No. of Recommendations: 17
Yes, one day DG will hopefully double as long as it doesn't go under first.
Dollarama was called expensive. It was up 45% YTD vs -44% for DG. Apple was called expensive for a few years and yet it's up another 33% YTD. What % of your portfolio are you prepared to commit to "deep values" and how does the return compare to S&P long term?
Well, certainly DG might or might not be a good investment. The price has been very cyclical for both DLTR and DG in the last 20 years, unlike their businesses, and I have made good money on each cycle. The question is whether the current weak stretch is just another cycle, or the harbinger of ultimate doom. If this is truly the end of the line for their business model, then yes, it could be a poor investment and I could lose quite a lot of money. We'll see. But I don't think they're in danger of going under, as they still make a nice profit every single quarter. Round numbers, $1-2 per share per quarter. It's quite hard to go broke so long as that sort of thing keeps happening even in weak stretches.
If it's NOT the end of the line, and margins can get even part way back to the old norm, they do look pretty attractive...the low share price is good news (good forward returns more likely), not bad news. Sales per share these days are 2.9 times as high as the first time they were trading at this price around mid 2015.
A more subtle point is that it's very hard to know in advance which firms will have their underlying business do well, and which will have their share prices do well for a while. If you pick something richly valued on meaningful metric, then the business MUST do particularly well in future, as you have already paid for that bright future which may not happen. if investing at rich valuations, you have to get BOTH your forcast of the business AND your expectation of continuing high valuation levels to be right. If either is off, you lose money, and generally it's permanently.
I think valuation levels are more important than anything else in terms of where to put your money. But I'm speaking of valuation levels relative to what a firm is likely to be worth several years down the road, or at least relative to its own history, not merely the latest P/E which isn't particularly predictive at all. I'm happy to pay (say) 30-40 times current earnings, but I'm unwilling to pay 15 times plausible earnings 5-10 years from now. A "deep value" stock to me is something trading at under 10 times "pretty darned likely" average real earnings per share 5-10 years out.
I do like a margin of safety, so I prefer not to prepay for an uncertain bright future, which I guess makes me a value investor.
You ask how much one might be prepared to commit to "deep values" and how well does it do relative to the S&P? For me the answers are "lots", and "pretty well".
My main portfolio, say 90%+ of my investments, is essentially all value picks depending on your precise definition. It's doing fine. It is up 13.4% on its average balance since end January, while averaging 57% cash. (end January because I shuffled my assets around a lot in January, not because it was a sweet spot for a baseline measurement). It's not all plain long stock--I do a lot of derivatives on them based most often wagering on mean reversion of valuation levels. On a time-weighted basis in the last year I'm very slightly beating the S&P 500 and very slightly lagging the Nasdaq at around 26%, despite the cash allocation. That result includes a substantial mark-to-market loss on DG this year, of course : )
Apple, which you mention, is a very formidable firm. You make a good point that a high valuation level can work out well, but not a convincing point that it's a good idea on average to buy firms with high valuation levels. (what I define as high multiples of plausible earnings 5-10 years from now). Very high valuations don't tend to last forever. Recall that Apple was trading at a multiple of 10-12 trend earnings not that long ago (much of 2016, for example), and the consensus was that it wasn't worth any more than that. (and I was quite bullish on it 2013-2016; I like 'em cheap). The earnings per share are running around twice what they were 5-6 years ago, a very nice result especially as they aren't cyclically high now...but the price is five times as high. The mood and therefore valuation is much more chipper now, yet the business is not growing nearly as fast as it was on any metric. That combination was not predictable, so the particularly high returns ending now were not predictable even if you knew how the business would do. I would not say with absolute certainty that the combination of slow growth and exuberant valuation will end, but that seems to be the likely outcome.
I guess I'm an old fuddy-duddy, insisting on a decent chance that a company will earn some decent money relative to purchase price within a reasonable time frame. But I'm OK with that.
Jim
