Five Top Stocks For The Long-Term- Stock #1

Before I begin this five part series, I’d like to remind everyone that I do not recommend you invest in any of the five companies I’m going to mention. You have to come to that decision yourself based on research you have done and the investment goals you have set for yourself. Remember that calling something a good investment is a relative term. What is good for one person could be bad for another person. This is simply an analytical exercise show the pros and cons of five different companies from five different industries whom I think are good investments for myself, based on my research and investment goals. So, on to company #1, Cherokee, Inc. (CHKE).

Many of you have probably never heard of Cherokee, Inc. If you’ve ever shopped at Dick’s Sporting Goods, Target and/or Eastern Mountain Sports, this is where you would find the products Cherokee makes. I call this my “Hippie Company”, because it gears towards sportswear and equipment for hikers, mountain climbers, rock climbers, campers and any other outdoor activities associated with nature.

I first bought this stock back in July 2006, when it was trading in the high twenties. It reached a high of about $38 per share during the summer of 2007. It currently is trading at just shy of $15 per share, but the great thing about this company is one, it is small (Market Cap of $130M), which means that it has room to grow. Again, I am long-term on this stock, so I can wait. If you are looking to make quick money, this is not the stock for you and you will end up broke before long anyway going for the quick hits and trying to turn over stock as fast as possible. This is when you slip into the world of the day trader. Chances are almost guaranteed you will be busted within a couple of months or less choosing this strategy.

Here are some more pros concerning CHKE.

1. No Debt- What I mean by this is no “long-term debt”, every company carries some debt in the form of accounts payable for example.

2. Only 2 analysts follow this stock- Analysts are idiots and their rankings of companies are typically driven by the investment companies they represent, which poses a huge conflict of interest. However, if they down grade a stock, the herd takes note and follows suit. The fewer the analysts, the less attention is paid to the company, which limits the volatility.

3. Great Management- The ROA and ROE are 38% and 50%, which is pretty ridiculous in this current economy. Also, the insiders hold 15% of the outstanding shares, which shows they are confident in the company enough to put their own money out there.

4. High Dividend Paid consistently- the current dividend is yielding 11.8%, which is like a junk bond, but without the high risk. Remember 75% of your long-term gains come from dividends reinvested.

Here are some cons concerning CHKE

1. High percentage of shares shorted- Currently 13.7% of the outstanding shares are being shorted by institutions. This means that they are bearish on this stock, mainly because of the industry it is in and the current economic crisis.
2. Low Amount of Cash- Currently has $14M in cash. Relative to its market cap, that is a lot, but the company is undervalued in my opinion and with stockpile of cash in the bank, it limits its ability to grow or expand into other markets. It also limits its ability to buy back stock when the price is cheap.

Since the stock is roughly half the price of when I purchased it 2 ½ years ago, as an investor, you can assess the situation in one of two ways. You can look at it as a bad investment, because you have an unrealized loss of 50% of you investment or you can investigate further into the company and determine if it is a buying opportunity or if the fundamentals of the company have changed and you have confidence in the company to flourish in the future. I prefer the latter, because I do not dwell on “unrealized” losses or gains for that matter. You have to constantly reevaluate your stocks in order to make an educated decision on what to do next. I have been checking everything with CHKE and I like what they are doing and I do not see any red flags that would indicate anything is terribly wrong with the company. I see this as an opportunity to lower my cost per share by doubling my investment (don’t confuse this with doubling a position. Doubling your investment means doubling the dollar amount you invest. Doubling your position means doubling your number of shares). Here is how “Dollar Cost Averaging” works in this situation. Just as a reminder, I’m using approximate prices and not factoring in dividends reinvested.

July 2006- 10 shares @ $30= $300
February 2009- 20 shares @ $15= $300

Total 30 shares for $600= $20 per share

With this, my “unrealized loss” has gone from 50% to 25%, but remember that you now have twice as much money invested that you could possibly lose, but you also have the possibility of making twice as much money, should stock price increase. For example, if the price returns to $30, my profit would be $300 or 50%, because the market value would be $900 for my 30 shares, but again, this is an “unrealized gain”, so don’t get too excited if this happens to you. This means that you must decide if the stock is priced low, fair or high and act on the conclusion you come to.

Doubling your investment amplifies your investment much more than doubling your position. Here is the same example, but instead of doubling the investment, we’ll double the position.

July 2006- 10 shares @ $30= $300
February 2009- 10 shares @ $15= $150

Total 20 shares for $450= $22.50 per share

With this, my “unrealized loss” has gone from 50% to 33%, but remember that you now have $450invested instead of $300 that you could possibly lose, again, so the stakes are higher now. For example, if the price returns to $30, my profit would be $150 or 33%, because the market value would be $600 for my 30 shares, but again, this is an “unrealized gain”.
Buying incrementally like this helps lower the effects of a volatile market. Remember that you may run into a stock that you think is really low that you already own and you increase your investment and the stock tumbles even lower. Do not get discouraged and try to keep a level head. Remember that the stock market is not rational by any means. I attribute a mob or riot type mentality to the market. Perfectly law abiding citizens can get caught up in a riot and behave the opposite of what their values are, because they simply follow what the crowd is doing. Until next time…..