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.

6 commentaires:

  1. Dollarama's fall is a self inflected wound. Dollarama has destroyed their own balance sheet over the last four years, their stock price was ripe to be shredded in a downturn and it is not bouncing back.

    Five Below faces no such problem,their balance sheet is pristine, they are smaller than Dollarama and growing faster than Dollarama. Five Below are studs.

  2. Actually Dollarama has a joint venture going on to expand into South America with another company…They also have an option to buy out that other company in a couple of years (they currently own 51% of that other outfit). On top of that Dollarama is much cheaper than they were last summer. In short I think it’s become a value stock where the downside is limited and where the upside is greater than it was last year…I don’t own it because all of my money is already in the market…

    It’s not enough to blindly believe the raw numbers of a stock. You have to find out what’s going on beneath the hood. If you can’t do that, you should seek out others who can do it for you. They are few and far between but they are out there.

    As for expensive stocks…I own one…Descartes Systems Group Inc…a recurring revenue model catering to the logistics of moving parcels around the world…a form of platform investing where they are attempting to consolidate a fragmented industry…I don’t own a lot of it but I do own them…

  3. CSU is expensive... even more so today.

  4. If you have some cash from this sell, it is a good time to re invest it in MTY

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