Crazy fucking 2020

We lost Neil Peart, probably the greatest drummer ever, at the beginning of 2020. Later, in october, we lost Edward Van Halen, one of the best guitarists ever.

In between, we got COVID all around the world, another plague coming from China, just like all the stuff on the shelves of Dollarama. Probably that everybody who reads this blog has lived the crazy month of march as an investor. Depending on how much money you had on hand, you lived that crisis with joy, anger, fear or indifference (although I'd be surprise to learn that some people may have stayed indifferent after a market drop of 30%). 

Me, I was very happy. It was one of the best times of my life, on the investing level. I really like a good old crisis, because people become irrational and sell everything. We just have to buy the best stocks and we're almost sure to be well rewarded in the medium term. I like when everything is a no-brainer, which happens only when everybody shits in his pants. I like a big scent of shit all around me. 

So, while there was a major panic, I bought some expensive stocks and they recovered quickly from the crisis. But i didn't buy Shopify or Mercadolibre (both more than tripled since their lowest point) or Tesla that was multiplied by more than 8 since it's lowest point. 

But I did OK anyway. 

This year, I opened a margin account, after about 12 years on the stock market. This margin is a tool for occasions to come. If the market drops a lot, I plan on using the margin aggresively. If the market is high, like these days, I'm not planning to use the margin. 

I also reduced the numbers of stocks held. I decided to keep the number of stocks always between 15 and 20, no more no less. I currently hold 20 stocks. When I'll get my Topicus shares from Constellation Software, I'll have to sell one of my stocks to free some space. That's how I now work. 

If I add my performance of 2020 to my performance of 2019, my portfolio got a combined performance of 51% for these two years. Not amazinly superior to the market, but great anyway, isn't it? But after such a year, and a succession of good years, I can't believe that the current valuation of the market will remain. It's just too much expensive. 

Anyway, another year has passed and I just thought that I should mention that things are going great for me, on the portfolio level. I could be a little more aggressive sometimes, but you have to respect your own personality. I prefer to stay closer to "cautious" than adventuring too much on the "gambler" side. With my style, I'd be surprised if I ever beat the market by a lot. But if I beat the market by a few points more than 75% of the time, it will mean that I do a good job. 

Performance of the Penetrator Portfolio in 2020: 19% (including dividend)

Performance of the S&P500 in 2020: 17% (including dividend)

P.S. This year again, please, lose any respect for the fund managers who will compare themselves against another index than the S&P500. It's the only real index. If a fund did less than 17%, it was simply not a very good performance. At best, it would be OK. 

Picks for 2021

At the beginning of 2020, my 5 picks for the year were:

Couche-Tard: 8%

MTY: 1%

Boyd Group: 12%

Facebook: 30%

Alphabet: 30%

Average performance (excluding the impact of US$ and dividends): 16%

My selection did OK, but it's about the performance of the S&P500. I don't look like a genius here. People who bought Shopify look much more like geniuses than I do. And while I'm still not that comfortable with Shopify, I bet that people investing on that stock will do well or very well in 2021. 

Now, here's my picks for 2021:

Square (SQ)

Facebook (FB)

First Isaac (FICO)

Epam Systems (EPAM)

Nike (NKE)

I invite you to suggest your 5 highest conviction stocks for the year ahead. There's two conditions: 

1- Propose 5 stocks, not more. Because I want only very high conviction stocks (you'll probably like it more too if it's short);

2- These stocks must be stocks you own. 

3- Thank you.

4- Goodbye. 

Debt and cash

Yesterday, I took a look at some of my favorite retail and restaurant companies, to see if the pandemic had a big effect on their debt level.

I was surprised to see that the effect of 9 months of pandemic was generally not that bad. For instance, the debt level of MTY, O'Reilly, Ulta Beauty and Richelieu Hardware hasn't reached a worrying level at all. 

For Ross Stores and TJX, the debt level is now much higher than it was one year ago, but it's not that bad. These two have always had a low debt, so, even if their debt has increased a lot, it's still OK. 

Of course, having a huge debt isn't good. For instance, there's two companies which I like (FISV which is a financial company and BURL which is a kind of TJX) that are great on every aspect except for their debt level. But how much is the debt a threat, given the fact that interest rates are very very very very low?

At the current rates (some banks have recently offered mortgages under 1%) and with the governments printing  money like their was not any toilet paper left to wipe our asses, what is the real value of money? I'm talking here as much about "positive money" (cash on hand) than "negative money" (debt). 

What's the advantage of a company like Google that has about 120 billion dollars cash on hand? If a competitor (Google has virtually no real competitor, but it's just an example) has less money, it can borrow money for almost nothing.  

So, I think that we are in a very different period that requires to analyze things in a different way. 

The real advantage is not to have a lot of cash or to have a very small debt. The real advantage is to grow very quickly. It's always been the real advantage, but other things such as cash and debt seem to me less important these days than they were before. 

Given the current valuation of growth stocks, it seems that many people have understood that long before me. 

Finding your niche

Finding your niche as an investor is, in my opinion, very important.

Some people like oil and gas stocks. Some others like value investing. Some others like very high growth companies, whatever the valuation is. And while I'm not comfortable with these approaches, it's fine. As long as it works for them, it's OK. However, if they don't analyze their performance and don't compare themseleves with the S&P500, I think that an important piece is missing. Like I wrote in my last post, why doing all that if you're underperforming year after year? An index fund will give you 8-10% on the long term without any effort...

Anyway, your niche is your niche and you better have some criterias to respect before investing on a company. Almost everytime I buy a stock without taking the time to analyze it and compare it to my other stocks, I regret it. 

Here's an example of how it works for me:

Recently, I had CGI Group in my portfolio. I've always thought that it was a good stock, but the growth has never been amazing, except after some acquisition. Let's forget the PE ratio and just take a look at some metrics for the two stocks

I decided to buy Enghouse Systems instead (a stock that I had some years ago).

Performance last 10 years

CGI: 528%

ENGH: 1322%

Performance last 5 years

CGI: 74%

ENGH: 90%

EPS growth from 2015 to 2020

CGI: + 67%

ENGH: + 200%

Average ROE last 5 years

CGI: 17

ENGH: 19

Margins:

CGI: 10%

ENGH: 20%

Debt Level

CGI: medium debt

ENGH: No debt

Cash on hand

CGI: good position of cash (about 50% of the recent annual earnings)

ENGH: lots of cash (2,5 times recent annual earnings)

Enghouse wins on every aspect.

Of course, the PE of both stocks is not the same. Enghouse is more expensive than GIB. But that's always like that. The better performer is more pricey. However, as long as the price is not completely irrational, I'm now going towards the best performer. That's how I work. 

CGI Group is a very good company. I might very well go back to it one day. But for now, I've found something better and I plan to go on for a while with Enghouse. Anyway, it's not a debate between these two stocks, it's just my way of doing and I encourage everybody to always compare what they hold with what they could hold and what they would gain and loss with a change. 

Domination with margins

About 3 years ago (january 2018), I wrote a post about some high margins stocks.  

Here's an interesting exercice. I will take the exact same list of high margin stocks to show the performance of the stocks over the last 3 years (from december 17th 2017 to december 17th 2020). 

Visa: 83%
Credit Acceptance Corp: 4%
Netflix: 176%
Mastercard: 116%
Canadian Pacific: 88%
Priceline (now Booking Holdings): 19%
McDonald’s: 23%
Microsoft: 152%
Alphabet: 64%
Apple: 194%
Disney: 56%
Starbucks: 77%
Tiffany: 29%
Fastenal: 86%

O'Reilly: 89%

Average performance of the group: 84%

S&P performance: 39%

The result is not really a surprise: a high margin stock is usually a dominant company. Because, if the company makes a high percentage of profit over 1$ of sales, it's because it has a position that allows it to do it. Which means that the company is probably dominant in it's sector. So, who says dominant company says dominant performance. That's a kind of sorcelery. 

Combine high margins with a high ROE and select 15-20 stocks who share these qualities and you will probably do well. Of course, you'll get a few underperformers like Credit Acceptance Corp, Booking Holdings, McDonald's and Tiffany but most of your stocks will beat the S&P. More, you'll sleep well and won't be too tempted to make transactions with your portfolio. 

In these crazy times of crazy valuation caused by the vaccine against COVID, let's remember what's really important. 

Penetrator, the voice of reason. 

When you should do the things you really like instead of investing on the stock market

People who read the comment section have probably seen the extremely long comments from a guy named "($)o($)".  

While looking nice, that guy seems to have problems managing his money via the stock market as we can see below (this is a copy-paste from his comment received on my latest portfolio review). 

PERFORMANCE:
Jan-Oct 2020
Mine: _ _ _ _ _ -10.69%
TSX: _ _ _ _ _ -6.11%
Cumulative since inception
Mine: _ _ _ _ _ 2.23%
TSX: _ _ _ _ _ 20.44 %

You know, there's nothing wrong watching porn all day long or doing any other stuff you like if the stock market is not for you. First of all, if the TSX beats you on the long term, it's not a good sign, because it's simply not a very good index. Then, if your performance since inception (who knows when exactly is the inception) is 2,23%, you really should think about stopping all that and simply buy the S&P Index. You're losing your time and money. As fascinating as the market may be, you should not accept being beaten by the TSX by a very wide margin and the goal of that hobby should be to make money, not spend your time. 

Maybe that such a post could be the wake-up call for you. You will kick your ass and try to become the best investor in the world. 

But for now, you are simply a bad investor. Perhaps a very, very good human being, but let's put it this way: you probably excel more in any other field of your life than in investment. 

Dividends and maturity

I don't understand why some people write about how dividends make them happy. 

For me, it's not important at all. I never invest on a stock based on the fact that it comes with a dividend or not. Actually, if the dividend is high, it's a warning sign for me. I probably won't buy a stock for which the dividend is higher than 3%. There may be an exception or two, but for 99% of stocks, a high dividend indicates that growth prospects are limited. 

To me, someone putting too much emphasis on the importance of dividends shows that he's not yet mature as an investor. Just like me in 2008 when I bought Yellow Pages only for the high dividend yield (another embarrassing confidence for those who discovered my blog recently). 

Sorry if I'm hurting a lot of these people who like dividends. But that's how I feel. I'm such an honest guy. 

XPEL, the story of a penny stock that's far from being a penny stock anymore

Most of my regrets as an investor are related to all the crappy stocks I've bought over the years. I've been lucky with most of them, selling them before losing too much money. But, there were some exceptions where I lost A LOT of money. Like enough money to buy an expensive car or to put braces in the mouth of my two kids.  

Among the few regrets related to stocks I've sold too early, there's a few names. First, there's Boyd Group which I bought when the stock was around 10$ and I sold when the stock got to 11 or 12$. Yes, I did that. 

The stock is now at 215$ and I came back when it was around 100$. 

Then, there's XPEL. I bought 3000 shares in april 2014 at 1,75$ and sold them about one month later for 1,55$ each. 

The stock is now at 42US$. I realize that if I had kept these shares that cost me only 5900 CAN$ 6 years and a half ago, the total worth of that investment would now be about 170 000 CAN$. Isn't it funny? 

Of course, it's very easy to say that with hindsight. At the time, XPEL was on the edge of being a penny stock and I owned many other penny stocks (I invested in many cheap stocks and I think that I sold XPEL as a statement against all those crappy penny stocks that are almost always a loss of time and money). In fact, when I look at all the other penny stocks I owned (or stocks just slightly over 1$), I'm happy to have sold them all. 

But, once in a while, you get the penny stock that has a future and XPEL was one of them. 

I'm currently thinking about being back in the stock. Just like Boyd Group, I've lost the chances of getting a spectacular twenty-bagger but, I still could double, triple or quadruple my money. That stock has everything I'm looking for, plus it's not a penny stock anymore. 

You may have fucked, but you may always get back on track. 

Valuation VS Risk VS Performance

I think a lot about the importance of valuation of stocks recently. 

I wanted to analyze a bit that topic by examining two group of stocks. A group with stocks that grow well and a group with stocks that grow substantially more. 

Obviously, these studies with only a few stocks imply a certain bias and they're not that scientific. However, I've chosen only top notch stocks for the two categories. I think that everybody will agree with me that the 10 stocks listed here are great companies. Of course, they're not in the same sector.  But, anyway, as imperfect as it may be, here's my study.

I've compared the performance of these stocks on three different time frames:

1- For the last year (since december 6th, 2019);

2- For the last 3 years;

3- For the last 5 years. 

First group

In the first group, I've chosen 5 great canadian and american stocks. They all have a very high predictability and have been incredibly well managed in the past. Also, they all offer at least a good, but not spectacular, level of growth. Their PE has always been reasonable (mostly from 15 to 20 since the last 5 years). 

Here's their performance over the last year, 3 years and 5 years: 

Carmax (KMX): (1 year: 0%) (3 years: 43%)  (5 years: 68%)

O'Reilly (ORLY): (1 year: 2%) (3 years: 79%)  (5 years: 71%)

TJX (TJX):  (1 year: 11%) (3 years: 80%)  (5 years: 89%)

Metro (MRU.TO): (1 year: 3%) (3 years: 46%)  (5 years: 55%)

Canadian National (CNR.TO): (1 year: 19%) (3 years: 35%)  (5 years: 74%)

AVERAGE: (1 year: 7%) (3 years: 57%)  (5 years: 71%)

Second group

In the second group, I've chosen 5 great canadian and american stocks. The predictability of these stocks is a little more uneven here, but it's at least OK. They've also been very well managed in the recent past. The difference here is that these stocks are much more expensive (they were always expensive over the last 5 years) but offer a much better growth.

Edwards Lifesciences (EW): (1 year: 6%) (3 years: 128%)  (5 years: 218%)

Paypal (PYPL): (1 year: 107%) (3 years: 199%)  (5 years: 518%)

Netflix (NFLX): (1 year: 64%) (3 years: 164%)  (5 years: 304%)

Constellation Software (CSU.TO): (1 year: 16%) (3 years: 102%)  (5 years: 177%)

Boyd Group (BYD.TO): (1 year: 8%) (3 years: 112%)  (5 years: 216%)

AVERAGE: (1 year: 40%) (3 years: 141%)  (5 years: 287%)

In each group, there's contraction or expansion of the PE ratio every year. I don't try to bet on a possible expansion of the multiple. I think that the right way to see stocks is to consider their historical PE ratio over time and to see if the current valuation is comparable or very different to the historical one and if the prospects of growth for the stock are still there. For instance, in the second group, the PE ratio has always been high for Paypal. Does the growth prospects for that stock are still there? I'd say yes without hesitation. Of course, some bad results would affect the stock as it is "priced for perfection" like some may say. But, is it really less risky to buy cheap stocks like Linamar or Home Capital Group? Even with a small PE ratio, we have seen a drastic contraction of their PE in the past. 

So, in my opinion, it's not riskier to buy expensive stocks, as long as their high valuation has always been high and their results still match their valuation. Of course, buying just one of these stocks, for a big position of your portfolio, is not a good idea. But if you buy 10 of these stocks, I'd bet that you'll beat the market by an appreciable margin, in a bull or bear market. 

With the first group, you would have had a performance of 71% for the last 5 years. It's a good performance, but with the second group, you would have got a 287% performance. 

Imagine the impact of such a performance on a 100 000$ or 1 million $ portfolio. Or just imagine that impact on your portfolio, as small or big as it may be. 

Portfolio review, december 1st

Here we are, december 1st, 2020. Christmas songs all over on the radio. Like "Do They Know It's Christmas Time" and "Last Christmas" and "Happy Xmas". By the way, it's gonna be 40 years since John Lennon got shot in New-York. What were you doing at the time? Me, I was probably taking a shit in a diaper, being one year and a half at that time.

Before entering into the subject of the present post, I want to adress a specific topic which I'm thinking about when I read some of my ancient posts.

As you probably know, my first language is french. I don't use any english daily, because I live in the suburb of Quebec City which is a place where very few people live in English. So, the english I write is not that natural for me. I don't speak a superb english but I'm probably better in english than 99% of english canadians are in french. 

That fucking english language is surely easier than french, but Guillaume de Normandie hasn't done a perfect assimilation in 1066 when he invaded England. So, while many of your words come from french, you have strange habits like putting capital letters in song titles like "Do They Know It's Christmas Time". In french, we put capital letters only on few words like first and last name and country names. Also, we don't use the verb "have" for everything like you do. It looks like you're all a fucking bunch of illiterate because that verb can be used for everything. Like "I'll have breakfast", "Thank you for having us", "Have a nice weekend". What the fuck? How come don't you make it a little more complicated? And why does your age comes with the verb "be" and not the verb "have"? In french, you say "J'ai 41 ans", you don't say "Je suis 41". And why do you put adjectives or colors before the noun? Like "A green shirt" while in french we put the adjective or the color after the noun. Yes, we say "A shirt green" as stupid as it may look for you, badly assimilated culture. How do your fucking brain works? It amazes me because many of you seem intelligent while using such strange fucking sentence structure. 

Anyway, here's my almost traditional quarterly portfolio review:

Number of stocks: 24

Average ROE of the portfolio: 42

Average forward PE of the portfolio: 30

Average Beta of the portfolio: 1

Performance YTD: 17% (including dividends)

Performance of the S&P-TSX YTD: 1% (excluding dividends)

Performance of the S&P YTD: 13% (excluding dividends)

I probably beat the S&P by 2% if we assume a 2% dividend for the market. It's not bad, but not a glorious victory. And I wonder how my very average beta coefficient has risen to 1. A lot of stocks I own have seen a strange increase of their Beta coefficient. You probably don't care about that. 

A question for those investing only in canadian equities: Why the fuck are you investing only in Canada? Have you seen the performance of TSX vs the performance of the S&P on a long time frame?

You don't invest in the USA because you're afraid of the conversion rate? Yes? Then fuck you. Stick with your fucking oil company and their fucking dividends that are the only fucking thing on earth that gives you a boner.