October Homework

Malcolm Myles on

Hi All,

Given the events of the Election and Sandy slamming the financial capital of the world, it isn't surprising to me that no one has done their Homework Assignment: review a companies earnings report.

I am also suspicious that many of you may be like me - why? I mean, there are hundreds of well meaning people out there that are reporting the numbers, giving there sincerest analysis of events and future prognostications, and, of course, wrapping it all in a package of iron clad disclaimers. Shouldn't we just look at five or six blogs and then KNOW the report? I admit, I have read reports in the past, but with the 24/7 WWW coverage, I have gotten out of the habit.

So, after thought and lots of caffeine, my homework assignment.

I like Fastenal. I like the way the numbers look - they are running an efficient company, using their cash effectively, have little or no debt, and are paying a nice dividend. Please go look at Morningstar, Schwab, the Street, Yahoo, Google, or a dozen other sites where the search engines have pulled the numbers from the report and put them into a blog format for your review.

The one caveat that everyone is picking up on is the PE. Its higher than Fastenal's peer group and the market- people like the company and are interested in keeping it (more investors than traders right now). The price per share is rich.

Fastenal is what I call a Canary Stock. It is an indicator of the economy much like railroads, ups, and GE. If the company is doing well with sales of their product (fasteners of all make and type) then that means construction and fabrication are doing well - stuff is being assembled, constructed and manufactured with fasteners. Right now, FAST is selling lots of screws, bolts, rivets, anchor bolts and grommets. In one years time, I expect them to still be doing the same thing. And in five years time, ditto.

Which answers the one question everyone should ask themselves about investing in a company - Can this company go bankrupt? For Fastenal, NO. It would be a horrendous series of events to take this company out.

On a technical slant - I read that the chart is showing a strong inverted head and shoulders with an extended shoulder (assume it is the right shoulder) that is bucking the trend of going higher to complete... the arm? I get it, but it was funny to read... I think the chart shows there are about as many buyers as there are sellers - the stock is trading in a narrow range over the last month or so of 42-45. And if you agree with anyone who tells you where the price will be tomorrow, next week, next month, next year; you'll both be wrong.

Then, Is this the best place for me to put my money for the highest return? No. You can always find a better investment, cheaper, riskier, higher gains, yadda yadda yadda. But you could do a lot worse than Fastenal. And I sleep at night knowing that this portion of my portfolio is turning out dollars like an atomic clock.

Okay, fine. Why should I buy this great company at a rich stock price? Don't. No disclaimer. Just back away and wait for a dip in the market that takes all boats down with it including FAST. Then, when you are comfortable with the price, buy. No disclaimer. I'd like to buy at $6 or $7 per share, but that storm would mean we're all trying to figure out survival rather than investments. I like an entry price around... Hey, do your own work you lazy... Okay, okay, below 36-38 range. No disclaimer. No real reason either except that it will bring the PE down to a more realistic entry cost. At 36, the dividend becomes a healthier percentage. 36 is a realistic low point to revisit (52 wk low 37.61). [editor's note: I use NAIC SSG to do my fundamental analysis; I use my cerebral cortex-gastronemous link to get a feel for the company]. And, you make more money when you buy quality companies at reasonable prices and sell when highly valued... not the other way around which is normal for the retail investor. We're at or near a high in the Market and there are a lot of clouds off shore and no one prepping for the storm at home.

Disclaimer: I plan on using cash secured puts (CSP) to re-establish my position in FAST after being called away for tax purposes. I'm looking to sell CSPs that will deliver as close to a 38 purchase price. I've work to do as my deep understanding of CSP (strikes, pricing, greeks, etc) is rather shallow. I won't loose money while I continue my education - period. (Pundits will say that I won't earn money either... why yes you're right... but I can stand to not loose money all day long).

I think I'll go visit my local Fastenal store and take a little pride in ownership... an find a bag of 10mm Stainless Steel, 32 F phillips head sheet metal screws for my green house project.

Malcolm

Dan Hess on

Malcolm

I also sold some FAST when it became quite overbought but retained quite a few shares that I view as a desirable full position. I have owned FAST for many years and view the company as extremely well managed in a cyclical growth business area. I view it as a core stock.

I agree with you the likelihood of FAST going broke is quite small given their zero long term debt and an ongoing sound business model. Should another recession or depression hit they will be affected but I think they would survive.

I also view FAST as a stock that is a good "Canary" indicator of the economy. They provide fasteners and other products to a broad range of industries and thus their results tend to provide an indication of the US economy. The recent indications the housing market may be near a bottom and future growth would bode well for FAST as builder need fasteners of various types.

Yes the PE Ratio is high and has been high historically. I attribute this to being in a business that delivers double digit net profit margins selling fasteners and other small items, their lack of any long term debt and being recognized as a very well managed growth company despite being in a cyclical industry.

You may also have noticed the FAST stock price had a nice up move on 10/31 the day the stock exchange opened after Sandy. This seemed to be in recognition of increased sales from the rebuilding effort Sandy will provide.

My fundamental analysis indicates FAST to be a buy below 36 and a sell above 58.

As you probably know FAST reports their sales results on the third business day in the month when they are not reporting quarterly earnings. This means that from an options viewpoint there may not only be news to impact the stock price when new quarterly earnings are reported but also on the third business day of other months. I suspect Paul may urge caution on using stock options on such a stock due to this.

Today FAST reported sales results for October. Sales reported showed an increase of 6.8%. Adjusting for currency (stronger US $) the sales increase was 6.6%. Mgmt reported sales were negatively impacted by 1.5% due to Sandy in October. So an adjusted gain would seem to be 8.1%. While this sounds pretty good in this slow economy, FAST sales have increased at slightly over 12% per month for the last 12 months. So this 8.1% number seems to stand out as either something related to FAST execution or a slowing economy. I have been unable to determine the cause of this slow down in sales growth but I do view it important to understand.

Since the large stock price decline in 2Q12, the stock price has been treading water within a range of 41 to 47. I do note FAST had a Candlestick Engulfing Bear pattern on 11/2 (along with the late market decline on 11/2) that suggests some short term lower prices. I admit I can not see the head and shoulders pattern you note although I rarely use that pattern. The FAST PnF chart is close to providing a bearish signal should the price decline further. In net I do not see any reason to buy or sell FAST based upon the technical signals.

I also am leery of the stock market decline continuing that will carry most all stocks lower. So I agree with your approach to do nothing but await better buying opportunities.

Dan

On 11/5/2012 12:39 PM, Malcolm Myles wrote:

Hi All,

Given the events of the Election and Sandy slamming the financial capital of the world, it isn't surprising to me that no one has done their Homework Assignment: review a companies earnings report.

I am also suspicious that many of you may be like me - why? I mean, there are hundreds of well meaning people out there that are reporting the numbers, giving there sincerest analysis of events and future prognostications, and, of course, wrapping it all in a package of iron clad disclaimers. Shouldn't we just look at five or six blogs and then KNOW the report? I admit, I have read reports in the past, but with the 24/7 WWW coverage, I have gotten out of the habit.

So, after thought and lots of caffeine, my homework assignment.

I like Fastenal. I like the way the numbers look - they are running an efficient company, using their cash effectively, have little or no debt, and are paying a nice dividend. Please go look at Morningstar, Schwab, the Street, Yahoo, Google, or a dozen other sites where the search engines have pulled the numbers from the report and put them into a blog format for your review.

The one caveat that everyone is picking up on is the PE. Its higher than Fastenal's peer group and the market- people like the company and are interested in keeping it (more investors than traders right now). The price per share is rich.

Fastenal is what I call a Canary Stock. It is an indicator of the economy much like railroads, ups, and GE. If the company is doing well with sales of their product (fasteners of all make and type) then that means construction and fabrication are doing well - stuff is being assembled, constructed and manufactured with fasteners. Right now, FAST is selling lots of screws, bolts, rivets, anchor bolts and grommets. In one years time, I expect them to still be doing the same thing. And in five years time, ditto.

Which answers the one question everyone should ask themselves about investing in a company - Can this company go bankrupt? For Fastenal, NO. It would be a horrendous series of events to take this company out.

On a technical slant - I read that the chart is showing a strong inverted head and shoulders with an extended shoulder (assume it is the right shoulder) that is bucking the trend of going higher to complete... the arm? I get it, but it was funny to read... I think the chart shows there are about as many buyers as there are sellers - the stock is trading in a narrow range over the last month or so of 42-45. And if you agree with anyone who tells you where the price will be tomorrow, next week, next month, next year; you'll both be wrong.

Then, Is this the best place for me to put my money for the highest return? No. You can always find a better investment, cheaper, riskier, higher gains, yadda yadda yadda. But you could do a lot worse than Fastenal. And I sleep at night knowing that this portion of my portfolio is turning out dollars like an atomic clock.

Okay, fine. Why should I buy this great company at a rich stock price? Don't. No disclaimer. Just back away and wait for a dip in the market that takes all boats down with it including FAST. Then, when you are comfortable with the price, buy. No disclaimer. I'd like to buy at $6 or $7 per share, but that storm would mean we're all trying to figure out survival rather than investments. I like an entry price around... Hey, do your own work you lazy... Okay, okay, below 36-38 range. No disclaimer. No real reason either except that it will bring the PE down to a more realistic entry cost. At 36, the dividend becomes a healthier percentage. 36 is a realistic low point to revisit (52 wk low 37.61). [editor's note: I use NAIC SSG to do my fundamental analysis; I use my cerebral cortex-gastronemous link to get a feel for the company]. And, you make more money when you buy quality companies at reasonable prices and sell when highly valued... not the other way around which is normal for the retail investor. We're at or near a high in the Market and there are a lot of clouds off shore and no one prepping for the storm at home.

Disclaimer: I plan on using cash secured puts (CSP) to re-establish my position in FAST after being called away for tax purposes. I'm looking to sell CSPs that will deliver as close to a 38 purchase price. I've work to do as my deep understanding of CSP (strikes, pricing, greeks, etc) is rather shallow. I won't loose money while I continue my education - period. (Pundits will say that I won't earn money either... why yes you're right... but I can stand to not loose money all day long).

I think I'll go visit my local Fastenal store and take a little pride in ownership... an find a bag of 10mm Stainless Steel, 32 F phillips head sheet metal screws for my green house project.

Malcolm

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