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Salesman likes companies with strong, predictable cash flow

Jim Chuong: 37

Occupation: Pharmaceuticals sales

Portfolio: Berkshire Hathaway , Fossil, Buckle, K-Swiss, American Eagle Outfitters, Columbia Sportswear .

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His strategy

Over the last 12 months, the markets have been very good to Jim Chuong, given that they perfectly matched his approach.

Mr. Chuong's strategy has much in common with that taken by investment bankers. He likes to buy companies that have had predictable cash flow for the last 10 years. He also looks at top line revenues, operating profit, and net profit. "I also don't want them to carry too much debt," he says. "With the credit crisis those carrying debt had a lot of problems."

His Approach

"I used to value a business by adding up its future cash flows to infinity and discounting it back to the present." But that proved to be a double-edged sword, as the further out he forecast, the larger the error. But the process made him realize that a lot of the companies that looked financially attractive had the same characteristics. "I realized if I bought companies with a [price-to-earnings ratio]P/E of 10 or less, and a price-to-book of two or less, I'd do pretty good," he says. Of course, he admits that most of the time the markets are in bull mode, and that means most companies never get near those levels. Almost, but not never. In 2001 and 2002, the market drop brought prices down enough to give him lots to choose from, as did the recent market rout.

Insider Ownership

Mr. Chuong likes to have management and directors with money on the line, and if they've come into stock thanks to exercising options, that they've held their shares for a long period of time. "When their income is more closely tied to the fortunes of the business through a large minority stake, there's usually more financial discipline," he says. "They seem to be more averse to taking on debt, and more interested in internal growth rather than leverage."

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His Other Rules

"I never deploy all of my money at once. I stagger it. If a stock is at a price I like, I deploy a third or quarter. If it falls more, I'll buy more, but if it rises, I won't," he says. "It gives me lots of kicks at the can, and I'm always safe from further declines and from running out of ammo."

How He Plays Puts

If Mr. Chuong likes a stock, but if its price is too high, he'll sometimes sell puts - giving someone else the right to make him buy the stock at a set price. If the stock falls to the price he likes, he's happy to then buy it. If the stock just moves up, he still keeps the premium.

Best Move

The market crash over the last year suddenly put a lot of companies right in Mr. Chuong's wheelhouse. He picked up consumer fashion accessory maker and marketer Fossil at around $12 (U.S.), clothing maker American Eagle Outfitters Inc. at close to $10, and clothing retailer Buckle Inc. in the low $20s.

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Worst Move

Sport shoemaker K-Swiss has given Mr. Chuong a kick in the rear. He picked it up two years ago as it met all his criteria, and the company was in a turnaround position. "They were doing everything right, and then the recession hit," he says. He figures the company will still come out right, but "instead of two or three years, it could take five or six."


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