Newsletter April 7, 2002 Newsletter, April 7, 2002


Clemex was updated, this is a micro-cap with very thin trading liquidity but I think it will be a good investment. To Buy, I would suggest use a limit order and be patient.

Forzani was added as a new listing but I will not be a buyer. It’s a great company but I think I missed the boat on this one, I wish I had analyzed it 6 months ago.

I’m still hoping to get some additional new research and updates put together for you. I hope to package this up and offer it soon to members for a small fee.

Members Only:

In case you missed it last time, I posted a Buy rated report that is available to members only and is not available to casual visitors to the Site. See BW Technologies.

As of next week, I hope to have this same web site running under the name That name rolls off the tongue a little easier and is easier to remember. Also, I really believe that I have been a friend to investors and that the name is very fitting. At the same time the new name is not all that different from investment-picks and so it should be an easy transition. I am hoping that this will not cause problems with links to the site, particular links to other than the home page.


The performance of my stock picking continues to be excellent and very consistent. For more gushing comments link to the comments section on the site which then has links to graphics which illustrate the strong performance.

How Much Growth Are Investors Implicitly (and probably unwittingly) Paying For (In Advance of Such Growth Actually Occurring)?:

In analyzing Forzani I ran into the issue of how much growth I should assume.

For stocks with positive and reasonably predictable earnings, I always do an implicit value calculation that starts with current earnings (normalized if necessary).  Then I calculate the intrinsic value of the earnings and dividend by assuming a growth rate and then assuming that the stock will be sold at a conservative P/E level of say 12 to 15 after ten years. This tends to work reasonably well for for stock like Enbridge, where I feel reasonably comfortable projecting a conservative growth of say 6% to 8% average over the next ten years.

However, Forzani illustrates a different case. It has been growing at over 25% and is expected to growth at perhaps 35% this year. Clearly I am not going to assume that it can keep that pace up for ten years. In the end I find it very hard to get a feeling for what the average growth over the next ten years might be (15%?, 18%?, what would a conservative bet be?).

In this case where I expect rapid growth in the near term but then slowing to a more sustainable growth, it probably makes more sense to think about an intrinsic stock value based on a model that focuses on a one or two year holding period, rather than a ten year holding period.

For Forzani, I calculated what level of growth seems to be “priced-in” to the current stock price. This can be calculated by assuming a P/E level that the stock can be sold for in two years and by assuming a required rate of return.

Forzani currently trades at a P/E of about 29 based on trailing earnings. For a conservative valuation, I would assume that if I was to sell this stock after a two year holding period a P/E of no more than 20 would apply. A P/E of 20 is reasonably high and while the P/E might stay higher than that, I am not willing to bet on it (much less pay for it in advance of its occurrence).

Based on this and assuming that I require a forecast rate of return of 9% then it is a simple matter to calculate that the earnings will have to grow at fully 33% in each of the next two years, in order for me to make my 9% annual return, given that I expect the P/E to decline to a more sustainable level of 20.

It turns out that forecasts of Forzani’s growth are actually in the 30 to 35% range. That’s great, except that it appears that all of this growth is now fully “priced-into” the stock. While it is very possible that Forzani will achieve this growth, it does not seem like a good bet to me to go ahead and pay up for all that growth now. Paying 29 times earnings for this stock simply seems to leave a lot of down-side risk and not all that much up-side risk.

On the other hand if you believe that Forzani is going to continue its robust growth for a good number of years, then you might forecast the P/E to remain at 29. In that case you will easily make your 9% required rate of return, even if earnings only grow at 10%. Even if the P/E declines more moderately to 24, you need “only” a 21% growth for this to work out.

In conclusion, many scenarios are possible and in some of them you will make a good return by buying Forzani stock now. However, I believe that conservative assumptions lead to the conclusion that Forzani is at least fully priced and is not a safe investment at its current lofty P/E. I may be totally wrong, not to buy Forzani, but I just think that the stock is “pricing-in” too much growth. As always, check other sources and make your own investment decisions.

For more detail on how to calculate the amount of growth that is already “priced-into” any stock see my new article on Implicit Growth.


Most of you may be aware of this, but for the others, note that full financial and press release data is available on-line for Canadian publicly traded companies at

Checking Back On A Visitor Who Did Not Like My Site (Sweet revenge!):

I can’t resist having some fun with an email I received just over 2 years ago, just prior to the peak of the market (remember those days?). I had asked this person if they wanted to join the membership, after we had corresponded about some stocks.

Here is the email I received January 23, 2000 and some comments on it:

Your asking me if I wish to subscribe?… Lets analyze some of your recommendations to date. Stonepoint- is a strong sell, in a short period of time this will be a poor recommendation. (Actually, it has gone exactly nowhere in two years – though I now think it does have potential). mc2 learning – another poor company? 15.00/share, strike 2. (Well, you were right… briefly…, it did go over $30 after changing its name to Centrinity but now it’s at $1.75, not my idea of a good investment…) Enough with small cap, I do agree that it is a difficult task to judge a micro co. Lets judge your expertise in the blue chip world. Nortel- you have this as a sell? I suppose your logic would that it has reached its peek and will not appreciate much in the coming year. Poor assumption if this is the case. Nortel will bring shareholders solid gains for years to come, it is a leader in its industry. BCE – a sell? This is not worth a response! (Gee, Nortel and BCE as sells not worth a response just prior to their peaks!, the only proper response was, in retrospect, to Sell). Whats next on the sell list? JDS, Wi-lan,Cisco,Microsoft… (As a matter of fact all four of those including microsoft were exceptionally good sell picks at that time, thanks for the suggestions!).

This individual was actually one of extremely few people who have ever had anything bad to say about my work (and I don’t think I have had even a single complaint since mid 2000). I again invited this individual to join about a year later, but there was no response…probably broke by then…

I probably should not be so mean here, almost everyone got burned at some point in 2000, but no name is used and I’m just having a bit of fun here. And anyhow, the above¬† email to me back in January 2000 was not very nice.


This newsletter is kept brief and usually only sent once each two weeks. I hope that you will all stay on the mailing list of this site. However, you can unsubscribe by simply replying with the word “unsubscribe”. I would appreciate knowing the reason.

Shawn Allen