FULL OF BULL - excerpts from Chapter 4

Specialists Do It Better

The best companies have a specific forte and a narrow market concentration. In seeking investment candidates, look for companies that create their market, are there first, have a leading edge, and have an entrenched position. If the company is the second or third entrant in the market, it makes me cautious unless it is the leader of a specific narrow segment. The product or service must be differentiated. The company should be focused on a select, definable niche. Uniqueness may be in the customer base, selling approach, manufacturing, timing to market, or any other aspect. But there needs to be some kind of specialization story.

A Dramatic Acquisition During Troubled Times Is a Diversionary Tactic

Sometimes executives, realizing that the company is in trouble, lethargic, losing market share, mature, growth diminished, and earnings outlook murky, embark on a desperate path. They attempt an inappropriate leapfrog�a dramatic, major acquisition to mask the condition. This is a sure warning. Companies running out of gas, realizing it will be impossible to maintain the expected expansion and profitability that underpins the current stock price, have a tendency to go a bridge too far. The purpose of a monster acquisition under these circumstances is to muddy the water, tossing financials and operating income statements into complexity, and obscuring current operating numbers. It sets up a situation where executives conjure up a strategic story for the future. There is the promise of enhanced results stemming from the stunning deal. Profit improvement via synergism and duplicate cost elimination are always a year or more away, but investors are told to be patient. By making a titanic, splashy merger, executives can forestall the need for immediate earnings, covering up an imminent earnings shortfall. Such a measure is overreaching. It's a disguise.

Be Wary of Stock Buybacks and Dilutive Stock Options

Stock repurchase plans, when a company buys back its shares in the open market, are a patently pathetic action to artificially boost earnings and the stock price. Executives rarely announce such deals when business is ripping, the outlook is brilliant, and the stock is running. Buybacks usually occur when profits have stalled or the stock price has languished. This type of financial maneuvering is no substitute for growth, market share, and the more real catalysts to propel a stock. These days companies are even borrowing, issuing debt, and leveraging the balance sheet to repurchase stock. It is shortsighted, and it makes me suspect. Home Depot, its business affected by the nose dive in the housing market, is a case in point. It issued debt and launched a whopping repurchase of 25% of its shares in June 2007. Wal-Mart, its stock price having flat-lined for about a year, commenced a $15 billion buyback at the same time. Be cautious when companies are borrowing, selling assets, and buying back their shares. It only works for a little while.