Archives for October 2012

Date The Plain Girl With The Good Job

October 10, 2012

 

You folks are never going to learn, are you? By “you folks” we mean the investing public, never ones to be dissuaded by a tight sweater or hair extensions. (Or for a corresponding example, an Xtreme Couture shirt and a neck tattoo.)

Our latest entrant in the irrational exuberance category, Chipotle Mexican Grill. The first few chapters of Chipotle history were a classic success story worth emulating. The company opened its 1st store in 1993, and opened its 2nd

  • 2 years later,
  • using the cash flow from the 1st.

Chipotle didn’t expand for the sake of expanding. It didn’t develop an appetite for franchise fees, saturating the market and abandoning quality control. It grew modestly, as you do.

There’s a common misconception that Chipotle originated as a brand of McDonald’s. Not quite. McDonald’s became a minority investor 3 years after that 2nd store opened, and within another 3 became Chipotle’s largest shareholder. With the resources of one of America’s healthiest corporations behind it, only then did Chipotle start growing exponentially and forever casting off its humble Denver origins.

And then, the initial public offering. January 2006, $42.40. Which is about where CMG stayed for the 1st year.

Look at the chart, which comprises CMG stock’s entire history. Notice anything unusual about it? Not that we encourage technical analysis over fundamental analysis here, but again, regard the chart.

It’s a fractal! The movement from inception through 2007 is a smaller version of the movement from the start of 2009 through April of this year (when the stock hit its zenith of $442.40.) We’ve already been on this ride before, the one where Chipotle loses ¾ of its value. This time around, the stock has lost only 35% of its value.

That includes a 7% drop in 5 minutes. The company has the Department of Labor assailing it from one side (for hiring illegals, or more precisely for hiring illegals while not being a union shop or a proud political contributor.) On the other side are venture capitalists selling off their institutional holdings. Unless you were prescient enough to have loaded up on Chipotle when it bottomed out the first time, which you weren’t, you’re probably looking to bail out.

Chipotle trades at 34 times earnings. It’s profitable, but not crazily so. What do we have here, fundamentally?

  • A company that provides what’s on one hand a necessity (sustenance), but on the other, a luxury. (We’re in a protracted recession, remember? You can make your own burritos, perhaps in less time than it takes to wait for one if your local Chipotle has an exceptionally busy lunch hour.)
  • A company with competitors that make an almost indistinguishable and indistinguishably priced product. (Qdoba, Moe’s Southwest Grill.)
  • The market leader, which isn’t necessarily a good thing:

Chipotle operates 1310 stores throughout the United States and Canada (and another half dozen in the United Kingdom and France.) Revenue is about $4700 per store, per day. Qdoba has half as many locations, Moe’s half of that, and Baja Fresh slightly fewer than that. The subject of our post can only sustain so much more growth.

Are there any barriers to entry? If you’ve got a) the phone number of a grocery wholesaler and b) a kitchen, you’re a potential Chipotle competitor.

Chipotle is a $9 billion company if you measure by market capitalization, what its stock is worth. It’s a $1 billion company if you measure by stockholder equity, the difference between accounting assets and liabilities. To us, that’s a company that’s overvalued by something approaching a factor of 9.

The food is better than Taco Bell’s. That’s not the point. This isn’t about winning consumer accolades. It’s about showing profitability and the potential for growth. Goofing on the food at McDonald’s is the go-to material for hack comedians everywhere, but In-N-Out didn’t turn a $5½ billion profit with a 20% margin last year.

Ask your average CMG stockholder which he thinks the stock will do first: hit $430 (a 50% jump), or $191.16 (a 50% reduction.) It’s obvious, isn’t it? We’re now at the point where mathematical inevitability will trump all the investor confidence in the world.

Believe it or not, we don’t follow the movements of 5000+ publicly traded securities every single day. We don’t even follow market sectors all that closely. But a $400 price tag for a seemingly unremarkable stock got our attention. Was that merely a function of the IPO, the company just originally deciding to have divided itself into a small number of shares in the first place? No. Did Chipotle figure out a way to dramatically reduce costs? (Unless you count hiring illegals, no. And the company’s habit of rounding checks to the nearest nickel doesn’t quite count as “dramatic”.)

Have you bought lunch at McKesson recently? Has Cardinal Health ever caught your eye with a wacky promotional and/or advertising campaign? The questions are rhetorical, but the balance sheets are hearteningly real. If you’re going to buy stocks, research like crazy and don’t lose sight of the goal – making money, rather than patronizing businesses you have an emotional affinity for. And if you have no clue how to get started, don’t just buy our book, but read the free e-book that accompanies it if you buy it on our site.

Filed Under: Bad Examples, Finance, Investments Tagged With:

Carnival of Wealth, Pre-Debate Edition

October 8, 2012

“It’s just a popularity contest.” “No kidding.”

 

And we’re back, regular as clockwork. Another compendium of the least average personal finance blog posts of the week, summarized and arranged for your reading pleasure and education. We call it the Carnival of Wealth, and it beats that unreadable and insipid Yakezie Carnival every day and twice on Mondays.

When inspired, we try to find an encompassing, somewhat universal theme for each week’s CoW. Not all of you are into college football or guns, so we have to broaden our purview a bit. Thus this week’s theme, the series of presidential debates that are somehow going to explain the candidates’ positions better than months of sound bites and ads (and years of endorsed and vetoed legislation) have.

Seriously, the debates are more a contest of the candidates’ ability to keep cool than anything else. For whatever reason, photogeneity and the appearance of confidence (whether said confidence even exists) have become prerequisites for the highest office in the land. Thus two visually appealing, resonant candidates. Hook noses and contralto squeals never had a chance.

The guy on the left, our left, won the first debate unambiguously. If you believe the polls, that changed a few people’s minds. If debate performance is the one criterion you use to determine your favorite between two candidates whom you otherwise consider indistinguishable, well…thanks for registering, we guess.

That introduction went absolutely nowhere and served no purpose, not unlike the debates themselves. Let’s start this thing:

The remarkable Dave at 6400 Personal Finance has earned top billing even when he doesn’t submit to the CoW. We picked this piece from his recent archives. He explains how a government can’t be expected to exercise fiscal discipline when the elected representatives who comprise it carry giant credit card balances and negative net worth of their own.

Sometimes (all the time) it seems as though the Internal Revenue Service goes out of its way to make the tax code as arcane as possible. The good news is that since Ron Paul didn’t win the Republican presidential nomination and, let’s be honest, probably won’t get the 50 million write-in votes he needs to win the presidency, the tax code promises to be even more complicated 4 years from now than it is today. Regardless of who’s in the White House. If you’ve heard stories about people winning cars or boats in raffles and then having to sell them because they couldn’t afford the taxes, never fear. Michael at Financial Ramblings explains that credit card rewards aren’t taxable income. But because they’re rebates, you have to deduct them from your income. Having this situation accounted for is a far more productive use of bureaucrats’ time than implementing a flat tax (and a basic standard deduction) would ever be.

Look who’s back! It’s the chairman emeritus of the Carnival of Wealth. Founder Shailesh Kumar at Value Stock Guide makes an all-too-infrequent appearance with his piece on The Boston Consulting Group Growth Share Matrix. What is it? Nothing less than the Grand Unified Theory of investing. What Stephen Hawking has attempted to do for the universe, The Boston Consulting Group has done for managing your portfolio. The Share Matrix is actually less complicated than you might think.

(Post rejected because it’s written for those who are “Looking for frugal eateries while traveling to Hyde Park in Chicago? We cover five such places.” Not only is it off-topic, anyone who uses the word “eateries” is a jackball.)

Oh, snap. Another “frugal” blog? With a green logo (you know, the color of money?) And big, boldfaced paragraph headings and a series of questions at the end of the post (Blogger 101)? John P. Schmoll at Frugal Rules enters the CoW with a post on how to roll your 401(k) over when you switch jobs. This post actually isn’t bad, although the news that 15 million people have left their 401(k)s with their old employers is. (Oh, and John? It’s “principles”, not “principals.” No worries. Here to help.)

The definitive authority on Canadian resource investing, Mich at Beating the Index, returns after a mysterious layoff. Maybe he was enjoying Canada’s 13 weeks of federally mandated vacation. No wait, that’s Denmark. Easy to confuse, they both have red-and-white flags. This week, Mich discusses exploration in that notorious hotbed of oil deposits…Trinidad & Tobago.

Didn’t know that Trinidad & Tobago was 7 miles north of Venezuela, did you? Nor that Trinidad & Tobago lowered the profit tax on petroleum this year. Mich met with the principals of a junior explorer that’s staked claims in that part of the world, and sees promise.

Free Money Finance is unapologetic about building wealth and wanting to build more. Which shouldn’t be noteworthy, except that for some reason lots of people feel guilt or ambivalence about doing so. If you don’t believe that, check out the commenters whom our contributor felt the need to clarify himself to. Everyone has certain advantages, the idea is to capitalize on whatever gifts you’re blessed with and have developed. Do that, spend less time emailing personal finance bloggers to tell them how unreasonable they’re being, and maybe you can be less of a failure too.

One of our favorite regular contributors, the erudite and hilarious PKamp3 at DQYDJ.net, found a subject that hits an even more sensitive nerve than usual:

We’ve spoken time and again on this site about what an utter waste of time and money a college education is unless you major in the hard sciences, math, applied science or finance. If you’re really committed to throwing your life away and being unproductive, you can keep collecting degrees (and debt) until you become a fully tenured professor in your useless discipline of choice. Like a certain political science professor at the City University of New York whom the New York Times gave some column inches to so he could ruminate on a rhetorical question too stupid for a site like Control Your Cash, “Is Algebra Necessary?”

He argues as follows:

  1. Math is hard.
  2. Studying it in high school makes kids drop out, or at least impacts their grades enough that they can’t qualify for college.
  3. So let’s drop algebra.

Hey, any high schooler who happened to read the professor’s opinion piece and is now reading this (you never know): if you’re too dumb to solve x + 3 = 7, learn to drive a bus. You’ll be more productive than if you’d squeezed into an undemanding college, and you won’t carry any long-term debt.

The professor says that the vast majority of students won’t need math in their careers. A) Bullcrap, and B), as PKamp3 put it:

(W)e should cancel physical education because most people sit at their desks.  Let’s cancel literature since most of us don’t read classics at work.  In fact, let’s cancel everything except lunch(.)

Herbert Hoover was the only engineer to serve as President, back in the ’20s. Since then it’s been a largely unbroken line of attorneys, most of whom couldn’t find a first-order derivative if their lives depended on it. No correlation, of course.

Speaking of unbroken lines, the lovely Liana Arnold at CardHub returns with a piece on organizations busted for credit card fraud. Liana doesn’t mean merchants slapping cardholders with unfair charges, she means card issuers that signed cardholders up for payment protection and other nonsense without the cardholders’ consent. The good news is that Discover, American Express et al. had to pay up. Was this straight-up fraud, or just misleading statements? Either way, read the agreement and save every email. (Also, Liana attempted a sports reference. Adorable!)

John Kiernan at the closely related Wallet Blog writes about the phenomenon of banks changing the ways they disclose terms and conditions. Pew Charitable Trusts, one of the biggest charitable funds in the world, recommended a simple and streamlined 1-page disclosure form for banks to use that will help accountholders answer variants on the question, “How much is this going to cost me?” Incredibly, many major banks adopted it. See, you folks using Bitcoins are missing out on the fun new transparent standard banking industry.

A couple of years ago, we tore an unreadable book to shreds. (Figuratively. We have Kindles.) The author and his army of relatives are persistent, however, sending us the occasional CoW entrant. So here’s Jack Thompson (regrettably not the former Bengals quarterback, or even the lunatic disbarred lawyer in Florida who loves to sue Howard Stern and video game manufacturers) of Becoming Your Own Bank. He writes about the wonders of…whole life insurance.

Whole life insurance is almost as big a waste of money as a humanities degree is. The author’s boss sells whole life insurance for a living. Do your research. Buy our book and don’t get screwed.

Harry Campbell at Your PF Pro backed away from last week’s ill-fated toe dip into Chipotle ordering strategy, and returns with a vengeance. This week, Harry discusses the nefarious tax called inflation. It hits all of us, and it hits the poor (i.e., people who have relatively more of their wealth in cash) particularly hard. Thus Harry recommends I Bonds, which include both a fixed rate and an “inflation” rate.  They protect against inflation, which the Federal Reserve says is currently negligible but which anyone who buys or sells anything knows isn’t. Harry’s post includes a smart, easily actionable strategy for buying I Bonds (when to, how much to etc.) that you can…(can’t use “take to the bank”, that’s too trite an idiom)…implement.

Darnell Brown at Excess Return (killer name for a site, by the way) is the guy holding his palm vertical and saying “Halt” when everyone else is telling you to buy gold. Darnell reminds us that precious metal prices aren’t wholly determined by supply and demand. (Thank you, central bankers!) If you’re set on buying gold or silver, listen to what Darnell says about the methods of doing so (bullion, exchange-traded funds etc.) before committing.

Big Cajun Man had an even bigger layoff than Shailesh Kumar, we think (have to check the records.) The former returns with a…oh wait, it’s a guest post by “journalistically trained” Miranda Marquit. Take it away, Miranda:

keyword keyword incredibly basic thought keyword SEO phrase link to sponsor keyword keyword pap keyword SEO phrase pablum keyword pabulum keyword keyword insultingly rudimentary advice keyword SEO phrase unnecessary adverb to keep the word count up keyword

Couldn’t have said it better ourselves.

Teacher Man guest posts at Young & Thrifty and asks if you should invest in a consumer electronics (mostly) company that’s trading 80% up from its 52-week nadir and that has a price-earnings ratio of about 15. Oh, and that’s sitting on more cash than most national governments.

Carlos Sera of Financial Tales loves to write. Paragraph after paragraph of unedited prose that, with some distillation, can get to a valuable and important point. Bring your favorite caffeinated beverage and plow your way through his post on risk, reward, and the Mar ratio. Again, there’s something worthwhile in this post, it just takes forever to get there. That’s why we saved it for last.

And we’re done. New blog posts every Wednesday and Friday. New CoW every Monday. Anti-Tips of the Day, daily. Investopedia too. Take care.

Filed Under: Carnivals Tagged With:

An Actual Financial Misstep

October 5, 2012

Some personal finance blogs (and by “some” we mean “all but these“) are nothing but chronicles of the authors’ bad financial decisions. Fortunately for them, they’ll never run out of material. Unfortunately for them, they’ll never get out of debt and don’t really want to. Meanwhile, we sit here from our relatively affluent perch, laughing at their foolishness and patting ourselves on the back for being so savvy.

We’re not perfect, it only seems that way. Case in point, last week we went to the Capital Grille. What a mistake.

If you’re unfamiliar, Capital Grille is one of those chain restaurants whose each location makes an effort to have you believe it’s not a chain restaurant. It’s an upscale steak joint, but not so upscale that they’ll turn you away for wearing shorts. The hostess wears a formal pantsuit, there’s a guy in a blazer who stands next to her and wears an earpiece, and everything is cherrywood and superfluous cutlery. But Capital Grille is still a subsidiary of the same company that owns Olive Garden and Red Lobster.

Maybe once or twice a year, your hosts splurge and eat somewhere expensive, and even that’s too many. The only reasons we went to the Capital Grille this particular night were a) we were going to be in its neighborhood anyway and b) American Express had sent us a $50 no-strings-attached gift card. That we used it makes us the betting favorites for next month’s RoTM award.

The rationale went something like this. “$50, that’s $25 apiece. How much more than that can an entrée be? We’ll end up enjoying a fancy steak dinner for like $10 each.”

Two steaks, a salad for one of us, and two shareable side dishes (green beans and pommes frites, and good God that’s a pretentious way of saying french fries.) Neither of us drink. So…total with tax and tip, including the discount?

$112. 

Not to go Trent Hamm on you, but we felt dirty. We could have had more fulfilling, more flavorful and healthier burritos at Qdoba for $7 apiece, and would have if we had the night to live over again. Our distaff half even said afterwards, “This is stupid. Let’s never do this again.”

Thank God our tastes are normally cheap. That Qdoba date is next on our list, assuming we can take enough time away from buying our groceries at Winco and flying coach to do so. However, we have plenty of friends – you probably have a couple too – who spend money like this as a matter of course. Maybe not on overpriced food, but on overpriced alcohol or overpriced mood alterers or vehicle rustproofing or something.

Our evening made us wonder if people really enjoy fancy dining, or if it’s just a rite that people adhere to unthinkingly. Most of our fellow diners appeared to be on business. A couple groups of 12, one group of 20, all obviously from overseas and all probably enjoying expense accounts. Plus they were visiting a city where financial recklessness is practically a requisite for entering.

Again, opportunity cost. That $112 could have gone to countless better places. We’re not agonizing over this; we can afford to drop $112 in a night and not worry about how we’re going to pay the power bill. But it’s just such a freaking waste. For an experience that lasted about 45 minutes, and that required us to wear clothes significantly less comfortable than what we usually wear.

The moral? Spend $112 on a hotel room if you know it’s going to be much more comfortable and cleaner than the $40 fleabag palace across town. Spend $112 on music, books or ski equipment that you know you’ll enjoy over and over again, as opposed to going without them. But $112 to keep yourself nourished for a few more hours, when you could do so for far less? Lunacy.

A dumb and/or rationalizing person would say “Hey, you only live once” and add the $112 to his credit card balance. (Oh, who are we kidding? His bill would be closer to $200 with wine and maybe dessert.) Then he’d try to win it back at the tables, fail, and go to the “Hey, you only live once” defense again. Vegas, baby. Meanwhile, your authors will think nothing of spending thousands of dollars a month on a property manager to save us the trouble of having to deal with our rental housing tenants. We value our time.

If you’re not spending money to improve your life, to make your life easier, to free up time, or to get a greater return in the future, what the hell are you spending money for? Us squandering $112 was no different than that kook at The Simple Dollar blowing 5 hours making his own Pop-Tarts and toothpaste. Time is indeed money. Worst of all, the food wasn’t even that great. The steaks sat in our intestines like lead. Vegetables are meant to be blanched, not smothered in grease and heavy sauces. Steak belongs on a list with movies, Radiohead, nightclubs, New Year’s Eve, Derek Jeter, Shakespeare and kids as the most overrated things in the universe.

Filed Under: Bad Examples Tagged With: , , , ,
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