Legend of Value Investing

How would you like $10,000 to turn into $5,388,000 over a 45 year span. If you had invested in famed value investor Walter Schloss's partnership from 1955 until 2000 when the partnership ended that is the type of results you would have been looking at. A disciple of the Ben Graham school of value investing, Walter Schloss fund had an average compounded return of 15.5 % a year vs the 10% return of the S&P. Walter Schloss is often overlooked but Warren Buffett has acknowledged the greatness of his fellow Ben Graham disciple and friend.

Here is an excerpt from an essay written by Mr. Buffett:

Walter has diversified enormously, owning well over 100 stocks currently. He knows how to identify securities that sell at considerably less than their value to a private owner. And that’s all he does. He doesn’t worry about whether it it’s January, he doesn’t worry about whether it’s Monday, he doesn’t worry about whether it’s an election year. He simply says, if a business is worth a dollar and I can buy it for 40 cents, something good may happen to me. And he does it over and over and over again.

He owns many more stocks than I do — and is far less interested in the underlying nature of the business;

I don’t seem to have very much influence on Walter. That’s one of his strengths; no one has much influence on him.

Stock Pick of the Week

If you have a teenage son or daughter you have probably shopped at Aeropostale (NYSE: ARO), the mall based retail store that markets and sale casual apparel and accessories to the 14 to 17 year old teenager. Aeropostale operates more than 900 stores in 49 States and Puerto Rico. They also operate roughly 50 stores in Canada.

Aeropostale has everything we like to see in a stock.It has a strong brand. It has a shareholder friendly management as seen by the $300 million share buy back,initiated in November 2010, that represents 13. 7% of Market Cap. Since 2003, Aeropostale has repurchased roughly $850 million shares outstanding. We also notice that Aeropostale has Return on Assets of 30.92 and Return on Equity of 51.65, which is highest among their direct teenage retail store competitors, American Eagle and Abercrombie.

We also show a forward Price Earning Ratio of 9.48 which means we are paying just $9.48 for $1 dollar of future earnings. The company has no debt on its balance sheet and about $240 million in cash. Based on conservative fair value DCF valuation, using 10% growth over the next 5 years, I have a a fair value price of 34.71. This represents a margin of safety of about 30%.

All in all this is a well managed company and the leader in the teenager apparel space. The company has strong financials and appears to be selling below its book value. I would buy about half now then wait for a pull back to buy the other half.

Phillip Fisher's 15 points to look for in a common stock.

Have been reading the investment classic "Common Stock and Uncommon Profit" by Phillip Fisher, who is actually known as a pioneer of growth investing. Warren Buffet has said on numerous occasions that he is 85% Benjamin Graham (known as the father of value investing) and 15% Phillip Fisher. In this book he talks about the 15 points investors should look for when deciding to buy a common stock an those are:

1) Does the company have products or services with sufficient market potential to make possible a sizeable increase in sales for at least several years?

2) Does the management have a determiantion to continue to develop products or processes that will still further increase total sales potential when growth potential of currently attractive product lines have largely been exploited?

3) How effective are the company's research and development efforts in relation to its size?

4) Does the company have above-average sales organization?

5) Does the company have a worthwhile profit margin?

6) What is the company doing to maintain or improve profit margin?

7) Does the company have outstanding labor or personnel relations?

8) Does the company have outstanding executive relations?

9) Does the management have depth of management?

10) How good are the companies cost analysis and accounting control?

11) Are ther other aspects of the business, somewhat peculiar to the industry involved, which will give the investor clues as to how outstanding the company may be in relation to its competitors?

12) Does company have a short range or long range outlook in regards to profit?

13) In the forseeable future will growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholders benefit from anticipated growth?

14) Does the management talk freely to investors about its affairs when things are going well but "clam up" when troubles and disappointment occur?

15) Does the company have management of unquestionable integrity?

These 15 points should be the start of your research when looking to buy into a companies stock and in the coming weeks, we will look to delve more into each one of these points.

Introduction

The greatest investors of all time have one commonality that set them apart from all other investors. That one thing is that they all adhere to the strategy of value investing. Value investing is the process of picking stocks in companies that are selling at a deep discount to what they are really worth ( known as intrinsic value). Value investing rewards investors for being patient and not falling victim to the the short term volatility of the market in order to capture the long term gains.