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?

 

Google's latest results

The problem with businesses is that they are living beings. They eventually die. Almost all of them.

So, even if some businesses are extremely solid at one time, they eventually grow old, get cancer and die. 

 

I mean, I really like some stocks, but most of them ride a wave. They benefit from a certain fad which will fade. 

Google is in another dimension to me. OK, Google probably won't last forever, but among all my portfolio, it's probably the stock for which survival won't be a issue for a long time.

When I read, a few years ago, that Google build their servers close to dams, I realized that it was one of the strongest barriers to entry. Who could, overnight, start a company that will have sufficient funds to reach that level?

Their last results were out yesterday. What about a 20% growth for a 870 billion dollars company? Isn't it incredible? And don't forget that Google is the center of our world when it comes to Internet. It's a reflex. It's a no-brainer. You go on the Internet? You use Google. 

These results would be very good for a small cap. How could we qualify them for a giga cap? 

"Excellent" would be the weakest word we could think of.

The fucking greatest name of a CEO

Do you know about Ameritrade Holdings (AMTD)? No?

Why? I wrote something about that stock a few months ago, saying it was a good company, if not great. How come do you come here if you don't remember what I write? Are you just looking for some random nasty words? You don't like my boring but great companies suggestions?

FUCK YOU.

Anyway, today, I read that the name of AMTD CEO is:

TIM HOCKEY

Yes. Like Tim Horton, but with Hockey instead of Horton.

THAT'S SO FUCKING HILARIOUS.

Please share below the name of a CEO which is funnier than that one.

Boring is beautiful

About one year ago, on july 30th, 2018, I wrote a masterpiece about NVR, the homebuilding and mortgage company.

At the time, the stock was selling for about 2700 USD a share. A few months later, the stock went as low as 2040$ (in october 2018) for no other reason than an unjustified panic. The stock went back with a lot of vigor and is now at 3525$. 

If you had bought the stock after my writing, you would have got a very interesting 31% return. And if you had bought at the bottom, you would have got a 73% return.

I look like a fucking genius, but I've only been a shareholder for a few months in 2018. I sold my shares, thinking I had found something which looked better but that wasn't better. I made a very slight profit with that short adventure. 

The problem with that stock, even if the Beta coefficient is low, is that it's linked to interest rates and to the general state of economy. The relation is way less important than banking or car companies, but it's related to it anyway. That's something I try to avoid. But it's nevertheless a great company.

Once again, you don't have to look at high-tech stocks or IPO, or the brand new trend. Actually, you better look at that kind of stocks that made profit last year and that will again make profit this year. 

And, once again, the so-called investors who take a look at the price of the shares won't invest there because they'll be afraid of a single share at about 3500$. That's something that should appeal to you.

When the perfect stock is expensive

Usually, great stocks can only be bought at a high price like 20 or 25 times current earnings. But when they reach another level, such as 30 times forward earnings, an investor should ask himself some questions, even if everything looks great with the stock.

For instance, I own two small positions in Visa and Mastercard. Both are perhaps the best companies in the world. You may disagree with that affirmation, but you can't disagree that both are incredible businesses and their decline looks far away.

However, both are currently priced at about 30 times next year's earnings. It's a lot, even for two companies that make a lot of money and that are very well managed. But should I sell them to buy a cheaper company not as great as them?

Maybe. Sadly I'll only know the answer to that question in a few years.

But here's a short analysis with which I'll decide to sell or keep them. Please, note that I know that both companies have incredible margins, good ROE (Visa) and unbelievable ROE (Mastercard). Both are growing a lot every year and that trend shouldn't stop. And both have a name that everybody knows. So, that approach wouldn't be valid for every stock. Actually, that approach is only valid for very special stocks (5% of stocks).
 
Mastercard
Current PE ratio: 47
Forward PE ratio: 31
Average PE last 5 years (2014-2018): 32

Visa
Current PE ratio: 37
Forward PE ratio: 29
Average PE last 5 years (2014-2018): 32

These are stocks that you can only hope to buy at around 25 times current earnings in a panic. Or at 20 times current earnings in a big crisis like 2008-2009. Otherwise, they'll be sold for 30 times current earnings or more.

If we look at the numbers above, both stocks are currently selling at a forward price that's a little smaller that their average PE for the last 5 years. It's still expensive, but on an historical perspective, with future potential similar to past performance, it looks like the price to pay.

Of course, if I would have a 10% position in both stocks, my reaction would be different. But with a small position, you can be more tolerant towards a high price. That's your job to mitigate that "risk" with some cheaper stocks in your portfolio.

That's where the real game is.