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Peter Lynch

Bluckbuster (Charles Silk)
1984-1992
Industry: Video Rentals
Category:

Context
Lynch met Charles Silk who had bought Blockbuster in 1984 for $3/sh, when it was called Cook Data Services.
After the price went up 3-4x, he didn't say to himself, I'll take my profits and run, he didn't get scared out of price drops, and he disregarded publicized negative comments
He had the discipline to hold on as long as the fundamentals were favorable. He was doing his homework all along.

Over the years Silk had searched for good stocks among small companies, which were debt free and beaten down, to the point they were selling for less than cash.
He would comb over pink sheets in the OTC.
In 1973, Charlie found several low-risk opportunities, Computer Usage for $2.25 which had $4.10 in cash.
Scientific Computers for $0.25 which had $1.37 in cash. He said that he was risking nothing, only his patience.

In 1983, Cook Data Services caught his eye. It had $4 in cash and was selling for $3.
The company had revenue increasing for 4 years in a row, and he put $10,000 in. He was one of the largest shareholders.
Around that time, Cook Data decided to open a video superstore in Dallas.
Silk did his research and found out only 30% of Americans owned a VCR, but eventually 60-70% would own the machine.
These people will need tapes. He found out that the coauthor of the study became a major sharheolder.
Charlie also learned that the revenue from the Dallas store had more than doubled in 3 months.
He learned that the store was packed, people were driving as far as 30 miles awa.
Charlie said stocks with heavy volume in the upward direction often are a harbinger of big moves.
Stocks usually don't hit bottom until volume subside.
In 6 months, Cook ahd already made 5x his money.
Cook kept his forcus where it belonged, not on the stock price but the company itself.
Cook visited the store and saw that the parking lot was always packed.
He thought to himself, this is going to be incredible.
People said, who needs another video store?
Charlie was confident he knew more about Blockbuster. The sales figures showed people were flocking to the new stores.
Wayne Huizenga, the Waste Management tycoon, jumped on the Blockbuster opportunity, eventually taking full control.
The business started to focus on company-owned stores, which were more profitable than franchises.
In 1989, an expert said that the company was carrying old video tapes on it's book, when they were worthless.
This made Blockbuster more profitable than it was.
This shot the stock down 36%.
However Cook said that the write-off this inventory would only be a one-time $0.10-0.15/sh expense, which is peanuts compared to the tremendous growth.

Why the Company is Mispriced

Alternative View

Result
Over 8 years, Silk made 150x in 8 years. That's a 85% CAGR.
Note: Lynch said his best gains usually come in year 3 or 4.