Penetrator's portfolio performance (1st quarter of 2018)

You may always shine if you chose the right index to compare to. Some funds compare their performance to the index they want, playing with numbers like fucking crooks. And we believe them because we don't know how these indexes work. Or we're too lazy.
 
I think we should always compare ourselves to the general market because that's general performance. That's the real market.

My portfolio is made of about 60% US stocks and about 40% CAN stocks.  There's some large caps, many medium caps and some small cap. Should I compare myself to 75% of the S&P500 and 25% to some fucking small cap index? That wouldn't be honest. So I compare myself to the TSX/S&P500 composite index (a mix of Toronto and Wall Street).

So, here's how it looks for the 3 first months of the year:

Penetrator's portfolio performance (PPP): -1,6%
TSX/S&P 500 performance: -5,1%
Penetrator's portfolio domination (PPD): 3,5%

Although it's been a negative performance, I think I did well given the fact that I beat the market and that 2 of my 3 first positions didn't do that well (My top 3 is: Ross Stores, MTY Food Group and Alimentation Couche-Tard).

Looking forward, I think my portfolio is very well balanced (Average forward PE: 16, average ROE: 27 and average beta: 0,8). There's been a lot of movement in my portfolio since the beginning of the year and now, it's mostly composed of very predictable stocks with a good ROE, a forward PE similar or lower than the market and a better growth than the market.

How's it been for you?

5 entrepreneurs to discover

So far, I've read 5 books about entrepreneurs. 

Howard Hughes (Howard Hughes corp);
Steve Jobs (Apple);
Alain Bouchard (Couche-Tard);
Phil Knight (Nike);
Warren Buffett (Berkshire Hathaway).

In my opinion, the most exuberant and fascinating entrepreneur in America and perhaps the world has been Howard Hughes. Many years ago (probably 15 years ago), I read a book about Hughes written by Noah Dietrich (his personal assistant). That was a great book. Hughes directed movies, tried to be an aviator, tried to build a car that worked with steam and many, many, many other things, such as fucking the most beautiful girls in Hollywood. He was a kind of Elon Musk, but much more fascinating.

I really like Steve Jobs too, although he was hard on people. He had opinions. He tried LSD. He stank in his 20's. He went to India. He walked barefoot and drank carrot juice. He loved the Beatles and Bob Dylan and went out with Joan Baez just because she was with Bob Dylan before. He was a character and he had a lot of drive. He knew how to convince people. I think I would have had fun with him.

Phil Knight is a little bit like Jobs because he was curious and he travelled a lot. He was fascinated by Japan. He took big risks with his business, but he put a lot of efforts in it and it eventually paid off. He was interesting but probably not fascinating like the first two names.

Alain Bouchard worked pretty hard to build Couche-Tard. However, his biography doesn't portray a fascinating guy. Just a guy who worked on very small details, earned his money cent by cent, bubble gum by bubble gum. You can't read his book and say he doesn't deserve what he has now.

By far, the most boring guy seems to be Buffett. The guy has always had only one major fixation: making money. He showed little interest for many things including culture and travel. While he seems more friendly than the others, he also seems the most boring. That guy looks like he never did any crazy thing. I have a lot of respect for his financial skills but that's all.

I don't recommend books about these guys to make of you a better investor. I only recommend them to you to discover interesting characters that made their way through life ending them with many billions of dollars... while you'll probably end up yours with only a few hundred thousands of dollars. Or one or two millions, if you're lucky.

What's going on with Facebook

Via my excellent Facebook page where nothing ever happens (https://www.facebook.com/MonsieurPenetrator/), I've asked people about which specific topic they would like me to write something.

A guy suggested Facebook.

A timely suggestion isn't it?

In 1986, Billy Joel wrote a song about the actual events. That song was called "A Matter of Trust". That's a rightful title for what's happening with Facebook right now.

I've wrote about the fundamentals of Facebook before. It's really an exceptionnal company (high growth, good ROE, almost no debt, a total domination of it's sector and a relatively low beta). The only letdown is that it's a huge company. One of the biggest companies in the world. And growth is always trickier once you've reached a certain level.

But, trickier than that, Facebook is now accused by a lot of people of laxism about the protection of it's data (about the US election but also about other things as well). I really don't have a clue if the recent events are due to laxism or if it's just the result of bad circumstances. What I'm sure is that the company is now in a situation where Mark Zuckerberg will have to be in a defense position for a while. And the company will surely suffer from some lost of confidence by consumers.

Everybody will be looking for rats in the walls. I feel it's gonna be like for Donald Trump which is accused everyday of any little or big thing he's done in the past.

I don't like polemics with my stocks. It's almost always counter-productive and usually, things go bad or stall for a while.

That's what I feel about Facebook. I may be wrong. But experience has made me looking for quiet places instead of hot spots.

Trash

Let's talk about waste.

As human being, the main thing we produce is waste. We produce more waste than we earn money. We produce more waste than we buy food or clothes. Human beings are there to spoil the planet and leave it dirtier after their passage than it was before. Many philosophers have spend all their life searching for that very simple meaning of life.

You may be tired of my constant sarcasm about everything, but you can't argue on what I'm saying here. We destroy our planet. For every single ecologist out there, there's at least 10 people who don't give a shit about oceans, animals and everything on that planet. Asians and Africans are reproducing faster and faster and claim their right to develop their country which will happen at the expense of our planet. Soon, we'll be 15 billion people on earth and it's gonna be ugly and it's gonna stink.

But let's see the positive economic aspect of that coming apocalypse: there's gonna be some money to make. 

A company operating in the sector of trash has a garantee of longevity. Eternal longevity. That's surely what you're looking for as an investor.

So let's take a look at three trash stocks that I've recently took a look at. They all look interesting to me in some aspect or another.

1- Waste Connection (WCN)
Forward PE: 27
Performance last 5 years: 230%
Performance last 10 years: 500%
Annual EPS growth last 5 years: 14%
Current ROE:10
Stock float: Large dilution (+43% shares over the last 3 years)
Debt: high
Predictability according to Value Line: High
Free cash flows: "A" rating (growing every year for the last 5 years)


2- Waste Management (WM)
Forward PE: 20
Performance last 5 years: 131%
Performance last 10 years: 153%
Annual EPS growth last 5 years: 27%
Current ROE: 45
Stock float: buybacks (-4% shares over the last 3 years)
Debt: medium
Predictability according to Value Line: High
Free cash flows:  "A" rating (growing every year for the last 5 years)


3- Republic Services (RSG)
Forward PE: 20
Performance last 5 years: 114%
Performance last 10 years: 131%
Annual EPS growth last 5 years: 19%
Current ROE: 16
Stock float:  buybacks (-4% shares over the last 3 years)
Debt: high
Predictability according to Value Line: High
Free cash flows:  "A" rating (growing every year for the last 5 years)

Despite what's written above, the growth of WM and RSG has slowed down lately. The momentum stock among these three is Waste Connection. However, the ROE of WCN is the lower of the three and there's a lot of dilution with that stock. I don't really like that. But the market prefers growth to everything else. The market prefers high growth to buy backs or high ROE. So, feel free to ignore my opinion.

But I'm not done yet with my opinion. The best managed company is probably Waste Management.

Anyway, all three have had growing free cash flows over the last five years (come on, try to find some stocks that achieved that, you'll see that it's gonna be pretty hard), and they operate in a very predictable industry. That's exactly what any investor should be looking for.

Perhaps there's no home-run there, but at least, there's steady and safe growth.

The difference between Ross and TJX

I'm currently in the States and, while I'm there, I always go to my favorite stores which are Ross Stores and TJ Maxx or Marshalls (both owned by TJX).

I haven't visited every Ross Store and every TJ Maxx/Marshalls but, from Florida to California, and visiting many states in between, I've seen that, usually, a Ross is dirtier than a TJ Maxx/Marshalls.

TJX and ROST are excellent stocks. All the fundamentals are great and have been great for many years. They're the best in retail.

Some people prefer TJX because it's bigger, more diversified (with Homesense, they sell stuff for the house) and present in many countries, which is not the case with Ross.

But I like Ross maybe a slightly more than TJX. Why? As written above, probably because their stores are dirtier.

It’s the same with dollar stores like Dollar Tree, Family Dollar and Dollar General: they're all dirty, with shit and fallen items on the floor and sometimes flies in the stores.

By a strange phenomenon, people seem to like to shop there. Maybe they believe that dirt + disorder + cheap stuff is a winning combo. I don’t really like shit on the floor while I’m shopping but in my mind (and probably in the mind of others as well) that sounds like a business that’s doing everything to maximize bargains for their clients. And a trace of vomit on the floor is a little less disturbing when you buy plastic toys than when you buy food in a grocery.

TJX has a ROE slightly higher than ROST. Imagine what it could be if they could tolerate some crap on their floors.


First picture: A Ross in Florida
Second picture: A Marshalls in Florida, about 200 meters from the Ross.

Railroads VS the market

In an expensive market and in a world where Amazon changes everything, you must redefine what's attractive and what's not. You must take back the bad words you've said about Carmax, hoping nobody remembers you've said not so long ago that you hated that fucking stock. And you must also take back what you've said about railroads, which was something like "good but not good enough for me".

In fact, my 10 years in the stock market made me try lots of stocks and approaches. And all this time, railroads were like a quiet river running besides me while I was trying to find the highway to quick richness. And that quiet river made it's way in a straight way while I zig-zagged mine.

Perhaps that my poetry makes you face-palm yourself because if you wanted poetry you'd be reading some lyrics written by Bon Jovi.

Anyway, in north america, we have some excellent railroads, the best being probably Canadian National, Canadian Pacific and Union Pacific. I know a little bit more the first two (and I've owned them both in the past). They've never been involved in a scandal or some shit and they've done almost as good as your favorite small cap (MTY for instance).

Let's add that CNR and CP have had growing free cash flows over the last 5 years, which is a great achievement. They're surely among the 10 best businesses in Canada.

Both are selling for about 16 times next year's earnings. It's at least a fair price. The growth is not spectacular but it's steady and management have proven multiple times that they were there for shareholders (just take a look at the impressive buy backs for instance).

Warren Buffett has said something like: you won't get rich buying a railroad, but you'll stay rich.

The ideal stock

Over the last few years, I've written about a lot of stocks I liked. But I don't think I've ever written about the ideal stock.
Here it is: Five Below (FIVE).

Your ideal stock has to be in a safe sector. Bargain retail to me is an excellent business (let's think about Dollarama, Dollar Tree and Dollar General). Amazon has not been a threat in that sector so far and I don't think it will in the short or medium term.

Five Below has almost zero debt. Hard to do better than that.

Return on equity: That's how much juice you could squeeze from the fruit. The current ROE is 26. The historical ROE over the last 5 years has been 23. That's very good.

Growth: The growth of Five Below has been spectacular so far. Here's the EPS.:

2013: (1,28$)
2014: 0,59$
2015: 0,88$
2016: 1,05$
2017: 1,30$
2018: 1,80$ (estimates)
2019: 2,38$ (estimates)

Beta: 0,8, which indicates a sector which is not cyclical. Which is great.

Market Cap: 3,8 billion dollars. Plenty of room to grow for many years because the market isn't saturated.

Everything looks great with that stock. Except the price of course. But that's how it's always been: you have to pay a lot for a very nice story that should remains nice for many years.

At the current price, you're paying about 29 times next year's earnings. It's a lot. But it's a very predictable sector, a very lucrative industry and don't forget the stock has no debt. You probably have many stocks with medium or even high debt on your portfolio. Sometimes, you pay 20 or 25 times earnings for a stock with a lot of debt without counting that debt in your evaluation. In fact, if you add the debt to the value of your stock, you'll see many PE ratios going up, way more than the PE of Five Below.

And, finally, that business grows organically. They don't rely on acquisitions to grow (not for now, at last). That's the best situation for a business. Because organic growth is less risky than growth related to acquisitions. 

So, in my view, this is the perfect stock. Or almost.

That's the kind of stock that you're waiting for a pullback before buying. But you shouldn't wait for a specific price target like those peewees on Seeking Alpha. You should be looking for a specific PE, like something under 25 times next year's earnings. You surely will never get that stock for less than 20 times next year's earnings, so don't set too optimistic target.