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

 

My First Purchase

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

Why Today?

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

Digging Deeper

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

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

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

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

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

Conclusion 

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