6 GARP Investors to Follow

Tis’ the season and I hope everyone is enjoying this time of year. I just finished celebrating Hanukkah and Christmas is only a couple short weeks away. With the new year just around the corner, I thought I’d put together a list of some great investors you all should have on your radar. I try and soak up as much wisdom as possible and these investors are dripping with juicy nuggets of information. This list ranges from bloggers to CEO’s of Fortune 500 companies, running the entire gamut. Knowledge can be gained from all kinds of different sources. This is far from a complete list, but just a few names you all should familiarize yourselves with.

  1. Francois Rochon-  First on our list is Canadian investor Francois Rochon. Rochon started his investment firm, Giverny Capital, over 20 years ago. Unfortunately, I had never heard of him until earlier this year. To make up for this delay, I devoured all of his annual reports in a single day. He is a classic GARP investor, focusing far more on the quality of a business than on the price of a stock on any given day. He is more concerned with how the earnings of a company are increasing each and every year. His returns are admirable, averaging 15.7% since 1993 as compared to the index result of 9.2%. Over the course of 25 years, this discrepancy has led to magnificent results. I particularly enjoy his writing style, mixing humor and humility. He includes a section every year highlighting his greatest mistakes, something that every investor can surely relate to. My own personal account seems to overlap with his constantly, with companies such as: Markel, Berkshire, Google, Visa and Union Pacific showing up in both. You can see his reports located on his company’s website
  2. 2. Pat Dorsey– I was introduced to this famed investor through Patrick O’Shaughnessy’s great podcast The Investor’s Field Guide. Dorsey gained notoriety through being the director of equity research at Morningstar, a well known investment research company. He went on to write a couple of highly regarded books The Five Rules for Successful Stock Investing and The Little Book that Builds Wealth, as well as start his own asset management firm. He focuses on companies with strong moats, otherwise known as durable competitive advantages. Due to those advantages, they are able to keep high returns on capital far longer than the average company. In his own words, his strategy can be summarized as “We purchase these businesses at what we believe to be reasonable discounts to a rational assessment of intrinsic value, and we seek to invest in companies with corporate managers who we believe can allocate capital in ways that benefit long-term minority shareholders.” Here is a great compilation of resources he has shared on his Website
  3. Warren Buffett– I would be remiss to make a list of extraordinary investors and exclude the granddaddy of them all. While often thought to be a value investor, I think he can more appropriately be given the categorization of a GARP investor. I probably don’t need to spend much time talking up his accomplishments, you’ve heard them all before. Just know that he is as wise as they come and his lessons are timeless. You can of course read his annual reports, watch his numerous interviews or even go to Berkshire Hathaway’s annual shareholders meeting as I have done myself in the past.
  4. Mark Leonard– Another famous businessperson I am embarrassed to have only found this year is Canadian superstar CEO Mark Leonard. Leonard is the CEO and founder of Constellation Software. While Warren Buffett has famously avoided technology, Leonard has embraced it. Realizing that software companies in niche industries spin off tremendous amounts of cash while only requiring minimal ongoing capital investments, Leonard has created a decentralized juggernaut. Leonard uses the vast amount of free cash to then acquire an ever growing list of niche software companies.  His real brilliance was in identifying how strong a moat these companies could have. Think of a dentist or an optometrist. Once they start using a particular software for their office, it becomes incredibly difficult to switch. All of their patient records are stored on that program. In order to switch, all of that data would need to be reentered and staff needed to be retrained on a brand new software. He has taken that premise and bought up companies in hundreds, if not thousands of different industries. You can read his annual letters, going back all the way to 1996 here.
  5. John Huber– I’ve been following this fellow blogger for a number of years at BaseHitInvesting. Not only does he run an incredibly informative blog, he also runs his own fund, Saber Capital Management. In his own words “Our general strategy is to make meaningful investments in high quality, predictable businesses that can be expected to grow intrinsic value at high rates and that are currently available at cheap prices.” I would peg that definition right up the GARP alley. I’ve learned a lot from Mr. Huber over the years, particularly his series on ROIC and compounding. He recently wrote up a new post entitled “Facebook Is Undervalued.” I’ve shared my thoughts on FB previously and the two of us seem to see eye to eye. I look forward to reading more of what he has to say over the years.
  6. Connor Leonard– I was introduced to our final GARP investor of the day through a guest post on Huber’s blog BaseHitInvesting a couple of years ago. Leonard(No relation to Mark as far as I know) runs the public securities portfolio for Investment Management Corporation. IMC is a particularly interesting business case study. On only $50,000 of startup capital, the founders started the restaurant Golden Corral. Due to managerial brilliance and the fixation on cash flow, they have never needed to invest a penny more. With such great cash flow, they have entered into many other business arenas, as well as their public securities division, which is where Leonard fits in. He runs his portfolio in a GARP oriented style. With a focus on moats and capital light compounders he has found great success. I foresee his notoriety in the investment community growing considerably over the years.

As always thank you for reading. I hope you found this post interesting. These are all great investors you can learn a ton from. Subscribe and let me know what you think. Thanks again!

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What a Roller Coaster!(3Q Update)

I’d like to start by apologizing for not posting in a while. Due to a combination of work, life, laziness and a sinking market, I’ve found it hard to muster the energy to type up a new post. That of course is not a great excuse and I’d like to get back into posting regularly. Without further ado, let’s get down to business.

Since I last posted, the market has given us all a roller coaster of emotions. Volatility has been extremely high, with markets moving 1, 2 and sometimes even 3% in a single day. October was a rather brutal month, the S&P 500 fell over 10%. The question is, what should we do about it?

While watching your stocks fall is never fun, you have to take a step back and think rationally. Are your companies executing? That is ultimately what is important. A falling price allows a company to buy back shares at a discount, increasing your overall ownership.  A falling market also provides a buying opportunity for you. I took advantage of this opportunity and bought shares of three strong companies.

New Purchases

LUV- Southwest Airlines is a leading low cost travel provider. By focusing on providing value to their customers, Southwest has emerged as a dominant player in their field. They simply offer the best value in the business and over time will continue to grow.

Googl- If there is one no brainer company, it is Google. They dominate the world of digital advertising. Online search is one of the highest margin businesses around and competitors can’t seem to steal market share no matter how hard they try. I simply needed to wait for a reasonable price. Thankfully, the market was gracious enough to present me with such an opening.

MSFT- I wasn’t always a believer in Microsoft during the Steve Ballmer era, but Satya Nadella has proven to be the real deal. Microsoft Azure is the fastest growing product in the cloud infrastructure arena. Microsoft is a free cash flow machine, paying a solid dividend and rapidly buying back shares. They are pushing all the right buttons and I’m happy to be an owner.

3rd Quarter Performance

Reminder I started with $10,000 and bench marked against the SPY at 285.06 which as of the closing on 11/13/18 stands at 272.34

%Return(1)          SPY Return(2)         Difference(1-2)

Portfolio value- $9,275.89         (7.25%)                      (4.65)                           (2.6)

So far pretty terrible, I clearly chose an awful time to start this portfolio and even worse my companies have under performed the benchmark. That being said, 1 quarter doesn’t tell a full story. To get a better idea let’s look into how the companies (not their stock prices) have performed this past quarter.

DG- Reported a great quarter. EPS growth of 40.7% YoY and bought back a significant amount of shares.

FB- Top line growth of 33% and remains debt free. Also bought back a significant amount of stock. DAU and MAU both increased, will be an interesting story to follow given all the adversity surrounding the company.

FND- Continues strong growth, adjusted EPS up 41.2% YoY. Opened 7 new stores during the quarter with plans to open many more.

GOOGL- Google put up another amazing quarter. The company is a behemoth, now sitting on over 100 Billion dollar of cash and cash equivalents.  EPS grew over 36% YoY, never ceases to amaze.

HII- EPS grew a whopping 61% from 3.27 to 5.29. This high moat company keeps chugging along.

IPGP- Faced a tough quarter due to the macroeconomic environment. EPS fell 13% YoY. They did however acquire a smaller competitor, growing market share in the robotic welding division.

LEA- Eps grew 3% YoY. Not too wonderful, but the company was able to reduce the share count considerably.

LUV- Southwest produced a steady quarter. EPS was up 22%. The share count continues to fall while paying out a decent dividend.

MSFT- Crushing earning estimates, Microsoft grew EPS by 36%. Continues to be an absolute machine.

ODFL- While last alphabetically, Old Dominion was anything but last performance wise. EPS grew a tremendous 71% YoY, a simply remarkable amount.

Overall, I think their is a lot to be encouraged about with this group of companies. They continue to compound and business continues to improve. IPGP and Lear continue to show weakness, but I remain confident in the long term viability of both companies. All others reported very strong quarters. Although the portfolio has not done well this first quarter, remaining patient will pay off eventually. Remember what Ben Graham said all those years ago, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” It is going to take time for these companies to reach their intrinsic value, but I am happy to wait.

As always, thanks for reading! Questions are encouraged and feel free to comment how your portfolio has performed this past quarter. Remember to follow along on the side.

Flooring Is Boring(That’s a Good Thing)

Warren Buffett has often said he knows within minutes whether or not he wants to buy a company. As I was looking through a stock screener yesterday, I knew in moments I wanted to own the company. Floor & Decor(FND) is amongst the fastest growing non technology stocks I have ever seen. Imagine my surprise when I saw it trading 5% lower on the day. I knew I had to pull the trigger and pounce on the opportunity.

I bought 35 shares for $32.49 a piece. I’m down to $4,166.81 in my 10k Portfolio, maybe I need to slow down. Sometimes I just can’t help it, when I see a company I like at a decent price, I act. Over time, compounding will work its magic. Let’s check out why I like Floor & Decor.

Why FND?

This company is what I would categorize as a classic Peter Lynch stock. For those unfamiliar, Peter Lynch is a famed investor who ran the Magellan Fund at Fidelity. His mutual fund performed incredibly well during the 1980s, buoyed by a bull market. He is known for picking stocks based on what he saw day to day. He would walk around the mall, tracking customer habits and then go research the financials to see if they matched up. He particularly liked small retailers that could replicate their success in one location over and over all around the country.

Floor & Decor is my kind of small retailer. According to their most recent quarterly report, the company just opened its 90th store. They intend to open 400 total stores over the next 10 years, more than quadrupling their current size. They do one thing, but do it incredibly well. They sell hard surface flooring at value prices. FND stocks a large big box store, filling about 70,000 Sq. feet with all of a customer’s possible flooring needs.

I have a bit of an edge here, during the day I work in commercial real estate. We often have to buy flooring and there is a local company I often marvel at. They sell overstock flooring at rock bottom prices. The local company is often busy and seems to turn over their inventory quickly. While I can’t invest in this local flooring success, I can invest in FND which has a similar business model. Not only is the model similar, but they are much larger and therefore able to achieve all kinds of economies of scale.

Let’s dig in to the numbers a bit. In 2013 FND sold 441 million worth of goods. That number increased to 1.385 billion in 2017 for a CAGR of 33.1% over that time period. EPS grew even faster, growing from .13 to .88. This gives us a CAGR of 61.3%. A company growing earnings at 61% a year will make shareholders incredibly rich. Obviously, this rate is unsustainable, nothing can grow this fast forever.

In fact, quarter over quarter earnings growth has slowed down to a “paltry” 35%. FND has been able to accomplish this while using little debt, only 160 million for a company with a market cap over 3 billion. I would actually prefer they finance their expansion with more debt, while financing options remain fairly cheap. The main problem with the company is that they are new and I’m not sure of managements capital allocation strategy. FND has been issuing shares, diluting existing shareholders. As the company grows, I hope they can generate more free cash and finance future growth with internal cash on hand.

The company now trades at a P/E of about 27, by far the lowest since their IPO in 2017. The stock price reached a high of 58 in April, but the stock has cratered since growth has slowed just a bit. I think this presents a tremendous buying opportunity. In the short term I’m not sure which direction the stock price will go, but over the course of many years this will be a much larger business.

Conclusion

Overall Floor & Decor is a fantastic company with a long road ahead of them. They provide value to their customers and fill a void in the market. They are growing rapidly, adding new stores and increasing same store sales. I think this is a great time to buy and shareholders will be rewarded handsomely.

As always thanks for reading and subscribe on the side! You can follow me on Instagram and Twitter @thegarpinvestor.

Tucker or Trucker?

Earlier this week, I bought 4 shares of Old Dominion Freight Line(ODFL) for $162.60 a piece or a total of $650.40. Of course since I bought shares, the stock has continued to fall. It now stands 3.5% lower than where I bought it. This always seems to happen to me, unfortunately luck doesn’t seem to run in my blood. Therefore I’ll have to keep relying on brains and long term appreciation to make my money. For those keeping track I now own 6 stocks and have $5,303.91 left in cash in my 10k Portfolio.

Why ODFL?

Founded in 1934, Old Dominion Freight Line has been around for a long time. I generally like old companies (as long as they are still growing), they have survived all kinds of different economic environments. ODFL is a less than truckload(LTL) transportation company. Rather than trucking a full capacity for one company, they pick up small loads from various customers. They then put them all together and because of their logistic mastery are able to deliver the goods quickly. They service all kinds of customers ranging from auto parts to healthcare equipment. If you need something trucked, they are happy to help.

According to their 2017 annual report, they are now the 4th largest LTL company in the country, up from 6th in 2011. Gaining market share is certainly a good thing and I hope this trend continues. One sentence from their report I particularly liked was that “Significant capital is required to create and maintain a network of service centers and a fleet of tractors and trailers. The high fixed costs and capital spending requirements for LTL motor carriers make it difficult for new start-up or small operators to effectively compete with established carriers.” This forms a bit of an oligopoly with the other large LTL companies. New competitors simply can’t compete with the incumbent businesses, due to a lack of existing infrastructure.

Now let’s take a look at some of the numbers that make ODFL so compelling. They grew revenue every single year since 1996 with the exception of the 2009-10 recession. Consistency is key, allowing me to sleep easy at night. From 2013-2017 EPS grew from 2.39 to 4.35 for a CAGR of 12.7%. While not exactly stellar over this period, growth is beginning to rise quickly. This past quarter earnings grew 67.2% over the prior year and growth is not expected to slow down anytime soon. The company is winning new jobs and growing market share.  They trade around a 27.5 P/E which in a vacuum is quite high, but I find to be reasonable for a company that is growing considerably and of high quality. Remember, I am the GARP investor after all. Growth at a reasonable price is my goal.

ODFL has a ROE above 20%, meaning for every dollar of equity put into the business over the years, they are able to generate a 20%+ return. This is frankly quite stellar. They are investing heavily into CapEx every year and if they can keep up these same level of returns, investors should do quite well. The business is actually remarkably simple. They earn a generous amount of cash flow, then take that money and invest it into new trucks and fulfillment centers for logistics. With whatever cash is leftover ODFL pays a small dividend, buys back some shares and pays off whatever debt they owe. The company has a very clean balance sheet with only 839 million in liabilities, a minuscule number for a 13 billion dollar company.

Conclusion

Overall, I don’t expect ODFL to be my portfolios best performer 5 years from now. I do however expect it to be a portfolio anchor, that is meaningfully larger every single year. They are a simple business that can be relied upon. Management knows what they are doing and the stock is trading at a fair price.

As always thanks for reading and subscribe on the side! You can follow me on Instagram and Twitter @thegarpinvestor.

Value vs Growth? How About Both!

Humans love to use labels. From low carb to bridezilla, labels are used in almost every walk of life.  It comes out of a need to identify and place something within a group. I myself have fallen victim to this very affliction, I purposefully called myself the GARP investor. Investors don’t stray from this norm, in fact they typically embrace it. Investors generally fall into one of two overarching categories: value or growth. Of course there are hundreds of subcategories ranging from deep value to angel investing but ultimately these are just derivatives of the main two categories with a slight spin. These two frequently find themselves at odds with one another. Members of one group can never seem to grasp the thinking of their counterparts. I personally find these arguments to be all for naught. In my opinion growth is just a factor used in determining a company’s value. They are two sides of the same coin and inextricably linked

Let’s examine what Warren Buffett had to say on the matter. In his 1992 letter to his shareholders(which you should all go ahead and read in its entirety), he tackled this very issue.

Most analysts feel they must choose between two approaches customarily thought to be in opposition: “value” and “growth.” Indeed, many investment professionals see any mixing of the two terms as a form of intellectual cross-dressing.

We view that as fuzzy thinking (in which, it must be confessed, I myself engaged some years ago). In our opinion, the two approaches are joined at the hip: Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive.

In addition, we think the very term “value investing” is redundant. What is “investing” if it is not the act of seeking value at least sufficient to justify the amount paid?

I don’t understand why an investor can’t be both a growth and a value investor, or rather just a regular plain vanilla investor. When making an investment, the goal should always be to find value. Growth is merely a factor in determining whether there is value in the investment or not. In fact, there can be investments of incredible value with no growth and even no value with incredible growth. This is why the price paid is so important. Let’s look at some examples to demonstrate:

Value With No Growth

Imagine a company that earns 1 million dollars a year in profit manufacturing toasters, whose fixed assets equal all of their liabilities. This company then needs to spend 1 million on capital expenditures in order to fix their machinery to sell the exact same amount of toasters. In year 2 they will make that same 1 million and spend that 1 million on fixing their machinery. There is never any cash leftover in the business. In years prior however, they were more profitable and were able to save up 5 million in the bank. Because they are unable to grow their earnings the P/E ratio has fallen to a pittance of 3. This means the whole business is only selling for 3 million. A classic value investor would buy what Buffett would call a “cigar butt” for 3 million. He would close the business, sell off the fixed assets to pay off the liabilities and walk away with the 5 million in cash. He bought it for 3, walked away with 5 and made a quick 2 million dollars, a 66% return. Unfortunately, the market is more efficient these days and such easy money is no longer there for the taking. Had you paid above 5 million for the same business, it wouldn’t be nearly as enticing. Price paid is what ultimately determines the success of an investment, even if there is no growth in the business.

Growth With No Value

First let’s look at another Buffett quote from the same letter.

Growth benefits investors only when the business in point can 
invest at incremental returns that are enticing - in other words, 
only when each dollar used to finance the growth creates over a 
dollar of long-term market value.  In the case of a low-return 
business requiring incremental funds, growth hurts the investor.

Let’s now imagine a successful company with a decision on their hands. This company has no debt, earns 200 million dollars in profit and has a billion dollars of equity. They therefore have a Return on Equity(ROE) of 20% and have a market cap of 2 billion(a 10 P/E). The company generates lots of free cash with no maintenance CapEx and doesn’t know how to spend it. They can either pay out this money for a 10% dividend, buy back 1/10 of the shares outstanding for a 10% return(buying shares back at a 10 P/E) or invest internally to try and grow the business. If we ignore the effect of taxes, paying out a dividend and buying back stock should have the same result. The question is what kind of return can the company generate by growing internally. Should the company invest that 200 million back into the business but grow earnings by any less than 20 million, it will generate less than a 10% return. Even if sales and earnings grow, this would be a poor allocation decision. While ROE is currently high at 20%, each dollar reinvested will have a Return on Incremental Capital far lower. Why dilute a great business by investing in low returns?

In this example, growing the business could actually hurt the investor. While they could  maintain the status quo as a high ROE business paying a generous dividend or buying back stock, plowing money back into the business at lackluster rates of return actually loses value for an investor. Unless you can invest each dollar back into the business at high rates of return, it is best for a company to look elsewhere for allocation decisions. Just because a business is growing, doesn’t mean it is the best way to provide value to its shareholders.

In conclusion, the difference between value and growth is really just semantics. As investors we are all looking for the same thing, finding value and making a good return on our investments. There are any number of ways to do so, but ultimately it all comes down to the price paid being less than intrinsic value.

As always thanks for reading! Please subscribe on the side and you can find me on Instagram and Twitter @thegarpinvestor

 

I Got a Dollar

This morning I bought 7 shares of Dollar General stock for $110.57 a piece or 773.99 total. I am left with $5,949 to work with. I have invested just over 40% of my original 10K into 5 different companies. I hope to diversify a little more, making smaller positions going forward. I intend to buy somewhere between 12 and 15 companies total.

Why DG

As a dollar store, Dollar General sells cheap items providing great value to their customers. How can you make money selling things for a dollar? Well as it turns out DG is able to make a whole lot of money selling at discount prices. This past quarter they sold almost 6.5 billion dollars worth of goods and earned 407 million on those sales. By selling only a limited number of SKU’s and ordering in huge quantities the company can source products at bare bone prices. When they buy from a supplier, they are making an order for a company with over 14,000 stores. This leads to great economies of scale. Additionally, they only target small inexpensive items. Don’t expect to find a new car in a dollar general.

What separates Dollar General from their competition is their focus on location and on the customer experience. Instead of targeting large cities, they focus on small towns. Think of how Sam Walton built Wal Mart and his focus on rural america but at a micro level. These small towns aren’t large enough to support a Wal Mart or a Target and they are difficult to reach for Amazon. For Dollar General however they are moneymakers. DG builds out small stores, under 10,000 square feet and stocks them with brands consumers want. They also take great care in design. Every store is bright and welcoming, encouraging shoppers to come more often and spend more.

Financially, the company has performed superbly. While not the fastest grower, they have increased both sales and net income every year since going public in 2010. I particularly like the way Dollar General has been able to plow down their share count. At the start of 2014, DG had over 317 million shares outstanding. That number now stands at 266 million, a 16% reduction. This cutback is substantial. Each share now owns considerably more of the company, therefore a larger share of a growing stream of income.

The company is also becoming a free cash flow machine. This past year their cash flow from operations equaled 1.8 billion and had 640 million in capital expenditures, leaving them with almost 1.2 billion in free cash. They were able to use this free cash to pay a reasonable dividend, buyback a meaningful amount of shares and pay off a fair amount of debt. This free cash number should grow meaningfully over the years.

DG is now trading right around a 20 P/E. While not incredibly low, it is a fair price to pay for a strong and growing company. Remember as a GARP investor, I’m not looking for the cheapest possible company. I’m looking for a great company to hold for years into the future and if I can find such a company, I’m willing to pay a reasonable price. Dollar General has ticked my boxes and therefore I’ve decided to become an owner.

As always thanks for reading and subscribe on the side! Follow me on Twitter and Instagram @thegarpivnestor

 

Tesla And The Horse Race

Elon Musk never ceases to amaze me. He is obviously brilliant and one of the great visionaries of our time. I respect his relentlessness and envy all that he has accomplished in such a short amount of time. That being said, his love of the spotlight might spell trouble for investors. He is volatile and such volatility can be scary. Who knows what he might tweet next? “I’ve decided to retire from Tesla and teach a heard of sheep to communicate through a series of blinks.” “My intern looked at me funny yesterday, I have removed the entire executive staff.” I don’t know what to expect next, but I do love the ride. It is incredibly exciting to watch, but as an investor I find it best to just steer clear of Tesla. They very well could become the world’s greatest company, it just isn’t worth the risk in my book. GARP investing is about compounding safely. We are playing a game of probabilities and there is a far larger than 0% chance this could all blow up and go to 0.

The Parimutuel System 

Investing is a lot like betting on a horse race. I’ll leave it up to the always cheerful Charlie Munger to explain, he is far wiser than I could ever hope of becoming. Here is an excerpt from his article

A Lesson on Elementary, Worldly Wisdom As It Relates to Investment Management & Business.

The model I like—to sort of simplify the notion of what goes on in a market from common stocks—is the pari-mutual system at the racetrack. If you stop to think about it, a pari-mutual system is a market. Everybody goes there and bets and the odds change based on what has been bet. That is what happens in a stock market.

Any damn fool can see that a horse carrying a light weight with a wonderful win rate and a good post position etc., etc. is way more likely to win than a horse with a terrible record and extra weight and so on and so on. But if you look at the damn odds, the bad horse pays 100 to 1, whereas the good horse pays 3 to 2. Then it is not clear which is statistically the best bet using the mathematics of Fermet and Pascal.

The prices have changed in such a way that it is very heard to beat the system.
And then the track is taking 17% of the top. So not only do you have to outwit all the other betters, but you have got to outwit them by such a big margin that on average you can afford to take 17% of your gross bets off the top and give it to the house
before the rest of your money can be put to work.

To simplify, we are looking to find a misplaced bet. It isn’t hard to tell what horse is the biggest and strongest. What is hard is figuring out which horse is trading at the best chance of winning given their odds. Let’s examine Tesla’s horse racing situation:

Tesla itself is a fine horse. They create great products that consumers love. Elon Musk is a true visionary and therefore a very able jockey. That all sounds great, but this isn’t an easy horse race. They are up against some of the finest horses around. American companies GM and Ford are strong entrenched competitors, having been in business for over a century. They also must face off against technological juggernauts from Japan and the elite engineering of the Germans. Not to mention the dozens of other brands that have found their own footholds.

If that weren’t tough enough, Tesla is being priced for perfection. They are no longer a small start up worth a couple of billion dollars. They have a market cap of nearly 50 billion, larger than GM or Ford. They are priced to be the leader in car manufacturing without yet proving they can do so. Maybe they can, but that doesn’t mean I have to place a bet.

I prefer to bet on a race that doesn’t leave so much up to chance. What us GARP investors are looking for is a race with a dominant horse that is getting faster, led by a great jockey who has weak competition. This is the horse racing equivalent of a moat. The next step is to examine the betting odds. Everyone can identify when there is a leader with no competition and therefore the odds become unfavorable. Think about basketball for a second. If we bet on the Golden State Warriors to win another championship, our odds aren’t going to be great. Everyone knows they are elite and therefore the payout is minimal. Therefore we want misjudged odds where we can find value. If we can find those variables we should place our bet and bet big.

Conclusion

I find everything about Tesla to be fascinating. Musk is truly one of a kind and I can’t wait to see what happens next. That being said, I think it is wise to avoid investing in TSLA. I choose instead to look for stocks that are simpler and less risky.

As always thanks for reading and subscribe to see what’s next!

The Double Dip!

I’ve gone ahead and hitched my wagon to Mark Zuckerberg. I bought 5 shares of FB on Friday for $878.90 and another share on Tuesday for $168.94 after seeing the company fall another 3.5% for a grand total of $1,047.84. I broke one of my original rules, never go above 10% in one company. Rules however are meant to be broken, I saw an opportunity and jumped on it. Besides I only stuck a toe over that 10% line.

I also purchased 5 shares of IPGP, the premier laser company in the world. Shares were down over 4% today, so I used this as a buying opportunity. I got in at $161.74 a piece for a total of $808.70. I continue to love the company and consider this to just be a blip on the radar.

For those keeping track, I now own 4 stocks and still have $6,723 out of my original 10K with which to buy more!

Why Facebook?

Facebook is one of the most phenomenal companies of my investing lifetime. Started in 2004, they are already one of the largest companies in the world. They IPO’d in 2012 at a market cap of 104 Billion. They now sit at 412 Billion meaning they have come close to quadrupling in that time period. Will they quadruple again over the next 6 years? Most likely not, but I wouldn’t completely rule it out. I do however think they have a great chance of outperforming the S&P 500 over the next 5 to 10 years by a considerable margin.

Commonly lumped in to a group called FANG stocks, I actually think they share a lot more in common with Google and Microsoft than they do with Netflix and Amazon. I find Amazon and Netflix to be almost impossible to value. They are great companies that provide incredible products to their consumers. That being said, Netflix continues to be cash flow negative and Amazon is in a world of their own in terms of valuation. I’d rather just stay away. Facebook, Google and Microsoft can all be valued by traditional value investing principles. They create meaningful profits and turn those profits into incredible amounts of free cash flow.

Let’s look at what makes Facebook so compelling. Over the last 5 years, sales have skyrocketed from 7.8 billion to 40.6 billion. This gives us a CAGR of 38.87%. EPS grew from .6 to 6.16 over the same time period, giving us a CAGR of 58.87%. It doesn’t take a rocket scientist to tell this is phenomenal. FB now sits at a P/E of 23.65, a laughably low number considering how fast it has grown in the past. They are sitting on 41 Billion dollars of cash and short term investments without having a single dollar of debt. That is simply incredible.

The past however does not automatically promise future performance. We have to examine what Facebook’s future holds. After their latest quarterly release, the stock plummeted from fears of reduction in future growth. I find these fears unfounded. Of course FB has to slow down. If they continued to compound above 50%, they would be bigger than the entire S&P in a short amount of time.

In the short term, there will be pain. Just today, representatives of the company are testifying before congress about what they can do to stop meddling in the midterm elections. This once again represents short term thinking. Facebook is a platform that is singlehandedly strong enough to affect a US election. That power is only growing stronger. They have daily users that number almost 1.5 billion and monthly users above 2.2 billion. They have barely even started monetizing the platform. Just the talk that FB could get into dating caused dating juggernaut Match Group’s stock to fall 20% in a day. It is a platform of strength never before seen in US history.

Instagram

I have yet to even mention Instagram, one of the most popular social media platforms and one of Facebook’s chief “competitors.” You see, Facebook bought Instagram for 1 Billion in 2012, proving they have their eye on the ball in the acquisition space. Some estimate Instagram alone could be worth upwards of 100 billion, 1/4 FB‘s total market cap. Yesterday rumors abounded that Instagram is developing a new shopping app. This platform is still in its infancy, just figuring out ways to monetize for shareholders.

The truth is we don’t know what the future holds for this company. We can merely look at their past success and determine whether we think the future is bright. In my opinion Facebook will be a trillion dollar company in the not too distant future and who knows how large it could grow. Stop thinking in the short term, but determine whether you want to own a company for the next decade.

Lasers

IPGP holds a particularly soft spot in my heart. You see for a while, it was by far my best investment ever. Within a year of buying it in my personal account, I had gained over 200% more than tripling my initial investment. Of course, nothing is ever as good as it seems. While the business was going gangbusters, the Trump administration laid out tariffs that have caused Chinese companies(IPGP‘s largest customers) to reconsider how much they will spend on capital expenditures. You see, lasers powered technology are large up front capital requirements and given a trade war, companies don’t want to commit to large spending given the uncertainty. That 200% investment within one year has fallen to a 100% gain within two. Still not too shabby!

I’m willing to sustain some short term pressure to buy into a fantastic company with long term advantages. IPGP sells lasers that enable manufacturers to cut their costs. A business that allows their consumers to cut their own costs has a recipe for success. They are simply selling a better technology. Metal cutting and abrasion systems wear out, whereas lasers are more precise, cost less and last longer. This has translated into robust sales growth, which has in turn led to much greater profits.

Given how long I talked about FB, I didn’t want to get too far into the weeds with IPGP. Just know they are a great company with a long track record. They have a squeaky clean balance sheet and generate loads of cash. Who knows how long this trade war will last, but when its over, I expect IPGP to burst out of the gate at a sprint. I’m willing to hold on to this gem for the very long term.

As always, thanks for reading and subscribe!

 

Stock #2 (HII)

I logged on this morning and bought my second stock for the portfolio. Huntington Ingalls Industries (HII) is a military shipbuilder and the leading supplier of the United States military. I got in today at $249.00 and purchased 3 shares for a total of $747.00. I still have $8,579.88 of cash left in my 10K Portfolio.

Why HII?

From a broad perspective, I often like to have an impetus behind an investment. You need to be able to tell a story and then focus in on the minutia. Looking at the Trump administration, I don’t think it is a stretch to say he favors a growing military budget. This set me on a quest to look at all the public military contractors. One thing I noticed is that they are almost all great companies. It is no wonder the US military spending is so large and growing. From there I determined HII was my favorite and have been following it ever since.

Huntigton Ingalls is a classic high moat company. They are the leading supplier of the US Navy, supplying over 70% of all ships. They are the only company capable of building and refueling nuclear-powered aircraft carriers and one of only two that can build a nuclear powered submarine. They were spun off from Northrop Grumman in 2011. Spin offs are often a good candidate for research, as they are not always properly valued. Seven years later, HII continues to gain market share and grow their earnings.

HII generates ample free cash flow each and every year. You might start to sense a theme, I prefer companies with lots of leftover cash ever year. This gives a company flexibility, they aren’t constrained to any one strategy. Should they see a good acquisition opportunity then great, otherwise they can pay out dividends or buy back shares of the company. The board recently increased the buyback allowance from 1.2 billion to 2.2 billion. If my math suits me correctly 2.2 billion is just over 20% of the entire company. They won’t buy it all back overnight, but the share count should fall dramatically over time.

While 2017 wasn’t quite a banner year, they more than made up for it in the first half of 2018. Due to lower taxes, a reduced share count and higher sales and margins earnings increased YoY from 3.21 to 5.40. That’s an increase of 68% in a single calendar year. While we can’t expect such growth going forward, that would be impossible. The company will continue to perform with precision.

Conclusion

Huntington Ingalls is a simple but extremely well run company. They will never be the fastest growing company, but they are almost guaranteed to grow at a decent clip over time. They have a growing backlog that will keep them busy for years to come. As of the end of 2017 their backlog stood at $21.4 billion. The company will continue to buy back shares and grow their earnings. They are trading at a reasonable multiple and over the course of 5-10 years the company will be considerably larger.

My First Purchase

Guess what? I bought my first stock this week for my 10K Portfolio! I am now the proud owner of 4 shares of the Lear corporation(LEA). I purchased 4 shares for 168.28 a piece for a grand total of $673.12. This still leaves me with a cash position of $9,326.88. Of course as soon as I bought it, the stock continued to fall. O well. If an immediate fall in price causes you trauma, I fear investing in stocks just might not be for you. Keeping an even temperament is probably even more important than a high IQ.

Why Today?

When I logged on to Robin Hood on Wednesday, I checked my watch list and saw that Lear was down almost 3.5%. Seeing that a stock I follow is down, I made a quick google check to see if there was any news. Turns out that there is increased worry about trade within the auto sector in NAFTA. The trade war is real and it may materially impact the earning power of the business. That being said, I think the company exhibits a strong moat and this is just providing an opportunity to buy a stock on the cheap. Would I have rather made my initial position even lower? Of course, but you never know when you will find the bottom. Buy in and if it falls lower, buy more.

Digging Deeper

Lear now sits at a P/E of 9.06. According to the Wall Street Journal, the S&P 500 average P/E is 23.79. This means that on just a P/E basis, Lear is almost 1/3 the price of the S&P 500. Looked at another way, Lear’s earnings could be cut in half and their P/E ratio would still be noticeably cheaper than the S&P 500.

As mentioned in my Watch List post, Lear is a vertically integrated manufacturer of automated seats for automobiles. It is simply the best in the business, displaying a wide moat. In the last 5 years it has increased sales from 16.2 billion in 2013 to 20.5 billion in 2017. EPS grew even faster going from 5.61 to 17.66 in the same time period. In 2017, Lear generated just under 1.2 billion dollars in free cash flow. Based on the current market cap of 10.9 billion, it has a free cash flow yield of 10.9%.

I also like what management had to say in their most recent annual report.

We also have an outstanding record of returning cash to our shareholders. Since we initiated dividend and share repurchase programs in 2011, we have returned more than $4 billion to our shareholders, which includes buying back 42% of  our shares outstanding and steadily increasing our quarterly cash dividend.

I believe that this is a great time to invest in Lear. We have the strongest team in the industry, a focused strategy that is delivering superior results, a growing market share in both business segments, a footprint that is second to none, a well-established and growing position in china and a record three-year sales backlog of $3.2 billion.

Conclusion 

Lear is a classic GARP stock, growing at a fast rate and selling for a bargain price. Even if it is impacted by this trade war, they have the financial strength to withstand a couple of tough years. 5-10 years from now they will be a significantly bigger business which earns appreciably more free cash. The company should actually be rooting for the stock price to fall. Given that they spend so much on share buybacks, Lear could buy back considerably more shares should the stock fall or remain flat.