We live in extraordinary times. Traditionally held beliefs toward the stock markets and the investment process have completely broken down. Whether the risk is outright fraud by previously respected "professionals" such as Bernie Madoff, a collapsing global financial system, or unstable nations (Greece, Libya, etc.), the result is the same: extreme risk, many times leading to large losses.
Investing has never been tougher, and we can no longer blindly put our faith in other investment professionals as we once did. It has never been more important to be in control of your own destiny.
Everyone has heard the phrase: "He was in the right place at the right time." In one way or another, most of us are seeking this result each day, both personally and professionally. Occasionally, you come across someone about whom you hear it said far more often than the rest of us. Hockey great Wayne Gretzky was said to be able to anticipate where the puck would be, not just where it was, and that put him a step ahead of everyone else on the rink.
Being in the right place at the right time is what The Monopoly Method investment strategy is all about. While simple and easy to understand, it is also comprehensive and powerful; changing the way you think and act while investing. Finding the right place and the right time is not as hard as one might think when it comes to investing. The right place is a company that exhibits monopolistic tendencies, such as Potash Corporation (POT) or Research in Motion (RIMM) - when the Blackberry was in its heyday. The right time is matching these companies with an investment theme that gives you the confidence the company can grow consistently over time. Again, Potash Corporation is a perfect example, which we will dive into later.
Another key part of the "right time" is investment timing and feedback. Stocks are volatile, and timing your investment - both your purchase and eventual sale - is critical to long-term success. Sometimes called "process," I am briefly introducing how I look at timing: eleven variables and a simple, yet powerful scoring system.
A key element of the process is its ability to adapt to change, meaning scores will change with new data and price movement. If the company releases significant information or new information is uncovered, investors need to be prepared to change the variables at any time. Scores will change daily with stock price movement as well.
Throughout my twenty two years, I have noticed three traits that define successful professional investors:
A sound philosophy is useless without rigorous discipline. Discipline is a systematic approach to learning as much as is reasonably possible about a potential investment, and staying informed about that investment once you own it.
Let us take a look at an example. We will use a company that you may be familiar with: Potash Corporation. There are five levels of discipline, and briefly:
Before we get started, make sure to utilize the best research services possible. As an individual, the advancement of the Internet has brought professional investment tools to the individual investor. A few sites worth mentioning as tools for data collection - in the fertilizer industry - during your due diligence include greenmarkets.pf.com, fertilizerweek.com, agweb.com, agriculture.com and usda.gov.
Case Study: Potash Corporation
Business Description: Potash Corporation of Saskatchewan Inc. (Potash) produces potash, phosphate, and nitrogen to the agricultural and industrial industries worldwide. The Company conducts operations in Canada, Chile, the United States, Brazil, and Trinidad.
Potash Corp. (POT: $47)
(Source: StockCharts.com)
The Eleven Variables of Investment Selection
Monopoly Factor: Potash is the largest global producer of Potash fertilizer in the world (approximately 20% of global volume), the lowest cost producer, and the key member of Canpotex, the largest global exporting consortium. Potash has many of the characteristics of a company with monopolistic tendencies. For this reason, the company merits the highest score of +1.0.
Revenue Growth: After a difficult 2008, global economic growth and fertilizer fundamentals have improved. Thematically, the world continues to be in short supply of key grains, such as corn (high fertilizer content), while emerging markets are placing ever increasing levels of demand. Growth will slow, but should be much higher than the global economy. A middle of the road score of +0.5 is appropriate.
Margin Growth: With demand increasing, prices should continue to move higher, and margins should continue to move higher as well. Prices, especially in 2010-2011, moved higher, which should lead to a better 2012. A score of +0.5 is appropriate, as the global economy is still challenging. It should be noted that margins are double weighted in the model, since they are crucial to growth.
Financial Visibility: Fertilizer demand and Potash Corporation in particular should have good visibility into their future earnings, since fertilizer prices are widely disseminated. For this reason, a score of +0.5 is appropriate.
Track Record: If we look past 2008, when many companies had a hard time forecasting their earnings, Potash has historically done a great job. A score of +1.0 is appropriate.
Management Quality: A bit enthusiastic for sure, but strong operators over time. A score of +1.0.
Financial Health: Very strong balance sheet and low cost operators. A score of +1.0.
Timing Catalyst: In Potash's case, there isn't anything significant that we are expecting, so the score is a zero.
Price Target: In Potash's case, we can look in the past to gauge our upside price target. Historically, the company has traded in the range of 15x forward price/earnings (P/E). Applying this level to 2013 earnings of approximately $4.00, we arrive at approximately $60. On the downside, it recently moved above the 50 day moving average, a key positive, and we can look to this level as support. Another way is to look back at how low the P/E has been in the past. A P/E of 10x looks to be a good level. To be conservative, let's use $40. The next step is easy: Divide the points of upside ($60 - $47 = $13) by the points of downside ($47 - $40 = $5) or $13 / $7 and our score is +1.9.
Technical Strength: From a technical perspective, the news is not perfect, but better than it was in December. The stock has broken through the 50 day moving average, which is a key positive trend. One can certainly suggest that it is also oversold based on other indicators. A score of +0.5 is appropriate.
Expectations: Potash is trading at the low end of historic P/E levels and from the technical section, we can infer that it is in oversold territory. The stock has recovered a bit off its lows though. All of this information suggests that expectations are generally low so a score of +0.5 is appropriate.
Scoring Methodology
- Scores greater than 10 are considered attractive ideas with high return probabilities.
- Scores from 8 to 10 are considered holds, meaning that there is likely upside over time, but it is close to being fairly valued.
- Scores below 8 could be a candidate for a sale or short sale. In other words, too much risk, given the level of return.
| Monopoly Method Score | 9.4 |
| Monopoly Factor | +1.0 |
| Revenue Growth | +0.5 |
| Margin Growth | +0.5 |
| Financial Visibility | +0.5 |
| Track Record | +1.0 |
| Management Quality | +1.0 |
| Financial Health | +1.0 |
| Timing Catalyst | +0.0 |
| Price Target | +1.9 |
| Technical Strength | +0.0 |
| Expectations | +1.0 |
| Total | 9.4 |
From the score above, we see that Potash Corporation, at $47 per share, is a solid hold/fairly valued for investors. To really buy more, the stock would have to move back to the $45 area. The calculator also helps investors isolate the specific variables to track whether their investment is on the right path. In this case, we know that margin growth and our price target is important, so tracking this each quarter (and re-scoring when we have new information) will help us increase our probabilities of a successful investment.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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