Back to Home > News > Monday, Apr 02, 2007 Today in the Times Posted on Mon, Apr. 02, 2007 email... Cashed out too soon...

Around 1970, I spent $4,600 on a stock called Ponderosa Systems. It was rising at a staggering pace. Back then, long-term investing to me seemed like six months. So after six months, I sold all my shares for $22,000, netting a 475 percent gain. I thought I was a genius. Had I held onto the shares for another year or so, though, my investment would have been worth more than $100,000. -- Philip Cash, Eagle Point, Ore.

The Fool responds: At least you made good money on the chain of steakhouses. You wouldn't have wanted to hold on for too long, though, as the company eventually ran into trouble, partly due to America's growing taste for lighter fare, such as chicken and fish. According to the International Directory of Company Histories, in 1988 John Warner Kluge paid $8.6 million cash and assumed $290 million in debt to add Ponderosa to his Metromedia restaurant group. It now includes Bennigan's and Bonanza, among others.

I was founded in 1891 in Chicago by a fellow who boosted his sales of soap to merchants with free chewing gum. My Juicy Fruit and spearmint gums debuted more than 110 years ago. Today my offerings are sold in more than 180 countries. My gum brands include Doublemint, Big Red, Winterfresh, Extra, Eclipse, Freedent, Hubba Bubba, Orbit and Excel. Among my other brands, you'll find Altoids, Life Savers, Creme Savers, Pim Pom and Solano. I rake in more than $4.5 billion annually, and my stock has appreciated more than 20-fold over the past 20 years. Who am I?

Inventory refers to everything in a company's pipeline. There are three main categories of inventory: raw materials, work in progress and finished goods. Imagine the maker of Mr. Burrito Head toys. Making the products involves ordering, receiving, storing and using raw materials, such as chemicals, cardboard and paint. These are then assembled into finished products. Inventory is likely to include vats of plastic, half-assembled burrito molds, finished boxes waiting to be shipped to distributors and returned products from retailers.

Too little inventory will hold up production when shortages occur. Too much will generate high storage costs and tie up money that could be used elsewhere. Finished goods sitting on shelves a long time also risk not being sold. In recent years, many American companies have adopted "Just in Time" inventory systems, pioneered by Ford and then the Japanese. These systems have firms holding precisely the minimum necessary inventory, replenishing supplies continually, as needed. This can increase efficiency and profitability, but can be problematic if demand spikes.

When evaluating inventory on a firm's balance sheet, compare it with levels from the year before and with revenue growth. If inventory is rising faster than revenue, it could signal a sales slowdown. If inventory growth lags sales, either the company is not meeting demand or it is successfully tightening controls on production processes and distribution.

High and growing turnover numbers reflect well-managed companies freeing up funds for other uses. Compare a company's results with those of its competitors. Kellogg's recent turnover was 7.9, for example, vs. 5.7 for General Mills.

Yet Wal-Mart (NYSE: WMT) continues to defy this convention. Its recently reported revenues for its latest fiscal year were up 11.7 percent (over year-ago levels) to nearly $350 billion (you read that right), and operating cash flow was up 14.3 percent. Wal-Mart's balance sheet remained squeaky clean, too, as it did not sacrifice financial strength to juice sales and earnings.

By comparison, Target's revenues grew 11.5 percent over the past 12 months, but its far smaller size makes that growth easier to achieve -- as long as you ignore the fact that Target has to compete with Wal-Mart.

Sales grew more slowly in established domestic stores, rising a modest but respectable 2.1 percent. Many expect much of the company's growth to come from regions such as Japan, South America, China and India.

Costco still tops Wal-Mart's Sam's Club, Target is giving Wal-Mart a run for its money, and it is hard to argue with how Eddie Lampert made Sears (Nasdaq: SHLD) relevant for investors again -- but Wal-Mart is still the king of the retail jungle. Given all the negative press the company has sustained and the struggles it has had with becoming a better corporate citizen, that is no small feat.

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