What Memorial Day Means to Me
Road Trip-Part One
An Undervalued Investment
For most Americans, Memorial Day marks the beginning of summer. Millions of families will cook out on the grill, drink beer and watch the Indianapolis 500. In the south, they'll swim, and in the north, they'll wish they could.
At the same time, Memorial Day provides an opportunity-even if just for a moment-to remember those who gave their lives for our great country, and to acknowledge that without them, we might not be able to celebrate so freely and safely in the company of family and friends.
For me, Memorial Day has traditionally involved canoeing the Ipswich River with a few dozen family and friends. The event has been going on since the 1940s, originally in wood and canvas canoes and now in aluminum canoes that don't mind when you scrape your way over fallen tree limbs. You see, the Ipswich is not a mighty torrent-it's quiet, little more than a big stream in places. But it floats our boats, we get to watch birds, ducks and turtles and enjoy an electronic-free day. And as long as it doesn't rain, it's great fun.
This year however, I skipped the canoe trip, as I've been serving as chief caretaker for my wife, who broke her wrist recently when she misstepped in Kentucky and fell down.
And what were we doing in Kentucky?
Pursuing my somewhat unusual vision of the great American road trip, which I will present over the next four weeks (if not more).
Road Trip-Part One
At the start, the goal was to drive to Minneapolis, where my wife had a couple pieces of art in a gallery opening, and back, stopping on the way to visit Niagara Falls, where neither of us had ever been, Detroit, to see the Diego Rivera/Frida Kahlo art exhibit, and Chicago, which we love.
From Salem to Minneapolis and back is a bit more than 2,800 miles.
But then I realized that this was the perfect opportunity to visit a few of the remaining states that I had never been to. So the question was, "Do we go further west and check off North Dakota, South Dakota and Montana, or do we turn south and check off Missouri, Kansas and Oklahoma?"
Obviously-given that I've mentioned Kentucky-the southern route won out (not least because returning from Montana would mean retracing our steps-and I prefer new experiences.)
All told, it was a great success (except for the broken wrist).
We drove 4,218 miles, going through (in order) Massachusetts, New York, Ontario, Michigan, Indiana, Illinois, Wisconsin, Minnesota, Iowa, Missouri, Kansas, Oklahoma, Arkansas, Tennessee, Kentucky, Ohio, West Virginia, Pennsylvania, New Jersey and Connecticut.
Fourteen days were spent driving, while three days were layovers, in Chicago, Minneapolis and Memphis.
We got no speeding tickets, no parking tickets and no flat tires.
We met a lot of really nice people, particularly as we drove farther west and got outside the big cities.
And as with every trip, the difference between the planning and the experience was interesting. I planned most of the trip myself, because I'm good with logistics and I know my wife's tastes.
But the detailed plans we set out with were just the outline of the trip, much like the black lines of a coloring book before the color is filled in-and it's the color that comes from the interactions with real people (and animals) that made a trip memorable.
Speaking of animals, we saw a lot of road-kill on the trip. Deer were most prevalent, particularly in Ohio and Pennsylvania, but we also saw dead raccoons, opossums, armadillos, turtles and squirrels. Once I thought I saw a dead kangaroo-but it was a deer.
I'll be providing a lot more color in the weeks ahead, but today, I'll finish by noting that those Dakotas and Montana are the only states I haven't yet visited. It won't be long!
Moving on to the market.
The main trend remains up, but as always, there are crosscurrents.
Still, there are always great under-valued investments to be found, and today I want to talk about one that our value expert Roy Ward did very well with recently.
Last July, Roy wrote the following to his readers:
"Middleby Corp. (MIDD: Current Price 82.78; Max Buy Price 84.87) is a worldwide manufacturer of commercial kitchen equipment, residential appliances and equipment for food processing, packaging and baking. Middleby designs, manufactures, sells and distributes its products worldwide. Products include ovens, ranges, dishwashers and microwaves sold under the Southbend, Auto-Bake and Viking names.
"Middleby has been able to produce steady sales and earnings growth during the past decade by introducing new products, acquiring numerous companies and expanding overseas. Sales surged 21% during the past 12 months ended 6/30/14 while EPS advanced 28%. The company's purchase of Viking Range at the beginning of 2013 is adding significant sales and earnings.
"Sales will rise 10% and EPS should increase at least 15% to 3.50 during the next 12 months ending 6/30/15. Results could exceed my estimates, if new products meet strong demand. The company has 50 new products lined up and ready to launch before the end of 2014.
"MIDD shares split 3 for 1 on June 16. The stock backed off its high of 102 earlier this year after rising 87% in 2013. At 27.7 times current EPS, the stock price is not cheap, but the company's growth spurt justifies the price. MIDD does not pay a dividend. The extra cash flow is used for new acquisitions and the development of new products. MIDD will likely reach my Min Sell Price of 133.77 within two years."
Like everything Roy writes it was clear, factual and without hype.
And when I did some more research, I was astounded by the variety of specialized food preparation equipment Middleby made for the restaurant and food service business, and I concluded that the company was a growing dominant force in what was previously a very fragmented industry. (It's a great growth formula.)
And after seeing the chart, which showed a stock that had likely bottomed and was beginning a new leg up, I was convinced.
This was the chart at the time:
So in the next issue of Cabot Stock of the Month, which every month recommends the best stock (in my opinion) previously recommended by another Cabot analyst, I featured Middleby-giving credit, of course, to Roy.
Since then, MIDD has done very well.
In fact, it's done so well that it's reached Roy's targets well ahead of schedule. So two weeks ago, Roy wrote to his readers:
"Middleby Corp. (MIDD 109.40) reached its Minimum Sell Price of 109.72 today. The company's first-quarter results were released last night. Sales rose 9%, and EPS surged 36%. Earnings were on target, but revenues fell slightly short of expectations. However, the news helped MIDD jump 7.5% today.
"Middleby was first recommended in July 2014 at 83.06. MIDD has advanced 32.10% in the past 10 months compared to a gain of just 6.79% for the Standard & Poor's 500 Index during the same time period. I recommend selling your MIDD shares now."
But I didn't recommend that my readers sell their shares, and here's why.
I think the company can grow further as it continues to consolidate and make more efficient the food service/restaurant equipment industry, and I think the bull market-as long as it lasts-can support a longer advance by the stock.
Yes, risk in the stock is higher now, based on valuation, and for purely value-based investors like Roy, selling is the right move.
But I'm not averse to risk, and I put a lot of weight on charts, and MIDD's chart today tells me that if the stock can get cleanly above 110, that will provide a solid level of support-which can lead to a longer advance.
And if it doesn't, and the stock falters, I'll tell my readers to sell.
So, what do I recommend you do?
I don't recommend buying MIDD here. On a value basis, it's high, and on a growth basis, the stock has come a long way. There are better set-ups out there.
What I do recommend is that you become a long-term reader of Roy's wisdom if value stocks appeal to you. Since inception on 12/31/95, Roy's Cabot Value Model has provided an impressive return of 1,148.2% compared to a return of 564.8% for Warren Buffett's Berkshire Hathaway. During the same 19-year period, the Dow has gained just 248.6%.
When you become a regular reader of Cabot Benjamin Graham Value Investor, Roy Ward will update you on all his picks every week, including his legendary Maximum Buy Prices and Minimum Sell Prices, which are updated for his Top 275 Value Stocks in every issue.
Alternatively, if you're looking for a little more excitement (from just one stock per month), you could become a long-term reader of my Cabot Stock of the Month.
Yours in pursuit of wisdom and wealth,
Chief Analyst of Cabot Stock of the Month
Publisher, Cabot Wealth Advisory