One of the good things about the Big Moat concept of investing is that once you do your research on a company, running the numbers and executing buy/sell orders using the tools takes a lot of the “thinking” out of investing. I imagine this is why Big Moat investing appeals to a lot of people who might not have traded in the stock market before or to people who may have not done so well with their investing in the past. The Big Moat concept works especially well in the minds of new investors when their first few trades go well, some people may even get the feeling that they can’t lose, and that’s a great feeling.
The problem arises when the first loss does roll around, and it will. There’s just no avoiding it. Hopefully it won’t be a big loss or, lord forbid, a overnight gap down like we saw with Chico’s as few weeks back. This one losing trade may be enough for many people to take all of their money out of the market and throw their hands up and scream that it doesn’t work. So what do you do to avoid this happening to you? In a post today, Brett Steenbarger offers a solution that is simple in its concept but will be difficult to actually follow. If his idea is something you can instill in yourself, it will allow you to become a better investor. His concept is to accept that you will lose money on the trade you’re about to execute. By making the loss the expected event, a winning trade will have much more significance which is the way it should be. If you’re expecting the loss and the trade is in fact a loss, then you got what you expected - no harm/no foul, just move on to the next trade when the tools show its time to buy.
Fastenal has several executives who have been with the company for quite some time and have been promoted from within. The Chairman of the Board, Robert Kierlin, is the founder of the company. This is all very positive for investors because having management with this type of history with the company lends itself to having their interests aligned with the shareholders interests.
Executive compensation for Fastenal management is actually lower than a lot of its competitors. The history has shown that Fastenal has always had one of the lowest CEO salaries for quite some time. In 2004, Kierlin’s bonus as CEO was dropped from $121,500 to $71,214 even though the stock price was up more than $17 from the start of 2003.
The one thing I couldn’t find when doing my research is what big-moat likes to call the “Big Audacious Goal” (BAG) of Fastenal. The CEO references their commitment to improve the customer’s experience but this is the goal of every company in this industry. To sustain the growth they have had in the past and to take market share from competitors, I want to see something different than what everyone else is doing.
Continue reading ‘The 4 M’s of Fastenal: Management’
Last week was interesting in that I was sitting in a tire store to have a tire replaced on my car and I met someone who had an interesting rags to riches story. He was a general contractor who ended up broke and lost his homebuilding business because he couldn’t pay his creditors. Once this happened, many banks wouldn’t even open a checking account for him so he opened an account with an online broker with checkwriting privileges. After opening this account he started researching stock trading and purchasing options. After paper trading for six months, he began trading options. He’s now in his 40’s, semi-retired and was in the tire store to have new tires put on his car that he was giving to a single mother.
The most interesting thing from our conversation is the very first thing he told me when I asked him what strategy he used. His response was, “the trend is your friend“.
Apparently professional investors don’t remember this rule all the time either as this article from TheStreet.com points out. It says:
…MotherRock, a two-year-old fund that once had nearly $450 million in assets, shut its doors in late July after losing nearly half of its value. Led by former New York Mercantile Exchange President J. Robert “Bo” Collins, MotherRock also bet wrong on natural gas prices.
…MotherRock got caught betting that natural gas would fall at a time that the commodity was soaring to new heights. The irony is that if MotherRock could have held on for another few months, it might have recovered much of its losses.
Fastenal’s Numbers (click image for full size)
In the previous post on Fastenal, I listed some of the reasons why Fastenal has a moat and would continue to be a good Big Moat candidate. Fastenal’s Big 5 numbers are shown in the image above and they seem to confirm the moat that Fastenal holds. The only blips have been in Cash Flow which is not a big surprise given the amount of money Fastenal uses to grow the company. They are a company that invests in its own future and the numbers other than cash flow show the success they’ve had.
If you’re interested to see how I’ve put together the Big Moat stock Lists, download this sample to see how the lists are displayed.
You can purchase the complete list of Big Moat stocks by visiting this page.
In his 2005 letter to the shareholders of Berkshire Hathaway, Warren Buffett states the following about calculating growth rates:
When growth rates are under discussion, it will pay you to be suspicious as to why the beginning and terminal years have been selected. If either year was aberrational, any calculation of growth will be distorted. In particular, a base year in which earnings were poor can produce a breathtaking, but meaningless, growth rate.
When performing Big Moat calculations it is always worth taking second look at the results for the year on which you are basing your calculations. If the starting or ending year you select is grossly out of line with the preceeding and/or following years, your calculations will have little meaning and this could result in a false margin of safety for the stock you’re analyzing.
The new version of Yahoo Finance Charts are available and they sure are pretty!
With this version you can set up the Moving Average, MACD, and Slow Stochastics exactly as defined in the Big Moat book. Best of all is that all three can be available on one screen which was not the case with MSN charts. Another big reason to switch is because the charts work in Firefox so you aren’t limited to Internet Explorer as with the MSN charts. If you aren’t using Firefox, well you should be using Firefox.
A recent article on Fool.com points out that Chico’s may be a good value in the near future. The author makes some good points.
Chico’s warned about upcoming quarters, with one notable nugget being the expectation that August’s same-store sales will be negative for the first time in nine — count ‘em — nine years.
The history of the stock has been very good but investors and the fashion industry don’t really care about yesterday. I’d still wait for the trend to turn around before considering this as a Big Moat choice.
Fastenal is one company where the Moat is not a question. They have repeatedly shown that they are here to stay and have been doing what is necessary to maintain their position as a leader in the MRO industry. Below are some brief highlights of why Fastenal has such a strong moat.
Brand: Fastenal is known as one of the big competitors in their industry and sometimes they are lumped in with Home Depot, Lowes and other home improvement companies because of the retail side of their business. They also do a huge amount of wholesale business where they compete with Grainger, Hagemeyer, MSC Industrial, Graybar and a few others. The MRO industry is very fragmented but Fastenal has continually remained a well known brand and they have the sales to back it up.
History: Existing customer relationships are very low cost for both Fastenal and their customers. The buying power of Fastenal means that competitors can’t compete with them on price. That means that for a competitor to take away a customer from Fastenal, they will have to provide better service. The cost in changing processes to implement a new supplier is often very prohibitive for the customer which makes sticking with Fastenal a very attractive option.
Wide Customer Base: With 1800+ stores worldwide and thriving retail and wholesale business, Fastenal has a very large customer base. Smaller customers pay higher margins on products while larger customers buy in volume. Both big and small customers have predictable purchasing intervals which allows Fastenal to better manage their own purchasing and inventory.
Distribution and Logistics: For many companies in this industry, inventory management and distribution can be the Achilles Heel. Fastenal has 12 main distribution centers and a truck fleet to deliver inventory to stores as needed. By having a hub and spoke setup, inventory and distribution challenges are kept under control and more easily managed.
In a future post, we’ll examine the Big 5 numbers to see if they back up the moat.
The Cheesecake Factory is a favorite among people looking for Big Moat companies, probably due to the frequency that it is used as an example in the book. The company has said that they have received a delisting notice from NASDAQ for failure to file their quarterly report on time. The late filing is due to issues surrounding stock option grants.
Cheesecake Factory Gets Delisting Notice
