The Iconoclast Investor

Here’s the third question in our value investing Q&A series. Please send us any comments or questions.

Question: I bought Garmin at 44.  Shortly and suddenly, it went south about 10 points to 35.  What surprise caused such a precipitous drop?  I read that they are stacking up inventory instead of sales, and their new phone product is not ready on time, and they have competition from others cell phone products.

I just subscribed recently and this is the first recommendation from you that I bought.   What do you think of the company’s ability to climb out of this hole?   Should I sell and move to something else, or hold, or double my investment and average the price down?

Why didn’t the Benjamin Graham screen pick up this company’s weak position regarding earnings growth?

Answer: Thank you for your email regarding Garmin (GRMN).  Your summary of the company’s problems is accurate.  GRMN declined sharply after the company made several announcements.  Garmin expects slower growth during the next several quarters mainly because of the slower economy in the U.S. and elsewhere. The company also announced that its smart phone, dubbed Nuvifone, won’t be released until the middle of next year. This is a disappointment, but I believe it is better to be well prepared for Nuvifone’s launch rather than introduce a product with problems.  I am disappointed, though, that Garmin will not launch this important product before the Christmas season because this allows Apple’s iPhone and others to get a big head start.  At the current price, GRMN sells at 8.8 times my 2008 EPS estimate, which is a bargain.  I recommend holding your Garmin shares, because the stock could double within the next two years.  Garmin surprised investors with their announcement of the Nuvifone delay.  Unfortunately, it was impossible to know what was coming, without “insider” information.  My faith in the company is diminished only slightly, because the GPS market provides huge opportunities for future growth.