2022 Q1 Update

Well, that was an interesting quarter to say the least. The Omicron variant of the coronavirus quickly ran its course and the pandemic finally looked to be coming to a close, giving us all a glimmer of hope. Vladimir Putin however decided the world hadn’t seen enough turmoil. The war in Ukraine has thrown the entire globe into a state of disorder. I don’t want to opine on current events politically, but from an investment perspective this war has had a number of impacts.

Given the sanctions placed on Russia, we have seen a rapid rise in the price of oil. We all see it at the gas pump, but maybe more importantly this has put a further strain on the already tight global supply chain. The price of shipping has skyrocketed and the cost of moving product is now astronomical. As an American, it calls into question our reliance on foreign imports. The Biden administration has put an emphasis on American made products to reduce this reliance. Combined with rising interest rates and general inflationary pressures, markets look murky at best.

We saw a quick drop in all markets at the beginning of the quarter followed by a small recovery towards the end of March. Should the war escalate and more countries join the fray, expect continued volatility throughout global markets. My portfolio of course did not escape the quarter unscathed. Things could have gone a whole lot worse, but it is never fun losing money. I take solace knowing my portfolio is filled with strong companies. They make use of market downturns by buying back lower priced shares and eating up market share from weaker competitors.

Q1 Performance

As of 4/1/2022, my 10K portfolio is worth $16,801.98. When I started on 8/19/18, the SPY had a price of $285.06 and my account started with $10,000. As of 4/1/2022 the SPY had a price of $451.64. In reality, the SPY has done even better due to dividends given out, so I have accounted for dividend reinvestment in the return calculation.

10K Return(1)SPY Return(2)Difference(1-2)
2018(8/19-12/31)(13.95)(13.71)(.24)
201937.3332.64.73
202021.2217.593.63
202138.5528.4311.52
2022(1/1-3/31)(15.34)(4.63)(10.71)
Since Inception(8/19/18)68.0268.54(.52)
CAGR15.5315.55(.02)

As we can see, I had a rather abysmal first quarter, particularly as compared to the S&P index. I lost by more than 10% in the quarter to SPY. Not great, but it happens. A little disheartening to see that I’m now losing overall since inception. If I cannot outperform the index, why even put all the time into investing. I could just buy the S&P, sit at home playing video games all day and get better results. Ultimately in the long term, I don’t think that will be the case. I’m pretty confident, maybe irrationally so. Over the course of many years and decades, I expect to do meaningfully better than the index. Of course, so too does everyone else. Only results will show the truth.

I had three main losers in the quarter, Facebook, Etsy, and my group of semicap equipment manufacturers(Lam Research, KLA and Applied Materials). All had valid reasons to have fallen, but perhaps the drops are overblown. I personally would buy more of each at these lower prices if I had available cash, but I am fully invested so cannot. I actually have acquired quite a few more shares in other accounts I manage, particularly of the semicap companies which I believe offer very favorable risk/reward ratios.

Transactions

I actually made zero real transactions this past quarter. Correct me if I am wrong, but I believe this is the first quarter since I started this portfolio that I have not made any changes. I like the companies I invest in and at this point I think just sitting back is the right course of action.

Due to my portfolio DRIP, I did however make a number of very minor transactions. As we can see, my portfolio now makes a handful of purchases automatically due to dividend reinvestment every quarter. These are very tiny purchases, but over time they will add up.

As always, I would like to thank you for taking the time to give this a read! Feel free to leave some comments or questions. Best way to reach me is on Twitter, follow me @TheGarpInvestor.

2022!

2021… What a year. Just when we thought the pandemic was finally coming to an end, the Omicron variant popped up and threw the whole world right back into chaos. I hope the trends of this strain appearing less deadly continue, but nothing would really surprise me at this point. While 2021 clearly ended on a sour note, I’m hopeful going into 2022. The world has looked so bleak the last couple of years, we could all use a return back to normal.

Investing wise, 2021 couldn’t have gone much better, at least for me. The bull market rages on and markets closed at or near all time highs. We have however seen some downright strange patterns. While the markets as a whole keep climbing higher buoyed by megacap tech, many names find themselves in deep bear territory. The back half of 2021 was a bloodbath for many names, particularly those that had risen quickly in the beginning of the pandemic. You don’t have to look very hard to find companies trading 50% below where they were trading just a few months ago. Even after a precipitous fall, I don’t find much value in most of these companies, but always good to be on the lookout.

I have partnered with the great group at 7 Investing and become an affiliate. They offer monthly stock recommendations and so far they have absolutely crushed the market. The team chooses their 7 best picks each and every month, one from each of their 7 lead advisors. Follow this link and use coupon code GARP to save $10 off your first month. I highly recommend their service!

Let’s have a look at my results:

Q4 Performance

As of 1/1/2022, my 10K portfolio is worth $19,846.55. When I started on 8/19/18, the SPY had a price of $285.06 and my account started with $10,000. As of 1/1/2022 the SPY had a price of $474.96. In reality, the SPY has done even better due to dividends given out, so I have accounted for dividend reinvestment in the return calculation.

10K Return(1)SPY Return(2)Difference(1-2)
2018(8/19-12/31)(13.95)(13.71)(.24)
201937.3332.64.73
202021.2217.593.63
2021(1/1-12/31)38.5528.4311.52
Since Inception(8/19/18)98.4772.8025.67
CAGR22.8317.844.99

While I am a bit disappointed that I didn’t end the year at $20,000, 2021 was an incredibly successful year for my portfolio. I put up a 38.55% return, an amount far beyond even my wildest predictions. This was mostly due to the market rocketing upwards, but I still beat the SPY by 11.52% on the year and now 25.67% since inception. 2021 was by bar my best investment year both in terms of overall return and when compared to the S&P. Some reversion to the mean is likely, I don’t expect to beat the market by nearly that much going forward. Some of my company valuations have also become stretched, meaning the stocks could take a tumble while still producing fantastic business results.

As usual, the Nasdaq continued to trounce me. I did however make up some ground in 2021, as the QQQ’s were “only” up 21.4%. Since inception of the portfolio, the QQQ’s still beat me by just a hair over 20%, so there is still work to be done. Maybe I’ll keep up the momentum and even pass the Nasdaq, but I for one doubt that will happen anytime soon. Stranger things have happened, but I certainly wouldn’t bet on it.

Transactions
ETSY- By mid November, Etsy stock had run up quite a bit, peaking around $300. I decided that it began to represent too large a portion of my portfolio, good problem to have I suppose. I had roughly $3,000 invested in the company, meaning it was approximately 15% of the account. While I generally recommend sticking to your winner’s and letting them run, occasionally the gap between estimation of fair value and total market cap becomes too wide. The stock had gotten out in front of their skis.

For this reason, I decided to trim my holdings. I sold half of my Etsy shares, still leaving me with a significant investment. So far this has proven to be the right decision, as I sold those shares at $297.14 and as of the new year the stock traded at $218.94. Granted, the shares I held on to have obviously fallen by that amount. I remain a big believer in the company and plan on holding onto the rest of these shares indefinitely, but I feel much more comfortable at a 7.5% position than a 15% position.

AMAT, LRCX, KLAC- Part of my reason for selling Etsy actually had to do with a need to raise cash. I was fully invested and saw an opportunity that I couldn’t pass up. I have been following the semicap equipment manufacturers for quite some time and after seeing their most recent quarterly reports, I could no longer sit idly by. I had to be a part owner of their success. Quarter after quarter I would watch this group produce spectacular financial results and I determined that it was time to pull the trigger.

I would be foolish to believe that I could ever fully understand the minutiae of the semiconductor industry. The technology involved is incredibly complicated and I am by no means an expert, far from it. I also can’t tell you exactly who will win on the consumer side. Will Nvidia and AMD continue to steal market share from Intel? Will Intel bounce back and regain their market dominance? Will TSMC continue their fab supremacy(almost assuredly)? I don’t have the definitive answer to any of these questions, but I don’t think I need to. What I can tell you, is that overall semiconductor demand will continue to grow significantly decades into the future. We live in an increasingly digital world, one where the reliance on semiconductors grows every year. This doesn’t mean the industry is without cyclicality, categorized by innovation followed by years of stagnation. There will be down years, but on average growth will be immense.

In my opinion, the semicap manufacturers are a far safer play than the consumer facing side of the industry. To protect myself even further, I’ve decided not to even try and pick the winner amongst them. I have invested in a basket of the top 3 American equipment manufacturers. Together I am considering them to be a single investment, roughly the same size as any of my other bets. They all produce fantastic financials, significant revenue growth with high levels of free cash flow. None require large capital investments, meaning they can allocate capital to buybacks and other shareholder friendly endeavors. All should continue to do well years into the future. If one should falter, it will likely be due to one of the others winning their business. I’m betting on the category, rather than a single company. Time will show if this is wise. I won’t be breaking down the numbers here, but at some point I’d like to post a deep dive showing why I like all three and what each brings to the table.

As always, I would like to thank you for taking the time to give this a read! Feel free to leave some comments or questions. Best way to reach me is on Twitter, follow me @TheGarpInvestor.

2021 Q2 Update

Summer is here and I hope you all are making the most of it. Much of the United States is vaccinated and life finally feels like it is returning back to normal. We are not completely out of the pandemic woods yet, but we are certainly heading in the right direction. Markets continue to boom and the economy sure feels like it is heating up. The government stimulated the economy with trillions of dollars and all that money flowing around needs somewhere to go. Inflationary pressures are pushing prices up, seen particularly in areas such as lumber and other building materials.

While some of these price changes will be temporary, they are important to take note. How will they impact our companies and what price fluctuations are set to last into the future? I don’t necessarily have the answers to these questions, but it is our job as investors to sit around and ponder. I can postulate over various outcomes, but as usual I come to a similar conclusion; invest in great companies that can weather any economic environment. These companies are able to pass rising costs onto their customers while maintaining strong margins.

I have partnered with the great group at 7 Investing and become an affiliate. They offer monthly stock recommendations and so far they have absolutely crushed the market. For only $17 a month, you get access to their 7 best picks each and every month, one from each of their 7 lead advisors. Follow this link and use coupon code GARP to save $10 off your first month. I highly recommend their service!

Q2 Performance

As of 7/1/2021, my 10K portfolio climbed to $17,100.01. When I started on 8/19/18, the SPY had a price of $285.06 and my account started with $10,000. As of 7/1/2021 the SPY had a price of $430.43. In reality, the SPY has done even better due to dividends given out, so I have accounted for dividend reinvestment in the return calculation.

10K Return(1)SPY Return(2)Difference(1-2)
2018(8/19-12/31)(13.95)(13.71)(.24)
201937.3332.64.73
202021.2217.593.63
2021(1/1-6/30)19.3817.51.76
Since Inception(8/19/18)7159.0511.95

2021 continues to deliver more than satisfactory returns, both for myself and the S&P 500. After a strong 2019 and 2020, I did not expect another 20% gain in the first half of the 2021, but I’m not going to complain. I have maintained my outperformance over the S&P, with the delta now growing to just under 12% since inception. This isn’t exceptional, but I’ll take it. I will never add a dime to this portfolio, but I am constantly adding new money to my personal portfolios and I hope you do the same. If you can just outperform the markets by a small amount, over the course of decades it can compound into vast fortunes. Time in the market is the most important variable.

As I have noted before, while good, my performance is not all that great thus far. While I have beaten the S&P, I have lost handily to the Nasdaq. I would have been better off just buying the QQQ’s and learning to play golf. Since I started, investing in the QQQ’s would have provided returns of 101.72% beating me by 30.72%. I’m hoping that over time I can close the gap, but the Nasdaq is a tough competitor. Time will tell.

As we can see, my cash allocation has risen to $1,354. This comes out to around an 8% cash position. This is higher than I generally like to carry, so do not be surprised if I make a transaction somewhat soon. I have my eye on a few companies and a buy could be coming up.

Transactions

MCO- At the end of April, I bought 2 shares of Moody’s. Moody’s is a company I had long followed, but had never owned any shares of. As a company Berkshire Hathaway invested heavily into, Moody’s is well known to the investment world. Berkshire owns roughly 13% of the company and Warren Buffett has often talked about how much he admires the company and why their economics are so strong.

Primarily, Moody’s is a rating agency. They rank the creditworthiness of companies that intend to issue bonds to the public market. Before a company can go to the market with a bond issuance, they must get a credit rating from one of the licensed major credit rating firms. Moody’s along with S&P Global and Fitch Ratings, form an oligopoly in the industry. The three of them providing over 90% of all credit ratings. Many have tried to enter the space and unseat the legacy businesses, but all have failed. The three companies are utterly entrenched within the financial world.

Moody’s has a long and storied history, as they were founded by John Moody over a century ago. The company has gone through many iterations with different ownership structures over the years, coming to be owned by Dun and Bradstreet for decades. In 2000 they were spun off back into their own independent company, if only I had been smart enough as a 9 year old to buy in. Since 2000, the company would have returned over 53 times the initial investment with dividends reinvested.

Financially, the company is a rockstar. They support gross margins over 70% and those margins follow down to the bottom line at over 35%. As is a trend with companies I like to invest in, the business takes almost no additional capital to run. In 2020, they cash flowed around 2 billion, while only needing to spend 103 million on capital expenditures. This leaves a lot of money with which to reward shareholders. In 2020 they paid out 420 million in dividends, bought back 556 million worth of shares, and made acquisitions that added up to just under 900 million. They followed suit this past quarter doing more of the same while adding cash to their strong balance sheet.

Speaking of this past quarter, they divulged a particularly strong report and I saw an opportunity to buy into such a well built growing business. In Q1, Moody’s saw revenue growth of 24% and adjusted EPS growth of 49%. Not too shabby for a company that’s been around since before WW1. So far I have been rewarded, my shares are up 13.65% after only a couple of months. Let’s hope they keep up the momentum!

EGHSF- At the end of June, I sold my shares of Enghouse Systems. I have long admired the company, but their most recent quarterly report made me question some of their decisions. Once you lose a little conviction, it is hard to remain invested in the company. I don’t do half measures, I’m either in or out.

Revenue this past quarter fell 16% as compared to the previous year. I call myself the GARP investor for a reason. I am looking for companies with growth, not slipping in the opposite direction. To be fair, Enghouse was running up against comps that were inflated due to how well their Vidyo business performed at the start of the pandemic. That business has since tailed off, returning back to PreCovid numbers. Part of my issue with the company is how reliant they are on Vidyo. In the world of Zoom, I’m just not convinced Vidyo provides a strong enough differentiating platform. They have invested a lot of money into Vidyo’s success and it might turn out to have all been a waste.

Enghouse has also publicly bemoaned their inability to get as many acquisitions done as they would have liked. They cite higher prices and a general slowdown in transaction speed due to the pandemic. I think these are valid claims, but when I compare them to another portfolio company of mine, Constellation Software, Enghouse comes out inferior. Constellation has had no trouble closing deals, I seemingly read about multiple acquisitions they close every single week.

Admittedly, I might look back at this as a foolish decision full of recency bias. They have been a strong performer in the past and their CEO Stephen Sadler is well respected for a reason. Given all the variables placed in front of me however, I think I have better opportunities to invest those dollars. I’ll be sure to revisit this decision in the future.

As always, I would like to thank you for taking the time to give this a read! Feel free to leave some comments or questions. Follow me on Twitter @TheGarpInvestor.

Q3 Update

2020 has been a remarkably odd time to be an investor. Granted, it has been an incredibly strange time to be alive in general. It is now October and Covid continues to rage on, a seemingly never ending storm without respite. Our President just tested positive for the virus and has entered the hospital. He has the best medical care and will therefore almost assuredly be fine, but you never know. The word has been used over and over, but that is because it rings true, these are unprecedented times. I think we would all like to just get this chapter over and move on with our lives. With an election right around the corner however, I expect more volatility to be on the horizon. I’m not one to make market forecasts, but I would not be surprised to see some pretty big swings in the near future.

Q3 Performance

As of 10/1/2020, my 10K portfolio stood at $13,047.01. When I started on 8/19/18, the SPY had a price of $285.06 and my account started with $10,000. As of 10/1/2020 the SPY had a price of $334.89. In reality, the SPY has done even better due to dividends given out, so I have accounted for dividend reinvestment in the return calculations.

10K Return(1)SPY Return(2)Difference(1-2)
2018(8/19-12/31)(13.95)(13.71)(.24)
201937.3332.64.73
2020(1/1-9/30)10.415.325.09
Since Inception(8/19/18)30.4721.858.62

As we can see, I have done reasonably well in both 2020 and overall. I am by no means crushing the index, but a steady outperformance compounded over years can grow into a massive delta. If I can keep beating the S&P by 4-5% a year, I will be thrilled. So far, my GARP strategy has worked. I hope my portfolio keeps up the momentum, but don’t be surprised to see some reversion to the mean.

My stocks are now worth $12,778.29 and I am sitting on an additional $268.72 of cash, meaning I am almost fully invested. The market does appear to be frothy in my opinion, but in general I like to have my money invested rather than sitting on the sidelines. Should the market fall, I expect my companies to make intelligent capital allocation decisions, coming in the form of share buybacks or acquisitions of target companies at lower prices.

BUYS

INTC– I saw someone on Twitter(I would give credit, but I don’t remember who) mention that Intel shares looked attractive given current prices. I decided to take a look and based on numbers alone I liked what I saw. Problem was, the semiconductor industry was well outside of my circle of competence. I then went on to do a mini deep dive and educate myself. Admittedly, I will never be a semiconductor expert, far from it. But I think I have learned enough to be able to assess the competitive dynamics, time will tell if I am right or wrong.

So why the Intel discount, what’s the rub? Intel has been perceived to be in a losing CPU race against smaller faster competitors, AMD and Nvidia. They have the advantage of being fabless, in other words they do not manufacture chips themselves. Rather they design the chips and outsource manufacturing, mostly to TSMC, the Taiwanese semiconductor giant. TSMC brings fantastic technology to the table, enabling the smaller competitors to leapfrog over Intel in ultra high performance technology. This perception very well may be correct, but I feel it fails to paint the full picture. Intel is now so diversified that they are no longer completely reliant on the microprocessor. The second quarter of 2020 marked the first time that the data center portion of the business overtook the CPU portion, accounting for 52% of overall revenue. Data centric revenue was up 34% YoY. Certainly doesn’t look like a company on the brink of death to me.

Intel likely did take their eye off the ball and let competitors catch up in areas they previously held complete dominance. While Intel used to be a microprocessor company, they now are involved in so many different lines of business. Their focus has shifted to data, which they estimate to have a total TAM of $230 billion by 2030 according to this past quarter’s earnings transcript. This is significantly higher than the PC market TAM and Intel has therefore made it into the priority.

At the end of the day, Intel is still an incredible business that spins off loads of cash that can then be reinvested back into the business. In 2019, they spent 16.2B on CapEx and an additional 13.3B on R&D. That is 29.9B being spent on innovation and improvement, almost 3x what Nvidia and 5x what AMD did in total 2019 revenue. Intel trades at around 13x expected 2020 FCF, a deep discount to the rest of the market. I expect the company to continue to make use of their vast resources to invest in the future. Simultaneously, they will continue to pay out increasing dividends, make accretive acquisitions and opportunistically buyback shares.

CBOE- This one is a little less controversial and much less discussed on the Twitter-sphere. CBOE, which started as the Chicago Board Options Exchange but now goes by CBOE Global Markets, operates as a market maker, creating a marketplace for options and futures as well as a global stock exchange. It is a brilliant business model, they take none of the risk, but rather create the rails for others to work on. They exhibit classic GARP characteristics that I like to see, high return on invested capital and a capital light business. The business requires very little reinvestment, which allows the company to use their cash flow elsewhere. In 2019, they generated operating cash flow of $632 million. CapEx for the year was a mere $35 million. This left just under $600 million to be used in value creating activities. For instance in 2017, CBOE made a $3.2 billion acquisition of BATS Global Markets that has really bolstered the company. Since then, top line, bottom line and FCF have all grown considerably. I expect more large acquisitions in the future.

There is actually a whole group of companies working within this greater marketplace industry that exhibit superior economics. Just some examples are CME, Intercontinental Exchange and Market Axess. I happen to like CBOE the most at the moment given current prices, but they are all great companies. Should an opportunity come available, I could see myself owning one or more of these companies in the future. I’m actually surprised I have never seen Warren Buffett play in this sandbox. Seems to be right up his alley, but he has his reasons.

As always, I would like to thank you for taking the time out of your day to give this a read! Feel free to leave some comments or questions. Follow me on Twitter @TheGarpInvestor.

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.

IMG_0278

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!

 

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!

 

 

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.