jeudi 17 décembre 2020

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. 

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