jeudi 31 mai 2018

When you pay too much

I once wrote that Dollar Tree (DLTR) was a permanent stock for me. What's a permanent stock? It's a stock you love and with which you plan to spend the rest of your life. In other words, it's place in your heart is equivalent or bigger than the place of your family.

I have to say that I'm not sure anymore that DLTR is a permanent stock for me.

They've released their earnings today and, without being catastrophic, they still struggle with their integration of Family Dollar (the stock is down 12%). I don't know if "struggle" is the right word, but they clearly paid too much for that business that wasn't growing that much. And when you pay too much, like 22 or 25 times the earnings for a business that doesn’t have a spectacular growth, you have at least a couple of tough years ahead.

That's something that never happened with Alimentation Couche-Tard (I think so). Because Couche-Tard has always been very strict on the price to pay for another business. And Richelieu Hardware is a good example too. They prefer many small acquisitions to a major acquisition that would double the size of the company.

You learn that kind of lesson better when you experience it with a stock you own than when you read it on Internet.

That's why I'm not so excited about the Metro-Jean Coutu deal. Metro paid a high price for a business that didn't grow that much. I would be very surprised if Metro would surge a lot in the next 2 years.

6 commentaires:

  1. I had a look at the DLTR price chart and it remind me the recent drop for MTY, Couche Tard and the RV stocks. For Atd and RV's, I deeply regret to don't have put a stop loss order I buy again after the drop. I did that for MTY and saved a lot of money. It is a similar situation with DLTR.

    I would like to read your thought on the use of stop/loss order.


  2. If you want to average ~ 8% a year and dont like feeling uncomfortable, get stopped out. If you are aiming for say ~18% annual with multi-year holds youd never consider a mechanical thing like a stop loss.

  3. I thought the acquisition of Jean Coutu by Metro was a reactionary purchase to compete with Loblaws/Shoppers merger. The reputation of Mr. Coutu and his brand value was also a factor in the higher price paid. Intangible value is not something I want to pay for as an investor, but sometimes its the cost of doing a merger. I sold my Metro shares and not really interested in investing in this area.

  4. The real question is how are you going to control risk and limit the downside. There's more than one way to go about doing that. I'm watching a stock I bought ten days ago go down today. It was down 6% at the start of the day (and Friday was a very bullish day for the market in general). Do I sell? Well, the first thing I want to know is if an entire sector is going down or just my individual stock. If it's just my individual stock, then I need to do more homework (especially redouble my efforts to hear the bearish case against my stock). In this particular instance, an entire sector was going down. Oil stocks and oil services stocks were not doing that well. I would need very bad news about this specific stock to sell (example: loss of a big customer). You see, I bought the stock for six times next year's earnings a day after the Chief Financial Officer and a director of the company both bought about 5-6,000 shares. If the stock seems like a good value and there is insider buying, I'm less likely to sell or panic.
    On the other hand, I bought Concordia Healthcare for about $44 when Donville assured us on TV that they make more than enough in cash flow to pay down their huge debt and Concordia would soon be back up over $100. By the time Concordia went down to $40 or $41, I had sold the stock. (Which is a good thing...because what does it go for now? 40 cents?). How did I escape that? Well, I read what the Concordia Healthcare bears were saying and understood their side. Basically, Concordia was full of shit in terms of their accounting. If they expensed their acquisitions honestly, they were not really making any money. People thought they were going for a next year p/e below 5.
    One risk control method is strict mechanical stops. Believe it or not, there's some great traders who have enjoyed great success using that method like Mark Minervini. Another risk control method is to buy a stock that has one quarter of its market cap in cash and is growing earnings like crazy. I think INSIDER BUYING is a great risk control method. If the chief financial officer is buying shares on the open market, I'm happy to join him and be patient. Especially if his stock has been beaten down some.

  5. Angelo do you subscribe to INK or CanadianInsider to get your info?