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Harry Newton's In Search of The Perfect Investment Newton's In Search Of The Perfect Investment. Technology Investor.

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8:30 AM Thursday, November 10, 2005: If Whole Foods (WFMI) drops dramatically this morning. I'm buying more. Read this report from BusinessWeek online and ask yourself: Isn't Whole Foods management a mensch?

NOV. 9 8:28 P.M. ET Natural-food grocer Whole Foods Market Inc. posted strong sales growth but saw profits slump last quarter due to higher costs related to Hurricane Katrina, which knocked out two of its Louisiana stores. The company threw a number of goodies at shareholders, including a special dividend and an increase in the regular dividend. Still, the shares fell $5.88, or 4 percent, in after-hours trading. In trading before the financial results were released, the stock rose $1.78 to $146.78 on the Nasdaq Stock Market.

Whole Foods said it earned $9.1 million, or 13 cents per share, for the three months ended Sept. 25, compared to $28.2 million, or 43 cents per share, a year earlier. The $9.1 million figure included pretax costs of $36.4 million related to Hurricane Katrina -- the storm shuttered two Louisiana stores for the last five weeks of the quarter -- stock-based compensation and early adoption of a rule change in lease accounting.

Analysts polled by Thomson Financial had expected earnings, excluding items, of 53 cents per share. Company officials said Whole Foods would have earned 52 cents per share excluding the extra costs, based on a 40 percent tax rate.

Sales rose 20 percent, to $1.12 billion, even though the hurricane cost it $5 million to $6 million in revenue, Whole Foods said. Analysts had expected sales of $1.13 billion.

Sales at stores open at least one year, a key measure for retailers, jumped 13.4 percent after adjusting for lost sales at hurricane-ravaged stores in New Orleans and Metairie, La. Whole Foods said it expects sales to grow 18 percent to 21 percent in the new fiscal 2006, up from an earlier estimate of 15 percent to 20 percent, and it said same-store sales would rise 8 percent to 11 percent. For the past five years, same-store sales have risen an average of 11 percent a year.

"The bar does keep getting higher," said Chief Financial Officer Glenda Flanagan. "Hopefully that's a conservative number."

Jason D. Whitmer, an analyst with FTN Midwest Research, agreed with the company's calculation that earnings fell a penny per share short of Wall Street's consensus estimate, after excluding special costs.

"It's a minor concern," Whitmer said. "Everything looks to be largely positive. The problem is it's an extremely expensive stock and one with expectations that are through the roof." He said nothing about the company's fundamentals had changed, as the chain's upscale concept is still performing better than other segments of the retail food industry.

Whole Foods announced it was raising its quarterly dividend 20 percent to 30 cents per share and declared a special $4-per-share dividend. The Austin-based company also authorized a $200 million stock-buyback program and announced a 2-for-1 stock split.

For the fiscal year ended Sept. 25, earnings increased to $136.4 million from $129.5 million. Per-share results were flat at $1.98 and below analysts' forecast of $2.46 per share. Annual sales rose to $4.7 billion, up 22 percent from $3.86 billion a year earlier, but just below the $4.72 billion analysts predicted.

And for those of you who think only rich folks shop at Whole Foods... I took this photo last night standing in line at my local Whole Foods under the Time Warner building on Columbus Circle. It's amazing how bored people can be standing in line. Photo with my trust Canon SD-450, with the flash turned off.

You're maybe wondering why building prices are going up. And returns are going down? Much has to do with exploding oil revenues. For example: The Royal Family of Dubai has paid more than $1.1 billion for two buildings in Manhattan --
230 Park Avenue, the gold-crowned, 34-story tower that sits astride the avenue between 45th and 46th Streets, and the Essex House, one of the grand Art Deco hotels on Central Park South. Over the past three years, Dubai has also quietly invested more than $1 billion in real estate in the United States, putting money into nursing homes, office buildings, hotels and thousands of apartments in Dallas, Phoenix, Nashville and Atlanta. I don't know what the rate of return their latest investment will be. I'm guessing it's low. I'm trying to find out.

TriPath Imaging's 3rd quarter results are nicely up: Third quarter revenues are up 19% on the third quarter of 2004; gross profit was up 21%; net income was up 80%. TriPath is having a big analysts meeting today. I'll be there.

Where go interest rates? George Friedlander's is Citigroup's bond king. He holds conference calls rarely. Only when there's BIG concern over interest rates. Yesterday afternoon he talked:
+ We do not think long-term rates will go substantially above where they are now.
+ The Fed will tighten again in December and February and possibly once or twice after that.
+ We're in the end game of the tightening cycle.
+ There's a lot of noise in economic data that it's making it very hard to read the tea leaves.
+ Mortgage markets have become more volatile because of players' need to hedge.
The replay of the call is on 866-421-3788 and is available through November 16.

My son, the investment genius read this article. He was so impressed, he rushed out and bought the two books. He did NOT ask me to pay for the books. That's a measure of his excitement. It's palpable. The article appeared on page C1 of yesterday's Wall Street Journal:

As hard as it is to envision, hedge-fund titans and other masters of the universe soon will be tucking themselves into bed with a thin tome bearing a cutesy title: "The Little Book That Beats the Market."

Here's why: The author is Joel Greenblatt, a former hedge-fund manager. His first investment guide, published in 1997, also sported a hokey title, "You Can Be a Stock Market Genius (Even If You're Not Too Smart)," and sold about 38,000 hardcover and softcover copies.

Not bad as first books go, but it also became a cult hit in the insular world of hedge funds, passed like samizdat from manager to manager. A book of war stories and case studies written clearly and laced with jokes, it had two profound insights, say hedge-fund managers who have pressed the book on me.

One was that there are secret hiding places in the stock market, like spin-offs and restructurings, where bargains tend to lurk. The other was there wasn't any compelling reason to have a giant portfolio of dozens of stocks when a well-designed, concentrated portfolio could accomplish the same goal of achieving high returns without adding risk.

"His book on investing is by far the most valuable thing I have read," says David Einhorn, who manages a large, successful hedge fund, Greenlight Capital.

But hedge-fund managers "were not quite the underprivileged group I was shooting for when I wrote it," he says. So for his second book, Mr. Greenblatt says he wanted to write an even more basic and fundamental book on investing that would appeal beyond Wall Street. Think Benjamin Graham does Borscht Belt.

Mr. Greenblatt, 47 years old, says his goal was to provide advice that, while sophisticated, could be understood and followed by his five children, ages 6 to 15. They are in luck. His soon-to-be-released "Little Book" is one of the best, clearest guides to value investing out there. I have some minor quibbles, but in a world where individual-investor advice is dominated by jargon-filled short-termism on the one hand and oversimplified throw-up-your-hands indexing on the other, Mr. Greenblatt's approach is valuable.

It is so simple and cute that an investor with a little bit of knowledge might mistakenly dismiss it. Mr. Greenblatt titles his investment approach a "magic formula." His tongue is in his cheek, but not entirely. He writes as if he were J.M. Barrie spinning a Peter Pan-esque fairy tale, but with the fervor of a true believer:

"You have to take the time to understand the story, and most important, you have to actually believe that the story is true. In fact, the story concludes with a magic formula that can make you rich over time. I kid you not."

What is the magic formula? Invest in good companies when they are cheap. As Mr. Greenblatt might say: See? We told you it sounded obvious. Yeah, so what's "good"? And what's "cheap"?

Good companies earn high returns on their investments, he explains, while cheap companies sport share prices that are low (based on past earnings). His proxies for these criteria are return on capital (operating profit as a percentage of net working capital and net fixed assets) and earnings yield (pretax operating earnings compared with enterprise value, which is the market value plus the net debt). To his credit, however, Mr. Greenblatt explains all that parenthetical jargon in terms that shouldn't insult his peers but that will ring a bell for the unschooled masses.

To make things simpler still, his free Web site,, screens companies using his criteria. He advises individual investors to buy a basket of top stocks and turn them over on a strict schedule, depending on how they perform. (For maximum tax advantage, sell losers just before a year's up, and winners just after a year.)

It sounds too easy. But in fact, his approach is difficult not because it is hard to understand, but because it requires patience and faith that you are right when the market is saying you're wrong.

This is based on Warren Buffett's investment principles. But they bear repeating. Even a die-hard value investor like Mr. Greenblatt says he didn't realize that trying to find cheap, good companies, rather than just cheap ones, was so important until the 1990s. While Mr. Graham, Mr. Buffett's mentor, was looking for starkly cheap companies, Mr. Buffett wants only the great ones.

"I didn't get Buffettized until the early 1990s," says Mr. Greenblatt. "I wish it happened earlier."

Looked at retroactively, the returns of the "magic formula" beat the market handily. From 1988 through 2004, according to Mr. Greenblatt's book, the high-return/low-price stocks of the largest 1,000 companies had returns of 22.9% annually, compared with 12.4% for the S&P 500.

The most convincing part of Mr. Greenblatt's argument is that when 2,500 companies are ranked for price and returns (based on the formula), the top 10% outperformed the second 10%, which outperformed the third 10% and so on. "The darn thing works in order," he says.

There are some limitations to the approach. It seems prone to tossing up stocks whose high returns and growth may be in the past. Magic-formula stocks with more than $1 billion in stock-market value include lots of fast-growing specialty retailers and niche pharmaceutical companies. Some of these will flame out.

That's why Mr. Greenblatt argues that novice investors buy at least 20 or 30 of them. For himself, he buys a smaller number that he can know deeply. But that requires something not easily taught in a book: good instincts and judgment to distinguish true cheap gems from one-hit wonders.

Though he always was a value investor, his hedge-fund firm, Gotham Capital, wasn't always run on his magic formula, especially in the early years, when he tended toward complex arbitrage. He started Gotham in 1985 and ran it for outside investors for 10 years, achieving compounded annual returns, before fees but after expenses, of 50%. He started with $7 million, mostly raised through junk-bond king Michael Milken. After five years, he returned half the outside capital. He finished with more than $350 million and returned all the remaining outside capital.

These days, he spends his time teaching at Columbia Business School and helping run a Web site for pros, the Value Investors Club. His wealth is mostly tied up in Gotham Capital, which manages $1.6 billion, including some outside money in a fund of hedge funds he started a few years back.

His home cooking isn't just good enough for Mr. Greenblatt. He's got his kids eating it, too. His eldest son is doing well following the book's advice. A daughter, at it for two months, is having a rougher time. "I'm not sure if she didn't have me as her daddy she'd be hanging in there," he says.

CDW has a major bargain: It looks like a mistake. One gig for the same price as 4 gigs. But it's not. This clip from their web site. I bought one of the 4 gig models at their local store. Works like a charm. Perfect for photos, backing up, carrying your files between your home and your office, etc.

If the price is not longer there, don't blame me. Maybe they caught their mistake.

Blonde Geometry Test:
See if you can do better.

Time to get rid of Israel: (This is a joke. don't be offended.)


Advisor: "Excuse, please, Mr. President, but Israel is not on any Iranian maps."

President of Iran: "See what I mean about those sneaky Jews!!"

A lesson in short story writing
A college class was told to write a short story in as few words as possible. The instructions were as follows:

The short story must contain the following three things.
1) Religion
2) Sexuality
3) Mystery

Only one A+ paper was awarded by the teacher. Here is the A+ short story.

"Good God, I'm pregnant, I wonder whose it is?"

Recent column highlights:
+ Dumb reasons we hold losing stocks. Click here.
+ How my private equity fund is doing. Click here.
+ Blackstone private equity funds. Click here.
+ Manhattan Pharmaceuticals: Click here.
+ NovaDel Biosciences appeals. Click here.
+ Hana Biosciences appeals. Click here.
+ All turned on by biotech. Click here.
+ Steve Jobs Commencement Address. The text is available: Click here. The full audio is available. Click here.
+ The March of the Penguins, an exquisite movie. Click here.
+ When to sell stocks. Click here.

Harry Newton

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads. Thus I cannot endorse any, though some look mighty interesting. If you click on a link, Google may send me money. That money will help pay Claire's law school tuition. Read more about Google AdSense, click here and here.
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