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No. of Recommendations: 17
Hello Fools,

Welcome to Pencils Palace! This board has existed since 2006, but here is a refresher of the background and purpose of Pencils Palace.

Pencils Palace

As individual investors, we can learn a great deal both from each other and the businesses we follow over time. Pencils Palace is a hub to find, discuss, and follow businesses that have potential to be great investments.

Going back to the beginning of this board in 2006, we managed to find some gems: Hansen Natural (now Monster Beverage), Tata Motors, and Chipotle Mexican Grill, to name a few. Of course, some duds were discovered along the way as well (Mexican Restaurants and Citizens Bancorp, you still owe me).

This is a truly Motley -- anything goes! -- discussion board. If you find a company or relevant topic that looks interesting, share it here. Think we are missing something about a business we are discussing? Let us know. Share your notes, questions, analyses, and everything in between on this board.

Pencils Palace is essentially a microcosm of the Foolish community: individual investors coming together to support each other in the search for great businesses and quality investments.

What is up with the name?

I wear the “pencils2” moniker because it was the username my father originally used when he joined the Fool community in 2004. My interest in investing was sparked at 12 years old when I began reading Stock Advisor and Hidden Gems newsletters over my dad’s shoulders. Soon after my custodial account was opened, I began posting on the Fool’s discussion boards using this pencils2 account (with my dad’s permission, of course) at age 13. Logically, the next step was starting my own discussion board -- the name, “Pencils Palace,” plopped right out of the ether.

When I was 14, the Fool wrote an article about me that was published on the front page of AOL: http://www.fool.com/investing/general/2006/06/16/picking-sto...

I’d like to think that Pencils Palace represents how attainable investing is to anyone willing to put out the effort to learn and take control of their financial future. If a young teenager can follow businesses and confidently invest in stocks, so can any adult. Not only that, investing can be fun! Pencils Palace is a place where investors of all backgrounds, beginnings, and experience levels can come together and learn from one another.

What is your investing style?

Throw in some Peter Lynch, a touch of Warren Buffett, mix with some Tom E (TMF1000), and top it off with the Gardner brothers -- voila! There you have my investing style. I am continually learning and try to avoid being dogmatic in my approach, but my focus tends to lean toward finding quality, understandable businesses that will be successful for many years to come. My investing horizon is at least 5 years for each company, and preferably with a time frame of 10-20 years. That time frame is easier said than actually followed, but that is another helpful reason to follow businesses with fellow Fools: we can support each other on our investing journeys.

Great investments are probably not hidden away in an obscure Chinese micro-cap stock; rather, great businesses and investments are quite likely right in front of us each day. Successful businesses offer products/services that are appealing and useful to a great number of people. This is where I really try to follow Peter Lynch: "invest in what you know." If you love a product, you very well might like the business behind that product as well. I look for companies that are easy to understand, have innovation in their DNA, and are darn good at what they do.

Warren Buffett will read over annual reports of businesses and come up with an estimate of a company’s fair value, based on his own analysis, before checking the actual present market value of the company. In other words, Buffett will study a company and ask, "What should this company be valued at today?" I tweak this approach slightly and ask, "What can this company be worth in 10-15 years?" I try to keep the big picture in mind and evaluate a business not solely on its past and present performance, but its future potential. I look for businesses with experienced and innovative management teams and a product or idea that can be successful and/or expanded upon for many years ahead.

My individual investments, stock picks, and musings can be found here on Pencils Palace and on my CAPS page: http://caps.fool.com/player/pencils2.aspx

This is not to say that people have to agree with me or my investing style 100% to fit in on this board. Individuals with unique approaches to investing are what make the Fool, and this discussion board, a great place to learn. Whether you are a buy-and-hold investor, still figuring out your style, or only buy stocks that start with the letter E, you will be able to find and offer something worthwhile on this discussion board.

The foundation of Pencils Palace, and the bottom line for me, is that there is always something new to learn (investing or otherwise). Combining Foolish forces to evaluate and follow great businesses is a learning opportunity I cannot pass up. Everyone is welcome and encouraged to join or start a discussion on this board.

Together we can make the world a more Foolish place, and learn a great deal in the process. Let’s find some great businesses and investments!

Foolish best,

David Kretzmann (pencils2)
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No. of Recommendations: 2
Well said David. I always enjoy reading your posts. Thank you for the efforts.

Keep up the good work.
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No. of Recommendations: 2
Hi David,

I will be right alongside on the journey :0)

Probably throw in some interesting microcaps along the way for clinical forensic financial investigation !

Trev
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No. of Recommendations: 1
You're on my favorite boards.

Saul
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No. of Recommendations: 2
David,

The more I read about you, the more I find to admire.

I am assuming that the NBA is no longer in your future...but would you care to share what you will be doing after school? If that is out of bounds, I understand.

A couple stocks that I am studying and already own shares of, that might be new to you....

**NGVC a smaller and younger WFM. Smaller in store count and store size, but I really like their business model. I like their idea of having health coaches.
**CHUY'S, small Mexican restaurant, offers only fresh daily ingredients.

For me to invest in a company, it first must have a "story" that I can somewhat understand and have a strong belief that it can fulfill that "story". I may not totally understand the story (DDD for example), but the part of the story that do understand offers huge potential. Maybe I need to change this to story/potential.

Second, it needs to show progress towards reaching that potential. If not, I can be quick to sell and move on (I normally will give it 12-18 months). To many great places to invest to hold on to a laggard.

An area that I would really love to become stronger in is the financials. Being able to spot red flags and discerning positive or negative trends. I place a lot of weight on ratios, but not sure I get all that I should out of the 10Q and 10K.

Merry Christmas,

David
MTH Ticker Guide
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No. of Recommendations: 7
Below is a page post that I wrote after NGVC's November quarterly report. I have owned this one for almost a year now and I am still slowing adding shares. I would be interested in getting feedback.

David

NGVC 2Q 3-31-13
**Net Sales $106.5M up 25.4% from $84.91M
**TTM Net Sales
**Cost of Goods and Occupancy Costs $74.67M up 26.1% from $59.22M
**Gross Profit $31.82M up 23.9% from $25.68%
**Store Expense $22.16M up 22.94% from $18.02M
**Administration Expense $3.34M up 18.8% from $2.81M
**Operating Income $5.52M up 24.9% from $4.42M
**Net Income $3.22M up 29.5% from $2.49M
**TTM Net Income
**Gross Profit Margin 29.9%, down from 30.2%
**Operating Profit 5.2%, even YoY
**EPS $0.14 up from $0.11
**TTM EPS
**Share Count 22,441,445 up from 22,372,184
**Store Count 65 up from 53
**Cash/Short Term Investments $11.83M down from $18.06M
**Debt is $0.00
**SSS up 8.1%

NGVC 3Q 2013 Page Post

**Revenue $113.2M up from $106.5M
**TTM Revenue $405M
**Gross Profit $32.6M up 28.3%
**Gross Margin decreased 50 basis points
**Net Income $2.9M up 13.6%
**TTM Net Income $9M
**Net Profit 2.6% up from 2.5%
**EPS $0.13 up from $0.10
**SG&A $26.4M up from $25.5M
**Comps 11.6%
**YTD Comps 11.2%
**Cash $5.7M
**Debt $0
**Store count up to 68 in 13 States
**Interest expense $610,000 up from $401,000
**Shares count 22,401,924 up from 22,372,184


NGVC 4Q 11-21-13

**Net Sales up 28.1% to $115.2M
**Net Sales full year up 28% to $430.7M
**Net Income up 129% to $2.2M…$0.10 per share
**Net Income full year up 58.7M to $10.6M…$0.47
**SSS up 11.1%
**Gross Profit $26.7M
**Gross Profit full year increased 26.9% to $125.7M
**Opened 13 stores for the year, year end store total 72 stores
**Cash $8.1M
**Debt $0


Who is NGVC

Natural Grocers is a rapidly expanding specialty retailer of natural and organic groceries and dietary supplements. We focus on providing high-quality products at affordable prices, exceptional customer service, nutrition education and community outreach. We strive to generate long-term relationships with our customers based on transparency and trust.

**Provides free nutrition education classes and each store has a full-time Nutritional Health Coach. This also provides ongoing training for store associates.
**Does not sell products that contain artificial flavors, colors, preservatives, sweeteners or hydrogenated oils. All produce is 100% USDA certified organic.
**Meats must be naturally raised without antibiotics, hormone treatments or fed animal by-products.



Overview

The company turned in very strong quarterly and year end results, both in terms of revenue and cost containment. Revenue for the quarter grew at a very impressive 28.1% to $115.2M and for full year 2013 revenue increased 28% to $430.7M. With just a quick look at the numbers, one might come to the conclusion that this strong revenue growth came from new store openings. This would be understandable, but wrong.

Yes, opening new stores helped, adding $15.7M in revenue growth for the 4Q, but SSS added $9.5M in revenue growth. So, the company is doing a great job on both fronts. Speaking of SSS, the 11.1% YoY growth came from 5.9% increased traffic and 4.9% increased ticket. Furthermore, it is not just the newer stores helping SSS...mature stores are still turning in comps of 6.4%.

Gross profit for the 4Q increased to $26.7M and for the full year 2013 improved a hefty 26.9% to $125.7M. Tight operating controls dropped $2.2M to net income, a huge 129% improvement. For the year, $10.6M dropped to the bottom line, up 58.7%

Cash improved to $8,1M from $5.7M, restricted cash stayed the same at $500,000 and investable securities decreased to $1.1M from $1.7M. Long-term debt stayed at zero.



New Stores

Management continues to do a nice job of running its existing stores, while expanding for the future. NGVC currently has 72 stores in 13 states, with plans to open 15 during 2014 and have signed 11 leases for 2014. Management believes it can eventually operate 1,100 stores. New stores cost about $2.3M to open, takes less than 4 years payback and has a cash on cash return of 35% . The average store is 10,700 sq/ft., less than half the size of Whole Foods.

NGVC gave comps of 11.1% (this was the 46Q in a row of positive comps), but also highlighted what it called mature stores. Mature stores are locations that opened before 2009 and as a group are posting 6.4% comps up from 5.7% comps. With older stores still growing at a handsome pace and newer locations doing even better, the future looks very positive.

I own shares in Whole Foods, but I think NGVC gives me the chance to invest in the next Whole Foods years earlier in the growth phase. Time will tell.

Outlook

With just 72 stores and the organic grocery business only controlling about 7% of total sales, I believe that the future is outstanding for early investors in NGVC. Management has stated that they can operate 1100 stores, which means this journey has just begun. I also expect the organic market to more than double during the next decade, which will also aid NGVC to grow its store base.

I like what the future holds for this company and believe that I am getting in early on what COULD be the next Whole Foods. I will keep a watchful eye on quarterly reports to see how things progress from here, but at this point, I am giving this investment plenty of room to grow.

If I did not already own shares, I would buy my first position next week, but with a PE of 57.5, I would make sure I sized my position right. I will be a buyer of another position when the market gives me a PE around 47. As always, please do your own DD and make sure this would be a nice fit within your portfolio. I would enjoy reading your thoughts on the company.


David

Page 1
https://docs.google.com/document/d/1WlTY4IpO7vhPjjWm7TOEjb_3...
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No. of Recommendations: 2
Hi David,

It is great to have you on this board. (Thank you, also, to all the others who responded here. It means so much to have your involvement in Pencils Palace!)

I am assuming that the NBA is no longer in your future...but would you care to share what you will be doing after school?

I may have to hang up the ol' sneakers, after all... I graduate in May from Berea College, and I am currently working out feasible next steps.

I am planning on applying for the Fool's Analyst Development Program (ADP). Thus far the Fool has been very welcoming and encouraging to me, and the ADP looks to potentially be a great opportunity to formalize that relationship. I should learn more about the ADP and other opportunities with the Fool in the next few months. Hopefully something there will work out!

A couple stocks that I am studying and already own shares of, that might be new to you....

**NGVC a smaller and younger WFM. Smaller in store count and store size, but I really like their business model. I like their idea of having health coaches.
**CHUY'S, small Mexican restaurant, offers only fresh daily ingredients.


I only recently heard of Chuy's, but hadn't yet heard of NGVC. Both companies look interesting and are the types of businesses I like to follow. NGVC reminds me of Village Super Market (VLGEA), a regional ShopRite grocer (focused in Pennsylvania and New York) that did well while I was invested in it last decade. Regional grocers and restaurants tend to be riskier investment opportunities, but there are gems among them.

NGVC seems to done well generating (and increasing) cash flow and net income over the past several years. If management can successfully continue store expansion toward that 1,100 number, NGVC could be a great long-term investment. Another thing I like to see is that one family in particular (the Isley family) has been with NGVC for 1-3 decades or more. The Isley family owns at least 20% of NGVC, signifying strong insider ownership and involvement in the business. (VLGEA is also largely led/owned by one family -- the Sumas. I like to see this, especially with smaller businesses like NGVC and VLGEA.)

Thank you for sharing your NGVC page post! I am intrigued by NGVC and look forward to following the company and your research here. I'll try to add some more coordinated thoughts soon. Chuy's is another I'll take a deeper look at as time allows.

For me to invest in a company, it first must have a "story" that I can somewhat understand and have a strong belief that it can fulfill that "story".

I also resonate with your story/potential analysis method. I look at a business and try to grasp its long-term potential -- this approach seems to be especially close to David Gardner's investing style. I look for businesses that have capable management, and decent enough current financials (or financial prospects), to successfully propel the business toward its full potential.

The 10K and 10Q are not the most exciting reads, but thankfully there are many Foolish minds who know what to look for with particular businesses. Starting with simpler businesses, like restaurants and grocers, can be a great start to gain confidence reading and evaluating financial statements. This is another benefit to following businesses over time -- trends and significant items are more easily spotted as our understanding of a business increases.

Thanks again for your involvement on this board. Looking forward to many more discussions. Merry Christmas!

David K
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No. of Recommendations: 0
David,

I read your post on NGVC. One question to start off with: How did they have interest expense of $600,000 if they have no debt?

Thanks

Saul
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No. of Recommendations: 0
I am at work, so I will look into better tonight. What I think this is, is short-term debt vs. long-term debt. Or long-term debt that was paid off during the course of the year.

More to follow,

David
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No. of Recommendations: 4
I spent some more time researching NGVC last night and this morning. The high level of insider ownership -- from the Isely family -- and the family's longstanding commitment to the business are both major pluses in my book. The company is a strong conscious capitalist business, as evidenced by the company's five founding principles: http://www.naturalgrocers.com/store-info/our-founding-princi...

Sales and earnings are growing at impressive rates. Annual comparable store sales are increasing at over 11%, signifying robust rates of return customers and strong performance in established stores.

The primary item of concern that I see is the company's cash flow production. This year operating cash flow only slightly increased to $25.72 million from $25.2 million in 2012. Capital expenditures, meanwhile, were $39.71 million this year. In other words, the company's ambitious growth plans will require debt financing because the business is not presently producing enough cash flow to finance expansion.

Besides the cash flow situation, NGVC seems to be a solid business with an increasingly popular concept. I'm not sure the company's performance justifies a P/E around 90. Interestingly enough, the company is yet to open stores in California, Washington, or Pennsylvania -- the top three states in terms of organic food sales. There is certainly a tremendous opportunity for expansion. NGVC management sees potential for 1,100 stores in the U.S.; Whole Foods thinks it can open 1,200 (Whole Foods still has under 350 stores in the U.S.).

Looks like you got into NGVC at a great time, David. The valuation today scares me a bit, primarily because the company's operating cash flow is currently not enough to cover expansion. It is one I will be watching closely, though, because the company has a dedicated management team and a concept that has a lot of potential in the long run.

Thanks for sharing your page post -- look forward to following the business here going forward.

David K
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No. of Recommendations: 0
David K,

With the growth levels that NGVC has been able to turn in, I am not overly concerned with management taking on some debt. With no current long-term debt and today's very low interest rate environment, I think adding debt at reasonable rates (that begs the question, what is a reasonable rate of debt increase) would be beneficial.

The PE does concern me some and why I will not be buying new shares until the PE comes down (preferably by even stronger revenue increases), but if given the chance, I will be a buyer again.

David
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No. of Recommendations: 1
David, a pleasure to be on this board, and continue in the learning process.

fvh
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No. of Recommendations: 1
Dave

Your post # 6179 was stated very well....I joined Motley about a month ago and quickly stumbled into Pencils Palace...it's fortunate for me because this "Board" makes for some very informative reading....

Nick (foolflorida)
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No. of Recommendations: 0
Hi Nick,

I'm glad you joined the Fool and managed to find your way to Pencils Palace! It's great to have you hear and I hope the discussions continue to be informative for you and others. Look forward to interacting with you here going forward. Fool on!

Best,
David K
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No. of Recommendations: 0
Nick,

Welcome to Fooldom, I believe you have made a wise investment.

Care to share a little about yourself? What is your investing style? Favorite stock? Etc...

The Other David
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No. of Recommendations: 0
The Other David

I am retired...retired a few years ago after 29 years in federal law enforcement...worked in quite a few different cities but mainly Detroit and Miami...I am a big baseball fan...while working I never had the time to devote to baseball or trying to educate myself about investing...I just threw money into mutual funds and any attempt I made at stock picking always, or almost always, ended up badly.

I have read books over the years, written by Charles Schwab, Peter Lynch and John Templeton...those individuals and their books, I found to be interesting and informative; but, since subscribing to MF four (4) weeks ago, listening to videos from the Gardner's, recently produced videos from the lead MF analysts and reading many of the better "posts" on the MF boards which I follow I believe I have gained a valuable education and formed a more appropriate investment philosophy.

Since joining MF I have purchased shares of WPRT....AMBA....KMI....and EXETF...if there is a common thread between those diverse companies other than decent management, good products and/or services, and being recommended by various Motley Fool analysts.....its those companies seem to fit the best quotation, in my opinion, from Peter Lynch: "it's hard to get hurt if you fall out of a basement window."

My wife is an RN....as a result we socialize with several others (MD's and RN's)...which is why I have acquired shares, in the last 6 months, in ANGO and OXGN.....OXBT I have owned for decades and I will go to my grave with it....

I used to have a membership in American Association of Individual Investors (AAii). AAii is a good organization. I just didn't do anything with it; however, while reviewing some of their stock screens I came across PRGN and TSYS....I have owned them for years...I have taken a big hit with those two (2)...I have kept them and added to them...averaging down....as a result of watching a recently produced short video by a MF analyst concerning the Baltic Index and Greek Shippers in general....I have a much better understanding regarding realistic expectations, time horizon...etc. regarding PRGN....I have a sell point for both PRGN and TSYS...then I will add to some of the aforementioned, or some other Motely Fool recommended pick through Stock Advisor/Rule Breakers.....or because I am not a youngster anymore possibly GHL, OMI, NYCB....I am tracking these three (3)

I am glad I joined.

Respectfully,

Nick
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