2022 Q3 Update

“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.” I actually wrote these exact words just nine short months ago. When you put your thoughts out in public, you have to be able to laugh at yourself. I could not have gotten the anticipatory pulse of the situation more wrong. In the time it takes to grow a baby, the investing world has flipped completely on its head. The bear has struck and it looks particularly grizzly. Market sentiment appears to be on the brink of collapse and investor confidence is holding on by a thread.

I am no market prognosticator, if I was, my results would surely be much better. I have no idea which way the market will move from here. Inflation could dampen and markets could come roaring back, wouldn’t that be nice. Just as likely however is that inflation continues to soar, forcing the Fed to continue raising interest rates, which will further compress asset values. I don’t like to sit around forecasting doom and gloom, but it is pretty easy to come up with some spine tingling scenarios we must all be prepared for. 

Most probably do not know this, but in my spare time I enjoy reading fantasy books. My favorite author is Brandon Sanderson, a man well known for writing incredibly long stories with intricate well thought out magic systems. His tome of a novel Rhythm of War, book four of his magnum opus, The Stormlight Archive, contained a scene that helps illuminate the feelings that help me deal with these kinds of periods. 

The protagonist, Kaladin, suffers from a long bitter battle with depression. After suffering yet another crushing blow, Kaladin finds himself on the brink of giving in to his hate. At his lowest moment, a character named Wit comes to him in a vision. Wit is a mysterious character, known for mocking all those around him, but occasionally he lets his callous façade drop and shares his otherworldly wisdom. Kaladin, unsure whether he has the strength to deal with the immense challenges placed upon his shoulders, asks Wit for a story. 

Wit shares the parable of The Dog and The Dragon. It is the tale of a small farm dog who wishes to become a mighty dragon after seeing one soar overhead. Of course in his various attempts to do so, he comes up woefully short. One day however a young child falls into a well. The dog springs into action and as the only one able to fit into the well, he is able to bring a bucket and rope to the child, thereby saving the child’s life. 

Wit stood and stepped over, then put his hand on Kaladin’s back and leaned in. “That night,” he said, “the little dog snuggled into a warm bed beside the fire, hugged by the farmer’s children, his belly full. And as he did, the dog thought to himself “I doubt any dragon ever had it so good anyway.”

He smiled and met Kaldin’s eyes.

‘It won’t be like that for me,’ Kaladin said. ‘You told me it would get worse.’

 ‘It will,’ Wit said, ‘but then it will get better. Then it will get worse again. Then better. This is life, and I will not lie by saying every day will be sunshine. But there will be sunshine again, and that is a very different thing to say. That is truth. I promise you, Kaladin: You will be warm again.’

Rhythm of War pages 920-921

Q3 Performance

As of 10/1/2022, my 10K portfolio is worth $13,431.85. When I started on 8/19/18, the SPY had a price of $285.06 and my account started with $10,000. As of 10/1/2022 the SPY had a price of $357.18. 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(1/1-9/30)(32.32)(23.93)(8.39)
Since Inception(8/19/18)34.3234.42(.10)
CAGR7.437.46(.03)

Somehow after running this portfolio for a bit over four years now, my performance almost matches the S&P 500 exactly. We are neck and neck, with one leading the other depending on the day you check. Of course on the day I make the tabulation, I am down by .1%. Yes, I’m salty about it. Statistically I’m not even sure this should be possible, but here we are.

Transactions

During the third quarter, I actually didn’t make a single transaction. I kept up my DRIP, so picked up some more tiny fractional shares, but made zero changes to the portfolio. Given how great the market selloff has been, I am starting to see some real opportunities. Don’t be surprised to see a few changes in the 4th quarter update.

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.

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2022 Q2 Update

First off, I’d like to apologize that this update is coming out quite a bit later than I would normally prefer. I was away on a vacation, then had to catch up on work at my business. It has been a particularly stressful period at work and I simply didn’t have the time or mental energy to type up this update.

It is also difficult to write a financial update after a quarter such as this past one. Losing money in investments is heart wrenching. There is no getting around that. It is especially difficult for me, because I have chosen to post my investments publicly and open myself up to ridicule.

I find myself questioning if I really know what I am doing. Am I an imposter posing as a credible investor? Did I do enough investment research or act impulsively? Are the companies I’ve chosen strong enough to withstand an economic recession? Are my investments too correlated and therefore subject to the same risks?

Well, only time will tell us the answers to these questions. In the face of adversity, there is of course only one proper course of action and that is to carry on. Wallowing in sorrow does nothing to improve the situation. Make use of market volatility and kick your research process into high gear and start turning over every stone. Fortunes are won and lost during tumultuous times. Do your best to find yourself sitting on the winning side of the equation. Blood in the streets breeds opportunity. There are high quality companies out there trading at multiples not seen in a decade.

Q2 Performance

As of 7/1/2022, my 10K portfolio is worth $13,971.17. When I started on 8/19/18, the SPY had a price of $285.06 and my account started with $10,000. As of 7/1/2022 the SPY had a price of $381.24. 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(1/1-6/30)(29.60)(19.61)(9.99)
Since Inception(8/19/18)39.7142.88(3.17)
CAGR9.129.68(.56)

2022 has proven to be an incredibly difficult investing period. My portfolio has gotten crushed, down just a hair under 30% this year. Even worse, I have lost to the market by a rather significant margin. Going into the year I was outpacing the market by a healthy amount, but after a 9.99% loss in 2022, I find myself trailing the S&P since inception. I don’t care so much that my portfolio has gone down, but I do care about losing to the market. Why spend the time and effort if I am unable to beat the index? Let’s hope in the long term this trend reverses and I can get back out on top. 

The economy appears to be on the brink of a recession, with few positives to rely on.. I don’t like to make market predictions, but all indicators are pointing downwards. Is this already priced in? I have no idea. The market could rebound and turn positive in the back half of 2022 or just as easily fall another 20-30%. Rather than try and time market movements, I believe the right course of action is to focus on picking quality companies with high returns on invested capital trading at reasonable prices.

Transactions

NTDOY- In mid June, I decided to make a couple of changes within my portfolio after seeing some particularly attractive opportunities. My portfolio was already fully invested, so I needed a way to raise money. After examining my companies, I determined that Nintendo was the one that had to go.

I sat on a slight loss, so there were no tax burdens to take into account. Actually I will be able to use that loss to offset the gains from selling shares of Dollar General which I will talk about below. I still really like Nintendo and think they have a great future in front of them. They are incredibly profitable with strong margins and boast what is probably the best IP in the entire video game universe. I have just begun to worry about the growth prospects and what the next phase will bring. Growth has gone in the wrong direction and the company has not laid out a roadmap of what exactly to expect in the future. A lot of variables are on the table that have to be taken into account. Don’t misunderstand however, I am still a believer in the company. I continue to own shares in accounts outside of this blog,

DG- I also decided to trim my position in Dollar General. No real problem here, I just needed to raise more cash. Dollar General stock had gone up quite a bit and was trading at a hefty premium to the overall market. I still love the company and want to remain a shareholder, but rebalancing and taking some off the table isn’t the worst outcome. 

ULTA- I have long admired Ulta, but never saw a good opportunity to pick up some shares. Ulta is a very high quality retail chain selling affordable beauty products. This market downturn finally opened up an opportunity to buy Ulta at a reasonable price. As long as I’ve followed them, the company traded for over 30 times free cash flow. Ulta came roaring out of the pandemic, as women could finally go back out in public and beauty products flew off the shelves. I bought Ulta for roughly 18 times free cash flow. They are a remarkably consistent company, growing revenue, net income and free cash flow virtually every year. They operate a simple business model, open high return stores each year and use the free cash flow to repurchase shares. Share count has fallen from 64.65 million in 2015 to 53.94 million today, a 16.57% reduction. 

There is also a longstanding psychological trend called the lipstick effect. In times of recession, women are found to spend money on small indulgences like lipstick and other beauty products, as they forego large expenses like foreign travel or a kitchen redesign. A splurge on a premium beauty product is unlikely to break the wallet, while providing a quick dopamine hit. Given the murky future our economy seems to be heading towards, I feel comfortable holding such a high quality steady company. 

INMD- In mid June I decided I couldn’t wait any longer and pounced on some shares of InMode. On financials alone, I personally cannot find a single company that provides a better opportunity. They check every single box I look for and do so with flying colors. High and growing margins? You bet. Low capital intensity? Only $1 million of CapEx on $170 million in operating cash flow. Strong balance sheet? $400 million in cash against only $61 million in total liabilities, not just debt. Ex-cash, the company trades for about 10 times trailing twelve months free cash flow.

Where’s the rub? Well, InMode sells minimally invasive medical products. If you are an astute reader of mine, you will know that I am not a medical doctor. In fact, I have absolutely no medical training at all whatsoever. I can’t really tell you what their products do, or how they compare to their competitors in the market. Could their products become outdated and replaced in the future? Sure. Could a competitor create a superior product and replace them as a market leader? Definitely. All I know is that the market can’t seem to get enough and sales are exploding. If I had to pick one company that I think has a good chance of becoming a 10 bagger, InMode is the one. Perhaps I am foolish for betting on a company with these kinds of unknowns, but I’m willing to risk it.  

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 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 Q3 Update

I can’t believe how fast this year has blown by, but alas here we are at the beginning of Q4. I suppose life always feels like it is moving along at a blistering pace, but maybe due to turning 30 this year, I have started seeing things a bit differently. If the the first week of the 4th quarter is any indication, we may be in for a bumpy ride. Volatility is up and the news feels rather incendiary lately. Time will tell how things shake out.

Bitcoin is nearing an all time high, NFT’s are all the rage, yet I continue to invest in “boring” companies like Google and Facebook. Imagine saying that a decade ago, things sure do change. I continue to root against Bitcoin and other cryptocurrencies, but this is mostly just a personal vendetta. I dislike watching anyone get rich in what I consider to be the easy way. Of course for many, that path was anything but easy. Investing in an incredibly volatile asset class is taxing on the soul.

I have come around to believing that Bitcoin has become a digital replacement for gold. A store of value that doesn’t come with the burden of being heavy to carry and expensive to house. Given that the market cap of gold is now over $10 trillion, I can understand why there is such a desire. The total crypto market cap hovers around $2 trillion, with Bitcoin comprising about half of that. Should Bitcoin supplant gold, we could see that gap close or Bitcoin could one day even eclipse gold . Will that happen? I have no idea, but it wouldn’t shock me. For that reason however, Bitcoin makes for an absolutely horrendous currency. Why would you ever want to spend a Bitcoin if you anticipate the price to rise in the future? This is a classic example of deflation. Deflation encourages hoarding, as each unit will become worth more in the future. Inflation however does the opposite, it encourages spending, which is what makes our economy go. This is the reason the fed targets a 2-3% annual inflation rate.

That all being said, I’ve never been a big proponent for investing in gold. Gold is pretty to look at, but comes with virtually no utility. It produces no cash flow and provides society with very little benefit. Call me old fashioned, but I like to invest in profitable cash flowing assets. Maybe I’m a man of a previous age, but I’m going to continue down the GARP path. I’m trying to temper down my biases and just applaud those who have made great fortunes in crypto or gold for that matter. They can make money in their way and I can make it in mine, the two need not be in competition.

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!

Q3 Performance

As of 10/1/2021, my 10K portfolio climbed to $17,550.72. When I started on 8/19/18, the SPY had a price of $285.06 and my account started with $10,000. As of 10/1/2021 the SPY had a price of $429.14. 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(1/1-9/30)22.5217.534.99
Since Inception(8/19/18)75.5059.0816.42

Thankfully, my outperformance has continued. Q3 was particularly strong, as I was only beating the SPY by 1.76% at the midyear. This improved to a 4.99% delta by the end of September. I’m now beating the S&P index by 16.42% since inception. While no year had a huge outperformance, the gains have been steady. This has translated into more than satisfactory results .

As usual, this wouldn’t be complete without mentioning what has happened with the Nasdaq, that damned tough competitor. I might need to call up Tonya Harding to get some advice on taking out the competition. Beating the S&P is great, but if you lose out to the other big index are your returns all that great? I’d say no. In the same time frame I’ve been investing this account, I could have put my money in QQQ and done a hell of a lot better. Since inception, QQQ with dividends reinvested is up 103.96%, a whopping 28.46% above me. Just know if the tide ever turns and I start beating the Nasdaq, perhaps start building your ark because we know the world must be coming to an end.

We can see my cash value has dropped to $33.35 meaning I am now almost fully invested.

Transactions

NTDOY– Nintnedo is a company most of you probably know. As for myself, they have literally been a part of my entire life. My brother’s NES was located in my bedroom from the day I was born(we used to share a room.) I grew up playing their games and never really stopped. They are probably the best known and most storied video game company in the world. The created iconic IP like Super Mario, Zelda, Donkey Kong and Kirby amongst a host of so many others. Maybe most importantly, they own a significant percentage of The Pokemon Company. Pokemon is an entity with near limitless possibilities. 2019 brought us the movie Detective Pikachu, which I believe to be just the beginning of Pokemon’s world dominance in all entertainment facets. I think without a doubt, Nintendo owns the best collection of video game IP in the entire world.

This is not my first foray into video game industry investment, if you have been following me for some time, you will know I was previously an owner of EA. I didn’t like the trajectory I saw EA going, but I think the industry as a whole has never had a brighter future. According to USA Today, the global video game market is now bigger than the global movie and music industries put together and growth remains strong. Video games are so profitable and it makes sense when you think about it. A hit game can be produced one time for a relatively low fixed amount of money. Particularly when downloaded digitally, every new game sold has virtually no variable cost. If you can sell tens of millions of copies of a game at $50-60 a pop, you can’t help but make a ton of money. Animal Crossing: New Horizons for instance sold 31.8 million copies in 2020, netting Nintendo over $1 billion in sales on a single game. I can’t find how much it cost them to produce, but I promise you it is a whole lot less than it costs to produce a big budget superhero movie like Avengers: Endgame. Endgame cost Disney around $356 Million to produce(still very well worth it on Disney’s end.)

Nintendo’s stock has fallen a fair amount this past year due to fears over the console cycle. The switch has undoubtedly been a spectacular performer, but the question is how do you follow that up? In a previous cycle, the Wii sold incredibly, but the next generation Wii U was a disaster. It sold terribly and Nintendo struggled for an entire cycle. Could that happen again? Yes, but I think the strategy is slightly different today and the company has learned from previous mistakes. I believe Nintendo has taken a page out of the Apple playbook and has focused on continuous improvement and iteration, rather than replacement. They just released an OLED model, which is the exact same console, but with a better screen and longer battery life. Next year I expect them to release a Pro model, with all kinds of enhancements, but keeping the core setup and infrastructure in place. If it ain’t broke, don’t fix it. No need to reinvent the wheel, just keep making it better and faster. I didn’t touch on the numbers today and why I love Nintendo, but I hope to post a Twitter thread soon showing why they are such a great company.

SSNC

While everyone knows Nintendo, unless you are in the investment world, nobody knows SS&C. SS&C provides the backend technology platform to financial and healthcare firms. Customers such as wealth management firms and hedge funds will buy their software and subscribe on a yearly basis. Much like why I love Constellation Software, switching costs in technology providers are high. A firm’s entire staff is trained on that platform and the platform has all the proprietary data. Switching becomes difficult because you would need to transfer all that data over and it very well may not be compatible with the new system. You would also need to retrain the entire staff on a completely new setup. As long as you aren’t being gouged on price, it is a whole lot easier to just keep the status quo. A new software would need to be much better to make a switch worth it, not just a little. Should that technology really be better, SS&C is the gorilla in the room. They are more likely to buy you out than let you supplant them.

Much like all companies I choose to invest in, SS&C is a cash flow monster. In the trailing 12 months, SS&C did over $1.3 billion in FCF. Capital expenditures were only $36 million. In 2016, that FCF number was roughly $350 million, meaning the company has nearly quadrupled in the last five years. It also costs virtually nothing to run the business. No expensive property or machinery to invest in. This allows them to funnel all that cash into other areas such as acquisitions. Management is always key and SS&C has a great manager. CEO and Founder Bill Stone started the company in 1986 out of his basement. He has been running the company longer than I’ve been alive. He has made himself a fortune in the process, but been a diligent steward of shareholder capital. I do not expect to see growth anywhere near the level we’ve seen this past five years, but that’s not necessary to make this a great investment. The stock currently trades at under 15x FCF. A fantastic company trading at a reasonable price, sounds pretty GARPy to me.

DRIP

This quarter, I decided to turn on the dividend reinvestment plan. For those unaware, the plan automatically reinvests all dividends back into the giving company at current market prices. I previously believed it to be better to receive the cash and allocate it in the future as I best saw fit. Over time though, I noticed this to be a drag on my performance. I might hold onto cash too long and miss opportune entry points. By turning on the DRIP, it automates the process and removes my human foibles. Due to the small size of this account, the tiny purchases are a bit comical, but over time they will add up. For instance, on 9/16 I got a dividend of $6.64 from Home Depot. This was reinvested, so I am now the proud owner of an additional .02 shares of HD.

As always, I would like to thank you for taking the time to give this a read I know this was a long one! 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.

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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.

New Year

Happy new year everyone! I hope you are staying healthy and able to find some enjoyment during these strange times. How do you even begin to write up a recap for a year such as 2020? If you had told me this time last year that a global pandemic would bring our country to its knees, leave 375,000+ dead and force businesses across the country to close, I would have guessed that the market had fallen precipitously. Little did I know, other than a blip in March, none of this mattered and the market climbed to all time highs.

The economy has been buoyed by the combination of extremely low interest rates and a seemingly limitless level of money printing. Neither of these appear to be changing anytime soon, so the rally could carry on. I however continue to remain cautious. The market cannot go straight up without reprieve. At some point, the bill comes due. When that will be, I have no idea, but I think it is important to be prepared for such an eventuality. I remain steadfast in my decision to hold companies of the highest quality. Their businesses will perform in good economic conditions and in bad. That is my margin of safety.

2020 Performance

As of 1/1/2021, my 10K portfolio stood at $14,324.59. When I started on 8/19/18, the SPY had a price of $285.06 and my account started with $10,000. As of 1/1/2021 the SPY had a price of $373.88. 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
Since Inception(8/19/18)43.2537.256.00

As we can see, my investments have continued to beat the SPY. I am up 3.63% on the index in 2020 and 6% since inception. This is a modest outperformance, but nothing exceptional. If I can outperform by a couple of percentage points annually, this outperformance will compound to a large disparity over the course of many years. Time is ultimately your greatest friend. Be that as it may, all is not as great as it appears.

While my investment record looks more than satisfactory, this is really just due to the benchmark I have chosen to compare myself against. Had I instead chosen the Nasdaq as my benchmark, my results would look rather awful. Over the same time period, investing in the QQQ with dividends reinvested would have provided a 78.13% return. This beats me by a whopping 34.88%. Sure much of this is due to valuations on some tech companies becoming stretched to levels not seen since the dot com bubble, but it is still disheartening to lose.

I could have simply put my money into the Nasdaq, done absolutely nothing and obtained returns that far exceed my own. It is frustrating to see, but this is the sandbox we play in. You can work diligently, remain disciplined and still lose. Investing is hard. Sometimes your approach will get a tailwind, driving you to superior results. At other times it will feel as if you are pushing a boulder up a hill. The only solution is to just keep going. Hone your strategy, keep putting in the work and fall asleep each night smarter than when you woke up.

My stocks are now worth $13,947.72 with an additional $376.87 in cash. Let’s look at what changes I made.

Buys

EA– Electronic Arts is a company I have long followed, but only did a deep dive into in recent months. Gaming as a sector is going through a renaissance during the pandemic. People are spending more time than ever in their homes and video games are a great way to kill time. Video games might seem like an expensive hobby at first glance as you are really just buying a bunch of digital code, but actually video games can provide some great bang for your buck. A new Playstation or XBOX game will typically cost $60. Some games deliver a 10 hour experience, which boils down to $6 per hour, but I and many others have been known to sink hundreds if not thousands of hours into certain games. For those games, you are paying only pennies on a per hour basis. Few if any forms of entertainment can yield that kind of value. A good deal for the buyer and an even better deal for those making and selling the games.

EA for instance can expect to cash flow $1.5 Billion+ each and ever year. They sit on over $6 Billion in cash with trivial levels of debt. They are able to do so by owning some incredible IP that more or less generates annual recurring income. Franchises like FIFA, Madden and NHL are virtually assured to sell hundreds of thousands if not millions of copies a year. As a personal anecdote, I have bought the new FIFA each and every year for roughly the last decade. I am predictable in this action and there are millions just like me. This is great for EA, as it costs them little to reproduce. EA updates the rosters, makes some slight game play and graphic modifications and ships the new game to coincide with the new soccer season. The company has locked in long term contracts with sports leagues to be the exclusive provider of simulation games, such as the NFL whose contract was recently extended through the end of 2026. With these long term contracts in hand, cash flows are predictable and provide the company with strong margins. Gross margins typically fall in the 75% range, with net margins over 25% even given the large amount spent on R&D.

Additionally, EA has locked down the contract to produce non mobile games within the Star Wars universe. Jedi: Fallen Order was a top seller and Star Wars: Squadrons was a strong follow up. With the success of The Mandalorian on Disney+, you can bet more games are to follow. As you would expect, video gaming is a capital light industry. No need to buy all new equipment or real estate. Therefore the company is able to generate a lot of cash that management is then able to allocate as they see fit. Thus far, acquisitions and share buybacks are the primary uses of this cash. Most recently, EA announced the purchase of Codemasters, the developers behind racing games such as Dirt and Formula One, for $1.2 Billion. I expect more acquisitions in the years to come.

Do not be surprised if another name within the gaming world ends up in my portfolio. The industry is extremely profitable, predictable and has a long runway for growth. I own shares of Nintendo in my personal portfolio outside of this account and if I can find some room I might add shares in this one.

ETSY– I also decided to purchase shares of ETSY. I’ve long followed the company and been impressed, but stayed away due to fears over their high valuation. After seeing their most recent quarterly report, I decided the company was too strong to ignore. Etsy sells custom made items, great for gift giving and anything you might want personalized. The company has been bolstered by the pandemic as ecommerce sales have skyrocketed. Mask sales in particular have been a bright spot, constituting 11% of sales. Even if those sales were to fall to 0, the company would still show impressive growth.

Revenue this past quarter was up 128% YoY and adjusted EBITDA was up 259.9%. Yes, you read that correctly. These growth numbers are mind boggling. More buyers and more sellers enter the marketplace every quarter, creating a flywheel effect. Of course they cannot keep up this pace forever, but growth is hastening, not slowing down. The market cap sat at around $20 billion when I bought in. They may never get to the size of Amazon, but they don’t need to in order to make a fantastic investment. The company is already profitable and the rate of growth is on an upward trajectory.

When I saw the stock tumble after reporting a fantastic quarter, I knew it was time to pounce. Turns out, I made a timely purchase, as my Etsy shares are up 43.5% after less than two months of ownership. Can’t say I expected that, but I’ll take it.

Sells

CBOE- While I still really like the company, I had to make room for Etsy. I only held CBOE for a short time, but something had to go. As my only allegiance is to making the best returns, no company is sacred. Every investment is open to turnover should it make economic sense to do so. I lost a few percentage points on the trade, but that was more than made up for with Etsy’s gain. So far, a great move.

MKL- Similar to my sale of CBOE, I sold shares of Markel to open up room for EA. Markel will always be a world class company, run by top notch management. They will steward shareholder capital intelligently and safely. The problem is currently with the insurance business as a whole. Given the low interest rate environment, insurance is a tough business to be in. By law, they are forced to hold a large percentage of capital in bonds that can guarantee the payments on their claims. If much of your capital is tied up in low earning fixed income bonds, it is hard to earn a high return on invested capital. It is no fault of the company and one day the tide will turn, but interest rates don’t look to be rising anytime soon.

INTC- Here is where I have to own up to my misjudgement. It is never easy to admit a mistake, but it is doubly hard when you post your positions publicly and open yourself up to ridicule. I deserve criticism for this and I accept it.

I bought shares of Intel with great hopes. Upon release of their most recent quarterly report, those hopes went right out the window. Intel presented a pretty poor quarter and outlook for the future was grim. I immediately realized I was out of my depth and needed to make a change. In my Q3 update, I wrote “Intel is still an incredible business that spins off loads of cash that can then be reinvested back into the business.” While this mostly remains true, I overestimated current operations. I thought I could predict how the company would perform, turns out I could not. Later on I added “admittedly, I will never be a semicondcutor expert, far from it.” If you ever catch yourself writing something that closely resembles those words, turn back immediately. As Peter Lynch would tell you, stick to what you know.

Much like IBM, Intel appears to be a technology hardware company that is stuck in the past. Given their incredible resources, they have time to right the ship. It wouldn’t surprise me to see them regain their superiority, but as it stands they are not performing up to the standards of their past. The saving grace in all of this is that I recognized my mistake quickly. I took action when I saw the economics not playing out as I expected. If you are wrong about a stock, it is better to admit the error and move on than to dig in your heels and double down. I lost 5.68% on Intel, hardly a disaster.

As always, I would like to thank you for taking the time to give this a read! I know this was a long one, but I guess I had a lot to say. 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.

Q2 Update

Count me as one who did not expect the market to come roaring back in the second quarter. I cannot quite claim to understand why the market has been so exuberant, but euphoria reigns supreme. Coronavirus case numbers are surging, major companies are being forced into bankruptcy and yet, the stock market continues to rise.

I see economic struggle everyday within my family business. We are commercial real estate landlords and many of our tenants are facing tough times. Some have been closed for months, unable to pay their rent. Others will probably have to shut down their businesses never to return. This is our new reality.

I truly hope things will recover, but we should all be preparing ourselves for any eventuality. You don’t have to think too hard to come up with some truly dire situations that could arise. I’ll spare you all the doom and gloom, but I have envisioned quite a few. Should certain events happen, calamity could ripple through the economy and really shock the financial world. Let’s pray I’m just being overly dramatic and none of these events come to pass.

Q2 Performance

As of 7/1/2020, my 10K portfolio stood at $12,478.91. When I started on 8/19/18, the SPY had a price of $285.06 and my account started with $10,000. As of 7/1/2020 the SPY had a price of $308.36. The SPY has also given out $9.78 in dividends since I started tracking, so I have accounted for that as well.

           10K Return(1)    SPY Return(2)   Difference(1-2)    

2018(8/19-12/31)                           (13.95)                  (13.71)               (.24)

2019                                                   37.33                    32.6                    4.73

2020(1/1-6/30)                              5.59                      (3.03)                 8.62

Since Inception(8/19/18)           24.79                   11.6                     13.19

As we can see, I have actually had a very strong 2020. In particular, most of the outperformance came within the second quarter. At the end of Q1, I was only beating SPY by 2.01% on the year. That delta has since grown to 8.62%. Given everything going on in the world, I’ll take it.

Screenshot 2020-07-02 at 11.22.27 AM

We can see my stocks are now worth $10,343.63 and I am sitting on an additional $2,135.28 of cash. This means the cash portion of the account now comprises 17.11% of the portfolio. I was uncharacteristically busy with my transactions this quarter, the state of Covid-19 and the corresponding effect it has on the economy really has me spooked. I therefore unloaded a few of my holdings. For the time being that money will just be waiting on the sidelines, I am not seeing many buying opportunities out there.

Buys

EGHSF– I purchased shares of Enghouse Systems in early June after the company reported their latest quarterly earnings. Enghouse is a vertical market software company not much unlike my largest holding, Constellation software. I purchased 30 shares for a total of $1,459. Enghouse has just come off an incredible quarter. Year over year, they increased revenue by 50%, net income by 63.8% and cash flows from operation by 72.5%. I don’t think I even need to say much more than that.

Sells

HEI and LUV– I decided to liquidate all of my holdings in any company competing in the travel industry. They very well may recover and I might end up missing out on some gains, but I would rather take the risk off the table. These are times that we really have never seen before. It is incredibly hard to predict how this will all play out. Heico and Southwest are both strong reputable companies. They will likely make it through to the other side, but I’d rather put my money in companies that don’t have to struggle through this crisis. Most of my other companies are operating from positions of strength.

FND and ULTA– I have also decided to sell out of my two big box retail companies. Floor and Decor saw a surge in the stock price and my confidence in the business began to wane. I don’t know where the economy will go, but I’m not sure a company looking to open up hundreds of more big box stores is where I want my money. Now that I’ve sold, I’m sure the price will double. I’ll live with those consequences. Coronavirus has really impacted Ulta’s business. As you can imagine, when no one is leaving the house, the need for beauty products has fallen to near zero. I expect their business to struggle for as long as the virus lasts. For that reason, I think my money can be put in better places.

As always, thank you all for reading! You can follow me on Twitter @TheGarpInvestor.

 

Updating The Watchlist

I’m not sure about the rest of you, but I have found myself with an abundance of time on my hands. I have spent the last couple of months quarantined to the house and much of my normal business work has been put on hold. I am not married and don’t have any kids, so let’s just say I have nothing but time. Watching Netflix and playing video games can only get me so far, so I figured I should at least be somewhat productive.

I have dedicated at least an hour or two every day to investment research. Some days I  have done far more than that, while others have gone completely wasted. What I can I say? I am human. Whether it is running screens, glancing through company financial statements, or reading 10Ks and quarterly transcripts, I have found the last couple of months to be the perfect time to learn.

Now is also an opportune time to update my company watchlist. I’m not sure what the next few months or even years will hold, but I am trying to get myself ready. Recently many of us tuned in to watch the Berkshire Hathaway annual meeting. Berkshire is now sitting on a record level of cash, over $130 billion. Buffett remarked that he wants to be prepared for any financial situation. Things could return to normal in a matter of weeks, but the Covid-19 numbers could spike and businesses could be forced to close for months further. If that should happen, economic calamity will ensue and I would assume that markets will drop into free fall. I want to have a list of companies ready to go for such a buying opportunity. I want to emphasize that this is not a prediction, but rather I am doing my best boy scout impersonation by being prepared.

The first companies on a watch list should always be ones you already own. These are companies you have studied and had the conviction to buy. Many variables have likely changed since the initial purchase, but that’s where research should begin. Check one by one and see how the businesses have performed. Have revenues and profits risen or fallen in recent quarters? Has their balance sheet held up, or have they taken on additional debt? Think into the future and consider where the obstacles might lie and whether they are still in a position to grow. Finally, when you have a good grasp on the business, look at the price. If the business scenario looks bright and the stock price is below your purchase price, that business is likely a good candidate for buying more. Conversely, if business conditions appear dour and the stock price has risen, you have a good indicator that it may be time to sell.

Aside from companies I have already invested in, I have compiled a short list of companies I am watching closely:

Comcast (CMCSA)- Look we all know them and if you are anything like me, you probably hate them. They may have terrible customer service, but that doesn’t change the fact that they are a phenomenal business. The cord cutting revolution was probably overblown, but it has been interesting to follow. As less people order cable, Comcast has simply raised prices on internet services. They are essentially an unregulated monopoly on a vital product. They are a cash machine, churning out a whopping 13 or 14 billion dollars of free cash in 2019 depending on how exactly how you measure it.

After a rather steep decline in the stock’s price, my interest has been piqued. Let’s be conservative and use the lower number 13.  Comcast now trades at 12.5x 2019 FCF, a very reasonable number. Much like Disney, we know the business will be adversely affected by the virus, they have been forced to close all Universal theme parks, a big money maker for the company, that comes along with high fixed costs. My real hesitancy however is the amount of debt the company holds on their balance sheet. Over 100 billion in debt and 180 billion in total liabilities. I need to dig in more before I would feel comfortable making an investment.

Copart (CPRT)- I just finished reading Junk to Gold: From Salvage to the World’s Largest Online Auto Auction, the story of Willis Johnson, founder of Copart. I encourage you all to pick up a copy, I thought it was a great short read. The book depicted his rise from humble beginnings to Copart’s domination of the auto salvage business. What started as just a tiny scrap yard has turned into the world’s largest auto auction business. It is a classic rags to riches story. Johnson is a tremendous entrepreneur and has a penchant for finding opportunities to make money in any situation.

Today, the company sits in a great position. Their financials look better every single year. In my opinion they are probably a bit expensive at current prices, but Copart will remain on my radar. They have a solid balance sheet and produce a fair amount of free cash. They reinvest that cash back into the business, which has allowed them to grow immensely.

Intel (INTC)- Intel is probably the company I am most interested at the current moment. It is a company you have probably all heard of, but may not actually know what they do. I understood what they did at a cursory level, but never did a deep dive until this quarantine began. I thought the semiconductor industry would be too difficult to understand, so I just skipped over it entirely. After taking a brief look through their financials however, I couldn’t push it off any longer.

Intel is the world’s largest designer and manufacturer of semiconductor chips used in virtually all computing equipment. Though they are known for their microprocessors, they design chips for a range of products from mobile phones to the self driving car. I admittedly will never understand the technical minutia of the industry, but I think I can at least understand the competitive dynamics and why Intel has been so successful.

Intel is the gorilla in the fight. With a market cap of around 260 billion and sales of over 70 billion in 2019, Intel is the major player in the US. To put that in context, their main American competitors, AMD and NVIDIA had sales of 6.7 billion and 10.9 billion respectively. In 2019 alone, Intel spent 13.3 billion on R&D and another 16.2 billion on CapEx. That means they spent just under 30 billion bettering their competitive advantage, all while spitting out over 15 billion in free cash flow. AMD and NVDA have found footholds in successful niches, but catching up to Intel in the overall market is incredibly tough. Intel just has so many more resources at their disposal. The company actually faces much tougher competition from companies outside the US. Samsung and TSMC are great companies in their own rights, but do somewhat different things. I’m not going to go too deep into this today, but know I am watching Intel very closely for now.

Medifast (MED)- As someone who was born and raised in Baltimore, I have a sweet spot for any local company. Medifast is one of the few public companies still located within city borders, so I like to check in on them. With a renewed focus, Medifast has grown quickly these last few years. Revenue has grown over 2.5x over the last 5 years.  Their financials look very strong, the company holds zero dollars of debt on their balance sheet. Any company able to grow quickly without having to take on a single dollar of debt is impressive in my book.

I am a little cautious about investing in this company however. I wouldn’t go as far as calling Medifast a pyramid scheme, but at first glance I would say they have pyramid like tendencies. Most of Medifast’s growth has come from the Optavia brand. Optavia is a multi level marketing company selling weight loss products. Their model works through having members sign up as coaches, who then make money selling products to other members. Perhaps this is all just a clever marketing scheme, but it sounds a bit fishy to me. Unless I can understand what differentiates Optavia from a pyramid scheme, I’ll be staying away.

As always, thank you all for taking the time to read! I hope you take some time and update your watchlist. If you find any companies I might be interested in, please send them my way. You can follow me on Twitter @TheGarpInvestor.