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I am a little concerned with the 5 picks nominated by our crack ck staff. Why you ask? Because nearly all the nominees have one or more criteria that do not meet ck status, e.g. CSCO (high flow), DELL (low margins), GE (low cash to LTD). Now before flaming me, I own all of these companies and believe they are great long-term investments. However, I believe an explanation is required regarding why you would select a stock with obvious ck criteria flaws over one that currently meets all the criteria. Otherwise, why have the criteria at all?

My thought is that you should select a company that meets all of the ck criteria today. My pick is PHB. Its only potential downside is that its not a "household" name (subjective), and its nomination arrived after the bell. Surely not reasons to eliminate a powerhouse company with a great future.

Enjoying this discussion immensely.
CEDC
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GE (low cash to LTD).

With cash-to-debt of 1.77, GE does meet the 1.5 criteria.

Phil
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However, I believe an explanation is required regarding why you would select a stock with obvious ck criteria flaws over one that currently meets all the criteria. Otherwise, why have the criteria at all?

Something to rememeber here is that not every company we purchase will meet all the criteria. Direction is often more important than location.

For example, we bought Gap even though it falls short on gross margins. However, these have been trending up over time and they meet the net margin requirements.

The same could be said for Cisco's flow ratio and receivables turnover. They have been improving on a quarter by quarter basis.

Phil
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"Something to rememeber here is that not every company we purchase will meet all the criteria. Direction is often more important than location."

I agree, which is one reason why I nominated Ericsson. As I said in my original post, they are close but not quite there in both gross and net margins. And their net margins have increased steadily over the last few years.

Otherwise, they fit the CK criteria very well. In addition, they have grown at a 31.1% rate over the last 5 years, and Zacks has them down for a 25.7% rate over the next 5. They are a world-wide name, even if they are not as well known in this country, but recognizability in this country alone is certainly not a determining criterion.

The major negatives as I see them (beyond the slightly sub-standard gross and net margins) are that they have only really been a force the last three years or so, so they don't have the track record of a company like Johnson & Johnson, for instance. In addition, although they are well positioned to take enormous advantage of the Asian market, as we have seen that is a double-edged sword. Still, assuming that market will eventually take off (especially in China), Ericsson is in the drivers seat.

Although there is no reason to select a foreign company just because we haven't yet, there are several very strong candidates out there, and only one of them made it onto anyone's list. I love Louis Vuitton, by the way, but I think Tom just picked that one so that he'd have an excuse to break out the champagne early. :c)

==> david
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Although there is no reason to select a foreign company just because we haven't yet, there are several very strong candidates out there, and only one of them made it onto anyone's list.

You can call me narrow-minded here, but I did not consider any of the foreign-based multinationals when I made my selections.

Until there is more uniformity in accounting standards I prefer to limit my investments to US based businesses. When there are US-based businesses like Coke that sell predominantly outside the US anyway, I feel that sufficient exposure to foreign markets is obtained, and that let's me read GAAP based finanacial statements which I understand and which provide the best disclosure of any in the world.

Phil
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"You can call me narrow-minded here, but I did not consider any of the foreign-based multinationals when I made my selections."

I don't think "narrow-minded" is the right term. It does, in fact, take quite a bit of additional effort to consider one of those monsters. And such effort is probably especially difficult to summon up when you've got to come up with five choices in a few days. But I think the effort may be worth it, and that it can be distributed among people around the world. Heck, if we're all being asked to make a decision, why can't we all be asked to do some of the research, too?

==> david
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