Sometimes, I think that the PE ratio is not that important, as long as it's not insane (like a PE of 50 or 100, for instance).
And the ROE isn't everything. Oh no. The market is full of high ROE stocks that go nowhere. It's just that, as a group, these stocks have more chances to go up, because they generate more cash than the others.
I now appreciate as much a good track record than a high ROE. For instance, I believe that if a stock had a great EPS growth over the last 5 or 10 years and the free cash flows are growing in a steady way too, that's a great indicator of a stock to own. Plus, if the current PE is about the same or lower than the average PE of the last 5 years, it shows that it may be a good moment to buy.
You may say: "Yeah, but if the current PE is lower than the average, it's probably for a good reason. Nothing is on sale for no reason". That's right. You have to be humble face to the market. You're not a fucking prospector barefoot in the Klondike in the 1800's. You live in an Internet world where everybody knows everything about everything.
So, here's a list of stocks that have growing free cash flows, that have achieved a great EPS growth over the last 5 years and that are selling at a PE ratio equivalent or lower than the 5 last years average (it doesn't mean at all that the current PE is low, it's just that it's lower or equivalent to the average):
Enghouse Systems
Hardwoods Distribution
Linamar
CGI Group
MTY Food Group
Canadian Pacific
Fortune Brands Home & Security
O'Reilly
LKQ
Dollar Tree
Biogen
Open Text
Disney
Credit Acceptance Corp
Middleby
Novo Nordisk
Robert Half International
Home Depot
Not any bad name on that list in my opinion.
They all fucking compound.
Your Last post raised some interesting points of interest for me…
RépondreSupprimerThe value of the P/E ratio.
The value of ROE.
Everybody knows everything about everything.
I’m sure most of the readers of this blog are familiar with the theory of the efficient market and the ensuing fallacies of that theory. I think an investor can apply that not only to the market itself but to the information the market presents to the individual investor. In other words I think it pays to focus on under-used information as opposed to the information that the majority concentrate on.
I use the P/E ratio at times but as the E in that ratio is largely based on the income statement (a lot of estimates and assumptions) and as it is used by almost everybody, it loses a lot of its value. It’s a good idea to try to focus on under-used information. In my own case I prefer to use Price/Operating cash flow as there are less estimates and assumptions that go into the cash flow statement. Another good value metric is called ‘cash return’ which takes the free cash flow a company generates and divides it by its enterprise value (market capitalization plus long-term debt, minus any cash on the balance sheet). I learned that metric from Pat Dorsey and it is a particular favourite of mine.
Over time I have come to use ROIC (return on invested capital) over the ROE but they are both valuable. You should look at the trend of these ratios over a few years as they can tell you whether a company is adding value over time or not.
Maybe the most overlooked problem facing the modern day investor is information overload. The problem that most of us face is not enough information but maybe too much. It becomes a problem of choice, its one thing to have information, but another to interpret it and use it productively. I try to focus on under used information. And lastly the emotional component in investing is the great wild card which can sink your ship no matter how sharp of an investor you might be. In the end, over time I have found that the market itself will be your greatest teacher.
Great comment Gavin. I agree with everything you wrote.
SupprimerHaving information is good, a mechanical approach, run by computer will kill it, plus way less fee. Human greed and fear remains the chief cause to market inefficiency. The movement of bitcoin this month make a spectacle out of efficient market, does the cryptocurrency worth $1300 a piece or $2700? The number of store accepting it and the currency base, that is the fundamentals, haven't changed much but the price swings wildly.
RépondreSupprimerThis is probably controversial but I would also submit that CSU and DOL are cheap... but I'mg going at this with a 'looking forward' view than behind. Chuck in SJ and ATD.b while we're at it for safe measure. I see CSU/DOL both higher materially over next 12-18 months. I expect CSU to surprise to the upside on the acquisition front and any hint at organic growth will get Bay street creaming their pants.
RépondreSupprimerI also expect DOL to surprise as well. It amuses me... saw that RJ upgraded them today with target price moving from $120 to $135 when the price was $128... really helpful. Such wonderful analytical work.
Analysts constantly get these two wrong. I was talking with an ex analyst friend of mine from Canaccord days and she said that analysts can't get approval to cover DOL/CSU as there is ZERO chance they will ever need to raise capital.
Last CSU analyst call there were 4... QUATRE analysts on the call. This is the single best performing security on the TSX over the past 10 years and 4 analysts on the call??!??!??!?!?! Makes no effing sense. I love it. Don't cover them... please don't cover them.
Happy weekend les gars.
Yeah, four analysts for CSU is completely crazy.
SupprimerPenetrator... you sound like the kinda guy that shops at Aritzia (ok, I'm joking)... but check them out boys. They put up some really nice numbers last quarter. ROE north of 50% (I think... don't shoot me if I'm off a bit) and forward cash PE in the low 20s (again; I don't have my stuff in front of me but I think that's accurate). That's cheap as well. I just bought some in my small cap model. Will look for a more convincing move before adding across other models.
RépondreSupprimerI haven't checked the numbers lately, but what is different between Aritzia and Michael Kors?
Supprimerhow the f&ck should I know?... my guess is Kors is a tired brand catering to an older crowd... Aritzia (from my hometown) caters to a younger hipper crowd. They don't really have a lot of fashion risk because they aren't like Lulu or other companies who only sell their own stuff. ATZ has a number of lines which really are their but they brand and market them differently. As with any company... it's all in the execution and they have done a spectacular job. Don't quote me on this but I think their sales per square foot is top 2 or 3 in north america... they know how to sell stuff... and lots of it and healthy margins. We have an analyst at Scotia (hollis is owned by Scotia... only til August when Industrial Alliance takes us over and I'm coming to visit you) who follows retail. She's a she and a PhD and when she threw up her recommendations of ATD.b, ZZZ and DOL as her retail picks I perked up. Anyhow she's quite keen on ATZ and has a $23 target price which I realize isn't worth shit... but she's quite good so I place more stock into her work than most. My deux sous.
SupprimerI'm going to invite you all to view our numbers. And not necessarily because I want to manage your money (truth be told, if you threw me some $$ I'd be honoured to run it)... BUT the reason I show you these results is because this is one of the few communities where you can appreciate what I'm doing. I'm ONLY owning consistent ROE generators. I don't give a shit if we don't own any banks or energy or whatever companies. They pass our screen, we buy em... very simple... of course there's more to it than that but not much.
RépondreSupprimerAll three of our models, IF they were mutual funds, are ranked #1 in their respective fund categories since inception Sept 2, 2014. So what I'm really trying to say is this shit works. Be disciplined and you will smash the markets. Here is proof that it works:
http://www.eventshillsidewealth.ca/performance?__hstc=231244928.96d107c0998ed54b48775528d37fe5a6.1488835300428.1495123526078.1496469582231.14&__hssc=231244928.13436.1496469582231&__hsfp=3352955327
if that isn't the longest most unsexy link ever...