Today was about as normal as normal gets.  Woke up, took the dogs out to a beautiful balmy morning, went for swim, stopped for a bagel and brew (coffee not beer), and made into the salt mine about 8:10.  First line of business was to get caught up on peoples extended holiday weekend then, let the meeting begin.

There was a special meeting of the The Fish Whisperer's founders

LtR John K., Yours Truly, Dana S.  and Dennis H.

at Hanna's today.  The Fish Whisperer's is a secret group of traditional fly fishermen (Yet we would be open to taking on fly fisher women.) who travel the world protecting the sanctity of traditional fly fishing.

The group was founded in 2003 in West Yellowstone.  Today we said adieu to one of our founders who is relocating back to God's country, Ireland.  John K pictured here

demonstrating the proper way of gloating over a recent catch heads back to Wicklow.  What could have been a sad event morphed into a planning session for next year.  The Founders of the FWs will be traveling to Ireland next year to seek out the bigeormous Brown Trouts of Ireland.

Safe travels fellow fisherman.

The afternoon was quiet with a few e-mails to take care of and the like.  Tonight I got to have dinner with Ben M at Hanna's in our typical guys night out fashion.  I was not able to play golf this evening as I am still nursing a hand injury described in an earlier post.  We did enjoy a great bottle of wine, a 2005 Turnbull Cab blend.  I had a chicken Parm and Ben enjoyed the bone in ribeye.  Kristin did a marvelous job of takig care of two demanding guys.  It was a fun night at Hanna's.

 In the market today

The ISM non manufacturing survey came in weaker than expected, which made it really weaker than we expected.  The market did not react to much today.  The Portugal poor debt rating didn't seem to fluster Mr. Market and neither did the interest bump in China.  (This is an important move as if you have been following this blog, China has been manipulating its economy with a series of capital adjustments to its banking system.  They must be very concerned if they actually raised the lending rate.  Of course they do have one of the hottest economies on the globe.)  Volume was light and you can tell everyone is waiting to see the jobs number on Friday.  As a possible teaser to the Friday number, the Challenger Job cut report came out today and the direction seems to be sideways, in other words no major corporate layoffs on the survey.  Perhaps we will see some good news on Friday.

 How Do You Do It?

One of our regular readers dropped me a note today saying he is now convinced that people who write and talk about stocks know nothing and he is going to stop relying on them.

We agree, this blog or e-mail included.  We have pontificated until our pont is blue purple that most retail investors and even the pros do not beat the market.  Our message has always been, if you are not going to do the homework, don't play the market.  Just create a balanced portfolio of bonds and index funds. 

We have explained many times what our basic homework for new positions and position reviews, but for a brief review for some of our newer readers.

Investment opportunities are everywhere.  We promise you that sometime today you bought or used a product from a publically held company whose stock is going to improve over the next 12-36 months.  Many will improve at or better than the general market and inflation.  How do you find these opportunities?

As Jim Cramer says, If you are going to get in the game, you have to be willing to commit to some basic homework.  If you do not want to do the homework, don't get in the game. 

First off, know how you company makes a profit.  You should be able to explain in a sentence or two how they do business.  Let's say you went to the movies this weekend and saw a 3 D movie and noticed how many more movies are being released in the 3 D format.  So you go home and start your homework by going to FinViz.com and typing in "motion picture" in the company profile prompt.

You will see 27 companies out of about 7,000 that have the words "motion picture" in their profile.  If you scroll down the list, you can read the brief profiles of these companies, many of which you would know. 

Down the page you see RLD RealD and realize those were the cool glasses you were wearing in the theater.  So you read the entire profile:RealD Inc. licenses stereoscopic three-dimensional or 3D technologies internationally. The company licenses its RealD Cinema Systems to motion picture exhibitors that show 3D motion pictures and alternative 3D content. It also provides RealD Format, active and passive eyewear, and display and gaming technologies to consumer electronics manufacturers and content producers and distributors to enable the delivery and viewing of 3D content on high definition televisions, laptops, and other displays. The company's 3D technologies also have applications in piloting the Mars Rover, heads-up displays for military jets, and robotic medical procedures. It develops and supplies 3D visualization tools for science, research, and product development. RealD Inc. has a strategic alliance with Sonic Solutions. The company was founded in 2003 and is headquartered in Beverly Hills, California.  (OK I did not write that.  It was taken from the finviz.com website who took it from their annual report.)

So in two or three sentences, their products and product knowledge allows people to enjoy the 3D experience.  Are they profitable?  Let's go to the main page on finviz and take a look.  Their market cap is 1.1 Billion, not a small company but not a giant either.  Their forward looking P/E ratio is 26 which sound expensive, but you don't know yet because you have just started the home work.  (It is expensive as the S&P is about 15 and this industry is about 17, so 26 is very expensive.  We only know this because we have done the homework before-remember BTN from a few weeks ago, that stock was in the same sector.)  There earnings per share is a negative number at -18 cents a share which mean they are not making a profit.  They are looking to make a profit of 5 cents a share next quarter.  Look at all of the data on the finviz.com page.  We won't bore you that exercise, but that is part of the homework.  If you do not know what some of the notation means, look it up.  For example P/B.  Well RLDs P/B is 7.9 and the number is red so it can't be good.  P/B is the price to book ratio which means you take the price of the stock divided by the book value of the stock.  If you don't know what book value is, look it up (yeah its part of the homework.).  Book value is what is left over after you sell all that you have and pay all of your bills.  In a perfect world, you would want to pay less than book value of the stock and sell it higher than book value, but unfortunately we deal with hopes and dreams and fear and greed so that perfect equation almost never happens.  A true value investor typically does not like a P/B of more than 2.  The industry average for this sector is 2.1.  (Morningstar has that info for free.)  Keep working your way through the red and green numbers. 

Personally we would stop here and say we have better places to put our money.  But let's just say you really had a good feeling about RLD.  You should then go to the SEC filings nd type in RLD in the ticker symbol box.  There you will see all of the legal filings RLD must file with the SEC.  We are looking for their most recent quarterly earning filing also known as the 10 Q.  Annual reports are called 10 K.  There we see a 10 K (annual) filed on June 10, 2011.  Let's take a look.  (This homework does take some time.)  This filing is 111 pages long.  You do not have to read the whole thing, but if you have never done so, I recommend it, but do it on a stock you know well.  If you shop at TGT Target everyday, read the entire 10 K of TGT, you will find it very enlightening.  Ok back to RLD, skip on down to section 7, Managements discussion. . . . .  This is where the CEO and CFO tell you what is going on in the company.  This is an interesting read as they lay out the metric by which they measure their success.  You can see how the number of 3 D screens has grown from 1,700 in 2009 to 8,700 in 2011.  Great growth.  Keep reading, there is good stuff in there.

After reading this, there are quite a few factors that even impressed us into understanding why this stock is selling at such a premium.  Not enough to buy it but at least we understand why it is soooo expensive.

Now our homework is not over because now if we were so inclined, we would start thinking about the value of the company and where we would want to buy in.  The company stock has taken a hit the last few months.  Let's see if we can figure out why.  In reading the press releases on finviz.com you can see that there was huge drop in May.  Look at the press release for late May.  There is one there by one of my favorite sources Motley Fool dated May 31.  (Doing homework will give you a good feel for good sources.)  Kung Fu Panda bombed in the 3 D format.  On June the 10^th you will see a Bloomberg article questioning the demand for 3 D movies.  This as well as a shaky market has driven the stock down from a high of 35ish.  There seems to be a resistance line at about 20.50 so today's 21.25 might be an interesting entry point.  (WE ARE NOT RECOMMENDING THIS STOCK)  So if you were to get in, you should always know where to get in and where to get out.  21.25 seems like a good entry point.  Let's minimize our losses by putting a stop order in at $20.00.  We would like to see a 7-10% increase in the stock by the end of the year.  So forget about the stock for a week.  Then look at it.  Once a week, just check the press releases on finviz.com and see if you have anything there to worry about.  Then forget about it again.  Once the stock starts reaching 23.00 see if the stock has filed a new quarterly report and read it.  Do you still have conviction for the stock? Do you see the value continuing to improve?  If so reset your stop at 21.25 and continue to follow the stock.  (Note $21.25 was your entry point so it is now IMPOSSIBLE to loose money on this stock.) 

So now we want your input.  We have just givin you the simple explanation of our homework.  How about you share your homework with us.  I will provide two copies of Katsenelson Little Book of Sideways Trading to the person with the most honest answer and the person with the best answer.  Please send them in and let me know if I can share how you do your homework.      

Salve Lucrum