Here’s a new homework submitted by a reader who needed some help with the Big Five Numbers and Moat. Read on:
I bought this stock CLZR for my
son, Shane, because a client at Bellagio suggested it. This was before
I met you. Okay, now I know it was gambling! But, it’s going up. I
bought it at 9.37 and it’s over 14 now. I own 55 shares. So now I’m
backtracking and putting it to your test, so here goes:
Meaning: Yes, I come from a spa and beauty background. Candela makes dermatology lasers for cosmetic and medical use.
Moat: Brand. Candela is known for establishing aesthetic
lasers 17 years ago. They are an industry leader
with the most advanced laser system.
Trade Secrets: Candela is the innovator of the PDL Platform
(3 new models), Patented DCD(TM) cooling device, Patented Dual-mode
filtering technology makes it safer.
Toll Bridge: New system cleared by FDA.
Switching: One machine has multi uses. Products are backed
up by Candela technical service and support, so switching would not be
Low price: Low price dominators? Not sure.
ROIC: is 20% (good)
Equity growth rate: help!! where is it?
EPS growth rate: 10
year average I got -40.30 (bad) On investools, do I use the numbers
from the first set of #’s or the historical ratio summary?
Sales Growth rate: 18.60
growth rate: okay, this is one of my biggest problems, I just don’t
know where to go to find stuff! I need a cheat sheet to tell me where
to find everything!
MOS: Investools doesn’t provide the sticker price, says not enough info.
Mgmt: Owner has a BAG. CEO upholds long term
reputation for technology, innovation, customer service, and support.
I think the support is huge. Designing a product and selling it is
one thing, but coming from the spa business, the vendors that stay
alive are the ones that constantly train, support, and follow up. They
have a presence, not just a product.
you can help me to understand what sell signals to look for, that would
be great too, because I already have real money in this one!
Here’s what I told Diane in an email:
Hi Diane,CLZR: Candela. Let’s take it step by step:1. Meaning: You seem to like the spa business. It’s important that
you connect personally with the product, too. You don’t have to tell
us if you are into laser hair removal but you should know that it’s a
great product. Best of class. Personally I haven’t been there. 😉2. Moat: You aren’t using the various Moats properly. Nice try
though. Each of the five types of Moat defines a kind of monopoly
position. Very few businesses have more than one, if that. CLZR may
have a secrets moat, but patents can be easily gotten around. You’d
have to know that no one can reproduce what they do easily. They do
not have a Toll Bridge Moat – a Toll Moat means that you can’t get
laser treatment without them, just like you can’t get power in San
Francisco without PG&E. A Switch Moat means that it is very
painful to switch from this product to another one. While it may be
painful for the client to experience the product, I doubt that it
causes much discomfort to the Spa Surgeon just to get a different laser
to remove the hair or whatever. Probably this is a Brand moat of some
sort, if there is a moat at all. Better dig in here, Diane.3. Management: you are looking for an honest, driven,
owner-oriented CEO. One who will use the surplus capital in the
owner’s best interest. And one with a BAG. I sort of see the BAG, but
any evidence of the owner-orientation in his letters to shareholders or
articles in trade mags? Short of that, a high ROIC is evidence of
owner-orientation to a degree.4. MOS: Here’s where you had real trouble. On Investools under
Fundamentals, click on Balance Sheet. You’ll see ten years of equity
- First see if the numbers go up every year. You’ll notice
they do not. They bounce around, but in a generally upward direction.
Not great but okay.
- Now do the rule of 72 on the numbers, especially
the last 4 or 5 years. My quick look shows me a business that isn’t
completely predictable that is growing equity at roughly 20% or so.
- A look at EPS mostly confirms the lack of consistency until
very recently… From this, I would immediately consign this one to my
Risky Biz portfolio if I was still interested.
- Next I’d do a quick and
dirty valuation by clicking on the Valuation tool. Note that there is
no analyst estimated growth rate. That happens when the business is so
small that it isn’t covered. That isn’t a bad thing, but it does mean
that we better know what we’re doing and make extra sure we’re dealing
with a predictable business… which we sort of are not in this case.
But let’s plunge on anyway and see what we get.
- I plug in 20% for
growth rate, 15% for my discount rate (AKA the minimum acceptable rate
of return) and 40 for the PE (2X the growth rate) and click calculate.
I get $18. It’s selling for $17. So this one is at the Sticker.Since you got in with a very nice MOS (accidentally I might add) you
are looking pretty darn good. And since this thing is at the Sticker,
what should you do now? Two choices.
- Get out and stay out until
this goes down 20% below sticker (and meantime get to know the business
well enough to know if you’d like to own this as your sole possession
for the next 100 years).
- Continue to play this thing as a pure
technical investment, using the arrows to get in and out … but know
that you are not investing anymore, you are speculating on pure
I’d do number one if it was my money.
Now go play!
Phil Town is an investment advisor, hedge fund manager, 3x NY Times Best-Selling Author, ex-Grand Canyon river guide, and former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence.