Cracker Barrel


Here is an example of why we need to use mathematical discipline in our value investing.   For years Merri and I drove up and down I-75 from Naples, Florida to Macon, Georgia (Merri’s mom’s home).  We watched the evolution of the Cracker Barrel Restaurant and Family Store.   The number of stores along the highway grew and all of them seemed prosperous.

cracker barrel

I thought, “Maybe we should invest in Cracker Barrel shares”.  This was the late 1980s. I took a look and saw that the price had recently doubled.

“Nah, the potential is gone”, I thought.  Wow, was I ever wrong, as the chart of the Cracker Barrel shares show.

cracker barrel

Click on image to enlarge.  Chart of Cracker Barrel share price from finance.yahoo.com

Here are four Golden Rules of Investing I wish I had know then.

  • Stocks in companies with rising earnings outperform stocks in companies with falling earnings.
  • Pick companies with share prices already in established up trends.
  • Stocks with high earnings and rising earnings outperform stocks with low and falling earnings.
  • Look for cheap, high quality stocks with rising earnings and increasing attention from the market.

Cracker Barrel shares, at that time, fit all four of the rules.  The fact that the price had doubled in a short period had nothing to do with future profits and earnings. In fact the price was trending up which was an indicator I should have invested.

This is why we added Tradestops.com into the mathematical studies we do in our Purposeful investing Course.  Tradestops uses algorithms to help us decide when a share is trending up or down.

A Tradestops analysis for example of Cracker Barrel shares shows that it has a volatility quotient of 16.41%

This means that the price of these shares can be expected to rise or fall 16.41% without indicating a new trend.  This is the fluctuation that should be expected.  Tradestops also creates a Stock State Stop Loss Price (Currently  $140.12).  This stop loss indicator is based on a recent high price (currently $167.59).

This is a more powerful stop loss indicator than a stop loss based on a percentage of an investment’s price (typically 25%) because investments might have been made at the top of a trend.

The long term chart below shows that these shares have only had one stop loss signal in the last decade until this year.  The Tradestops strategy would have held the share from its price of $26 in 2007 until last November 2015 when it was stopped out at $126 per share.

tradestops

The price dropped to $115 by January 2016 but has since skyrocketed to a high of $167.

tradestops

Tradestops not only sets Stock State Stop Loss Indicators, but also gives reentry indicators.  After recovering from the $155 low, a signal to renter was made and a new stop loss has been set of $140.12 based on on the recent high price (currently $167.59).

This is so much more powerful than my old idea that once a share price has doubled in a short time it’s too high.

Learn more about Tradestop here.

We track a Tradestops Model Portfolio in our Purposeful investing Course.  Learn more here.

Gary

We’ll look at how to use tradestops in a good value portfolio at our International Club Retreat this August 12-13-14.


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