dimanche 24 février 2019

That fucking Carmax: A great place to invest after all...

Over the past years, I've been a bit negative about Carmax, qualifying that stock as a "fucking stock".

Well, it's not really a "fucking stock". It's a good stock. But it's volatile. So, it could be a stock you trade when it's expensive or cheap.

Everybody knows that Carmax sells mostly used cars. Their business model is simple: no harassment and cheap prices. And it worked well so far (continue reading).

The historical PE ratio of Carmax is about 20. Currently, the PE ratio of the stock is 14 and the forward PE is 12. In other words, that stock is very cheap right now.

The predictability of the stock is very high (close to 100% according to Value Line). These highly predictable stocks are very rarely cheap because predictability is a pricey characteristic. And according to analysts, annual EPS growth for the next 5 years should be around 13-14% while annual EPS growth has been 15% for the last 5 years.

Plus, that company is in a sector which is competitive but not associated with fads or technology (they sell used cars, so even if Tesla or other electric cars become more present, Carmax will sell these cars).

There's very few highly predictable stocks with such a nice growth. The Beta of that stock is a little high, but it's a very good company anyway. Many great investors own shares of KMX, and while it shouldn't be a reason to invest (many great investors have that prestigious name but don't have the qualities to deserve it), when you find the numbers you're looking for, a co-ownership with Chuck Akre or Giverny Capital isn't a bad thing. 

dimanche 17 février 2019

Sequoia Fund - In love with Google

What happened with Sequoia Fund during the last quarter? Here's their top 10: 

Alphabet/Google (Class A + Class C): 18,7% (sold about 2% of their shares)
Berkshire Hathaway (Class A + Class B): 11,8%
Carmax: 8%
Amazon: 5,5% (sold 4% of their shares)
Credit Acceptance Corp: 4,6% 
Fiat Chrysler: 4,5% (increased their share count by 14%)
Liberty Media: 4,4%
Mastercard: 4,2% (sold 8% of their shares) 
Jacobs Engineering: 4%
Facebook: 4%

While that top 10 doesn't look bad (I'm not sure about Fiat Chrysler and Liberty Media though), It disappoints me to see that they gamble at investing in foreign economies. 
They've invested in South Africa (Naspers), China (Alibaba) and Russia (Yandex). Why have they sold almost their entire stake in TJX and their entire position of Apple, Waters and American Express, while buying some suspect stuff from suspect economies? OK, there's less growth in American Express than in Alibaba, but you can't trust anything that goes out of China. 

I'd rather gamble with The Trade Desk or Shopify than with any megacap from China, Russia or any other fucking communist or ex-communist country. A communist country is like Biovail . An ex-communist country is like Valeant. Both are exactly the same corrupted shit. Come on, if we've had some crappy shit like that in Canada, how shitty can it become in Russia or China?

First rule according to Buffett: Don't lose money. First rule according to me: Be mistrustful to most businesses. Be mistrustful to anything outside western civilization in finance.  

vendredi 15 février 2019

Giverny Capital - bullish on construction stocks

Giverny Capital have made significant buys and sales during the last quarter. We rarely see that much action with a fund.
We can’t see the movement with canadian stocks (they probably still own Constellation Software, Dollarama and MTY Food Group) but they surely did some transactions there too.  Anyway, here’s how it looks for the american stocks
Top 10 US stocks :
Berkshire Class B : 21,8%
Carmax : 9,6%
Ametek : 6,8%
Visa : 5,2%
Markel : 4,7%
Alphabet : 4,7%
NVR : 4,3% (added 91% more shares)
JP Morgan : 3,9% (added 46% more shares)
Heico : 3,8%
Charles Schwab : 3,6% (added 31% more shares)

Other significant buys and sells :
Union Pacific : 3,5% of the fund (reduced by 30%)
Mohawk : 3,5% (added 89%)
Fortune Brands : 2,9% (added 53%)
Disney : 2,8% (reduced by 36%)
Edwards Lifescience : 2,5% (reduced by 32%)
Bank of the Ozarks : 2% (reduced by 50%)

Here’s my observations :
They’re very agressive on construction related stocks (NVR, Mohawk and Fortune Brands). These 3 stocks now represent almost 11% of the total US portfolio. Even if these 3 stocks are on sale right now, I don’t think that construction is a sector on which we could be very confident for a long period of time. It’s more a momentum thing. Among these three stocks, I like Mohawk (and it’s selling for almost 50% of it’s historical valuation), I’m neutral about NVR and I don’t really like Fortune Brands (their results have been bad for many quarters). These three buys are not bad, but they’re a little too related to the general state of economy for me. But it’s a value play: Giverny is making a defensive move here, with stocks that don’t benefit from a momentum but that have rarely been so cheap on a PE basis. I guess every portfolio should let a little space for that kind of stocks, but not too much.
It looks like Rochon and his friends think that Bank of the Ozarks stinks. They’ve been bullish on that stock for years and it’s been one of their top 5 position in the recent past. Now, they’ve sold about 50% of their position, which means that they probably think that some shit is happening. Actually, 2018 has been a very tough year for the bank and a lot of suspicion was raised over the business, but it turned better with the last results. When it stinks, it’s probably not a bad idea to look elsewhere.
Today, I've seen that the performance of their fund in 2018 was released.  I thought it was gonna be ugly with a lot of their stocks biting the dust (Dollarama, Mohawk, Fortune Brands, Bank of the Ozarks…). But it didn't turn out that bad because they achieved a performance of -3,2%. And they still compare themselves to some fucking adjusted index (taking a part of the S&P, a part of something else and another part of something unknown) which makes absolutely non sense to me. At least, that index has achieved a performance of -2,9%, so Giverny doesn't seem to play with numbers to look great. But everybody should compare themselves to the market (S&P500 or TSX/S&P500 if your portfolio is balanced between US and Canada). If I wanted to look like a fucking genius, I'd take the worst indexes and I'd justify my choices of using that index as a reference because I owned the only good stock of the index.

While I think that this approach doesn’t look fair (perhaps it is, but it doesn't look so), they’re still the most interesting fund managers to follow in Canada. Actually, they’re among the small and select club of fund managers that look almost exclusively on highly predictable stocks according to Value Line, which is the recipe of success for me now.

jeudi 14 février 2019

A special dividend?

I was very surprised this morning to learn that Constellation Software would distribute a special dividend of 20 USD per share in april plus the normal 1 USD dividend. If I put that money VS what I’ve paid for my first shares in 2012, it’s something like a 32% dividend on a single quarter. Holy fucking shit. I almost forget my bad moves like Valeant with that fucking home-run. 
I’m mostly surprised because Mark Leonard has said at least once that he wouldn’t hesitate to cut the dividend if an interesting acquisition was possible. So, I’ve always expected a cut instead of a raise. And even if I like dividends, I trust Leonard better than I trust myself to do valuable things with money. In that regard, the dividend is not that good. But, who can be unhappy with a 800$ surprise dividend?  The market seems to like that because the stock is up something like 14% today.

I realize that many stocks with a historical and steady forward PE around 20-25 are usually the best things to look. You may find some big fucking bias in that statement, but I actually have at least 15 names in mind of great stocks with that steady valuation over long periods of time. 
So, thank you for the money Mark Leonard. I’ll go visit the Machu Picchu with that fucking pile of cash.

mercredi 13 février 2019

To deal with expensive stocks

We never know when a stock is too expensive. For instance, the guys at Sequoia sold their Idexx laboratories (IDXX) shares because they thought the stock was too expensive. To their surprise, the PE multiple of the stock only went higher and higher. So, that expensive stock got even more  expensive. Currently, it's selling for 45 times next year's earnings. And the analysts expect a growth of about 18% annually for the next 5 years.

That's a real nice growth rate. But 45 times next year's earnings is a very expensive price to pay. Actually, it's about twice a price that I would consider expensive. So, 45 times next year's earnings would be what some people call "priced for perfection" and, while I don't really like that expression, it seems appropriate to use it for Idexx.

Another stock which I know better and I've owned for some time now is Five Below (FIVE). I really like that stock, it has everything I'm looking for. But it's expensive. And it's been expensive for a long time. Actually, it's currently more expensive than it's been for a while (about 42 times next year's earnings). OK, the estimated growth for the next 5 years is amazing (29% annually), but we all remember what happened with Dollarama lately (same kind of company with a high valuation). When the expectations for a stock become that high, the drop can be brutal. And which company can keep a pace of 25-30% growth year after year, for a long time? Very, very, very few. So, while I respect a lot the managers at Five Below, I think that the odds are not on their side for the medium term.

That's why I've reduced substantially my position in Five Below. But I keep about 75% of my shares. Because it's an incredible company. And it's hard to find a great company. So I prefer to keep smaller positions of great companies than trying to find a substitute cheaper but weaker.

Another lesson of my great wisdom freely distributed to the masses.

dimanche 10 février 2019

A2 Milk (ACOPF)

The guys at Sequoia Fund recently released a letter about some of their new investments. Among them, there was a milk company based in New Zealand named "A2 Milk".

It's fucking ironic talking about that stock on that blog because I recently realized that the cancer I thought I had is probably an intolerance to lactose. Isn't it funny?

Actually, no, it's not funny at all. Because all of my life, I've been a big big fan of dairy products, like yogurt, ice cream and milk. And now, these products which I've cherished for almost 4 decades, give me cramps which I always associate to cancer even if I know I don't have that disease.

I've thought for some time that my life was more and more boring, but now, with that restriction for dairy products, my life is not just boring, it's fucking sad. But well, there's pills for that. I'll probably try them and be once again that good old jovialist Penetrator.

So, what about that A2 Milk stock?

The company claims that milk with A1 protein is harmful. I don't know shit about that A1 protein. Is that in the milk I used to drink? I don't know. I don't even care. But that's why that company produce milk with the A2 protein. The problem is that research doesn't corroborate that affirmation. So, it's not obvious that this miracle product is magic. I like when research goes along with a revolutionnary product. Otherwise, it looks just like a fucking scam.

However, the numbers are very interesting.

Market Cap: 6,6B
Beta: 0,72
Debt: 0
Current ROE: 49
Average ROE last 5 years: 39
Annual sales growth last 5 years: 58%
Annual EPS growth last 5 years: 109%
Current PE ratio: 40
Forward PE ratio: 20

Given these numbers, it looks like a great company. The problem is that they may surf on some hype which isn't scientific at all. Like all that fucking new age shit about energies in rocks or in light. Or eating grass and pumpkin seeds. Don't remember that about 25 years ago, some people even drank their piss as a therapy. It's not a fucking joke. It's true. We should always remember that when talking about some revolutionnary food or drink.

Anyway, that's exactly the kind of stock in which I'd invest maybe 1 or 2% of my portfolio, but definitely not more. But I'd go with A2 Milk long before any of those stocks which don't make money or very little money.