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Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era -- Ignore unavailable to you. Want to Upgrade?

To: porcupine --''''> who wrote (444)	6/29/1998 7:04:00 PM
From: Freedom Fighter	Respond to of 1722

Reynolds, >Your letter to Barron's says, in part, "My primary hit list includes >retail, computers, and restaurants." >I agree. As one commentator has pointed out, these are companies that >need to raise prices to raise profits -- an unlikely scenario if my >"3rd Era" thesis about a long-term deflation/disinflation environment >holds up. I'm not sure that I agree with the premise that they (restaurants or retail) either need to raise prices or that it effects the values negatively. Much of the growth in sales and profits comes from reinvested retained earnings. In other words more restuarants, new types of restaurants etc... If they cannot raise prices as fast due to a decline in the inflation rate (as we are presently experiencing), that is OK as far as I am concerned as long as the expenses are rising at the same rate. If the overall growth rate in sales and earnings is declining (as one would expect) it really doesn't matter because the discount rate used to value the business is also declining. In short, if you are growing at 10% with a 7% inflation rate, that's not much different than growing at 5% with a 2% inflation rate. The "real" growth rate is the same and the discount rate would drop by 5% (give or take). If anything, the business is worth more because there is less faulty depreciation accounting associated with low inflation. Earnings quality improves. This is something that you point out above. My major concern with many restaurants, retail and technology companies is that most have no real competitive advantage. It thus seems unlikely that many (and most other businesses for that matter) can maintain the higher than average ROE that they are experiencing at present. Second, the consumer boom has lead to significant expansion by many retail and restaurant chains. I believe there is significant overcapacity in both industries. Third, there are shortages of relatively unskilled labor. All in all it has margin squeeze written all over it and serious problems if we have a significant slowdown!!! I do own shares of both Sbarro and Applebees. I am concerned about both. I believe that the price of both has enough margin of safety built in that I won't get hurt unless things get real bad. The upside can be better than anything else I can find in this market. In a typical market environment I would probably pass on both. In this environment given my very conservative portfolio position, I think they are OK investments. (my average price on APPB is 18, SBA is 26 7/8). I am monitoring the situation and will be out if I see things taking a serious turn for the worse. I am not a technology investor but I read the opinions of a few that I have tremendous respect for. As far as I'm concerned, technology is a monumental accident waiting to happen with only a few exceptions (Microsoft being an obvious one)