Originally posted by: glenn1
for every paychex you find, there will also be an enron (or some other under performing stock). It is very easy to find these stocks ex-post, but are you willing to stake your financial future on the fact that dean foods will continue to out perform the market?
Here is a chart of DF vs. enron before its fall. Are you telling me you would have known to pull out?
I think we can both agree that ENE was an extreme case where the accounting and regulatory systems broke down.
So enron was an extreme case, but a stock that has gone up 5000% in the past 10 years (paychex) isn't? Mind you, the s&p has gone up probably about 100% in the same time period.
But even then, there were warning signals. Most notably when a company in a profitable segment decides to totally change their business model, it's generally a good time to consider abandoning ship. The warning signal was there with Enron when they decided to move to a "energy trading" business model
Enron started trading energy derivatives long before it went belly up.
Let's refer back to the Warren Buffet investment model:
1. Understand the business in which you are investing.
you think warren buffet understood what a "operating system" was when MS-DOS came out? What about Oracle and one of those fandangled "relational database" things? You think he understood that business?
2. Look for sound fundamental economics.
Dean Foods is the largest milk and dairy producer in the U.S., and widening their lead. Paychex is one of the two major companies in their field. Those are pretty damn big moats, as Buffet likes to say. What did Enron do again?
Sound fundamentals? Enron had revenues of 40 billion dollars in 1999. In 2000, there revenues topped 100 billion dollars. Where else can you get revenue growth like that? From a dairy company? Sure, it is easy to look back now and say "those revenues didn't exist". Hindsight is always 20/20, but can you honestly say you made that call back in 99?
3. Find competent leadership.
Tom Galisano, CEO of Paychex, billionaire, has over 30-plus years annually returned 30% or more to his shareholders. Dean Foods is run by Gregg L. Engles, who parlayed an $18 million investment in an ice company in 1988 into a 30% marketshare of the dairy industry, giving shareholders a 29% annual return since 1996. He's 11th on the Forbes "best CEOs" list. Ex-Enron CEO Jeff Skilling left after six months in the position citing "personal reasons." Draw your own conclusions.
Ken Lay (former enron CEO) has a BS, MS, and PhD in economics; he was also an assistant professor of econ at the George Washington University. From a bio on the web: "Lay serves on the Board of Directors of Compaq Computer Corporation, Eli Lilly and
Company, and Trust Company of the West. He is a member of the President?s Council on Sustainable
Development, The Business Council, the National Petroleum Council, and the American
Enterprise Institute."
He took two gas companies in 1985 and transformed them into the 7th largest company in the country (by market cap) in a matter of 15 years. That is pretty damn "compentant" (again, at the time, no one knew the books were being cooked).
4. Buy at the right price.
PAYX, $29.70 at close, DF $32.23, ENRNQ $0.07.
yeah, great theory after the fact. ENE (enron) on 1/1/2001: $80, PAYX: $45. Again, you knew back then that enron was overvalued at $80, right? Did you also know that PAYX was well overpriced as well at the time?
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