dimanche 27 juillet 2014

How much would you pay?

Hi folks. How are you doing?

Me, I'm fine. I went to a karaoke yesterday night. Took some beers and sang some great tunes such as "99 Red Balloons", "I Want to Break Free" and "What's The Frequency Kenneth".

Today, I'm in my underwear, laying on the bed with a laptop on the belly. Wow! What a life! I guess you wouldn't have imagined that. Usually, you're reading blogs about stocks, thinking that the writer wears nice clothes with a "cravate" like we say in french. But have you ever thought that some of those writers could be in underwear or actually completely naked? What a fucking change of perspective this information may have on you!

Which leads me to a question that I would like to ask to some investors: How much would you pay for a company that offers the growth that you're looking for?

The question is complex. You need to have more details to answer in a good way.

First of all, the question is asked only with a good company in mind. The same company evolves in a solid industry, without moral issues about the management or the product (let's exclude companies such as Herbalife, Nu Skin and even Ruger or Smith and Wesson). In other words, how much would you pay for a great company, in a great sector that offers great growth?

I'm usually very reluctant to pay more than 20 times earnings. It's my mental limit. But I could, on some occasions, transgress this rule to buy something expensive. But to pay higher, I need a very good company, with a very high growth rate.

Let's examine 6 good companies on the Venture or the TSX that are expensive. And let's see which one offer highest growth for the lowest price.

RX.V: Biosyent (healthcare):

Actual PE: 52
Sales Growth Rate 5 years: 48% per year
EPS Growth Rate 5 years: 100% (4 years)
Average ROE 5 last years: 45
Debt: Low
EPS 5 years/PE: 1,93

ACQ.TO: AutoCanada (financial):

Actual PE: 40
Sales Growth Rate 5 years: 11% per year
EPS Growth Rate 5 years: 40%
Average ROE 5 last years: 24
Debt: High
EPS 5 years/PE: 1

AVO.TO: Avigilon (security systems) :

Actual PE: 38
Sales Growth Rate 5 years: 102% per year
EPS Growth Rate 5 years: 250% (4 years)
Average ROE 5 last years: 17
Debt: Low
EPS 5 years/PE: 6,6

BAD.TO: Badger Daylighting (industrial equipment):

Actual PE: 32
Sales Growth Rate 5 years: 17% per year
EPS Growth Rate 5 years: 13%
Average ROE 5 last years: 27
Debt: Medium
EPS 5 years/PE: 0,4

ESL.TO: Enghouse Systems (softwares):

Actual PE: 31
Sales Growth Rate 5 years: 28% per year
EPS Growth Rate 5 years: 32%
Average ROE 5 last years: 12
Debt: Medium
EPS 5 years/PE: 1

BYD-UN.TO: Boyd Group (auto repair):

Actual PE: N/A (negative EPS)
Sales Growth Rate 5 years: 23% per year
EPS Growth Rate 5 years: Negative EPS
Average ROE 5 last years: 12
Debt: High
EPS 5 years/PE: N/A

Jason Donville uses the ratio ROE/PE to screen good companies. I propose my own formula this time: The Penetrator coefficient which is EPS 5 years growth/PE. Some disciples of a well known investor call that the PEG ratio. I call it the Penetrator coefficient. Fuck you Peter Lynch.

Using the Penetrator coefficient, the best company appears to be Avigilon. The stock is expensive, but the growth is very, very high. Few stocks offer such growth. The forward PE is about 18-19 times, which isn't high at all.

I've written before about Avigilon, so, I don't want to go further and appear like someone who wants to pump the shares. These 20 readers of my blog sure can make a fucking huge difference on the TSX.

I still don't think that you shouldn't buy too much of these companies which are expensive. But, if you select a place in your portfolio for high growth/high PE companies, you should only keep the greatest ones. And at this moment in time (all-time highest TSX level), you probably shouldn't buy too much of these companies that are too at an all-time high PE ratio.

dimanche 6 juillet 2014

Outside the crisis: Canadian Banks

Once upon a time, I was a big fan of Canadian Banks. My knowledge was limited about investing, so, I took up every advice from my friend at work.

He was a big fan of Canadian Banks. So I became like him. The first shares I bought were some Nova Scotia Bank shares, in the autumn of 2008. Then, I bought some Royal Bank shares and finally, some TD Bank shares.

I didn't know about the importance of growth at the time. I thought that choosing a blue chip was the most important thing in investing. Yeah, I can hear you laugh, motherfuckers. Laugh at the stupid cunt I was back then.

I sold all of my shares of these banks in 2012. I realized that I couldn't evaluate banks with the same precision as some retail or healthcare companies. So I took a big breath and sold about 40 or 50% of my portfolio in a couple of days. In retrospective, it was a good move.

Because Canadian Banks may be a secure investment. They may be some of the greatest banks in the world. But their growth rate isn't that high. Too many people are blinded by the fact that they're "blue chip" and about their high dividend yield.

Today, I don't own a single company with a growth rate inferior to these banks. Let's take a look at the earning per share (EPS) growth rates of the Canadian Banks in the last 5 years:

Royal Bank: 10,4%
TD Bank: 7%
Nova Scotia Bank: 11%
National Bank: 13,5%
Montreal Bank: 11,8%
Laurentian Bank: 2%
CIBC: -3,6%

That explains why not a single of those banks doubled in the last 5 years while a lot of other companies did.

Those numbers don't mention if the bank made a big acquisition that took a lot of money and resulted in a decline of EPS. So, don't take these numbers at the foot of the letter like we say en français. You should also take a look at the ROE to see the quality of the business.

ROE of Canadian banks is generally good but not excellent (between 15 and 20 for most of them). That's better than keeping some money under your bed, but you could easily find something better in the last 5 years. Just take a look at a chart of these banks VS some great American companies (TJX, ROST, DLTR, GWW, AAP, ORLY, GOOG, etc).

If you compare Canadian Banks with champions of the TSX (Dollarama, Home Capital Group, Badger Daylighting, Enghouse Systems, Alimentation Couche-Tard, Constellation Software, Stella Jones, etc), you'll see that in the long run, a big bank (or a blue chip) isn't generally a champion of performance.

It's mostly a good investment for insecure people or old people about to die.

mardi 1 juillet 2014

Top picks from 2009 to today (Part III: 2012)

Today, we'll take a look at Jason Donville's Top Picks of 2012.

Once again, every Top Pick for which the price has rised from 100% at least gets a rating of "good". Every Top Pick for which the price has rised between 0 and 100% gets a rating of "average". And finally, every Top Pick for which the price has declined gets a rating of "bad".

The Standard and Poors (S&P) index has been up 56% since January 1st 2012. That's why it's still required to get a 100% yield to get "good". 

Precision: Some companies could go private or be bought a little after Jason made his picks. I don't consider anything else than the price at the time when the Top Pick was made and the last price recorded for the shares. Only the result in appreciation is considered.

2012-01-16

Paladin Labs: UP 230% (GOOD)
Carfinco: UP 23% (AVERAGE)
Constellation Software: UP 233% (GOOD)

2012-03-05

Carfinco: UP 15% (AVERAGE)
Constellation Software: UP 193% (GOOD)
Total Energy Services: UP 25% (AVERAGE)

2012-05-07

CGI Group: UP 74% (AVERAGE)
Jean Coutu: UP 55% (AVERAGE)
Paladin: UP 236% (GOOD)

2012-06-18:

Directcash Payments: DOWN 35% (BAD)
Jean Coutu: UP 50% (AVERAGE)
Paladin Labs: UP 208% (GOOD)

2012-10-03:

Badger Daylighting: UP 272% (GOOD)
Directcash Payments: DOWN 37% (BAD)
Softchoice corp: UP 70% (AVERAGE)

2012-11-23

Badger Daylighting: UP 273% (GOOD)
Enghouse Systems: UP 134% (GOOD)
High Liner Food: UP 79% (GOOD)


A few stats about those 6 appearances on the TV:

1/6, Donville has had 3 good top picks
2/6, Donville has had one bad top pick
2/6, Donville has had 2 or 3 good top picks
6/6, Donville has had at least one good top pick

If we attribute a note of 10/10 for each good top pick, a note of 5/10 for each average top pick and a note of 0/10 for each bad top pick, Donville would get the global score of 125/18 which is equivalent to 6,9/10. So, his top picks for that period were "average plus".