Tag: 10 bagger

Company Name:  Bally Technologies Inc	Stock Symbol:  BYI	Industry:  Gaming
Percent Appreciation:  7,800%	Number of Bags:  78	Holding Period: 14 Years
Entry Date & Price:  October, 2000 @$1.00 share	Exit Date & Price: August,2014 Takeover @ $83.30	Original Investment($10,000): $780,000

Company Description: Bally Technologies, Inc. is a diversified, worldwide gaming company that innovates, designs, manufactures, operates, and distributes advanced technology-based gaming devices and systems, as well as interactive and mobile solutions.  As a global gaming-systems provider, we offer technology solutions which provide gaming operators with a wide range of marketing, data management and analysis, accounting, player tracking, security, and other software applications and tools to more effectively manage their operations.  Our primary hardware technologies include spinning-reel and video gaming devices, specialty gaming devices and wide-area progressive systems for traditional land-based, riverboat, and Native American casinos, video lottery and central determination markets, and specialized system-based hardware products.

Quick Trading Overview & Objective: While Bally Technology’s stock price has appreciated only a little over 300% since first going public in 1982, we will begin our analysis at a multi decade bottom that had occurred in 1999-2000.  Bally’s stock price hit bottom in May of 2000 at around $0.42 a share before staging an impressive 20,000% rally (a 200 bagger) between then and the January of 2014.  We will initiate our coverage at this 1999-2000 bottom of around $0.40-0.50 a share (split adjusted) in order to see what had caused the company to appreciate over 7,800% between 2000s tradable bottom and today.

We will go back in time and take an in depth look at the company in order to determine if we could have taken a long position at that time. More importantly, we will look at Bally’s fundamental and trading patterns over that period of time in order to ascertain if we would have been able to maintain our position over a 14 year period of time and/or until the takeover bid for Bally’s Technologies was announced on August 1st, 2014 by Scientific Games Corporation at $83.30 a share.

To Be Continued On Monday…….. 

Let’s Play A Game Google

Continuation from yesterday…..

CONCLUSION:

Chipotle Mexican Grill (CMG) presents us with a perfect case study of what to look for in potential Tenbaggers, when to take position and when to exist.

One of the things we have learned right away is that it wouldn’t be a wise decision to take a position in Chipotle’s stock right after its IPO in January of 2006. That was due to our inability to determine the stock’s structural trading patterns, price doubling at the open and subsequent excessive valuation levels.

Yet, the stock presented us with another buying opportunity at the end of 2008, when the company’s stock price declined 75%. At that time, Chipotle offered us a perfect Tenbagger investment opportunity for the following reasons.

• Fundamental: Even though Chipotle’s stock collapsed 75% in the midst of the 2007-2009 financial crises, the company itself was doing incredibly well. Opening over 100 new stores, improving margins and growing at 25-30% per year.  What’s more, for the first time since going public, Chipotle’s valuation metrics were not too expensive.
• Technical:  After establishing a clearly defined down trending channel between its 2007 top and its 2008 bottom, Chipotle’s stock broke out of this channel in the late November of 2008 at $42.20, giving us a clear signal to take a long position.
• Timing:  An analyst aware of the overall structure of the market would know that a bear market mid cycle leg would terminate in the early 2009. This information alone would ensure that an analyst who was following Chipotle’s stock would be watching closely for an anticipated technical bottom.

It is not often that we get all three disciplines confirming each other.  Yet, when we do, it becomes increasingly easier to take a position as the risk/reward profile clearly benefits an investment. Just as was the case with Chipotle’s stock in November of 2008.

Finally, not only did Chipotle’s stock present us a perfect case study of when to go long in a potential Tenbagger, it also teaches us when to get out. As is the case today.  Making Chipotle’s stock a perfect financial instrument to follow over the next few years.  With an ability to profit on the short side before reversing course at the next bear market bottom to benefit from the next leg up. Perhaps just in time for the next Tenbagger run.

Final Prescription: Fundamental Analysis + Technical Analysis + Timing Analysis = A Massive ROI.

How Many Burritos Does It Take To…… Google

Continuation from yesterday…...GETTING IN AND OUT OF THE STOCK

As you very well know and as was suggested before, taking a trading/investment position in a Tenbagger at the appropriate time is only half the battle.  Staying put, increasing your position and not being forced out to sell at the wrong time is the other side of the coin. After all, it wouldn’t be a good idea to take a 100% profit, only to see your stock go up another 20,000% over the next decade. As human beings we are wired to buy and sell at exactly the wrong time. Hence the inability to outperform the market.  When it comes to Tenbaggers we must have a clearly defined set of trading rules that will help us mitigate the risk of being wrong (Please see the Tenbagger Trading Rules & Maximizing Returns chapter).

Yet, it is equally important to know when to get out and when to go short.  In order to protect your profits and to profit from the stocks subsequent decline. In the case of Chipotle, today’s valuation levels and the overall macroeconomic setup present us with a unique opportunity to look at the other side of the coin.

Even though the stock price has appreciated close to 1,500% over the last 5 years and even though the company is performing incredibly well on the fundamental level, Chipotle’s stock is in a very dangerous territory. For a number of reasons.

First, the valuation itself. With a P/E of 62, a P/S ratio of 5.66 and a P/B ratio of 11.70, Chipotle’s stock price trades at levels typically reserved only for extremely fast growing and incredibly profitable tech companies. And while the company is executing very well, today’s price offers no room for a single misstep. In other words, even if the company continues to grow at 25-30% per annum, its stock price today offers very little further upside and way too much risk.

Second, the overall stock market is in a bubble territory as well.  Just as it was at 2000 and 2007 tops. Suggesting that a significant correction is just around the corner.  Typically, when such corrections develop we can anticipate overpriced stocks such as Chipotle to decline at X multiple to the overall market. For instance, when the Dow declined 55% between 2007 and 2009, Chipotle’s stock price declined 75%. Giving it a 1.4X multiple. Suggesting that if the Dow is to go through a 30% correction between 2014 and 2017, Chipotle’s stock could decline as much as 40-50%.

When we put two and two together, it would make perfect sense for investors in Chipotle to exit the stock at this time and to consider going short once the breakdown confirmation is received.  In fact, looking at the chart alone, if the overall stock market is to correct over the next few years as some of my other forecasts suggest, it is highly probable that Chipotle’s stock price will retest its 2012 low of $243. That would mean a 64% collapse in its stock price and within a relatively short period of time.

This presents investors in Chipotle with a unique opportunity to A. Sell at the top B. Profit on a short side of the trade and C. To enter Chipotle’s long side at a much better valuation level at a later point to benefit from the subsequent bounce.  Once again, this concept will be further reviewed in our Tenbagger Trading Rules & Maximizing Returns chapter.

To Be Continued Tomorrow……..

Is It Time To Short Burritos?….Almost  Google

Continuation from yesterday…….TIMING & MATHEMATICAL ANALYSIS:

As was suggested earlier in the book, both the overall stock market and individual stocks tend to move according to their own cyclical compositions. A number of cyclical examples were given, including a 5-year and a 17-18 year cycles. Showing that the stock market moves in clearly defined patterns.

While it is certainly possible to identify the internal mathematical structure of almost every financial instrument, a long trading history is a must.  In the case of individual stocks, a 15 to 20 year trading history is necessary. Anything less than that would not yield appropriate results.

Since Chipotle’s stock first started trading in January of 2006, it would have been impossible to ascertain the stock’s internal mathematical or timing composition by either 2008 or 2009. Even today.  Yet, despite our inability to figure out what the stock itself would do, we did have the next best thing available to us. The overall stock market.

As Chipotle’s stock price was collapsing in 2008, so was the market. In fact, between October 11th, 2007 and March 6th, 2009 the Dow declined close to 7,500 points or 55%. A massive mid cycle collapse reminiscent of the 1972-1974 and 1907-1908 declines. An analyst working with the overall cyclical composition of the market would be aware of the following facts at the time.

1. The overall market is tracing out a 17-18 year secular bear market that started in 2000.
2. The 2007-2009 bear market leg represents a mid cycle collapse where 50% or more declines are typical.
3. The bull market of October 10th, 2002 to October 11th, 2007 lasted exactly 5 years. Suggesting that the upcoming mid cycle decline would last 1.5-2 years.
4. Mid cycle bottoms are typically followed by either a 2-year or a 5-year bull market runs.

In other words, an analyst working with the mathematical and cyclical composition of the stock market would have had a very good understanding that the stock market was likely to hit a bottom in the early 2009, followed by a strong rally. This was further confirmed by a number of other indicators converging on March of 2009 as a high probability turning point.  Once again, the methods of analysis that have lead to such a conclusion can be studied further in my other book Timed Value.

When it comes to investing in Chipotle, this type of an analysis would have been of great help for a number of reasons. First, we would have realized that Chipotle’s share price is likely to stage a strong recovery if the market was to turn around and to stage a multi-year bull market rally. Since no fundamental reasons, outside of general overvaluation, existed for the company’s stock price to decline, it would have been logical to assume that Chipotle’s stock price would recover as soon as the market does. Second, the company was growing at a rapid pace despite the economic collapse and was now selling at a reasonable valuation. Finally, an analyst familiar with all of the above would be watching the company’s stock for a clear technical bottom and a confirmation. With a clear intention of purchasing the stock once the confirmation was obtained.

This confirmation was obtained during the 3rd week of November when the company’s stock broke out of its down trending channel at around $42.20. A long position should have been initiated at that time.

The result? 

Chipotle’ stock price had appreciated 1,465% (14.7 bagger) between its February of 2008 bottom and today.

To Be Continued Tomorrow…….

How You Could Have Been A Burrito Kingpin Google

TECHNICAL ANALYSIS

Continuation from Friday…….Since our fundamental analysis did yield a strong buy signal for Chipotle’s stock in late 2008 and early 2009, we must now concentrate on the technical side of the equation to see if such a decision would have been confirmed.

As the chart above shows, the company’s stock price collapsed over 75% between December of 2007 and November of 2008. In the midst of the 2007-2009 financial crisis. In fact, Chipotle’s stock price established a clearly defined down trending channel throughout the move. The price then followed this channel all the way down into its 2008 bottom.  The stock price proceeded to bottom at $39 a share and then immediately broke out at around $45 in November of 2008.

Giving us a clear sign that the stock price might have bottomed. Any analyst following the company should have watched for this development very closely. It would have been the first sign that the stock price has corrected and is in the process of a bounce. While it would be unclear how long the bounce would last, when we combine such information with our mathematical and timing work below, we could have assumed that Chipotle’s stock price was about to stage a massive multi-year rally.

A second entry point opportunity presented itself in March of 2009 when the company’s stock price broke above its previous high at around $65 a share. Further confirming the change in trend and suggesting that the stock price has much more room on the upside.

In conclusion, technical analysis did confirm our fundamental analysis with two clearly defined buy signals. When the stock price first broke out of its down trending channel in November of 2008 and when it pushed above its previous high in March of 2009. Any investor closely following the stock should have been able to take a position in November of 2008 at around $45 a share. Particularly, when you take our mathematical and timing work into consideration.

To Be Continued Tomorrow……

How You Could Have Made A Fortune Investing In Burritos  Google

Continuation from yesterday…...In other words, over the last eight years the company has been able to grow its new restaurant base at an annual rate of 27.5%. More importantly, Chipotle can continue to grow its restaurant base at the same pace for the foreseeable future.  By comparison, other fast food giants such as McDonalds and Subway have 35,000 and 33,000 worldwide restaurants respectively. Suggesting that if Chipotle continues to perform as it has done over the last decade it might, in theory, continue to grow at the same rate for at least another 10 years.  This was certainly the case back in 2006 when the company had only 500 stores.

Further, Chipotle’s restaurant-level operating margins are among the best in the industry at 26.25%. Suggesting that the company can continue on with their aggressive growth plans for the foreseeable future and without any additional outside capital. Finally, the company has a number of new concepts in development.  They include ShopHouse Southeast Asian Kitchen with 6 restaurants and Pizzeria Locale with only one location. In short, investors in the company anticipate that Chipotle’s management will be able to convert these new growth seeds into successful concepts that can grow at least as fast as Chipotle itself.

When we put these factors together, in addition to great tasting food, we begin to understand why Chipotle was, and still is, selling at such a high multiple. Simply put, investors in the company anticipate Chipotle to continue on with its impressive 25-30% growth trajectory for the foreseeable future and without any need for additional capital.

Whether or not such thinking justifies Chipotle’s speculative valuation levels is an entirely different matter. Coming from a strong value oriented background my initial reaction would be NO.  That would certainly be the case in 2006 or right after the IPO.

Based on my own trading experience it is wise to avoid trading in IPO’s right after they become available.  It typically takes any given stock at least a few years to settle within its trading pattern. Until that happens it is next to impossible to determine if the stock will decline or surge higher. That is further complicated by the fact that most companies go public at the highest price possible, leaving very little upside for new investors.

Point being, despite Chipotle’s fundamental strength and its future growth opportunity it would not have been a wise investment decision to invest in the company right after its IPO.  Not only because the company’s stock price doubled right at the open, putting its valuation out of reach, but also because it is smart to allow newly public companies to first set their trading patterns.   And while this would render our 2006 entry point obsolete, the market presented us with even a better opportunity in late 2008 and early 2009 when Chipotle’s stock price reached a low point of $39 a share. A 75% decline from its 2007 top.

Despite this massive drop in its share price due to a 2008 financial crisis, Chipotle’s fundamental picture remained intact. In fact, in 2008 alone the company increased its revenue by 22.7%, grew its sales to $1.3 Billion, opened 136 new restaurants, repurchased $100 million is stocks and maintained its operating margins at 21.5%.

In short, the overall business was performing incredibly well, yet the company was selling at a valuation level that was, for the first time, reasonable. With a market cap of $1.2 Billion, a P/E ratio of 16.52, a P/S ratio of 0.92 and a P/B ratio of 1.9, the valuation of Chipotle was sensible. Particularly when you take the future growth rate and opportunity into consideration. Making an investment in Chipotle at this point in time and from the fundamental perspective alone…… a no brainer. Let’s us now see if the technical analysis at the time would have confirmed our fundamental decision.

To Be Continued On Monday……

The Secret Behind Turning 5 Burritos Into 75 Burritos  Google

Continuation from yesterday……

Key Statistics	2006	2014
Price Per Share	$42	$660
Market Cap	$1.3 Billion	$20.4 Billion
Earnings Per Share	$1.29	$10.66
P/E Ratio	31	62
Price/Sales Ratio	1.58	5.66
Price/Book Ratio	2.74	11.70
Revenue	$823 Million	$ 3.63 Billion
Net Income	$41.4 Million	$356 Million
Annual Earnings Growth	31% (revenue)	20%
Total Cash	$154 Million	$804 Million
Total Debt	$ 0 Million	$0 Million
Book Value Per Share	$15.3	$56.51
Shares Outstanding	31 Million	31 Million
Total Assets	$604 Million	$2 Billion
Shareholder Equity	$474 Million	$1.54 Billion

As we look at the data above, one thing jumps out at us immediately.  Just how overvalued the stock is. Not only in 2006, but even more so today. With a P/E of 62, a P/S ratio of 5.66 and a P/B ratio of 11.70, Chipotle’s has one of the highest valuation multiples in the restaurant industry and on par with some of the fastest growing technology companies out there.  In comparison, another high flyer Apple Inc (AAPL) has a P/E of 16, a P/S ratio of 3.27 and a P/B ratio of 4.8. Clearly illustrating just how expensive Chipotle’s stock is.

Despite its substantial overvaluation levels (by any traditional measure) Chipotle was able to demonstrate significant growth in most of its metrics over the last 8 years.  During this time revenue grew 341%, net income increased by 768%, book value grew 273% and shareholders’ equity increased 225%. While an impressive performance, the numbers above do NOT justify the 1,465% rise in the company’s stock price.

We must now go back to 2006 and study the company in greater detail in order to determine why the company was selling at such an expensive valuation back then and what was the catalyst behind its stock price going even higher. Most importantly, we have to figure out if we would have been smart enough to take a long position in either 2006 or 2008/09.

Chipotle’s fundamental growth and investment story is best understood if we break it down into 3 categories.

• New Store Growth
• Margin Improvement
• New Concepts & Future Growth

By the time the company went public in 2006, Chipotle had 500 restaurants and growing at approximately 100 additional stores per annum. By the end of fiscal 2013 the company operated 1,595 restaurants, with 185 stores being opened in 2013 alone.

To Be Continued Tomorrow…..

Why You Should Have Bought Chipotle’s Stock Instead Of A Burrito  Google

Company Name:  Chipotle Mexican Grill, Inc	Stock Symbol:  CMG	Industry:  Restaurants
Percent Appreciation:  1,465%	Number of Bags:  14.6	Holding Period:  8.5 Years
Entry Date & Price:  Feb, 2006 @$42.20/share	Exit Date & Price: Current ($660.50/share)	Original Investment($10,000): $146,500

Company Description:  Chipotle Mexican Grill, Inc., together with its subsidiaries, develops and operates fast-casual and fresh Mexican food restaurants. As of December 31, 2013, it operated approximately 1,600 restaurants; and 6 ShopHouse Southeast Asian Kitchen restaurants. The company was founded in 1993 and is based in Denver, Colorado. The company focuses on trying to find the highest quality ingredients they can to make great tasting food, on building a special people culture that is centered on creating a team of top performers empowered to achieve high standards, on building restaurants that are operationally efficient and aesthetically pleasing, and on doing all of this with increasing awareness and respect for the environment. The company expects to open between 180 to 195 additional stores in 2014.

Quick Trading Overview & Objective: The Company went public in January of 2006 after being spun off from McDonalds. While the company’s IPO price was set at $22 a share, the price immediately doubled at the open, only to trade at $45. The share price continued to appreciate over the next 2 years. Running up 200% before collapsing 70% in the midst of 2008 financial crisis.  Subsequently, the company’s share price went on to appreciate over 1,550% between 2009 bottom and today (as of 7/23/2014 @ $660.50)

We will now go back in time and take an in depth look at the company in order to determine if we could have taken a long position in either 2006 or 2008-2009. More importantly, we will look at Chipotle’s fundamental/trading patterns over the last 8 years to ascertain if we would have been able to maintain our position over such an extended period of time in order to walk away with such massive gains.

FUNDAMENTAL ANALYSIS:

In order to establish a clear picture of what had happened between 2006 and today we must first analyze the fundamental growth of the company over the last 8-10 years.

To Be Continued Tomorrow…….

One Million Chicken Burritos  Google

Continuation from yesterday……

TIMING & MATHEMATICAL ANALYSIS:

After going public in 1985 at around $0.05 a share (split adjusted) the company’s share price gradually increased until November of 1994 when it set an intermediary top of $4.71. Regrettably, after looking at the stock price composition my mathematical and timing work has failed to yield a clear result. In other words, Best Buy’s stock price had no clearly identifiable cyclical, structural or internal time frameworks associated with it.

While a rare occurrence, some stocks do not have such a structure. They tend to oscillate on their own accord and without as much of a hint as to what the future holds.  It would not be at all inappropriate to file such stocks under a “Wild Animal” category and forget about them. Particularly when the fundamental and the technical analysis results had failed to yield anything worthwhile.  Based on my personal experience, it is best to steer clear of such stocks.

CONCLUSION:

Best Buy Inc gave us no warning or evidence in 1997 that it was about to stage a massive 4,000% rally over the next 9 years.   In fact, all of our analytical metrics had failed in predicting the upcoming rise.

Sometimes it is just as important to know when it is time to take a position as it is when it is time to walk away. Best Buy presents us with a clear illustration as to why you should have walked away, even though the stock was about to stage a massive rally. Despite its general undervaluation at 1997 bottom, the future was anything but clear.

From the fundamental perspective, there was no way to know if the company would be successful in making their new store concepts work and if they would be able to improve their margins. In addition, it was impossible to anticipate when the company would accelerate their new store growth and to what an extent.  Certainly not in 1997 and certainly not when the company’s stock price was at around $1.25 a share.

Out technical and mathematical analysis did not fare that much better. Both had failed to predict and upcoming surge in the share price.  While our technical analysis did suggest an entry point in November of 1997 at $3 a share, when the stock price broke above the previous high, neither the fundamental nor the mathematical side of the analysis would warrant a position.

In conclusion, even thought Best Buy’s stock price went on to gain 4,000% between 1997 and 2006, there was no prudent way to take a position in the stock in either 1997 or early 1998. By the time the fundamental picture was starting to clear up, the stock price has already surged to $40 a share.   In other words, the only way to take position in the stock was to speculate or to have it as a small allocation within your overall well diversified portfolio.  It would have been impossible to benefit otherwise.

Final Prescription: Sometimes It’s Better To Walk Away

Don’t Buy The Best Buy Google

Continuation from Friday…...When we combine the factors above we begin to understand why Best Buy’s stock was selling at a discount in 1997 and why it started to rally once the performance improved and the company began to grow at a rapid rate once again. The question is, would investors be able to forecast such changes all the way back in 1997 from the fundamental perspective alone?

Absolutely NOT.

The fundamental developments above took years to play out.  And while improved performance could have been anticipated, there was no clear evidence that it would occur. In addition, a few questions remain. For instance, while company’s initial undervaluation and subsequent growth can be explained by the first 1,000% to 2,000% increase in Best Buy’s stock price, it cannot be explained by Best Buy’s stock price surge of 4,000% during the same period of time.  Perhaps technical analysis can offer us a better answer.

TECHNICAL ANALYSIS:

Since the fundamental analysis did not yield a strong buy signal for Best Buy in 1997 we must now concentrate on the technical side of the equation.

As the chart above shows, Best Buy’s stock price collapsed over 75% between November of 1994 and February of 1997. Dropping from $4.70 a share (split adjusted) to about $1 a share.  What’s more, this substantial down move had occurred during one of the strongest bull markets in history. A bull run that initiated at the same time that Best Buy’s stock price topped out, in November of 1994.

Unfortunately, outside of dropping 78%, Best Buy’s stock gave us very few clear technical signs that it would either top out in 1994 or bottom out in 1997. Outside of a clearly defined downtrend between November of 1994 and February of 1997, we have very little to go by. In other words, by early 1997 it was unclear if the company’s stock price was going through another bear market bounce or if it was in the early stages of a massive bull run. It was not until October of 1997 that Best Buy’s stock price broke above $3 a share, giving us the first indication that the company’s stock price has shifted gears and might be starting a sustained bull market run.

In conclusion, technical analysis alone would have failed in giving us a clear buy signal at around $1.25 a share in February and March of 1997. There were NO clear technical signs that Best Buy’s stock price was about to stage a 4,000% rally. Perhaps we will have better luck with our timing and mathematical analysis.

Were You Smart Enough To Buy Best Buy At The Bottom And Make Millions? Google