What a Roller Coaster!(3Q Update)

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

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

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

New Purchases

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

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

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

3rd Quarter Performance

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Flooring Is Boring(That’s a Good Thing)

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

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

Why FND?

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

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

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

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

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

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

Conclusion

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

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

Tucker or Trucker?

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

Why ODFL?

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

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

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

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

Conclusion

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

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

Value vs Growth? How About Both!

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

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

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

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

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

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

Value With No Growth

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

Growth With No Value

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

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

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

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

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

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

 

I Got a Dollar

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

Why DG

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

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

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

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

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

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