Hey Friends. I hope this weekend’s post finds you doing well! Today, we will do something unusual, namely speak of a specific stock but it is for a specific reason. It is the stock that was identified by my investing approach and included in my book, “Choose Stocks Wisely.”
My book was published in late 2013. In the book, I shared my personal investing approach I had used for years to identify healthy businesses trading at potentially low prices. Further, my approach was shared by illustrating first the filtering process used to screen for deep value companies as defined primarily by balance sheet metrics, and secondly the analysis applied to potential investment candidates revealed by the screener. Analysis was illustrated using my Adjusted Floor Scorecard to examine for financial health and a low price. My approach at the time of book release revealed Rocky Brands, Inc. (RCKY) as a potentially attractive deep value at $11.75 a share or lower.
RCKY had earlier in 2013 initiated a quarterly cash dividend of .10 per quarter and it has paid quarterly dividends until the present with the dividend currently at .14 per quarter. At the time my book was released, RCKY was trading around 14 a share and thus not as deep a value as my approach sought. That’s not to say it wasn’t a good deal at 14 a share. Based on today’s share price, one would have loved to acquire it at 14 back then. However, my approach would not have led to a buy at 14.
I like to get a lot of value for the money — sometimes you miss out altogether. However, in RCKY’s case, it finally got below the adjusted floor price and presented regular opportunities to buy at or below the Scorecard price from October of 2015 through the summer of 2017.
Fast forward — it has retreated some from its high of 69 per share achieved last week on May 6 to close today just below 56 a share. From a low of below 10 (well below the adjusted floor price at that time) a share during October 2016 to a high of 69 a week ago, RCKY turned out to be quite the performer.
My book pointed out that earnings drive stock prices but don’t define a low stock price. A low price starts with proper analysis of the balance sheet. You want a profitable business but the price is unlikely to be bottoming if earnings are growing. So, a profitable business with reason to believe the business could see future growth is an ideal find if the balance sheet equity substantively supports the price you will pay. My method seeks to find such a price. RCKY moved up and down several dollars from the time my book was published until around spring of 2018. Earnings started to pick up then and the share price blasted forward to about 34 a share by September of 2019. During the COVID crash of early 2020, RCKY pulled back deeply like most companies and dipped to about 15 a share then. But earnings growth has continued and at an increasing rate.
So, RCKY proved to be a winner — a stock with a valuable business as defined by the balance sheet and selling for an extended period of time at a significant discount to the balance sheet equity. Now, it trades at multiples of its equity position as earnings growth has put the company on the radar screen of the stock market.
I’ll not address the “sell” issue as it continues to be the abstract (where is high?). If one bought RCKY at or near the Scorecard number, he or she sure would be selling high now in terms of the return achieved whether it continues higher or not.
As you know, all stock stories aren’t the story of Rocky Brands, But, since it was the company highlighted by my book, I thought it was a worthy topic for this blog post.
On an aside, we heard earlier this week about inflation showing up big-time in the data. Yesterday the Fed tried to allay fears about inflation and the market was up big today (Friday, May 14). But as a dear friend just shared (via an article) with me, one would wonder what other choice does the Fed have than to try and allay fear? If it postures itself that it is concerned over the inflation data in terms of what could be ahead, the fear witnessed in the markets earlier this week would likely be minuscule to the damage in market values we would see.
With investing, never forget the import of the balance sheet dear friends. See you next time.
You have outlined a very good set of financial metrics for identifying promising companies based on value associated with balance sheet data. Rocky brands is a very good illustration of how and why your investment strategy is likely to work long term. There is an emotional component to investment that can at times intrude on staying with a position long enough to realize good return. Some who say RCKY go up and then recede after COVID-19 might have become discouraged and left the stock. Those who re-evaluated at that point might have increased their holdings. One of the more difficult, long term aspects to investing is knowing how to manage a winning hand. Right now the market is significantly over heated and those who invested in quality stocks since 2009:have few losses and outstanding gains in their portfolio. It is at such a time you need to think about taking some money off the table, building a cash/near cash position and maintaining the asset mix you agreed to when you started investing (whether it’s 30, 40, 50% cash/near cash). However in doing so, you will pay taxes if the positions are in a trading account. If those positions are in a qualified IRA then there are no tax consequences for unloading positions. So when maintaining cash/near cash balances I look at the IRA accounts first. One thorny issue now is how to get the most out of the higher cash/near cash positions. For the last 5 years I’ve been using BRKB as a proxy for cash given their heavy cash position and strong insurance operations. However, their stock price has also become frothy. We are in uncharted territory in terms of Fed policy with that agency becoming politicized since 2008. A cash will occur sometime in the not too distant future – housing prices on a cost per square foot basis are just as high as in 2007, price/earnings are at levels not seen since just before 2008, and once again companies with high, negative price/earnings are trading at prices higher than $100/share. So what’s my question? Well it’s a question and a worry, if we get massive inflation, coupled with a crash (similar to 1978-79) what happens to the value of our currency? Has the Fed really lost control of the money supply (is the Bitcoin bubble trying tell us something)? If so, what should you be doing with your cash position? Buying Gold coins is an inefficient hedge, however as someone who held a few gold coins in 1977 found out — the coins produced gains that could be used to buy other assets at very low prices. Publicly traded gold mining companies do not appear to be any more attractive than gold coins. But gold coins are difficult to own because of grading differences. The gold etfs give you exposure to gold, but they may also include companies that are expensive relative to value. So, given today’s financial landscape what makes sense?
Andrew, thank you for that very well stated commentary. You said a lot of important things in an efficient manner. And I concur from top to bottom. And to the last few words you wrote, “what makes sense?” — I think you pose THE question of our time. Who has the answer or even a good notion? I’ve pondered this too and admit to falling short of any kind of answer I hold with confidence. How could Bitcoin and Dogecoin achieve such demand levels when cryptocurrencies are so poorly understood unless there is more than a passing concern about the future of our currency? That is, can what appears to be an irrational demand for bitcoin be explained by a reasonable concern over the sustainability of currency as we’ve known it? I think the answer is likely affirmative. If we are on the precipice of a dire financial event, I can’t fathom anything other than tangible assets holding value. What that would ultimately look like, I don’t know if we can’t define a liquid definition for value.
Thanks again for that very useful comment.