Finding the Next Starbucks: How to Identify and Invest in the Hot Stocks of Tomorrow by Moe Michael

Author:Moe, Michael [Moe, Michael]
Language: eng
Format: epub
Publisher: Penguin Group, Inc.
Published: 2007-12-17T16:00:00+00:00

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THE FIFTH P—PROFITABILITY

“Show me the money!”

—ROD TIDWELL IN J ERRY M AQUIRE

Lou Holtz was my college football coach when I was a very backup quarterback at the University of Minnesota. Coach Holtz is an amazing leader and without question would have been a world-class CEO if he wasn’t a head football coach. Coach Holtz and I had a conversation about what ThinkEquity was doing. He loved the four Ps, but he had one question: Where are profits? And he could have asked, “How about the sixth P, P/E?”

Profits are critically important for a company to be successful. All companies are ultimately valued on future profits discounted back to today.

I believe that through proper analysis with a disciplined application of the four Ps, an investor can prudently invest in a company when it has negligible profits today or none at all.

Predicting what a company will look like three to five years from now is where art and science converge. While for a business to be successful and valuable, it needs to generate growing and sustainable profits, I think it’s possible to invest in a company with the four Ps before profits are self-evident.

As to P/E multiples, while investing in companies with high P/E multiples is risky business and not for widows and orphans, the fastest-growing companies that produce the highest returns over time often have absolutely high P/Es. If we are right about the earnings growth, over time we will be right about the stock. Remember, the average P/E of the top 25 companies from 1995 to 2005 was 18.9x, hardly bargain basement.

The four Ps may seem a bit corny and unsophisticated—they are! But part of the secret to investing success is to make complex things simple and to use a systematic framework to achieve your objectives. The four Ps are the foundation I’ve built in my effort to identify and invest in the stars of tomorrow.

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