彼得·林奇邮箱

The stock picker's stock picker finally catches up with his mailand answers readers' questions

By Peter Lynch

Letters from readers have been piling up on my desk for morethan three years. I appreciate the fact that so many of you havetaken the time to ask questions and make comments. This keepsthe mail carriers in shape, and I never get lonely. I'm takingthis opportunity to answer a few of your questions in public.

What's your current opinion of Pier 1 Imports?

Carl J. Cooper, Rockwall, Texas

I bought Pier 1 (NYSE: PIR) for the Magellan Fund in the mid-1980s,but it was really my wife, Carolyn, who discovered it. She likedthe eclectic assortment of furniture, rugs, pottery, and glassware-- allimported from exotic places like Mexico and the Far East, butwithout the exotic prices these items would have fetched at Bloomingdale's.

In 1991, I recommended Pier 1 again after the stock had fallento $7 a share. The economy was in a recession, money was tight,and buying a new couch wasn't high on most people's shoppinglists. Mom- and-pop furniture stores were going out of business,and big department stores were closing their home- furnishingdepartments. I figured as soon as the recession ended and peoplecould afford to redecorate, Pier 1 would capture a huge chunkof a market that had been abandoned by its former competitors.Also, at the $7 price it looked cheap.

Today, Pier 1 has 651 stores. The key element to the expansionplan is that 100 of its newest 150 outlets have opened in whatthe company calls "single-store markets"--places like Hattiesburg,Mississippi; Rapid City, South Dakota; and Twin Falls, Idaho.The company is expanding into smaller cities where it can attracta bigger percentage of the shoppers. These people no longer haveto drive 150 miles to buy a rattan room divider.

Pier 1 has continued to cut costs and reduce debt, and it'salso expanding abroad, with ten stores in the United Kingdomand outlets installed in several Sears stores in Mexico. TheMexican experiment has been a modest success, in spite of a severerecession there, and when Mexico recovers, results should improve.Although 1995 has been tough for U.S. retailers, Pier 1's domesticsales are up 11 percent. The company is likely to post recordearnings of 85 cents a share for 1995. Analysts expect it toearn $1 a share in 1996.

As I write this, the stock is selling for about $10. Obviously,it's not as cheap as it was in 1991, but it's still undervaluedat 10 times the 1996 estimated earnings, in a market where theaverage stock sells for 15 times earnings. Pier 1 is a maturecompany that is no longer growing at 20 percent a year, but itcan be a decent long-term performer. I still own the stock. Andevery August, my two older daughters, who are away at school,furnish their rooms in Pier 1.

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I enjoyed your article "Charlie Silk's 150-Bagger" in the May1994 issue. I'm curious about what sources Charlie uses to findcash-rich companies with no debt and good earnings growth.

C.J. Biddle, La Jolla, California

That was the article in which I nominated Charlie as the world'sgreatest amateur investor. Figuring he ought to answer your question,I coaxed him into providing the following:

My search for undervalued Nasdaq stocks begins with Barron's,which I study every week, noting the stocks making new 12-monthlows that have fallen 50 percent or more from their 12-monthhighs. I take this list of the downtrodden and review their fundamentalsin either the Standard & Poor's monthly guide or Moody's OTCIndustrial Manual. I reject the companies that have a low cashposition or a declining sales trend. I'm also looking for companieswhose current assets are at least two times greater than alltheir debt.

Whenever a company passes these hurdles, I call the investor- relationsperson and request the latest annual report, 10-K, proxy statement,and product literature. I study these materials to get a feelfor the business, the products, and the competition. Weighingthese various factors, I choose an "entry point," a price atwhich I would begin to accumulate the stock.

The most important factor is the cash or cash equivalents onhand. My goal is to find situations where there's little or nodebt and the cash per share is nearly equal to or greater thanthe price of the stock. I've never seen a company with a lotof cash and not much debt go bankrupt.

A basic rule is to have the safest investment value with thesmallest downside risk. The next most important considerationis the probability of a turnaround. Was this price decline atemporary aberration that can be reversed, and is there a possiblere-acceleration of growth?

This approach works best at the year's end, due to tax-lossselling pressures or after a significant market decline. In afrothy market, there are very few opportunities.

Last March you wrote about Cedar Fair. Of all the hundreds ofstocks available, how do you focus on a few to study and research?

Raymond Capobianco, Foster, Rhode Island

There are attractive companies everywhere: cyclicals, fast growers,slow growers, some that pay a dividend, others that don't. Mytheory is to stay flexible. When people limit themselves to acertain kind of company, they also limit their opportunities.

I'm always on the lookout for companies that have no debt, lowprice-to- earnings ratios, good records, and prospects in businessesthat are easy to understand. These don't come along every day.Once I get to know a company, I look for the chance to buy moreshares when the price happens to drop for reasons that have nothingto do with the fundamentals.

I discovered Cedar Fair L.P. (NYSE: FUN)in the pile of prospectuseson my desk. It had just come public in 1987, but it had ownedand operated its amusement-park business for over 100 years.Here was a company that had a good growth rate and paid a dividendof 10 percent, which is rare for a solid growth company

Later, my family and I did the on-site research, riding theroller coasters at Cedar Fair's three amusement parks in Ohio,Minnesota, and Pennsylvania. Many of the 70 million people wholive within driving distance of these parks already knew thiscompany firsthand, so they were a step ahead of me. This is anotherexample of finding great investments close to home. None of thebig Wall Street firms bothered to follow Cedar Fair, but amateurinvestors had the perfect chance.

The story is simple to follow. The parks are only open a fewmonths a year, so you've got those off- season months to studythe quarterly and annual reports. If the stock price drops inthe idle months, you know it's not because the company has reportedbad results. There are no results to report.

This is where it can pay to wait for a buying opportunity. In1987, Cedar Fair had just come public at $10 when the marketwent over the ledge. Suddenly, you could buy FUN for $6, withan 18 percent yield. Because the market had crashed, people wereworried that the country was headed into a recession. But ifyou did your homework, you realized that Cedar Fair's businesswouldn't be affected for at least six months, because the parkshad just closed.

In 1990, when the recession jitters hit the market once again,you had another opportunity to buy Cedar Fair on a dip. If youkeep a list of stocks you'd like to own and watch them like avulture, eventually you will get the chance to swoop.

Cedar Fair had a great run from its $6 low in 1987 to its all-timehigh of $36 in 1993. It's been trading between $26 and $36 eversince. The company also keeps raising the dividend--this year,it's $2.30 a share.

In 1995, Cedar Fair acquired two adjoining parks outside Kansas City, Missouri. Every year, a fantastic new ride is added atone or more of the parks, the latest being the new $12 millionroller coaster in Ohio. Next year, Wild Thing will be installedin the Valleyfair park near Minneapolis. This roller coasterwill be more than 200 feet tall, with a weightless zone at thecrest of the second hill. I can't wait to do the research onit.

The only hitch is that Cedar Fair enjoys a favorable tax status,which is likely to run out in late 1997. But the market has alreadydiscounted that. Even if Cedar Fair paid a normal tax rate in1996, the stock is valued at 15 times 1996 estimated earnings,so it's cheaper than the average company in the S&P; 500. I ownthe stock.

-----In Beating the Street you gave Body Shop a great write-up. Thestock has dropped nearly 49 percent since I bought it. What areits prospects?

William A. Boudreau Nesconset, New York

Here is another example of why investors should focus on whetherthe story is still valid. A stock can fall in half, only to reboundso you end up making several times your money. I'm not sure BodyShop (LON: BOS; ADR: BDSPY) will have such a rebound, but ithas the potential.

The stock price tripled from a low of 125 pence (this is a Britishcompany) in 1990 to a high of 375 pence in 1992, and lately ithas fallen back below 140. The earnings declined in 1993, largelybecause of recessions in three of the Body Shop's most maturemarkets: the U.K., Australia, and Canada. In 1994, the earningsmade a nice recovery, but the company predicts that they willbe lower for the first half of 1995. Earnings would be higherexcept the company is spending a lot of money to introduce newproducts in the U.S. and to revamp its packaging. The Body Shopfaces stiff competition from The Limited's Bath & Body Worksin the U.S. But whether Body Shop succeeds in the U.S. may notbe that important. What's really important is what happens inthe 44 other countries where it has gained a foothold.

The company could concentrate on those 44 markets alone andenjoy excellent growth for the next decade. But it has plansto open Body Shops in China, Korea, and India. This is a fast-growingglobal operation that is opening 150 new stores a year. Coca-Cola is in almost 200 countries worldwide, and there's no reason BodyShop can't reach the same audience.

A company that can manage to grow at 20 percent a year willdouble its earnings every three and a half years. The earningsquadruple every 7 years, and increase eightfold every 14 years.That's how you make big money.

That's the upside. I wouldn't take a chance on Body Shop ifthe company were saddled with debt. Then I'd be facing bankruptcyrisk. But Body Shop is debt free. It is a profitable company,and the stock is very cheap. In my opinion, the risk/reward isfavorable. I own it, and I'm sticking with it.

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In October you wrote about buying shares in savings & loans.But how are the stocks of S&Ls; allotted to depositors? Does thenumber of shares you're allowed to buy depend on how much moneyyou have on deposit? It hardly makes sense to keep thousandsof dollars on deposit for a handful of shares.

Murray Dornfeld, New York, New York

You usually have to keep at least $50 on deposit, and sometimesthe minimum can go as high as $500, but beyond that, the sizeof the deposit has no effect on the allotment of shares if theS&L; decides to go public. You generally can buy as many sharesas anyone else.

It doesn't matter how you've deposited the money, whether it'sin a checking account, a savings account, or a CD. What doesmatter is when you opened the account. Again, the rules vary,but people who get first dibs on the shares are usually thosewho've had an account with the S&L; at least a year before it announces the offering.

It's too bad 98 percent of people who have deposits in S&Ls; that go public pass up the chance to research and then considerbuying shares. They throw away the announcements and prospectuses they get in the mail. Don't dismiss these offers. Most of them have turned out to be great investments.

Written with John Rothchild. Peter Lynch is vice-chairman of Fidelity Management and Research and the coauthor, with Rothchild, of two books on investing. Beating the Street, the latest, is published by Simon and Schuster.