jeudi 7 novembre 2019

Best managers in the world

Most great businesses have high net profit margins.

For instance, some interesting companies have 20-25% net profit margins. And an exceptional business like Visa has 50% net profit margins.
Imagine that you have a business and when you sell one unit of your merchandise, you get a 50% profit. Wouldn’t it be great? You’ll get profitability much quicker with that type of business than with a business like Ross Stores for which net profit margins are around 10%.
At the bottom of the scale, just before churches and non-profit organizations, you’ll find Costco with 2% net profit margins. And even with these ultra low margins, Costco still makes money. And every shop is always full.
As an investor, Costco doesn’t grow enough for me. It’s valuation is also very high. Nonetheless, their ROE is around 20 which is incredible for such a low margin business.
I think that it’s the business I respect the most, from an investor perspective. Not my favorite business model, but probably the best managers in the world. Who I am to say that? Well, getting such small profits (mostly membership) and building such an empire where everybody goes is, to me, the incarnation of skill and intelligence.

lundi 4 novembre 2019

Waiting for the next correction

Currently, the stock market (S&P500) is more or less at it's all-time high. 

I'm preparing for the next drop. Actually, I'm looking for a drop of the market of 15% or more. Then, I'll buy stocks. I may even use margin, for the first time of my life.

Because since 2008, I've only bought regular stocks. Never bought anything else. Never shorted a stock. Never used margin. Nothing else than stocks, sometimes bad stocks, sometimes good stocks.

So, here's what I'm planning to do at the next correction:

I'll probably use margin for the first time of my life. For those who don't know what a margin is, here's my novice view on it:

When you open a margin account, you can buy stocks with money you don't have, if you put a specific amount. For instance, I could put 5000$ and use a margin of 5000$ (ratio 1:1). I could go as far as 30% personal funds and 70% margin, but I wouldn't start too agressively.

With a margin, you pay interest on a debt you have to reimburse over time. But with the money borrowed, you can buy stocks and make a profit. However, as much the returns can be very interesting, a negative performance is also amplified and you could also experience a margin call, which is a kind of mini-apocalypse for a portfolio. It means that, if the value of your stocks drop a lot, the institution that offered you the margin may sell stocks without your authorization. 

Some people recommend to NEVER EVER use margin. Some other people believe that it's the only way to get great returns over time and to achieve some financial independance. I believe that the truth is somewhere in the middle. But five things are sure for me:

1- Never use margins if you're a novice investor. Use it only if you have good knowledges about stocks and investment.
2- Never use margins if you're insecure about the stock market or if you'll have trouble to sleep after using it.
3- Never use margins for other things than great quality businesses. 
4- Never use too much leverage. I plan to get a margin equivalent to 10% maximum of my portfolio. I'll start that way and I'll see over time if I expand it. Mistakes will be less harmful if I start slowly. 
5- The best way to use a margin (that's what I'm planning to do) is after a severe market correction. Because stocks will be cheaper and your return will benefit from the rebund of the market. Obvisouly, we never know how long or how big a correction will be, but after a 15-20% drop of the market, it may be a good moment and that's what I'll be looking for. 

For instance, Berkshire Hathaway would be a great candidate for a stock bought with leverage. You won't get a stellar performance with BRK, but the 8-10% annual return may be amplified by the use of leverage. At the opposite, If you use leverage with weed stocks, you're a stupid gambler and you expose yourself to very big losses. 

Any opinion on margin/leverage?

Some people use it?

jeudi 31 octobre 2019

8,5% VS 11,8%

8,5% VS 11,8% is the difference between the annual return of an investment on the TSX\S&P500 composite and the same investment on the S&P500 on a 39 years period (1979-2018).

Click on this link to see the reference:

I don’t understand why some people don’t buy american stocks.

The best stocks are there and the exchange rate has almost an unsignificant impact on the long term. So why not putting all the chances on your side and hunt on the American market?

Of course there’s a few exceptional Canadian stocks, but apart these 8-10 great stocks, in my opinion, you should look south of the border. Try it, it won’t harm you. You’ll feel a little weird at first but you’ll get used to it.

And these supplimentary 3,3% will make an important difference on the long term. A much bigger difference than the exchange rate.

dimanche 27 octobre 2019

Portfolio review (october 27th 2019)

It's been about 3 months since my last portfolio review. 

It's time for the quarterly report.

Number of stocks held: 22
Average forward PE: 20
Average ROE: 48
Average Beta: 0,7
Cash held: 7,3% of the portfolio
Performance of the portfolio YTD: 22%
Performance of the TSX/S&P500 YTD: 13%
Performance of the S&P500 YTD: 19%

I have to admit that I'm pretty proud of the performance of my portfolio. There's probably a shitload of people beating my performance once again, but I still beat the canadian/american market by 9% and the american market by 3%. For my size of portfolio, I think it's a very good performance. And I have to tell that my biggest position is MTY which is going not that good these days (-15% YTD). And all of my stocks are large caps (more than 1B$ market cap). 

Whatever the stocks I own, it's been a pretty steady couple of investing years for me. I feel like I have found the stocks that correspond me the best, and more, the balance between all of them. The balance between risk and a predictable performance. I may be redundant here, but I now believe that finding the right balance is the most important thing to achieve. It takes years. And sometimes, you never achieve it, because you just don't really know that you do and you just look for posts like where somebody recommends you a stock or another.

I may sound a bit cocky with that post. But it's not the case. The next recession will hit me like it will hit everybody. But I'm pretty sure it will hit me less than most investors. 

Here's my top 5 positions: MTY, Constellation Software, Couche-Tard, Google, Carmax.

mercredi 23 octobre 2019

Get your thrill

Like every investor, I've never been inclined towards weed stocks. Whatever the weed stocks did on the market, I never thought it was a good investment, mostly on a valuation basis.

I wasn't that smart. Anybody could see that, with a valuation of 25 billion dollars and no profits, Canopy growth was a strange investment. Even if the stock dropped a lot over the last year, it's still vastly overvalued in my opinion.

Recently, I went to a poker game hosted by my famous anonymous friend whom I initiated to stock markets.

He told me that he sold (with a loss) all his weed stocks for which he was so excited last year..

He also told me that he sold his MTY shares some time ago. Such as his Biogen shares (that went up something like 20% yesterday). Such as almost every good company I told him to invest in, instead of weed stocks.

But he didn't listen to me. He tried to speculate everywhere. And he seems to have sold almost all his positions with a loss. But he continues to be on the market.

Frankly, I don't understand how he sees investment. Well, actually, I know. He sees the market as a big casino and he gets his thrill from ups and downs. That's what he's looking for.

It doesn't hurt anybody expect his finances. If that keeps him out of heroin, rape and rampage, it's not a bad thing, after all.

It may be a good thing for you too, investors who'd like to rape kids. Please, continue to invest in weed stocks and bitcoin if it's sufficient to get your thrill. It's better for everybody that way.

dimanche 20 octobre 2019

MTY Food: One of the best at a bargain price

Here we go again: MTY is at it's lowest price over the last 52 weeks.

Why? Because even if sales grew a lot in the last quarter, income didn't grow that much. Rising costs don't appeal to investors. But, after a 250 million dollars acquisition (Papa Murphy's in april), I don't think any rational person would have thought that everything would be wonderful after 6 months.

To tell the truth, I don't have a clue if that acquisiton was a good one. We never really know how things will turn in the short term. The growth of Papa Murphy's wasn't spectacular. Actually, if I remember well, it what a negative growth. MTY seems to be aiming at some kind of rationalization there.

MTY achievemenents is pretty good: EPS have doubled between 2014 and 2018. However, we never know if the trend will continue forever. But, that's the same for every company out there. Anyway, you better bet on companies that achieved something great than speculate on a company that never did anything good.

Everybody is praising MTY managerial practices. For instance, low compensation for managers and humble headquarters.Will Eric Lefebvre (the new CEO) will be as frugal as Stanley Ma? I can't be sure. But, at least, he's been in the company over the last 10 years, so he probably agrees with the culture. So, I give him the benefit of the doubt, even if I don't believe in him like I believe in God.

Actually, I don't believe in god.

Whatever the situation looks like, we should never own a position equivalent to 10% or more of a portfolio. But, to me, MTY is a rare case where a position could reach the maximum level. It was a great company 8-10 years ago and still is, in my opinion.

Well, my experience with Dollar Tree tells me that a permanent stock can become an indesirable stock overnight. But, worst case scenario for me is that MTY could stall for many quarters. I don't see it going much lower than it's current level though. At 15 times next year's earnings, it's a pretty good price for such a high grower. Many stocks with very low growth rates are selling for more than that.

There's not that much occasions out there with great companies. For me, two current occasions are Ulta Beauty and MTY Food Group. 

vendredi 4 octobre 2019

Respect the market

In the beginning, I thought that it was easy to find great stocks: just find something with a good ROE and a low PE and bingo, you're a great investor.  

But that's not how it works. A stock with a low PE is usually (90% of the time) cheap for some good reason. It may not be obvious at first sight and you may be tempted to buy the stock, but you should be careful. Take some time to think about it before buying it. I think that I'm giving a good advice here.

Lately, I've realized that I now respect the market a lot. The valuation given to stocks is usually correct, if we exclude the hype stocks like Shopify and Canopy Growth or some really depressed stocks that had some bad quarters in a row.

Let's take a look at two examples that explain, in my opinion, why we should most of the time respect the valuation of the market. Obviously, there's a bias there, because these are two stocks I know. But fuck, I'm doing what I can.

First example: Linamar (a cheap stock)

Share price october 2013: 34,50$
EPS 2013: 3,52$
PE 2013: 15
ROE 2013: 19
Net profit margin 2013: 9%

Share price october 2018: 61$ (currently 38$)
EPS 2018: 8,94$
PE 2018: 5
ROE 2018: 17
Net profit margin 2018: 10%

Second example: Intuit (an expensive stock)

Share price october 2013: 67$
EPS 2013: 2,83$
PE 2013: 28
ROE 2013: 27
Net profit margin 2013: 23%

Share price october 2018: 211$ (currently 263$)
EPS 2018: 4,64$
PE 2018: 41
ROE 2018: 65
Net profit margin 2018: 25%


Both are good businesses in my opinion. We can't say that Linamar (auto components) is a bad stock. It's well managed, growth has been very good so far. But it's cyclical and related to the state of the economy. However, the current PE (5) is very low and I'd be tempted, even if I respect the valuation of the market, to say that it's undervalued right now. 

Intuit (tax softwares) is a great company. But I'd say that it's overvalued right now. There was a massive expansion of the PE over the last 5 years (50% higher).
However, there was a massive compression of Linamar's PE (66% drop) over the same period.

It's very strange to see that Linamar's PE has compressed that much with such EPS growth while the PE of Intuit increased a lot with a good growth, but not as spectacular as Linamar.

I don't really understand what has happened here with both stocks. But the market told us to be careful with Linamar 5 years ago and told us we could expect something good from Intuit 5 years ago (on a PE basis). That's exactly what happened.

That's sorcellery.