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Joshua Harris

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Stock Pick by Joshua Harris

FOSL: FOSL goes to $48.35 in 3 years

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Posted 129 days ago on 12/14/16

FOSL will go UP
$48.35 on 12/14/16
$16.99 (-46.27% from time of market call)

My #1 Value Investing/Discounted Cash flow/Margin of Safety/Warren Buffet/Ben Graham style stock pick on 12/14/2016 is Fossil Group Inc. with the ticker "FOSL" which trades on the NASDAQ. It's a US based company in the consumer goods sector and the textile - apparel footwear & accessories industry. It has a market cap of $1.58 billion so it is considered a small cap company. They design and make watches and other small accessories sold under their brand names and licenses their watches to other name brands. For instance if you buy Burberry brand watch, it says Burberry on the face but it is licensed to them and manufactured b Fossil. Fossil is making inroads into the smart wearbles space. For example, a little snippet from a research article I saw said there has been positive feedback on the fashionable, Fossil made, Michael Kors smart watch as per recent articles descriptions. Fossil supposedly produces 25% of all watches. FOSL currently trades at a 73.66% discount to the margin of safety. In other words, you can buy this company right now for 26 cents on the dollar. Things I like: The company trades at significant discount to the margin of safety while at the same time producing free cash flow per share that has grown at a compound annual growth rate of 30.05% for the trailing 10 year period. It has only had decreases in free cash flow per share in 3 of those 10 years. The R2 on that compound annual growth rate is 0.805 so it has a fairly steady progression that increases on average over time. The current ratio is 3.30 which is good because Ben Graham always looked for current ratios over 2. This means there are twice as many short term assets as short term liabilities making it likely that the company is solvent and on a sure footing for paying its bills this year. Book value per share has also grown at a compound annual growth rate of 9.08% over the trailing 10 years and this is with a R2 on that growth rate of 0.8111 so it is also achieved with little variance and at a steady rate. In addition, book value per share growth has a 0.8920 correlation to free cash flow per share over the trailing 10 year period so value is being created for shareholders who hold the shares over a longer time-frame. The average return on equity rate over the trailing 12 years is 24.01% and has been increasing over that time on average. Gross margins on average over the past 10 years are 54.80% and have been increasing over time. The price to free cash flow is 7.69. I consider anything under 10 to be a positive. Price to book is 1.58, I will accept anything under 5. Cash to shares is 4.78 which works for me as I look for anything over 3 to be acceptable. There are no pending lawsuits facing the company and there are no accounting irregularities to speak of in news about the company. They are not a serial acquirer which can lead to buying companies/assets outside of their core competencies in an attempt to create value through accretion. I read some news articles on the company and found nothing that made my stomach turn so that is a good sign. No company is perfect so let's consider the negatives of FOSL. Some things I don't like: I don't see any insiders buying stock. There is a minimal, almost nil, stock repurchase program at this time which I will consider no stock buyback. At the undervalued price, a substantial stock buyback program would seem appropriate. Price to Cash is at 6.70 where I like to see a P/C at 3 or less. The debt to equity is 0.74 and the long term debt to equity is 0.72 where I like to see both these numbers under 0.5. The P/E ratio is 15.01 where I used to really shoot for a P/E under 10. I learned through reading everything I could about value investing that more important than the P/E ratio for valuation is the discounted free cash flow per share + margin of safety which we established above so we will let that P/E slide by this time as it is a second rate valuation metric even though it is the one the media follows the most every quarter. Now back to the good stuff: At a current price of $31.79 and 10 year CAGR of earnings per share of 30.05%%, with a free cash flow per share ratio of 7.69 and, a hurdle rate of 15% as is Warren Buffet's back of the envelope rate, a dividend yield of 0.00% and given the decent discount to margin of safety of 73.66%, it would appear that FOSL can grow into its intrinsic value price at an unencumbered rate of 15% a year. At this rate I would expect FOSL to trade at an adjusted price of $48.35 per share in 3 years time on 12/14/2019 and an adjusted price of $63.94 per share in 5 years time on 12/14/2021. Time will tell.

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