Goodbye Summer (Q3 Update)

Unfortunately, all good things must come to an end. Summer came and went in the blink of an eye. Labor day weekend is now well behind us and so are any hopes I once had of not gaining a good 15 lbs over the Summer. A couple of trips and way too many burgers and beers are probably the primary culprits. I hope you all got to enjoy the summer heat as much as I did.

September however brings a new level of excitement. Kids are back in school and if they are forced to learn, we should be as well. We are all mere students of the game and therefore we need to work on our investing practice. A day doesn’t go by where you cannot learn something, so seize hold of the opportunity. A little bit of knowledge every day, will turn into a mountain of information over a lifetime. With that out of the way, let’s check in and see how I did this quarter.

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Q3 Performance

As of 9/1/2019, my 10K portfolio stood at $11,088.12. When I started on 8/19/18, the SPY had a price of $285.06. As of 9/1/19 the SPY closed at $292.37(it’s actually had quite a run up since.)

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

Portfolio value $11,088.12:                  10.88                       2.56                         8.32

With dividends reinvested into the SPY their returns would look a bit more like this.

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

Portfolio value $11,088.12:                  10.88                       4.42                        6.46

I have to say that I am more than satisfied with my results thus far. I have cut a few of my losers and held tight onto my winners. I like to let my winners ride and let compounding do the work. Some might be overvalued and others are hopefully undervalued. In the long run, stocks will follow suit with growth in intrinsic value. I feel good about the companies I’m invested in and their prospects for the future. That being said, I hold onto almost $1,700 in cash. I am finding it hard to find deals I am comfortable with in the current environment. That doesn’t mean the search is over, just means I have to turn over more stones. One will appear and I will be ready to put my remaining capital to work.

Taxes

One topic I don’t see talked about nearly enough is the effect of taxes on investment returns. So often I hear analysts talk about a stock hitting their price target, meaning it is now a sell. Too often, these recommendations fail to mention taxes. Should you have a good gain, the second you initiate that sale, your gain is now realized. You will now be responsible for the taxes. Let’s just look at a simple example. Say you bought company A at $100. You made a great pick and after 6 months, the stock has now doubled to $200. Obviously you have made a fantastic investment, the question is what do next? If you sell out entirely, you will have a gain of $100 and it will be considered a short term capital gain, as you have not held it for longer than a year. It will be taxed at your normal income tax bracket. As of now, these taxes will fall somewhere between 10% and 37%. Let’s just assume a middle tax bracket of 24%.

On the $100 gain you will have to pay $24, leaving you with $176 to work with. Additionally, depending on where you live, you will owe state and local tax. Here in Baltimore County, Maryland you owe 5.75% to the state and 2.83% to the county. This lops off another $8.58, bringing that initial $200 down to $167.42.

The variables are of course ever changing. Should the characteristics of company A fail to live up to expectations or should your investment thesis no longer hold true, it very well might be a good time to sell out and switch companies. The important lesson is to take the effects of taxes into consideration and make an apples to apples comparison. In this example it is not $200 in Company A vs $200 in Company B, but instead $200 in Company A vs $167.42 in Company B. With that in mind, selling out of Company A might not be as enticing.

As always, thank you for reading. Be sure to subscribe and follow me on Twitter @Thegarpinvestor. Feel free to share the post, thanks!

 

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One Year Down

I have now officially been running this blog for a full year now. I’ve had my ups and my downs, but I think I’ve grown considerably as an investor. I truly think I am better than when I started and I am now even more committed to GARP investing. Putting my thoughts out in public has forced me to focus on my core beliefs and has held me accountable. I expect my growth in year 2 to be even greater than in year 1. Just like wealth, knowledge is always compounding.

Year One performance

I started this journey exactly one year ago. I put $10,000.00 of my own money into my 10K Portfolio. I put that money into companies I believed in and let them do the work for me. Thankfully, I didn’t fall flat on my face and I’ve been able to make some money. My portfolio now stands at $10,843.11. As I often state, making a positive return isn’t all that difficult. You can buy government bonds and make a virtually risk free return, it just won’t be very good. I choose to compare my portfolio to the S&P 500. If you can’t outperform the general American index in the long run, you don’t have much business in picking individual stocks. When I started on 8/19/18, the SPY stood at $285.06. As of 8/19/19 the SPY closed at $292.33.

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

Portfolio value $10,843.11:             8.43                      2.55                         5.88

Simply looking at the SPY ticker isn’t quite fair to the index. My portfolio value accounts for all dividends I have collected over the last year. The SPY does not automatically reinvest dividends. They currently give out a yield of 1.86%. Without knowing the exact days of distribution and all that jazz, I think it is easiest if I just add in 1.86% to the SPY return in order to give a more accurate picture. Therefore a more realistic result would be as follows:

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

Portfolio value $10,843.11:             8.43                      4.41                         4.02

Overall, I am pretty satisfied with my results in year one. I outperformed the SPY by a hair over 4%. Take this with a grain of salt, one year is not nearly enough time to get an accurate picture. It will likely take at least 3 years to really tell whether this out performance is for real. That being said, I certainly prefer to have this head start.

Mistakes Made

I have learned a number of lessons since starting this blog. Some were completely new to me, while other things I knew but needed to be reinforced. My first punch to the gut came shortly after beginning. I rushed into some companies, rather than waiting for an appropriate entry price. Soon after I bought into my first companies, the market took a precipitous fall. Had I just bought in a couple of months later, my returns would likely be higher by a good 10%. The biggest lesson I learned was not to fight against a large macroeconomic situation. I grossly underestimated both how much effect the trade war could impact my companies and how long such a situation could last. I thought we were looking at a blip on the radar and my companies would return to form in just a couple of months. I was wrong. This trade war has lasted far longer than I had anticipated and has greatly lowered the earning power of some of my companies. I don’t think the end is in sight and for that reason I have chosen to make some changes to my portfolio. I still believe in these companies, in the long run I would bet that all will end up fine. However, I must stick to my principles as a GARP investor and therefore I choose to invest in the path of growth, not turnaround situations.

Portfolio Changes

Within the last month, I have cut out my positions in HII, IPGP, and LEA. As I stated, all are fine companies. They simply haven’t been able to whether this trade war without suffering. Each has seen their earning power eroded greatly and the stocks have followed suit. Unfortunately, I lost money on all three of these investments. Thankfully, some of my winners have more than made up for it. In fact, my investment into FND alone has made up all losses in these three companies. With the money from selling, I bought one additional share of FB for $180.17. I now sit on a cash balance of $1,688.44. I have a number of companies on my watch list that I am following and I will be waiting for a good time to enter into two or three new positions. I’ll be sure to let you know when that happens.

As always, thank you for reading. I have appreciated your support over the last year and look forward to seeing where this journey takes me. Be sure to subscribe and follow me on Twitter @Thegarpinvestor. Feel free to share the post, thanks!

 

 

Blogging Is Hard (Q2 Update)

I hope everyone has gotten to enjoy the long holiday weekend. This time of year, we get to celebrate America and appreciate all the freedoms we are given. On the investing front, we should acknowledge how fortunate we are to invest in a country that has provided long term annual market returns of 8-10%. If you can just keep up with the market over the long run, you’ll end up pretty well off.

Just like the market though, running a blog has its ups and its downs. Sometimes you feel the jolt of inspiration, a never ending flow of thoughts simmering at the surface just waiting to be written down. At others, writing a post can seem like the greatest hassle in the world.  Recently, writing for the blog has frankly been a challenge. This is my first post in three months, since my last portfolio update. What starts as a one week lapse, quickly turns into two, which inevitably carries on for many more. Just like investing, the weeks tend to compound.

It isn’t like I haven’t had any good ideas, I just haven’t been able to muster the energy to sit down and write out a full post. The year 2019 gives us a never ending supply of distractions, whether it was watching the NBA Playoffs or browsing through Reddit and Twitter, I always found something inconsequential to occupy my time. I can now say I understand how a famous author can keep fans waiting year after year without ever finishing a series(well maybe I don’t understand the whole having fans part). George RR Martin, you have my sympathy.

On the financial side of things, 2019 never ceases to surprise. After a calamitous end to 2018, 2019 started the year sprinting out of the gate. By the end of the the first quarter, I was sure the market had to give some back. Instead the market has continued its steady onward march. Luckily for me, my portfolio has been fully invested and my companies have continued to grow.  I’m not however ready to be too confident. The bottom could fall out at any moment, so who knows what will happen, I’m just along for the ride.

2nd Quarter Performance 2019

Reminder my 10K Portfolio started with $10,000 on and was bench marked against the SPY at 285.06 which as of the open on 7/1/19 stood at 293.

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

Portfolio value $10,620.89:             6.93                          2.78                         4.14

My portfolio has continued to do well and I now outpace the SPY by over 4%. Let’s not get too ahead of ourselves, I am still shy of the 1 year anniversary of the portfolio. I’ll chalk this up to luck, but if I can still be beating the market 5 years from now, I’d like some credit! I am unlucky and perhaps a bit stupid for when I started the portfolio. Had I waited just a few months, that nearly 7% return would easily be double that amount.

More important than the stock returns however, the performance of my portfolio companies have been quite good. Let’s take a look at what’s been going on.

Best Performers

MSFT- Under Satya Nadella’s leadership, Microsoft continues to dominate. They may have taken a break from growth in the early 2010’s, but they are back and hungrier than ever. You would think that a company with a market cap over 1 trillion would have trouble growing. Right now, that couldn’t be further from the truth. This past quarter, MSFT grew operating income by 25% and diluted EPS was up 20%(both YoY). Buoyed by their cloud division, Azure, Microsoft’s dominance looks inevitable. Azure had revenue growth of 73% compared to last year. The company also now sits on a treasure chest of 131 billion dollars of cash and short term investments. Their balance sheet is rock solid and they are well positioned for years to come.

ODFL- Old Dominion Freight Line is much smaller than Microsoft, but their recent success is no less impressive. This past quarter they were able to grow EPS 23.3%, while also reducing the overall share count by 1.5%. It is almost always a good sight when you see EPS growing rapidly and the overall share count falling. You can get in trouble if the company is paying a price well above intrinsic value for those shares, but I do not believe this to be such a case.  I now own a greater percentage of a company that is performing excellently. Debt levels remain almost nonexistent and I feel comfortable holding onto this company well into the future. I am down about 7% in the company even though the market has gone up and the company has performed extremely well. This is probably a pretty good indicator that ODFL is trading at an attractive price.

Worst Performers

LEA- Unfortunately, not all of my companies have been great performers. Lear Corporation has had a couple of bad quarters in a row and my holdings are now down almost 20% in the company.  Sales were down 5% and adjusted EPS fell from 5.1 to 4. These are never good signs, I like to see companies going in the opposite direction. GARP investing is about finding growth, not watching sales fall. Lear is being impacted by the cyclical nature of automotive sales. We seem to have hit a peak and auto sales have fallen in recent quarters. On the bright side, the company continues to drive down the share count. On a P/E basis the company looks pretty cheap, trading around 8.5 but that isn’t necessarily a good enough reason to hold onto the company.

HII – Unlike Lear, Huntington Ingalls was able to grow revenue, up 11% YoY. It wasn’t all good however, operating income fell from 191 million to 161 million. This was primarily due to lower margins and how penchant expenses are accounted for. Either way, earnings were down considerably. The company also took on a substantial amount of debt and the balance sheet doesn’t look nearly as strong as it used to. Not all is bad though, HII did win some crucial contracts and the backlog now stands at a record 41 billion.  The company remains a high moat competitor with long term contracts locked in. I just have to wonder if this is the best investment opportunity available.

For the time being I am going to hold onto these companies and monitor how they do in the next quarter or two. Should things not improve, don’t be surprised if I sell out of one or even both of these. I like the future prospects of HII more at the moment, but they still need to be paid close attention. I don’t care how much a stock moves in the short run, if the business doesn’t perform up to expectations it may be time to move on. I would rather put my money into a company with better industry tailwinds.

As always thanks for reading, I appreciate it! Be sure to subscribe to this blog and follow me on twitter @TheGarpInvestor. 

A Resurgence(Q1 Update)

Investing can be funny sometimes. The market looked to be on the brink of a collapse at the end of 2018. Talking heads were instilling fear and prognosticators foretold of the  impending doom of the American economy. Three months later, things appear a bit rosier. The markets have boomed and confidence is up. Investors are happy and making money looks easy. Benjamin Graham would have declared this a classic Mr. Market situation.

The truth is things probably fall somewhere in the middle.  Predicting a collapse doesn’t do us much good, but neither does euphoric jubilation.  I really don’t know what is going to happen in the near future. The rest of 2019 could be wonderful, but it could just as easily be terrible. Around 1 out of every 3 years is a down year. I hope the market goes up, but if it doesn’t it will provide us with new buying opportunities.

I have a family member who tends to be overly pessimistic. He is in constant fear of a market crash and has urged us to sell off and go into cash any number of times. I like to joke that he has called 20 out of the last 5 recessions. I don’t think this is a productive way to live your life and moreover a drain on your investing performance. I choose to avoid playing the macroeconomic game, it is simply too hard and too reliant on emotion. One day everything looks great and the next the world looks bleak. I instead focus on finding well run companies with durable competitive advantages. These companies can weather any economic storm and in the long run should provide market beating returns. If you can find companies that have better economic conditions than the average index company, while also trading at a lower multiple than the index, you can’t help but outperform over the long run.

1st Quarter Performance 2019

Reminder my 10K Portfolio started with $10,000 and bench marked against the SPY at 285.06 which as of the closing on 4/1/19 stands at 285.83

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

Portfolio value- $10,364.61:          3.64                          .27                                3.37

While I had a rather disastrous end to 2018, I’ve burst out of the gate in 2019. I’m now beating SPY by over 3% points. While I’m always happy to see outperformance, there hasn’t been nearly enough time to pat myself on the back just yet. I started this portfolio on 8/19/2018. We have yet to even reach the one year anniversary. This portfolio is being run for the long term, so what happens within the first year or two is really of no consequence. What does matter are the results over a longer time period. As the years go on, market prices should converge on intrinsic value.

Let’s take a look and see how some of my companies executed this past quarter. Notice I care not how much the stock price moved, but rather how the businesses have performed.

Best Performers

GOOG- It is hard not to marvel at how well this company has executed. Google continues to dominate their field and remains one of the very best businesses in the world. They continue to widen their moat and generate ever growing mountains of cash. Year in and year out they blow through expectations and don’t appear to be slowing down anytime soon. Twenty plus percent growth to the top and bottom line all while sitting on over 100B in cash. I’ll continue to sit back and enjoy the ride.

LUV- Since the end of their last quarter Southwest has gotten into a bit of trouble due to Boeing’s unfortunate incident with the MAX 737 plane. Sadly hundreds of innocent people lost their lives due to this error. Southwest has a number of these planes and the US government has forced Southwest to ground them all until the problem is completely fixed. The quarter ending 12/31 however couldn’t have been much better. The company was firing on all cylinders, doing better in every conceivable way. Considerable growth in earnings led to just a hair shy of three billion in free cash flow. They then used this free cash to buyback a ton of shares, reducing the overall share count by 6.1%. Not too shabby in my book. Southwest also announced that they will start flying in and out of Hawaii. I’m a happy stockholder and will be sure to one day take advantage of this new route.

Worst Performers 

LEA- Unfortunately Lear did not report a phenomenal quarter. Both sales and operating income fell, a trend I hope they are able to reverse. As an automobile supplier, Lear relies on auto sales. Given the cyclicality of auto sales, it is difficult to predict what will happen in any given quarter.  The company was however able to use this as an opportunity to buyback a significant amount of shares, increasing my ownership of the company.

IPGP- The company continues to feel the impact of the Trump administration’s negotiations with China. IPGP’s largest clients are Chinese manufacturers. Given the unknown of potential tariffs, these manufacturers have been unwilling to spend on upgrades to their machinery. I am hoping the US and China can come to an agreement soon, allowing IPGP to get back onto the path of growth.

As always thanks for reading, I appreciate it! Be sure to subscribe to this blog and follow me on twitter @TheGarpInvestor.

Crafting Your Lens(Part One)

I’d like to take a step back today and look at the investing world in a more abstract way. I often find the investing community to be too focused on the minutia of quarterly movements and precise calculations. On the other hand, they are woefully uninterested in building their overall business acumen. Long term investment works best when you focus on being a business analyst, rather than just a stock analyst.  The challenge is too great if you can’t see the world through the correct frame, so it is important to work daily on a term I’ll call Crafting Your Lens.

If you want to be successful, you have to start viewing the world differently. You can’t merely be a passive observer, but rather an active analyst throughout the day.  Each and every day is comprised of thousands of moments you can use to build up your investing knowledge. Let’s start with one simple task you can do today to start crafting your lens!

Breaking things down into their smallest parts and recognizing where things come from is imperative. How about we take a look at the contents of my bathroom? I have a pretty typical young adult male setup. My toothbrush and toothpaste are both made by Crest. I have Listerine mouthwash and I use Old Spice deodorant. My razor and shaving cream were both made by Harry’s. My hand soap is made by Softsoap. In the shower I have Head and Shoulders shampoo and Dove body wash.

With that information, we can do a little digging. A quick Google search will tell you that Crest, Old Spice and Head and Shoulders are all Proctor and Gamble subsidiaries. Listerine is manufactured by Johnson and Johnson, Softsoap is a Colgate Palmolive company, and Dove is owned by Unilever. That means the only items I own not being produced by a mega conglomerate are made by Harry’s. Harry’s along with their competitor Dollar Shave Club are recent entrants into the world of shaving. They have turned the industry on its head and broken up the near complete monopoly owned by Gillette(another Proctor & Gamble company), by selling razors at a fraction of the cost(another business lesson).

Simply acknowledging who produces the items you consume on a daily basis will make you a better investor. You can use that information as an avenue to finding potential investments. If a company is able to convince you to spend the money you have worked so hard to acquire, they are probably good at doing the same to others. Of course this does not automatically make something a good investment, but rather it is a good place to start.

This exercise can be done virtually anywhere, from schools to hospitals someone has to produce everything we use on a daily basis. I find the grocery store to be one of the more fascinating locations to study. You could teach an entire college course about walking through the grocery store and discussing all of the different dynamics at play. Head down any aisle and you will see product after product produced by massive companies. These companies pay large sums of money for premier placement in the store. You will always find top brands being sold at eye level, where they are within easy reach for a customer. Smaller brands can’t afford to pay for this placement and are stuck on the bottom levels.

Let’s look at an area of the store everyone is familiar with, the chip aisle. What do Cheetos, Doritos, Fritos and Tostitos all have in common? Well besides the fact that for some reason they all end in “os”, they are all made by the Frito-Lay corporation, the salty snack division of PepsiCo. The list doesn’t stop there, Pepsi owns a staggering amount of different brands ranging from Tropicana Orange Juice to Sabra Hummus. If you do a little bit more research you can find out that most of these brands started out as their own company, but through a series of mergers and acquisitions over the course of the last 100 years they have all come to be owned by Pepsi.

This same dynamic plays out in basically every industry. It is a little more obvious to see in consumer items we use on a daily basis, but consolidation into large corporations happens throughout the business world. Take Middleby for example. They dominate the field of commercial kitchen equipment. Each year Middleby acquires different products found within a commercial kitchen. From industrial sized ovens to huge ice makers, Middleby supplies restaurants all over the world.

Walking around and identifying where things come from is a simple step that anyone can take. You don’t need to be a genius, but just be intellectually curious and have access to Google(just one of many things that make Google such a great company). Take a few moments each day and just identify the items you come into contact with. Start crafting your lens and I promise it will start paying dividends.

Thanks for taking the time to read! Be sure to subscribe and follow along. You can find me on Twitter @TheGarpInvestor.

Happy New Year!

I hope everyone had a happy new year and took some time to celebrate! For us investors these past few months haven’t been too wonderful, so finding reasons to celebrate is always nice. As anyone following the market knows, we have seen a precipitous drop in prices. Everything from tech stocks to blue chips have seen a significant fall. From the market highs in October, prices now sit about 20% lower. This has given us a reminder that prices often fall much faster than they rise. Watching your portfolio drop by multiple percentage points day after day can truly leave you breathless. Volatility however is a price we must pay for satisfactory results.

This drop has certainly not left me unscathed. My personal accounts have taken a beating and my 10K portfolio now sits just around $9,000.00. I clearly chose the exact wrong time to start a portfolio. I made a rookie mistake and rushed into my investments, instead of letting ripe opportunities arise. Let it be known that I am far from a perfect investor. This is merely one mistake of the many I am sure to make. I only hope that in the aggregate, my winners will outshine my losers and overall my portfolio will beat the market in the long term.

Let me make it clear, no one likes losing money. I hate losing money as much as anyone, probably even more than most. It pains me to watch my hard earned money wash away. I could have had a lot more fun blowing $1,000.00 than losing it in stocks, but that is the risk us investors take.  In the short run anything could happen. There are infinite possibilities, but we play a game of probability. In the long run, measured over many years not days or even months the market has grown and grown enormously. I therefore choose to let the numbers dictate my investing philosophy. Pick great companies and allow time and compounding to increase my wealth.

The ability to control your emotions is probably the most important attribute an investor can have. What is most important is not intelligence, nor financial modeling, but the ability to remain calm and think rationally.  Never one to mince his words, Charlie Munger stated “A lot of people with high IQs are terrible investors because they’ve got terrible temperaments.” The stomach is often what makes or breaks an investor, not the brain.

Market volatility also happens to provide opportunities to buy at a discount. If you have a long investing horizon, you should actually root for the market to fall in the short term. It allows you to accumulate shares of great companies at lower prices, that in 20-30 years will be worth far more. If you are a net buyer of stocks, falling prices are your friend not your enemy. Another thing to consider is that not only can you buy stocks at cheaper prices, so too can the companies you invest in. If you invest into companies with high free cash flow, they can use that cash to buyback their own stock or even make investments into other companies at reduced prices.

I used this drop in the market to enter two more positions and effectively fully commit my entire 10K portfolio. I have $150 leftover that I’m saving to use on a rainy day. Over time I will also accumulate money in the form of dividends and I’m sure there will be some turnover in the portfolio as certain companies do not perform according to my investment thesis. Therefore, I doubt these are the final decisions I make.

APH- I purchased 9 shares of Amphenol at $82.97 for a total of $746.73. Amphenol is a neat company which sells fiber optic connectors and other such products to all kinds of industries ranging from hospitals to aerospace. They grow their earnings each and every year and they generate lots of free cash flow. They sit around a 20 P/E which is still on the rather high end, but at a level I am comfortable with given the quality of the business.

MKL- I purchased 1 share of Markel for $1,029.96. Often referred to as a baby Berkshire, I am happy to be an owner of such a high caliber business. Much like Berkshire, Markel operates primarily as a specialty insurer and then reinvests the float into all kinds of other vehicles. A company of this magnitude rarely goes on sale, but such an occasion recently occurred. One of the small subsidiaries they own got in trouble with regulators for misrepresentation of loss reserves. I believe this is a one time small issue, and not endemic of the entire company. This caused a great drop in price, that put Markel under 1.5X Price/Book value. The company almost never trades at such a level, so I pulled the trigger on a company I will be happy to own forever.

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

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!

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.