurred back in the spring of 2003, when price dropped to between -1.75 and -2.0 sd below the regression line. At that time the price was somewhere in the $13 range. In today’s relative prices, a drop to that neighborhood in the regression chart would take it to about $27 or so. Therefore, I’d pass on this one.

Just for interest, some additional things I’d look at are the following. The current P/E is 89% of its 5-year average, which is a little high for my tastes. The current P/BV is 108% of its average, way too high. And the current P/S is 103% of average, again too high.

I have some of the same issues with M* as you noted in your posting. That’s why I do my own homework as well, and why I give the regression analysis equal importance to the DCF price analysis from M*. I think of my approach as progressively exclusive; each step along the way has the opportunity to remove a stock from further consideration. In this case, it was the regression analysis that did it. But I do agree with you…I would love to jump into FAST at the right price, which right now would be in the high 20’s or so, assuming the fundies are still in good shape. So my conclusion on FAST is that the fine folks at M* are probably right on the fundies, and they may even be right on the price analysis, but it’s too rich for my blood at these prices. There are better candidates elsewhere.

Thanks much for the though-provoking posting…now it's time to go back out and see if the number of grandkids is still five.

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