jeudi 31 mars 2016

ROE VS EPS growth

It's been written here and elsewhere before, but ROE is very important. That measure shows how efficient a business is to make money.

A high ROE is much better than high EPS growth. Because with high ROE and low EPS growth, a business gets much more money than with low ROE and high EPS growth.

For example, you have two businesses. The first one is growing very fast. It's EPS growth rate is 100% each year. However, the worth of the assets of that business is 1 billion dollars and that business generates 1 million dollars of net earnings each year.

The second one is not growing at all (stable revenues). So, it's EPS growth rate is 0%. But the worth of the assets is 1 billion dollars and that business generates 500 million dollars of net earnings each year.

Unless you've had a lack of oxygen at birth, you'll probably have much more interest towards the second business than towards the first one.

Because that second business gets a lot of money every year and with money come opportunities (stock buyback, dividend increase, build more stores, buy other companies, etc...).

The first business may excite a lot of people on the stock market with an incredible growth rate. However, that business doesn't generate a lot of money. All they can do, if they really excite the market, is to issue more stock to get more money, which is not a good thing.

I've done the exercise of checking most of the investments I've made in the past. It appears that the biggest part of high ROE stocks I've owned have produced good or great return over time. There's some exceptions, but the average result is pretty good.

So, here's a list of most of my investments made over the last 6 years.

2009: Scotia Bank, Royal Bank, Cominar, Transcanada

2010: Johnson and Johnson, TD Bank, SNC Lavalin

2011: BMTC Group, MTY Food Group, Apple, Grainger, Intel, Home Capital Group, Mastercard, Boyd Group

2012: RPC, Accenture, HNZ Group, Cummins, Teva, Canadian National, Constellation Software, Advance Auto Parts, Oracle, Coach, Nu Skin, Dollar Tree, Ross Stores, Paladin Labs

2013: Horizon North Logistics, Rifco, Biosyent, Valeant, Loyalist Group, CGI Group, Directcash payments, Macro Enterprises, Cipher Pharma, Questcor Pharma, Alimentation Couche-Tard, United Therapeutics, Carfinco, NTG Clarity Networks

2014: Portfolio recovery and associates, Dorman Products, Gilead, Avigilon, Concordia Healthcare,
Vecima Networks

And now, here's the companies with high ROE when I bought them (the ROE may have dropped a lot since then). I've written the ROE at the beginning of the year of purchase and the performance since the beginning of the year of purchase (my calculations are based on january 1st of each year). And the exchange rate isn't considered.

ROE in 2010: 26
Performance since 2010:  67%

ROE in 2011: 27
Performance since 2011: 35%

ROE in 2011: 64
Performance since 2011: 913%

ROE in 2011: 38
Performance since 2011: 131%

ROE in 2011: 42
Performance since 2011: 328%

ROE in 2012: 56
Performance since 2012: -34%

ROE in 2012: 29
Performance since 2012: -21%

ROE in 2012: 46
Performance since 2012: 144%

ROE in 2012: 26
Performance since 2012: -57%

ROE in 2012: 65
Performance since 2012: 117%

ROE in 2012: 42
Performance since 2012: 130%

ROE in 2012: 77
Performance since 2012: 562%

ROE in 2012: 24
Performance since 2012: 59%

ROE in 2013: 23
Performance since 2013: -83%

ROE in 2013: 57
Performance since 2013: -66%

ROE in 2013: 76
Performance since 2013: 634%

ROE in 2013: 21
Performance since 2013: 254%

ROE in 2013: 30
Performance since 2013: 111%

ROE in 2014: 30
Performance since 2014: 22%

There's some pretty bad performances up there, like Horizon North Logistics and Rifco. There's also Coach and Nu Skin that have produced bad results.

But, think about it: Horizon North Logistics was very linked to natural resources (housing for workers in the oil/gas industry). Rifco was very linked to Alberta (almost the same as HNL).

Then, Coach is a brand and brands can easily go out of fashion. Then, Nu Skin was a company full of controversy (and still is).

Most of the other names are "boring" companies that aren't linked to natural resources or a specific geographic place.

So, to conclude:

1- Chose high ROE businesses;
2- Avoid sectors like fashion, natural resources, oil and gas, companies for which you have doubts about honesty of the management;
3- Buy these businesses at a fair price (forward PE between 10-20 times earnings);
4- Build a balanced 15-20 stocks portfolio;
5- You'll do well.

mardi 29 mars 2016

Amaya stinks

Not so long ago, I thought that Amaya (AYA.TO) could be a good investment.

But today, I'm convinced that this stock stinks.

We have known for a long time that Amaya was investigated by the Autorité des marchés financiers (kind of SEC in Quebec). But nothing was proven. It was maybe an error. Like that error for O.J. Simpson.

We recently learned that David Baazov, the CEO of Amaya, now faces insider trading charges because he and some of his friends/family made a lot of money via some serious insider shit.

And today, we learned that Baazov has decided to take a break from his CEO position to concentrate on the buyout of Amaya.

BLAH BLAH BLAH. It's the same fucking story as Valeant: take off a CEO full of controversy to calm down investors (but continue to pay him as a fucking king).

Oh, wait a minute. Why not any great investor own shares of a gaming company (well, I'm not sure about what I'm writing here. So, let's say: why not any great investor seems to have a BIG position in a gaming company)? Amaya scored well last year's ROE reporter I believe (at the ROE/PE ratio list) but I think that Jason Donville never bought shares. At least, he was never a big supporter of the company.

Well, if there's so little great investors around, maybe it's because that's a fucking industry full of crooks and these casinos related businesses are well-known for money laundering.

Yeah, there's enough fucking crooks out there on the stock market, give yourself a fucking chance and chose an industry where there hasn't been too much crooks discovered. Chose an industry where crooks remain hidden.

When the honesty of managers is questionable, you should quickly take a look elsewhere. Because, when some rot is visible to you, it's probably because the walls are full of dead rats. Companies have public relations that are paid to make everything look beautiful and wonderful. When their shit is stronger than their public relations, it's a bad sign. And when there's proof that you can't trust the high executives, how could you trust what they're saying or writing on their annual report?

Chose honesty. Chose Valeant. 

jeudi 24 mars 2016


That Valeant story made me mad.

First of all, mad about myself. Then, mad about Sequoia Fund, Lou Simpson, Bill Ackman and even Jason Donville...

Ok, nobody forced me to buy some Valeant shares. I'm the main idiot here. But I trusted all these guys above. I've trusted them too much.

And, for myself, I thought that I knew what I was doing even if I knew that investing without using traditional metrics was a risky move. But I was convinced by what I read about Mike Pearson and Valeant. And I was blinded by the great results of some big Valeant shareholders like Sequoia Fund, Bill Ackman, Lou Simpson, Jason Donville and a couple of others (some great investors from Quebec like Bernard Mooney and François Rochon owned Valeant shares too).

Lesson learned: If the metrics of a company aren't used in a traditional way, forget it. Fuck all those companies that use ADJUSTED metrics. Like adjusted ROE. Adjusted EPS. Adjusted management performance. Adjusted SHIT.

Fuck Patient Home Monitoring. Fuck Valeant. Fuck Concordia Healthcare. Fuck all that shit that have more chances to be run by crooks than those companies that are using traditional metrics. It's way easier to manipulate numbers when you adjust them. If you adjust it correctly, you'll make a pile of shit look like a gold nugget.

It's been painful for me. Very painful because I've lost maybe a year of performance with that scandal. But it opened my eyes. And here's some lessons painfully learned:
  • Never invest again in a company that doesn't use traditional metrics;
  • Never trust again all those superinvestors (I won't reproduce their moves but I'll take them as a bonus if they chose the same companies as me);
  • Never believe what anybody says on television. I still trust Jason Donville and still believe that he's one of the best in Canada, but I'm pretty disappointed about his fall appearance on BNN about Valeant as previously said. Everybody having media exposure without any exception is using that exposure at their benefit. 
  • In retrospect, you have to be the judge of what is good and what's not good. So, better read a couple of good books about investing as soon as fucking possible to get rid of all the people that want to convince you to buy the same thing as them (to pump the price of their shares). 
Bob Goldfarb, the great, great investor at Sequoia Fund resigns today from his position at the fund, because of that Valeant scandal. So, some heads rolled and a lot of people including myself must learn lessons about that story.

To conclude, here's some words of Buffett about the use of EBITDA (which is used a lot with companies like VRX, CXR, PHM and many others):
"We’ll (Berkshire Hathaway) never buy a company when the managers talk about EBITDA. There are more frauds talking about EBITDA. That term has never appeared in the annual reports of companies like Wal-Mart, General Electric, or Microsoft. The fraudsters are trying to con you or they’re trying to con themselves. Interest and taxes are real expenses. Depreciation is the worst kind of expense: You buy an asset first and then pay a deduction, and you don’t get the tax benefit until you start making money. We have found that many of the crooks look like crooks. They are usually people that tell you things that are too good to be true. They have a smell about them."

lundi 21 mars 2016

Exco technologies (XTC.TO)

In the 80's, there was a british band called XTC. They made strange songs. But some of them were great, like "Making plans for Nigel" (1979), "Senses working overtime" (1982) and The Ballad of Peter Pumpkinhead (1992).

Excstasy is also a drug that make people retard.

XTC is finally a small canadian company which is little known... but which looks promising.

This business is a favorite of Peter Hodson (one of the few good analysts in Canada) and the company was in the Donville Kent's ROE reporter of last january, being part of the list of fastest growing companies in Canada (without being cited as a top pick or even a pick).

Exco technologies produces various automative parts (moulds for transmission cases, engine blocks, accessories for the interior of the car, etc.). In many ways, that company looks to me like a Richelieu Hardware for cars.

In fact, even for the numbers, that company reminds me a lot of Richelieu Hardware: good but not great ROE, heavy insider ownership, little debt, steady growth and design of various parts in a field that is a bit boring...

Here's a list of XTC numbers:
  • Insiders control 23% of the shares
  • Debt free (the debt is almost only short term debt)
  • Dividend has increased by 250% in the last 6 years
  • 49% of sales in the states, 38% in Europe, 4% of sales in Canada (a Canadian company that should not be affected by Alberta at all)
  • 2010 EPS: 0,25$
  • 2011 EPS: 0,36$
  • 2012 EPS: 0,60$
  • 2013 EPS: 0,58$
  • 2014 EPS: 0,73$
  • 2015 EPS: 0,96$
  • Actual PE ratio: 15
  • Forward PE ratio: 10
  • Actual ROE: 18
  • Average ROE last 5 years: 16
  • Perfomance 1 year: 10%
  • Performance 5 years: 289%
I've came to believe that good but not great ROE business like Metro, Richelieu Hardware, Logistec, CGI Group and probably Exco Technologies offer a possibility to get richer slowly but safely.

I've initiated a position in Exco. I believe that this business will be very rewarding in the long term. 

jeudi 17 mars 2016

Portfolio review - March 17th 2016

It is now the time for a Penetrator's portfolio review.


CGI Group 10,2%
Couche-Tard 8,6%
Constellation Software 7,8% 
Concordia Healthcare 7,5%
Home Capital Group 5,5%
Knight Therapeutics 3,7%
Canadian Pacific 3,7%
Logistec 3,2% 
Valeant 3,0%
Callidus Capital 2,7%
Nobilis Health 2,4%


Gilead 8,6%
Allergan 6,9%
Ross Stores 6,2%
Dollar Tree 5,5%
Apple 5,4%
Polaris 4,4%
Lithia Motors 2,0%

Cash 2,5%

TOTAL: 100%

Penetrator's clever comments: The US dollar is now close to it's historical average. So, I believe that any good US stocks avalaible at a good price could be bought without too much hesitation.

What do I look on the market these days? Except for my now tiny Valeant position, I'm looking at:

  • Logistec (a huge load of stock buyback these last months)
  • Stella Jones (pretty good results released today)
  • Dollarama (great company, expensive but very interesting)
  • Knight Therapeutics (the healthcare sector is on sale, a company full of cash like Knight may be opportunist)
  • Allergan (the acquisition price by Pfizer should be higher than the actual price of the shares)
  • Lithia Motors (the last results were great and the stock is still cheap) 
  • Rifco (that company is still incredibly cheap even though it's making money. Too, the ROE is pretty high...but it's on the fucking venture exchange)
  • Canadian Pacific (the last results were pretty good and the company is looking for a big acquisition)

mardi 15 mars 2016

Some thoughts about Bill Ackman related to Valeant's drop and a word on Nobilis Health

  •  When you think you're having a bad day, just remember that it could be worse: you could be Bill Ackman.
  • In fact, if Bill Ackman was japanese, he'd probably commit hara-kiri (don't do this Bill, I've heard it hurts a lot. I have some suggestions below to forget about painful moments like today).
  • What's that smell? It's the huge nervous shit in Bill Ackman's pants that's so abundant, it's smelling from New-York to Canada.
  • Bill Ackman could have bought almost any crappy stock one year ago, he would have had better results than with his investment on Valeant. In fact, a monkey or even a chicken would have had better returns.


Today, I almost laughed, seeing the incredible drop of Valeant. It was so tragic to lose so much money in a single day that I couldn't manage my emotions. So I was inclined to laugh, or at least to smile, saying: "C'est pas possible, tabarnac!". Oh yeah, the shit under Philidor was surely much bigger than what I thought.

Some people say that the sales of Valeant's drugs are way lower than what was expected, proving that Valeant's model is starting to crumble.

Maybe both opinions are right (Philidor + sales declining). I don't know. I still believe that the actual valuation is insanely cheap (less than 4 times earnings), but maybe I'm a victim of the management and their beautiful words that seem to worry everyone but me. Because I'm so fucking stupid.

Well, fuck all that and let's party with some cocaine and russian whores! There is no future anyway.


I have a word to say on Nobilis Health (NHC.TO). Holy shit, the last results were released this afternoon and they are so fucking great!

0,68$ (US) per share in 2015 VS 0,06$ (US) per share for 2014. They actually beat expectations by 0,39$, which is incredible.

And the shares are selling at 4,40$ (CAN)!

They fucking killed estimates. I fucking hated that company until today because of their public relations and accounting problems but now I'm madly in love with them and I hope a fucking load of people all around the world will buy their shares tomorrow to help me getting back the 20 000$ I lost with Valeant!


mardi 8 mars 2016

What the fuck?

It's probably not a scoop for anyone but yesterday, on market call (BNN), the three top picks of Jason Donvile were: 

- Concordia Healthcare
- CGI Group
- MTY Food Group

Three great picks once again. All solid companies that have done well in the past and that should continue to do well.

But, on the BNN website, I've read something pretty crazy:

Donville Kent has sold almost all their Valeant position in november. Now, their Valeant position is about 0,5% of the fund (it was something like 10% not so long ago).

In october, Jason still had Valeant as a top pick. Still in october, he went to BNN on a rant against Andrew Left and Citron research, calling Andrew Left "a turkey" and defending Valeant vehemently.

What the fuck? A couple of weeks after having Valeant as a top pick and after discarding Citron's point, saying that Valeant's ROE is very high, making it a great company that many people didn't understand because of their model, he sold almost everything...

What the fuck Jason?


dimanche 6 mars 2016

Losing money

This comment was recently posted on this blog:

I am running out of patience on VRX (Valeant). I have not sold as I keep thinking we must be close to the bottom and see some value fundamentally. Only real accounting update is extremely insignifcant (10 cents less in 2014 vs 9 more in 2015) - but SEC investigation, terrible Management communication, delayed reporting, huge $30B debt is hard to remain positive. 

It looks like I'm gonna do so, but I don't want to defend once again Valeant. Because talking about this stock is like a conversation between muslims and christians.

I've "lost" a lot of money with Valeant. I haven't sold a single share, so money is not actually lost. But virtually, it is. And when you lose lots of money on the stock market, how do you react? Do you want to beat your wife and children? Do you feel suicidal?  Do you get depressive, seeing your retirement days vanish?

I keep calm. Well, for Valeant, I'm staying calm.

Here's a few things to think about when one of your investment is free falling:

1- Did the fundamentals change? Did your company started to lose sales or market share?
2- Is the money "lost" essential to your life?
3- What about other investors? What about superinvestors on Dataroma?

Here's what I think:

1- I don't think the fundamentals have changed with Valeant. This company is selling a lot of products and these sales are not that related to the name of the company (I doubt a lot of people will stop buying Bausch and Lomb products because of what's happening with Valeant). Maybe some sales were related to Philidor (the infamous pharma at the heart of the problem), but all indicates that the EPS of Valeant will be OK without Philidor. Frankly, I don't understand why that Philidor scandal went that far. For me, it's not worse than what happened with Whole Food Markets...;

2- Although I've "lost" a lot of money with my Valeant investment, I'm convinced that an overpessimism is above the stock. Maybe it was an overoptimism last summer when the share's price was someting like 4 times higher. But things went way too far on the other direction. Anyway, the money invested in Valeant is not essential to my life. I can still buy toilet paper (which is gonna be pretty useful in a couple of minutes).

3- Other investors are still buying Valeant. Lou Simpson added to his position recently (he added 38% to his Valeant position), just like Sequoia Fund (they added 13,50% to their very big position). I greatly admire Sequoia Fund. Anybody should read their annual letters which are to me more interesting than Berkshire's letter. Their team of investors is so great. And their comments on companies in which they invest are excellent. I have a great trust in Sequoia Fund and their holdings (Fastenal, TJX, O'Reilly, Mastercard, Google... and Valeant which is by far their biggest holding).You may hate Valeant, but I defy anybody to tell me that their others holdings aren't great.

Some people, including the guys at Sequoia, have said that Mike Pearson is an outsanding CEO. The guys at Sequoia said in 2014 that "you shouldn't bet against Mike Pearson". A lot of people would say the opposite these days, but I have more confidence in the guys at Sequoia than in the average guy on Seeking Alpha.

I believe that a guy like Pearson will know what to do when VRX shares are selling at 320$ or when they're selling at 80$. An astute guy could buyback large chunks of stocks or try to sell the company or find something that the average investor wouldn't. From what I've read, Pearson is constantly trying to improve shareholder's value.

Call it an act of faith. Maybe it is. Maybe I'm like those Russian soldiers in World War 2, going to a certain death with an empty rifle and thinking that my leader is an half-god. Maybe it's the case. But with the moral help of my hedge funds heros, I believe in my leader.

Which is the best cure for the mind when you're losing money.

mardi 1 mars 2016

Another way to find attractive stocks

A strategy that could produce good results in the medium/long term is to buy great stocks that are heavily shorted after a bad quarter or some bad news.

What does "stocks heavily shorted" means? It refers to stocks that are sold before being bought. In other words, some people sell stocks today thinking that they'll be able to buy them at a lower price in the future.

I've never done any short selling. I'm not comfortable at all with that approach. But even if you're not comfortable with it, short selling could serve you to identify stocks for which there's an exaggerated pessimism.

When a company is hated, it may also be shorted. What about Valeant, the most hated stock in the recent history of capitalism? I'd thought it was impossible but Valeant seems more hated today than it was 3 months ago. But strangely, Valeant is not that shorted. For a stock supposed to go to zero, there's not so much people thinking that they could do a homerun by selling Valeant at 88$ today and buying it at zero in a couple of days.

High number of short sellers happened in the recent past with Home Capital Group and CGI Group (remember the Obamacare fiasco?). Both were and still are great companies. But even great companies face some difficulties or simply face a short seller with lots of exposure.

A couple of years later, all seems forgotten for CGI for which the PE ratio has expanded a lot. Human is a forgiving creature.

So, here's an interesting way to chose stocks from a list of heavily shorted stocks:

1- Type "shorted stocks" on google (for a specific stock, go to, type the name of the stock and watch the percentage of the float which is short)
2- Look for familiar companies on the list;
3- Take a look at the ROE of the familiar stock for the last 5 years (on;
4- Take a look at EPS growth for the last 5 years (on reuters too);
5- Read recent news to understand why the stock is so heavily shorted. If it's related to a single event or a single analyst that benefits from lots of exposure, the situation is probably not that critical. Perhaps you should even buy that hated stock. 

Which known stocks are shorted these days? (source: morningstar, which is not the most accurate website in my opinion, but it's better than nothing). The percentage of the float which is short is indicated besides the name of the stock.

1- Mylan (13,2%)
2- Mattel (13,4%)
3- Fastenal (16,2%)
4- W.W. Grainger (17%)
5- Carmax (19%)
6- David's tea (19,4%)
7- Lululemon (21,8%)
8- Portfolio recovery and associates (23,3%)
9- Tesla (28,6%)
10- Chesapeake Energy (45,8%)

Usually, when stocks are shorted, it's for a reason. Most of shorted stocks are not appealing. Most are crappy stocks. But sometimes, there's a Home Capital Group or a CGI in the list. In the list above, there's Mylan, Fastenal, Mattel, Carmax and Grainger. I wouldn't bet against them. I'm not a specialist of these stocks (although I've owned some shares of Grainger in the past) but they all look pretty solid companies in my view. I'd rather bet against a shitty company that never achieved some consistency in it's results. If you ever bet against something, bet against crap.

And if you're like me, check for gems that are mistaken for crap. It doesn't happen so often, but it happens enough to keep an eye open.