jeudi 7 septembre 2017

Keep it simple like AC/DC but don't choke in your own vomit

I like AC/DC. They always keep it simple: three or four chords songs with lyrics about only two topics which are sex and hell.

See for yourself:

Hells Bells
Highway to Hell
You Shook Me Hell Night Long

They've done that for 40 years and it still works. They won't be worshipped as geniuses in the history of rock and roll but they should be remembered for a recipe that works again and again by just singing about sex, hell and sex in hell.

As an investor, we should do the same. For myself, I try to do that. I'm always looking for the simplest yet best recipe to apply to find a good investment.

For a while, I thought that ROE was everything.

Lately, I've found out that growing free cash flows was a great indicator of performance.

And more recently, by analyzing some rare but great investors, I've found that combining these two factors (ROE + growing free cash flows) was the best thing to do to find winners.

I've took my spreadsheet about the great stocks I follow and I've added the A-B-C-D factor.

A is a stock with growing free cash flows over the last 5 years without any exception
B is a stock with growing free cash flows over the last 5 years with one or two years with a decreased followed by an increase
C is a stock which isn't steady with free cash flows
D is a stock with some negative free cash flows

I know I've written about that in the last few months, but I've improved my view.

Try that. Try to find growing free cash flows for 5 years. You'll find it very hard. But once you'll find them, you'll see that, in the long run, these are the best stocks. Combine that with a high ROE and you've got an handful of winners. Almost none of these stocks will do badly in a long period of time.  You may find an exception here and there, but if you build a 20 stocks portfolio sharing these similarities, you may see something like these five "A" rating stocks.

They're almost all expensive. But that's probably the only stocks for which you shouldn't bother paying more. 

Priceline (PCLN)
Credit Acceptance Corp. (CACC) 
Constellation Software (CSU.TO)
Boyd Group (BYD-UN.TO)
Enghouse Systems (ENGH.TO)

4 commentaires:

  1. I once presented a great cash flow stock to the penetrator. His reply at the time? I don't care about cash flow. I care about ROE. Let's try this again:
    Lassonde Industries Inc. (LAS-A.TO)

    1. I've matured! Lassonde is a good stock but the ROE is similar to the market (almost).

    2. Lassonde is my biggest holding. Very sleepy stock. No one knows about this, no single share issuance for at least last 10 years, amazing free cash flows etc... Only downside of the stock is Paul Lassonde is getting very old. He would be around 75-80 now I think? I wish I knew about the company and him earlier when he was like 60 or 65...

  2. I totally agree with you on cash flows. I pay less attention to EPS growth than operating and free cash flows growth. My favorite free cash flow earners are Enghouse, MTY food group, Lassonde, Constellation software, CGI and Stella Jones... All great capital allocators, tones of insider holdings, frugal, minimal or no share issuance and of course enormous free cash flow per share.