How to react to a 30% drop on a single day?

You write that you haven't written about a single bad investment idea over the last two years and, in a matter of hours, one of your stocks drops by 30%. That's how the market works. There's always something happening to make you feel humble when you think you've achieved a certain level. At least, it shows once again that a portfolio with various stocks in it with no stock representing more than 10% of the portfolio could help to avoid catastrophes. Some people only swear by a concentrated portfolio, to me, it's the perfect path to failure.

That 30% drop happened with Ulta Beauty (ULTA) last thursday in afterhours. Yesterday (friday), the selloff was official and everybody was making very funny jokes about "Ulta Beauty's ugly day".

What happened and how to react?

Well, ULTA missed estimates by 1,4%, which is very little. And they said that full year's earnings would be about 12$ instead of about 13$ (8% lower than expected).

About 16 million shares were sold instead an average volume of 1 million on a single day. Everybody felt like Ulta Beauty was plague.

How come sales have drop that much? What does it mean? Did Amazon or another online competitor stole some sales?

I don't know. Usually, companies don't tell where the money has gone.

But, let's take a look at ULTA's EPS over the past 10 years:

2010: 1,16$
2011: 1,90$
2012: 2,68$
2013: 3,15$
2014: 3,98$
2015: 4,98$
2016: 6,52$
2017: 8,31$
2018: 10,94$
2019 (estimated): 12$

Annual EPS growth from 2010 to 2019: 34%
EPS growth from 2018 to 2019: 10%, which is quite a drop. But it's positive nevertheless.

How looks Ulta Beauty now?

If we expect an EPS growth of 10% next year, the stock is selling for about 18 times next year's earnings. It's not that expensive for a stock with a ROE over 30. Also, the company carries no debt which is great for acquisition or share repurchase. It's recession-proof (cosmetics).

Ulta sells a lot of stuff. They’ve got everything you need in a single place and there's processionals to help you.

So, I don't know if it's a buy, but to me it's not a sell either. You have a lot of stocks out there with an higher PE than that, that don't grow more than that, have a smaller ROE and operate in a much more cyclical sector.

To lose a few thousand dollars in a matter of hours is always a shock, no matter how big a portfolio is. That's why we should always mitigate the risk in various forms (20 stocks or more, various industries, etc.)

The beauty of blogging

I recently had a converstion with Be Smart Rich. He seemed a bit disappointed about the fact that his blog didn't bring him a lot of money for all the advices he writes.

Sometimes, I feel the same. I say to myself that all I write here could help a lot of new investors to avoid making big mistakes. It could even help them to find great stocks (actually, over the last 2 years, I think that I haven't written a positive post about any truly bad stock. They were all from OK to excellent).

But, isn't that fucking world cold and sad enough like that? Do we really need to pay for everything? Can't we access something interesting for free sometimes?

I find some pleasure from blogging. I like to write about upper deckers and gross stuff. That's my revenue against all the advices I offer. You'll have to cope with my cunts and alaskan pipelines references.

And I like to despise publicly almost all investors out there. I feel like I am one of the few investors telling you to trust nobody. Most of them take themselves seriously and play a fucking game to seduce you. They'll tell you that they are up 200% this year with some stock but they'll never tell you that they're down 95% with 3 other stocks. Or they won't admit that the stock that's up 200% represents 2% of their portfolio. They suck. And they're not cool or even good people.

The only sect I'm looking to create with this blog is a sect of atheists. I'd really like you to join me in my beautiful sect where we believe in nothing: honesty of investors, companies (apart a very small minority) medias, politicians, friendship, love and life in general.

Keysight Technologies (KEYS)

Last may, I saw that Giverny Capital had a recent position in Keysight Technologies (KEYS) which is an equivalent of Ametek (AME) for people like me who like shortcuts. Last quarter, Giverny increased their position by more than 100%. They seem to have a lot of conviction in this stock. 

Let's continue a bit with my shortcut between AME and KEYS: Both provide many measure instruments (oscilloscopes, meters, generators, network tests, etc). These instruments are probably a bit different from one company to the other, but they're mostly electronic instruments used for various measures which aren't probably useful for someone like you and me.

 

There's no fashion there, unlike Apple, for instance. There's no government regulations (not an industry where consumers could be hurt or abused, like pharma or credit companies). It's a sector that's probably linked a bit to the general state of the economy (potential impact with a recession), but much less than banks and car dealers.

The growth is there. The margins are improving. While not great, the ROE is OK.

Estimated EPS growth is OK for analysts (around 10% per year). However, the company keeps on beating estimates by a wide margin (beaten by 10 to 20% over the 4 last quarters). So, it looks like we could be more enthusiastic about what's coming than what's estimated.  

 Here's the results of the last 4 years:

2016

Revenues: 2,9B

EPS: 1,95$

2017

Revenues: 3,2B

EPS: 0,56$

2018

Revenues: 3,9B

EPS: 3,24$

2019

Revenues: 4,3B (estimated)

EPS: 3,95$

KEYS was hurt by a big  income tax rate in 2017. I don't know why, but that explains the big drop in EPS. Apart from that, we can see that revenues are growing, year after year.

Currently, you pay 20 times next year's earnings for such a company. On Value Line, you can't see earnings predictability because the stock is a little bit too young (spin-off from Agilent Technologies about 5 years ago). But earnings predictability is between 90% and 100% for Ametek. So you could probably expect something similar. Paying 20 times next year's earnings for a stock very predictable is a fair price to pay in my opinion.

Survey

Who's buying stocks these days?

Who's waiting for a correction?

In my opinion, the market is not too expensive, however, I don't see anything short term that could result in a substantial raise of the market. So, I believe that a portfolio that's 8-12% cash is not a bad idea at all.

What about you?

An upper decker

I just come back from a very nice trip to Newfoundland. What a beautiful province. I have to admit that New-Brunswick has made serious damage to my opinion about Maritimes. That province is by far the worst place I've been in Canada.

But Newfoundland is beautiful. The landscape, the houses, the sea, even the churches have something special.

Anyway, I'm not at ease of writing more than 4 sentences of praise. That's not the mission of this website. So, here comes the shit.

I've been in a motel in the middle of nowhere, in the north of Newfoundland. The kind of motel that's in the middle of a forest where only truckers pass. But strangely, there was a big beach party in the bar of the hotel the night we were there. At 3:30 AM, people knocked on the door of our room asking for one of their drunk friend. They kept on knocking so I went opening in my underwear and, after I closed the door, some guys made comments about my balls ("Were they nice? Did you grab them?"). I was fucking mad, so I dressed up and I went to the office, telling them that I was mad and it was inacceptable that many drunk people knocked on random doors at such a time. The owner finally came, probably drunkier than all these 25 years-old customers coming out of nowhere. He said to me that he'd refund me for that night the next morning.

The next morning, he and one of his friends, both fucking drunk, came to see me at 7:30 AM in the morning while I was having breakfast. Both smelled like shit. They were standing at 30 cm from my face while I was eating my toast, their smell ruining my breakfast. They apologized and asked me what I wanted. I told them that I wanted a complete refund.

After 30 minutes of a bad-smelling and incoherent discussion with two newfies, I understood that I wouldn't get a refund because the owner "had no control about what happened in the motel the night before". What the fuck. Where's the notion of responsability here?

Anyway. Do you know about Upper Decker?

If no, you're a normal person. Because few people read about scatophilie on the Net. I don't, but I know some people who do, so I have access to privilegied information.

An upper decker is the action of defecating in the tank of a toilet, causing it to clog. Usually done as a mean-spirited prank.

I've never done that, but I've planned to do it for years. Not to some innocent. But to some bad people. I didn't do it in that hotel, but that's exactly the kind of place where an upper decker would be appropriate.

Now, you know that it exists too. You'll never forget that it's a possibility you have when no other option seems possibile. 

A view on some less-known investors

Do you know about Pat Dorsey?

That investor is wild. It may excite some readers here looking for sensations because, what I can see after 5 years writing this blog is that very few people care for traditional stocks like Mohawk or Ross Stores. Most are looking for the next big thing, which is something I'm very suspicious about.

But I live to give. So here's what you're looking for, you fucking bunch of gamblers.

Here's the portfolio of Dorsey Asset Management:

Facebook: 21%
Avalara: 18%
Wix.com: 13%
Despegar.com: 10%
Alphabet: 9%
Paypal: 8%
eBay: 8%
Cimpress: 6%
ANSYS: 4%
The Trade Desk: 4%

There are probably a few names there that you don't know. But before getting to these names, I have to tell that the average PE ratio of that portfolio is very high. We're far from growth at a reasonable price. We're more in the territory of "very high growth at a crazy price". But the guy owns 10 stocks, so he probably benefits from some statistic rule saying that among 10 very high growth stocks, the majority will probably continue to grow a lot for some time. I don't know if there's a rule about that, but it helps me to keep some respect for the guy, thinking that.

The problem with that portfolio in my opinion is that it contains some stocks that don't even make profits (I'm talking here about Avalara and Despegar which represent about 28% of the portfolio). That's something everybody should avoid in my view: stocks that don't make money. Whatever how beautiful the future may look, if they don't earn profit now, I'm not tempted at all to anticipate that their management will be able to reverse the situation. That's the definition of speculation. But, again, most of you fucking assholes are excited about that kind of situation, so fuck my writings and let's buy these stocks with all our savings, and why not putting a mortgage on the house to get more money to invest in these?

************

David Rolfe of Wedgewood Partners has the portfolio that looks the more like mine. Actually, we look like cosmic twins. I own many stocks that he owns and I've been interested in owning most of the other stocks he owns. I'll follow him closely in the future.

Here's his top 10 positions:

Apple: 9%
Visa: 9%
Facebook: 8%
Edwards Lifesciences: 8%
Tractor Supply: 7%
Berkshire Hathaway: 6%
Booking Holdings: 6%
Fastenal: 6%
Paypal: 5%
Ulta Beauty: 5%

*********

Let's complete with the funny Bill Ackman. Because now, Bill Ackman goes Buffett.

Yes, after saying that Valeant wasn't worse than Berkshire that invested money in a sugar-water company (Coke), Ackman puts 11% of his portfolio in Berkshire. It's his way of admitting  that Buffett is better than him. Frankly, Ackman is the funniest investor alive. So cocky, so proud-looking but so inconsitent and incoherent. But still so cocky. He's the Bono of big investors.

Human rights now

China is preparing for a military invasion of Hong Kong. Because Hong Kong wants democracy.

We all know that most investors are heartless. If they can make money somewhere, they’ll go for it. 

For instance, they’ll invest in Alibaba or Tencent or any other chinese company that grows. What may slow them is that, in China, transparence is not a norm. And companies always belong to the state, in a way or another. But no other reason than that is evoked. 

Today, it’s time for many investors to stop thinking about money for a few minutes and start thinking about democracy and human rights.

It’s time to boycott as many chinese products as we can. It’s impossible to boycott everything, but at least, take a look at the origin of goods we buy. And buy something from any other country. Anyway, even if it’s a bit more expensive, it’s gonna last longer or gonna be better for your health or the health of your kids who play with toys full of toxic products made in China. 

China is an horrible country on a political level and it’s our duty to vote against it with our money.

And above all, it's time to see if that blog can have some impact on the economy of a 1.4 billion people country. 

Mohawk Industries (MHK) at book value

In a world obsessed by growth, by Shopify, by Amazon, by The Trade Desk, we sometimes forget old-fashioned businesses like tapestry and carpets. 

I know that very few people are excited about Mohawk. Nobody gives a fuck about that kind of business because it's not "the future". Also, metrics are OK but not great. Frankly, even me, I'm not that excited about MHK. But there's some stuff to like...

I've been a MHK shareholder in the recent past but I decided to sell my shares when I saw that growth slowed down a lot. That's the problem with a stock like Mohawk: it's a cyclical business. But it's one of the few great cyclical business. Which means that it eventually goes down, but when there's a rebound, it's a very interesting rebound.

It's important to note that, these days, you can buy a MHK share for around 115$. Which is about the book value of shares. 

 

Take a look at the book value multiple since 2009:

 

2009 BV: 1

2010 BV: 1,2

2011 BV: 1,2

2012 BV: 1,7

2013 BV: 2,5

2014 BV: 2,5

2015 BV: 2,9

2016 BV: 2,6

2017 BV: 3

2018 BV: 1,1

2019 BV: 1,1

 As we can see, the historical book value is much higher than the current level. I won't repeat the exercice for PE ratio, but it's currently 11 and the average over the last 10 years has been a little over 20. So, on a a book value and PE ratio perspective, the stock is about twice cheaper than it's historical average.

Of course, when a stock is so cheap, it's for a reason. EPS have started to drop. There's currently no growth for the stock. But it's a cyclical thing. Nothing indicates that the company will decline and vanish. It happens after a few good years.

 But EPS growth has been pretty good since 2009. See below:

2009 EPS: 1,53$

2010 EPS: 2,52$

2011 EPS: 2,92$

2012 EPS: 3,78$

2013 EPS: 6,55$

2014 EPS: 8,15$

2015 EPS: 10,20$

2016 EPS: 12,61$

2017 EPS: 13,61$

2018 EPS: 12,34$

EPS have doubled a few times over a 2 or 4 years frame (from 2009 to 2011, then from 2011 to 2013, then from 2013 to 2017). It's excellent. But they will surely drop a lot when the next recession hits us.

Also, the current debt level is pretty low which gives a lot of flexibility to the company to buy back their very cheap shares or to make an acquisiton. I think that Buffett could buy that company. However I believe Berkshire owns a tapestry company which could bring some conflict of interest. But there's very few great companies avalaible at 11 times earnings these days.

A very good idea, in my opinion, for a small position in a portfolio. Many insiders and superinvestors are also buying. Most of them are bad, but when they share my opinion, I can grant them credibility.

Expensive and predictable stocks... Do you really need to worry about the PE ratio?

I once read some article about Giverny Capital saying that the guys working there usually didn't bet on an increase of the PE ratio for any specific stock.

It was a revelation for me. These guys seemed more inclined towards a stock that's expensive but that's always been expensive and highly predictable.

I had the idea of taking a look at 10 stocks with a PE ratio always high. It's not really a random list, because I know all these stocks. All of them are great businesses, with a great moat. But, even if it's not a random list, it's pretty varied.  You have softwares, healthcare, paint, clothes, chocolate, instruments, payment systems, analytical company, aeronotics parts and stuff for construction. I don't think you can be more varied than that.

Right after the ticker, you have the average PE ratio for the last 5 years, then you have the performance of the stock over the last 5 years:

Hershey (HSY): 30 (performance last 5 years: 70%)
Ametek (AME): 23 (performance last 5 years: 76%)
TJX (TJX): 21 (performance last 5 years: 95%)
FactSet Research (FDS): 27 (performance last 5 years: 127%)
Sherwin Williams (SHW): 26 (performance last 5 years: 145% )
Home Depot (HD): 23 (performance last 5 years: 165% )
Intuit (INTU): 44 (performance last 5 years: 239%)
Mastercard (MA): 35 (performance last 5 years: 256%)
Edwards Lifesciences (EW): 35 (performance last 5 years: 359%)
Heico (HEI): 34 (performance last 5 years: 428%)

These stocks have been expensive for a very long time. However, they've beaten the market easily.

Everybody should have a few of that kind of stocks in their portfolio. Perhaps not exactly these stocks, but stocks that share similar characteristics.

High Liner Food (HLF.TO), a tool to destroy our civilization

A few years ago, many analysts, including Jason Donville, had a positive opinion about High Liner Food (HLF.TO).

To me, it never looked attractive enough to buy some shares. It looked just like an OK stock, nothing more.

On june 19th 2014, a little more than 5 years ago, Jason Donville recommended HLF. At the time, the stock was selling for 24,54$.

Today, the stock is selling for 10,34$. A drop of more than 50% in 5 years. What a bad investment it's been.

I won't write anything about EPS, ROE, and the usual metrics. I will only state that at my local grocery, I often visit the fish departement and, among all the frozen fishes, when I see High Liner packages, I can see that almost all (if not all) are fishes from China.

Do you trust China food, even when it's not transformed? I don't.

These fucking chinese put paint in their milk. They feed their fishes with shit. I don't trust chinese stuff. I think my opinion has some credibility because I was in China last year and I've smelled a lot of bad smells there.

So, in retrospect, I don't think that we should feel proud about that company because it's canadian. Eating safe stuff is important. Chinese want to destroy our civilization. They want us to buy their spy phones and eat their fishes full of shit.

That's how they'll destroy us for good.

Portfolio review

Here comes the moment when you can compare your performance to mine and thus, have some respect or some disdain for my approach. After all, who can have esteem for an investor who gets a worse performance  than the market, year after year? Even if that person gave a kidney to some poor guy and was helping people dying from scorbut in Azerbadjan, I would laugh at him. You are what you achieve. Anybody can give a kidney (we have two), but few people can beat the market. 

Personally, I think some reorientation would do some good to people who can't beat the market. For instance, some guy wasn't good at arts. He became dictator and things went much better for him for many years.  

So, here's a look at my portfolio:

Number of stocks: 20

Cash: 12% of the portfolio

Average ROE: 40

Average Beta: 0,73

Average forward PE: 19

Performance of the portfolio (YTD): 21%

Performance of the TSX/S&P500 (YTD):  14%

I haven't lived that much emotions with my portolio this year. Don't get me wrong, I almost never feel euphoria with my portfolio, but I sometimes feel excited or feel bad after a sudden drop. 

Either because I want to buy more, either I'm mad because I just deployed money and I should have waited 24 hours. 

Actually, I've been waiting for the last 6 months for a substantial drop and I'm still waiting. That's why 12% of my portfolio is cash. I'd like to deploy this cash but I'm willing to wait. Because the best moment to buy is when everything goes down. And very few stocks go down these days.

All the stocks I own were in my portfolio at the beginning of the year. I've only sold two stocks (Lassonde and Enghouse) and I've kept the rest, adjusting some positions and keeping most of them intact. There's not a lot of action but I like it that way. It looks like each stock completes the other and that's the wonder of a well-balanced portfolio. You can own a stock with a PE of 30 but the position is small and is compensated by a bigger position of a cheaper stock. That way, you can stop listening to people saying that this stock is too expensive. 

Yeah, it's expensive, you fucking asshole, but it grows much better than everything else and it's only 2% of my portfolio, so fuck off. In fact, a stock is truly risky when it represents a large percentage of your portfolio. Otherwise, it's probably "riskier" to own only stocks with a PE of 12 than to own some expensive and some not expensive stocks. 

For instance, I own 5 stocks that I would qualify as expensive stocks and they represent 15% of my portfolio. These 5 stocks gave me the best returns among all the stocks I own over the last year or so. They were meticulosely chosen and they fit perfectly among all my other stocks so please don't interpret that as "buy as much expensive stocks as you can and you'll get rich". That's a stupid shortcut. 

Anyway, I'm beating the market by 7% right now. And you?