ROE VS EPS growth

It's been written here and elsewhere before, but ROE is very important. That measure shows how efficient a business is to make money.

A high ROE is much better than high EPS growth. Because with high ROE and low EPS growth, a business gets much more money than with low ROE and high EPS growth.

For example, you have two businesses. The first one is growing very fast. It's EPS growth rate is 100% each year. However, the worth of the assets of that business is 1 billion dollars and that business generates 1 million dollars of net earnings each year.

The second one is not growing at all (stable revenues). So, it's EPS growth rate is 0%. But the worth of the assets is 1 billion dollars and that business generates 500 million dollars of net earnings each year.

Unless you've had a lack of oxygen at birth, you'll probably have much more interest towards the second business than towards the first one.

Because that second business gets a lot of money every year and with money come opportunities (stock buyback, dividend increase, build more stores, buy other companies, etc...).

The first business may excite a lot of people on the stock market with an incredible growth rate. However, that business doesn't generate a lot of money. All they can do, if they really excite the market, is to issue more stock to get more money, which is not a good thing.

I've done the exercise of checking most of the investments I've made in the past. It appears that the biggest part of high ROE stocks I've owned have produced good or great return over time. There's some exceptions, but the average result is pretty good.

So, here's a list of most of my investments made over the last 6 years.


2009: Scotia Bank, Royal Bank, Cominar, Transcanada

2010: Johnson and Johnson, TD Bank, SNC Lavalin

2011: BMTC Group, MTY Food Group, Apple, Grainger, Intel, Home Capital Group, Mastercard, Boyd Group

2012: RPC, Accenture, HNZ Group, Cummins, Teva, Canadian National, Constellation Software, Advance Auto Parts, Oracle, Coach, Nu Skin, Dollar Tree, Ross Stores, Paladin Labs

2013: Horizon North Logistics, Rifco, Biosyent, Valeant, Loyalist Group, CGI Group, Directcash payments, Macro Enterprises, Cipher Pharma, Questcor Pharma, Alimentation Couche-Tard, United Therapeutics, Carfinco, NTG Clarity Networks

2014: Portfolio recovery and associates, Dorman Products, Gilead, Avigilon, Concordia Healthcare,
Vecima Networks


And now, here's the companies with high ROE when I bought them (the ROE may have dropped a lot since then). I've written the ROE at the beginning of the year of purchase and the performance since the beginning of the year of purchase (my calculations are based on january 1st of each year). And the exchange rate isn't considered.

JNJ
ROE in 2010: 26
Performance since 2010:  67%

HCG
ROE in 2011: 27
Performance since 2011: 35%

BYD-UN
ROE in 2011: 64
Performance since 2011: 913%

AAPL
ROE in 2011: 38
Performance since 2011: 131%

MA
ROE in 2011: 42
Performance since 2011: 328%

COH
ROE in 2012: 56
Performance since 2012: -34%

NUS
ROE in 2012: 29
Performance since 2012: -21%

ROST
ROE in 2012: 46
Performance since 2012: 144%

HNZ
ROE in 2012: 26
Performance since 2012: -57%

ACN
ROE in 2012: 65
Performance since 2012: 117%

AAP
ROE in 2012: 42
Performance since 2012: 130%

CSU
ROE in 2012: 77
Performance since 2012: 562%

ORCL
ROE in 2012: 24
Performance since 2012: 59%

HNL
ROE in 2013: 23
Performance since 2013: -83%

RFC
ROE in 2013: 57
Performance since 2013: -66%

RX
ROE in 2013: 76
Performance since 2013: 634%

ATD-B
ROE in 2013: 21
Performance since 2013: 254%

UTHR
ROE in 2013: 30
Performance since 2013: 111%

GILD
ROE in 2014: 30
Performance since 2014: 22%


There's some pretty bad performances up there, like Horizon North Logistics and Rifco. There's also Coach and Nu Skin that have produced bad results.

But, think about it: Horizon North Logistics was very linked to natural resources (housing for workers in the oil/gas industry). Rifco was very linked to Alberta (almost the same as HNL).

Then, Coach is a brand and brands can easily go out of fashion. Then, Nu Skin was a company full of controversy (and still is).

Most of the other names are "boring" companies that aren't linked to natural resources or a specific geographic place.

So, to conclude:

1- Chose high ROE businesses;
2- Avoid sectors like fashion, natural resources, oil and gas, companies for which you have doubts about honesty of the management;
3- Buy these businesses at a fair price (forward PE between 10-20 times earnings);
4- Build a balanced 15-20 stocks portfolio;
5- You'll do well.

Amaya stinks

Not so long ago, I thought that Amaya (AYA.TO) could be a good investment.

But today, I'm convinced that this stock stinks.

We have known for a long time that Amaya was investigated by the Autorité des marchés financiers (kind of SEC in Quebec). But nothing was proven. It was maybe an error. Like that error for O.J. Simpson.

We recently learned that David Baazov, the CEO of Amaya, now faces insider trading charges because he and some of his friends/family made a lot of money via some serious insider shit.

And today, we learned that Baazov has decided to take a break from his CEO position to concentrate on the buyout of Amaya.

BLAH BLAH BLAH. It's the same fucking story as Valeant: take off a CEO full of controversy to calm down investors (but continue to pay him as a fucking king).

Oh, wait a minute. Why not any great investor own shares of a gaming company (well, I'm not sure about what I'm writing here. So, let's say: why not any great investor seems to have a BIG position in a gaming company)? Amaya scored well last year's ROE reporter I believe (at the ROE/PE ratio list) but I think that Jason Donville never bought shares. At least, he was never a big supporter of the company.

Well, if there's so little great investors around, maybe it's because that's a fucking industry full of crooks and these casinos related businesses are well-known for money laundering.

Yeah, there's enough fucking crooks out there on the stock market, give yourself a fucking chance and chose an industry where there hasn't been too much crooks discovered. Chose an industry where crooks remain hidden.

When the honesty of managers is questionable, you should quickly take a look elsewhere. Because, when some rot is visible to you, it's probably because the walls are full of dead rats. Companies have public relations that are paid to make everything look beautiful and wonderful. When their shit is stronger than their public relations, it's a bad sign. And when there's proof that you can't trust the high executives, how could you trust what they're saying or writing on their annual report?

Chose honesty. Chose Valeant. 

Crooks

That Valeant story made me mad.

First of all, mad about myself. Then, mad about Sequoia Fund, Lou Simpson, Bill Ackman and even Jason Donville...

Ok, nobody forced me to buy some Valeant shares. I'm the main idiot here. But I trusted all these guys above. I've trusted them too much.

And, for myself, I thought that I knew what I was doing even if I knew that investing without using traditional metrics was a risky move. But I was convinced by what I read about Mike Pearson and Valeant. And I was blinded by the great results of some big Valeant shareholders like Sequoia Fund, Bill Ackman, Lou Simpson, Jason Donville and a couple of others (some great investors from Quebec like Bernard Mooney and François Rochon owned Valeant shares too).

Lesson learned: If the metrics of a company aren't used in a traditional way, forget it. Fuck all those companies that use ADJUSTED metrics. Like adjusted ROE. Adjusted EPS. Adjusted management performance. Adjusted SHIT.

Fuck Patient Home Monitoring. Fuck Valeant. Fuck Concordia Healthcare. Fuck all that shit that have more chances to be run by crooks than those companies that are using traditional metrics. It's way easier to manipulate numbers when you adjust them. If you adjust it correctly, you'll make a pile of shit look like a gold nugget.

It's been painful for me. Very painful because I've lost maybe a year of performance with that scandal. But it opened my eyes. And here's some lessons painfully learned:

• Never invest again in a company that doesn't use traditional metrics;
• Never trust again all those superinvestors (I won't reproduce their moves but I'll take them as a bonus if they chose the same companies as me);
• Never believe what anybody says on television. I still trust Jason Donville and still believe that he's one of the best in Canada, but I'm pretty disappointed about his fall appearance on BNN about Valeant as previously said. Everybody having media exposure without any exception is using that exposure at their benefit. 
• In retrospect, you have to be the judge of what is good and what's not good. So, better read a couple of good books about investing as soon as fucking possible to get rid of all the people that want to convince you to buy the same thing as them (to pump the price of their shares). 

Bob Goldfarb, the great, great investor at Sequoia Fund resigns today from his position at the fund, because of that Valeant scandal. So, some heads rolled and a lot of people including myself must learn lessons about that story.

To conclude, here's some words of Buffett about the use of EBITDA (which is used a lot with companies like VRX, CXR, PHM and many others):

"We’ll (Berkshire Hathaway) never buy a company when the managers talk about EBITDA. There are more frauds talking about EBITDA. That term has never appeared in the annual reports of companies like Wal-Mart, General Electric, or Microsoft. The fraudsters are trying to con you or they’re trying to con themselves. Interest and taxes are real expenses. Depreciation is the worst kind of expense: You buy an asset first and then pay a deduction, and you don’t get the tax benefit until you start making money. We have found that many of the crooks look like crooks. They are usually people that tell you things that are too good to be true. They have a smell about them."

Exco technologies (XTC.TO)

In the 80's, there was a british band called XTC. They made strange songs. But some of them were great, like "Making plans for Nigel" (1979), "Senses working overtime" (1982) and The Ballad of Peter Pumpkinhead (1992).

Excstasy is also a drug that make people retard.

XTC is finally a small canadian company which is little known... but which looks promising.

This business is a favorite of Peter Hodson (one of the few good analysts in Canada) and the company was in the Donville Kent's ROE reporter of last january, being part of the list of fastest growing companies in Canada (without being cited as a top pick or even a pick).

Exco technologies produces various automative parts (moulds for transmission cases, engine blocks, accessories for the interior of the car, etc.). In many ways, that company looks to me like a Richelieu Hardware for cars.

In fact, even for the numbers, that company reminds me a lot of Richelieu Hardware: good but not great ROE, heavy insider ownership, little debt, steady growth and design of various parts in a field that is a bit boring...

Here's a list of XTC numbers:

• Insiders control 23% of the shares
• Debt free (the debt is almost only short term debt)
• Dividend has increased by 250% in the last 6 years
• 49% of sales in the states, 38% in Europe, 4% of sales in Canada (a Canadian company that should not be affected by Alberta at all)
• 2010 EPS: 0,25$
• 2011 EPS: 0,36$
• 2012 EPS: 0,60$
• 2013 EPS: 0,58$
• 2014 EPS: 0,73$
• 2015 EPS: 0,96$
• Actual PE ratio: 15
• Forward PE ratio: 10
• Actual ROE: 18
• Average ROE last 5 years: 16
• Perfomance 1 year: 10%
• Performance 5 years: 289%

I've came to believe that good but not great ROE business like Metro, Richelieu Hardware, Logistec, CGI Group and probably Exco Technologies offer a possibility to get richer slowly but safely.

I've initiated a position in Exco. I believe that this business will be very rewarding in the long term. 

Portfolio review - March 17th 2016

It is now the time for a Penetrator's portfolio review.

CANADIAN

CGI Group 10,2%
Couche-Tard 8,6%
Constellation Software 7,8% 
Concordia Healthcare 7,5%
Home Capital Group 5,5%
Knight Therapeutics 3,7%
Canadian Pacific 3,7%
Logistec 3,2% 
Valeant 3,0%
Callidus Capital 2,7%
Nobilis Health 2,4%

US

Gilead 8,6%
Allergan 6,9%
Ross Stores 6,2%
Dollar Tree 5,5%
Apple 5,4%
Polaris 4,4%
Lithia Motors 2,0%

Cash 2,5%

TOTAL: 100%

Penetrator's clever comments: The US dollar is now close to it's historical average. So, I believe that any good US stocks avalaible at a good price could be bought without too much hesitation.

What do I look on the market these days? Except for my now tiny Valeant position, I'm looking at:

• Logistec (a huge load of stock buyback these last months)

• Stella Jones (pretty good results released today)

• Dollarama (great company, expensive but very interesting)

• Knight Therapeutics (the healthcare sector is on sale, a company full of cash like Knight may be opportunist)

• Allergan (the acquisition price by Pfizer should be higher than the actual price of the shares)

• Lithia Motors (the last results were great and the stock is still cheap) 

• Rifco (that company is still incredibly cheap even though it's making money. Too, the ROE is pretty high...but it's on the fucking venture exchange)

• Canadian Pacific (the last results were pretty good and the company is looking for a big acquisition)

Some thoughts about Bill Ackman related to Valeant's drop and a word on Nobilis Health

•  When you think you're having a bad day, just remember that it could be worse: you could be Bill Ackman.

• In fact, if Bill Ackman was japanese, he'd probably commit hara-kiri (don't do this Bill, I've heard it hurts a lot. I have some suggestions below to forget about painful moments like today).

• What's that smell? It's the huge nervous shit in Bill Ackman's pants that's so abundant, it's smelling from New-York to Canada.

• Bill Ackman could have bought almost any crappy stock one year ago, he would have had better results than with his investment on Valeant. In fact, a monkey or even a chicken would have had better returns.

***

Today, I almost laughed, seeing the incredible drop of Valeant. It was so tragic to lose so much money in a single day that I couldn't manage my emotions. So I was inclined to laugh, or at least to smile, saying: "C'est pas possible, tabarnac!". Oh yeah, the shit under Philidor was surely much bigger than what I thought.

Some people say that the sales of Valeant's drugs are way lower than what was expected, proving that Valeant's model is starting to crumble.

Maybe both opinions are right (Philidor + sales declining). I don't know. I still believe that the actual valuation is insanely cheap (less than 4 times earnings), but maybe I'm a victim of the management and their beautiful words that seem to worry everyone but me. Because I'm so fucking stupid.

Well, fuck all that and let's party with some cocaine and russian whores! There is no future anyway.

***

I have a word to say on Nobilis Health (NHC.TO). Holy shit, the last results were released this afternoon and they are so fucking great!

0,68$ (US) per share in 2015 VS 0,06$ (US) per share for 2014. They actually beat expectations by 0,39$, which is incredible.

And the shares are selling at 4,40$ (CAN)!

They fucking killed estimates. I fucking hated that company until today because of their public relations and accounting problems but now I'm madly in love with them and I hope a fucking load of people all around the world will buy their shares tomorrow to help me getting back the 20 000$ I lost with Valeant!

LET'S GO STUPID PEOPLE! FOLLOW MY WORDS LIKE I FOLLOWED THE WORDS OF MIKE PEARSON!

What the fuck?

It's probably not a scoop for anyone but yesterday, on market call (BNN), the three top picks of Jason Donvile were: 

- Concordia Healthcare
- CGI Group
- MTY Food Group

Three great picks once again. All solid companies that have done well in the past and that should continue to do well.

But, on the BNN website, I've read something pretty crazy:

Donville Kent has sold almost all their Valeant position in november. Now, their Valeant position is about 0,5% of the fund (it was something like 10% not so long ago).

In october, Jason still had Valeant as a top pick. Still in october, he went to BNN on a rant against Andrew Left and Citron research, calling Andrew Left "a turkey" and defending Valeant vehemently.

What the fuck? A couple of weeks after having Valeant as a top pick and after discarding Citron's point, saying that Valeant's ROE is very high, making it a great company that many people didn't understand because of their model, he sold almost everything...

What the fuck Jason?

WHAT THE FUCK?