A Review of my holdings

[XMFgoLong]

Hi all,

I undertake a yearly portfolio review, looking at how I did, and what I hold. 2014 wasn’t a particularly great year, with IRR for the year being a tad under 4%. One reason was my investments into smaller companies. The year gone by was not a great one for small cap investing.

The full review is below. Warning, it’s a LONG post, but hopefully it has enough interesting rid bits to get some discussion going.

Feel free to post comments. Let me know if I 'm missing your favourite investment ideas. I would surely look into any ideas that are shared.

Anirban

Overview of Holding

I have a total of 53 positions in the portfolio. Effectively, this is like running my own little mutual fund. I have some high-level commentary first, followed by more details on the composure of each sector and the holdings.

My largest sector exposure is ‘technology’, although the exposure is nicely spread across various industries (consumer electronics, communications equipments, semiconductors, information dissemination). Total exposure is around 29%. It captures various themes such as growth of mobile, wearables, Internet of Things, search, online networking, technology service, and travel services. I ‘m happy with the concentrated exposure in the technology sector because the holdings are a nice combination of stalwarts and upstarts. Many of the upstarts have founder led management, with significant insider holdings. Historically, the technology sector has delivered market beating gains. Note that I don’t count Solar City, Netflix, and Amazon in this sector, and this classification is debatable but I ‘m following Morningstar’s classification system.

Financials are next at about 18% of the holdings. This sector offers value in a market where many stocks seem to be trading at a premium. For the finance sector, the scars of the 2008 crisis are still not a distant memory. I suppose there are couple ‘inferences’ to be drawn from this. One, if someone wants value there’s more opportunity in the finance sector. Two, we need the finance sector to forget about the horrors of the 2008 financial crisis for the next crisis to come about. I should really be looking to increase exposure to some of my holdings that are trading at attractive valuations and may be add a bit more exposure via other stocks. I have some more exposure via long calls in BAC and AIG. I also have some AIG warrants but I didn’t include them here as I ‘m treating them as part of my options portfolio. Overall, I like the exposure here, which covers themes such as online banking, card/electronic payments, innovative insurance models, asset management, and diversified financial house.

The consumer cyclic sector accounts for about 17% of the portfolio. Here, I have restaurants, again a mix of stalwarts (SBUX) with upstarts (ZOES, CHUY), home improvement concepts (TTS, LL), specialised retail (TCS, FIVE), and online retail (AMZN, MELI). I use to hold Coach but I sold them around their 52-week low and substituted them with 2017 calls. In this cohort, SBUX and MELI have done really well so far, while TTS, LL, TCS, and FIVE have been drags on the portfolio. More comments below.

I have a tad under 10% exposure to the healthcare sector, and to my surprise is lower than what I thought it was, especially when noting that GILD is a relatively new position. I really like the holdings here, with good opportunity of capturing longer-term upside. May be the issue here might be that the speculative investment MZOR is assigned a similar weight as the others and I should really look to exposure here, probably via a pharmaceutical benefits manager, or a biotech or two, or a service company with strong exposure to the healthcare sector (e.g., VEEV). Not sure, I have to think some about this.

My holdings in the industrial sector encompasses diversified industrials such as commercial kitchen suppliers (MIDD),engines and power plant suppliers (PSIX); shipping (SSW); waste management (ECOL); injection moulding & CNC machining (PRLB). Together, these account for 9% of my portfolio. Some of the holdings here could be classified as ‘technology’ stocks but let’s stick with Morningstar’s classification. MIDD can be a big winner going forward and I except PSIX to also deliver strong returns. ECOL and SSW are likely to be steady performers. PRLB can also turn into a big winner over the long run. Overall, I ‘m quite happy with what I hold in this sector, and I ‘m opportunistically adding to my existing positions.

The remainder of the portfolio had a little bit of real-estate, some Netflix, a bit of Solar City, some Caesarstone, and a tiny and fast depleting holding in Clean Energy.

Portfolio Churn

During 2014, I have mostly added to positions or started new positions. My buy to sell ratio was 4:1, i.e., in sales of stocks over 2014 netted $100, than the amount spent in 2014 buying stock was $400. So, I was a net buyer of stocks, and overall churn was lower than in 2013.

I did, however, completely sell out of a few positions:

• Rackspace Hosting (RAX): I lost faith in this company and it’s ability to compete with Google, Amazon, Microsoft, (and many others) in the cloud computing space. Cloud is becoming commoditised and the space has become extremely competitive. Long-term, it will be best for RAX and it’s shareholders if the company was purchased by a big tech giant.

• Paneria Bread (PNRA): I got tired of waiting for their Paneria 2.0 bearing fruit. Same store sales have been sluggish for a while. I also wanted to redeploy capital in more emerging and early stage concepts. These guys have over 1700 stores.

• Texas Roadhouse (TXRH) and BJ’s (BJRI): In both cases, I was having a hard time figuring out their novelty and why these would be steady growers over the long-term. TXRH seemed like a decent operator, so I could have held on to it, but BJ’s seemed to struggle for the year and half that I followed it. Both were sold via covered calls.

• BRK: Okay so this one I sold because it was getting to 1.5x book value, plus being such a large company I thought it might be better to have the capital work in smaller players like LUK and MKL. I have several large-caps in the portfolio (AAPL, FB, GILD, SBUX), and I wanted to invest more in small to mid caps. Of course, BRK has continued to appreciate since my sale, but we will see how my decision to reinvest cash from BRK into MKL and LUK does over time.

• CBOE: I originally invested because I play around with options. That’s not really a good reason to invest in a company! I did some due diligence and I didn’t see strong revenue/earnings growth in the past, so I sold out of this position.

I also had a few partial sells and or change over to leveraged exposure via options:

• COH: Thinking that COH is about to turn the crucial corner, I decided to have leveraged exposure to COH. I sold my shares and substituted these with 3x ITM calls. So far, this one is playing according to my script.

• SZYM: I sold out when the bottom fell on this one following news of plant delays and restructuring of the business. This was always a long shot. I did, however, buy a few calls, just to have some exposure.

• INVN: Following the bad news last quarter (the Apple debacle!), I sold half my shares and substituted these with calls.

• AMBA: This position had become large, so I trimmed it by half. Semiconductors are IMO a risky area. Of course, since I trimmed, it has gone up another 25% or so.

More Details on Holdings

1. Sector: Technology (29.2%)
o Covers a range of industries, including communications equipments, consumer electronics, 3D printers, semiconductors, information dissemination
o Holdings: SWIR (3.7%), AAPL (3.3%), UBNT (2.6%), FB (2.3%), LNKD (2%), CRTO (1.8%), CAMP (1.8%), AMBA (1.8%), TRIP (1.5%), SSYS (1.5%), YNDX (1.2%), TWTR (1.1%), EPAM (1.1%), INVN (0.9%),

• I have a high allocation to Internet of Things ideas, where I am counting SWIR and CAMP as IoT pure plays and INVN as a side play on IoT.SWIR has grown to become the largest holding in this sector, and I ‘m looking to trim about a third via covered calls; let’s see how it goes. CAMP has been a laggard in 2014, but it should be picking up and is among the cheaper IoT stocks when earnings are considered on an adjusted basis. CAMP has a strong relationship with Caterpillar, so it’s got its wheels running on the “Industrial IoT” phenomena. CAMP has also been a good put writing candidate given its cheaper valuation and the stock appears to be range bound.

• UBNT is a communications equipment manufacturer focused on wireless connectivity. I like this company for many reasons. It’s employing a disruptive business model, with essentially no spend on sales, focussed engineering, and focus on getting sales through word of mouth, pricing advantages etc. The founder is still at the helm of the company with a majority stake in the business. It’s also cheap because sales appeared to have slowed down recently, but the CEO insists on taking a longer-term view and focusing on rolling 3-year windows. Overall, I expect this company to have lumpy sales because of its exposure to emerging markets, but I also think this should be a good long-term winner because of its exposure to emerging markets and disruptive business practices.

• The social triplets FB, TWTR, and LNKD, along with YNDX, TRIP, and CRTO are plays on the Information Dissemination industry. My FB allocation has grown to its current size, LNKD has done okay for me, and TWTR is still losing money. However, I believe these will stand the test of time.

• YNDX is probably the riskiest of the lot, hence the smaller allocation, but is also among the cheapest tech stocks, all because of the uncertainty surrounding Russia/Ukraine; sales has grown at a 46% rate during the past 5-years.

• CRTO is a newer holding, specialising in the re-marking advertising world. They are the upstarts challenging the incumbents. This one needs a bit of a watchful eye just to make sure everything is on track. The founders are still at the helm of the company.

• EPAM is my favourite holding in the ‘IT services’ sector. Sales have grown at 35+% rate during the past 5-years. It’s founder run, profitable, decently priced and growing nicely. I should really be looking to up my allocation to this ‘Gem’.

• INVN is probably the holding I ‘m most concerned about. It’s MEMS technology doesn’t seem to have a big differentiator. Both Bosch and STM have similar tech. This isn’t a founder-led business and I ‘m not sure of the CEO; he sounds unconvincing in the conference calls. The upside though is there are only really 3 big players in the micro-electronic-mechanical chips making business and these chips are going to find their way into all sort of mobile devices & wearables. So, this can be a way to play wearables and INVN is the smaller company. This one is going to be on a short leash. INVN has won Apple’s business finding their way into iPhone 6. Let’s see if this helps their bottomline. If having Apple as a customer doesn’t help them, then they can’t really be helped is my thesis. After all, they are a component supplier with a small range of products in a competitive arena, so they have very little pricing power.

2. Sector: Financials (18.3%)
o Covers diversified financials; electronic payment systems; insurance; online banks; asset management services
o Holdings: INBK (3.1%), WETF (3%), MA (2.6%), BOFI (2.5%), PGR (2.4%), LUK (2%), MKL (1.9%), SVXY (0.8%)

• INBK and BOFI are plays on online banks. BOFI has done very well, with industry leading efficiency ratios, but today one has to pay a premium multiple (in terms of Book Value) to buy into BOFI. INBK, however, is selling for less than book value because it’s efficiency ratio is sky high. Having spent a lot of time closely following INBK, I believe that INBK is about to turn the crucial corner. This coming quarter should show how it’s doing with its investments in staff and IT. One should note that INBK has done well, transforming itself from a lender for RV & horse trailers (!!) to a lender that’s mainstream with a diversified loan book, a growing deposit base, and all the good stuff. INBK is also founder led with founder having around a 10% stake. Directors have been buying shares. Given the book value and founder-led culture I have been happy to have about 3% riding on this micro cap.

• WETF is my exposure to the asset management industry. WETF pioneered fundamentally weighted ETF and is currently the 5th largest ETF provider. Interest in ETFs have been increasing because of the diversification advantages of ETFs and this trend is likely to continue. The risk here is that WETF’s AUM has primarily been driven by their Japan funds.

• PGR and (to some extent) MKL are insurance plays. Both have excellent insurance underwriting histories and these should be steady growers. PGR’s float & cash is invested in high-quality fixed-income securities, but these are on shorter duration bounds and should be able to capitalise on any increases in interest rates. Both are very good underwriters with combined ratio in the 95-97% range (i.e., they make monies on the policies they write). I like both holdings They are led by able leaders and over time should be able to provide nice compounded gains.

• LUK is a diversified holding company with investment banking (Jeffries), energy, mortgage servicing, car dealerships, and beef processing. This one is an interesting one as it has undergone some changes at the top (Jeffries CEO is now in charge as part of a well thought out transition plan) and LUK is also trading at a discount to book value. I ‘m slowing building my position up on this one, using options to add to my position via ATM written puts.

3. Sector: Consumer Cyclic (16.5%)
o Covers restaurants; various retail concepts including speciality retail, e-commerce platforms, home improvement stores; automobile; residential construction;
o Holdings: SBUX (3%), TTS (2.6%), MELI (2.2%), AMZN (1.8%), TSLA (1.8%), LL (1.8%), CHUY (1.4%), ZOES (1.2%), FIVE (1%), MTH (1%), TCS (0.6%)

• I have restaurant industry exposure via SBUX, CHUY, and ZOES totalling about 5.6%. CHUY’s is a tex-mex offering, while ZOES’ is a mediterranean offering; both have small footprints, so is a ‘local’ to ‘national’ story, and both have very good restaurant economics. With CHUY’s and ZOES’ one has to be really patient, but both can potentially return outsized gains. SBUX is a mature concept, strong fan following, and tons of growth opportunity in emerging markets. I would like to slowly add some more to each of these holdings. Writing ATM puts on CHUY’s and ZOES’ can be a position building strategy.

• MELI and AMZN provide exposure to online retailing. At a 4% exposure, this is probably okay. I have some additional exposure to AMZN via synthetic long and ‘m also writing puts opportunistically to add to my existing positions. Note that these could very well have been classified as ’tech’ exposure but it’s probably better to have them here as they are economically sensitive holdings.

• TTS and LL provide exposure to the home improvement industry, with TTS being the local to national concept in Tiles and LL being the local to national concept in floorboards. An improving economy should lift the housing market, which in turn should help these companies. TTS has been in sort of a transition this year, with first the short attack, then the CEO’s brother-in-law incident, and finally with the CEO’s departure. TTS stores though have excellent unit economics, so it’s promising. TTS is down a bit for me, but I have added more to it as I have noticed significant insider buying. I believe somewhere around 40% of the company is owned by insiders, and they bought a significant chunk of the stock when it went downhill. LL also had a poor run, but here I have started a position following a large reset in the stock price following couple bad quarters, so let’s see. LL has been a winner for RB, and they have vey good leadership, and the local to national story still got legs.

± FIVE, well this is an interesting idea where a store sells everything for sells than 5-dollars. They have appealing stores with nice layouts and high traffic areas, and generally appeal to the teens and young adults. As an idea, it sits somewhere between a target and a dollar store, and this too fits the local to national idea. I ‘m not really sure about this one, but this was recommended by Rick Munarriz over at Rule Breakers, who’s recommended some of biggest winners in the Rule Breakers service. It’s only a 1% allocation, so may be it’s worth the ‘punt’.

• TCS, well this is yet another local to national concept but the seller of containers have been a total disappointment. Here, I went in because I liked the concept and I ‘m a happy user of Elfa systems, but I should really have looked at the post IPO valuation, their debt load, and their performance before buying. Right now, though, the stock is reasonably priced, so the downside from the current prices (around $20) is limited. My friend iVish seems to have won his bet

± MTH is the only stock that I bought expressly for the purpose of writing covered calls. It’s been a good candidate for writing calls as it has been mostly range bound between the low 30’s and low 40’s. At some point, I expect this stock to be called away, which would be fine by me.

4. Sector: Healthcare (9.6%)
o Covers major biotech and medical device companies
o Holdings: ISRG (2.8%), MZOR (2.4%), CELG (2.2%), GILD (2.2%)

• ISRG’s flagship DaVinchi surgical robots are used worldwide for soft tissue surgeries. The stock had taken a beating because of concerns on slowing rates of prostatectomy, benign gyneacologic surgeries, uncertainties around capital spend by hospital from the Obama care implementation etc.n However, as the leader in soft tissue surgeries, they are able to find new areas where robotic surgery was previously unused, improvements to the system that allow more efficiency (e.g., reduced setup time allowing simpler procedures to be performed using robots). International demand has been rising as well. As such, I strongly believe that there’s a big future for robotic surgery and these systems will get better & better over time and ISRG, which is a big winner in the RB scorecard, will continue to reward shareholders.

• MZOR is a small company from Israel focussed on computer assisted spine and brain surgeries. These are not fully automated systems but a ‘assisted system’ where the surgeon performs the surgery by directly handling the tools which move on a platform. This is a green field in that they are the only ones providing a computer assisted system for performing spine and brain surgeries. The system improves accuracy and reduce hospital stay time. The company projects opportunity for sale of 1000 systems in the US alone; currently there are less than 100 systems deployed in the US. So, this is very early in the cycle and they seem to be doing reasonably well. They seem to be getting international traction. As a story, this is similar to MAKO, which was bought out by Stryker for $1.6B. I follow this closely and think 2.5% or so is about right for this sort of investment.

• CELG is a company long-term investors got to love. They go as far as providing earnings goal 5-years out. The company is known for cancer and inflammatory disorder treatment drugs. It’s got a very good pipeline of products.

• GILD is probably the cheapest of the lot, selling at multiples less than the SP 500. GILD is known for HIV treatment regimens and more recently for the Hep C drug (Sovaldi/Harvoni) that has a $90,000 or so price tag. The cheaper valuation is potentially due to the market’s uncertainty surrounding how pharmaceutical benefits mangers will react to the big price tag. Express Scripts decided to go with Gilead’s competitor AbbVie. Gilled struck back signing deals with Aetna and CVS. Nonetheless, I would expect GILD to do very well over the next few years with Hep C and HIV drugs. They also have a very active pipeline of drugs under study. Overall, this looks like a good place to be in the Healthcare sector where almost everything seems overpriced.

5. Sector: Industrials (8.8%)
o Covers diversified industrials such as commercial kitchen suppliers,engines and power plant suppliers; shipping; waste management; injection moulding & CNC machining
o Holdings: MIDD (1.9%), PSIX (1.9%), SSW (1.7%), PRLB (1.4%), ECOL (1.3%), GTLS (0.6%)

o MIDD, for most of it’s history, was engaged in manufacturing, marketing, and servicing cooking equipment and related products that are used in commercial restaurants, institutional kitchens, and food processing operations. More recently, with the Viking acquisition the company has entered the high-end residential appliances market. Selim Bassoul has been an outstanding CEO, growing the company through a number of acquisitions that have fuelled both the top and bottomline. MIDD is working on the next-generation of commercial ovens (less energy, faster turnaround times etc). While MIDD is a top player in the commercial market, it’s only a niche player in the residential market. MIDD will try to grab a larger share of the residential market and the Viking acquisition is the first step in this process. Acquiring companies and folding them into MIDD improving the overall economies has been a big part of MIDD’s success and this will likely continue as long as Bassoul is at the helm. This stock has been an outstanding one for those who have held it for a while. Since 2001, the stock is up some 50x. Couple things to watch. One, CEO Bassoul has been the key architect of MIDD’s success. If he leaves, there would be a fair amount of uncertainty. Two, debt has gone up as the company has been on an acquisition spree. We need to watch the debt load and how the company would deal with interest rate increases. Overall, I still like MIDD and would opportunistically add to this holding.

o Power Solutions International (PSI) is a global producer and distributor of "clean tech” power systems, running on alternative fuels such as natural gas, propane, and biofuels, for original equipment manufacturers in a wide range of industries. PSI’s power systems are used in electricity generators, oil and gas equipment, forklifts, aerial work platforms, industrial sweepers, agricultural equipment, aircraft ground support equipment, construction equipment, irrigation equipment, and numerous other industrial equipment. PSI also provides clean tech engines on-road/highway equipment such as school busses, transit busses, long haul trucks, garbage trucks, and military vehicles, while steering clear of the long-hual truck market. One of the big drivers for PSIX has been generators that run on ‘flare gas’ at oil & gas field. There’s some concern that falling oil prices would impact this business line, although one could argue that falling oil prices slow down exploration activity but PSIX’s market penetration is still very low. There are over a million oil wells in the US alone and the economic opportunity is to use the free natural gas to power generators/compressors that are already operating at these well sites. Overall though, this is an economically sensitive business and the next few quarters would reveal how well they are weathering the oil price decline. It’s a well managed company, still small, and has ambitious revenue & earning growth goals. It’s founder led and insiders have a large stake in the business.

o Seaspan (SSW) owns and manages a large fleet of containerships. The company leases its vessels on long-term to major container liner companies. The longer-term contracts ensure steady cash flow, and a growing fleet along with lease renewals at higher rates enables the company to steadily grow its dividend. The risk here are the debt load and the tie-in with world economic growth. Any long-term slowdown in shipping traffic is going to hurt this company. At current prices, the stock is yielding above 6%, so I ‘m happy to hold this one. I may look to add some more to this position, but I ‘m looking at adding opportunistically.

o Proto Labs (PRLB) is a leading manufacturer of custom parts for prototyping and short run productions. Prototyping and short production runs (which are production runs a product for an initial trial or initial supply while the manufacturing processes & supply chains are being setup) are inherently low volume manufacturing. Low volume manufacturing is not new. Its being going on for ages, but there are many inefficiencies in the traditional low-volume manufacturing industry because of the inefficiencies inherent in the quotation, equipment setup and non-recurring engineering processes required to produce custom parts. Proto Labs’ solution provides product developers with an exceptional combination of speed, competitive pricing, ease of use and reliability that they typically cannot find among conventional custom parts manufacturers. What I like about this company is the opportunity they have and the lack of any concerted competition. While they compete with the mom & pop small manufacturers, there’s really no big competition breathing down Proto Labs neck. Further, the company has been extending its capabilities, most recently into 3D printing via the FineLine acquisition. This is still early days, so I ‘m looking to build this position over time by writing puts with the goal of adding to my position at better value points.

o US Ecology (ECOL) is a new position. This company owns and operates hazardous and nuclear waste disposal and treatment facilities. As people and governments continue to become more conscious, careful disposal of hazardous chemicals will become more important. The valuation seems good, the company has presence in both US and Canada, and it operates two radioactive disposal sites which allows it to treat regional radioactive waste (which aren’t allowed to travel across the country). Waste disposal is highly regulated, so entry of new competitors is not straightforward, giving existing players a protective moat.

6. Sector: Consumer Staples (4.7%)

o A single, but large, holding in WFM (4.7%). This position was built up when the Whole Food stock took a beating on concerns of increased competition in the organic grocer market. More competition can be thought of as organic and healthy eating becoming main stream. This IMO is a good thing and it augurs well for the giant in the field. WFM has been a big winner in David’s side of the Stock Advisor scorecard and why not. In the past 5 years, cash from operations have grown at a 20% annualised clip and EPS has grown at a 30% annualised clip. They have about 370 odd stores and they believe the US alone can support some 1000 stores. They have operations in Canada and the UK, so there’s some international opportunity. This is a well run business, and I got in at a ‘value’ multiple. I expect to hold this for a long time.

7. Sector: Real Estate (4.4%)
o Covers REITS and non-REITS
o Holdings: ROIC (2.2%), STAG (1.7%), HHC (0.5%)

• ROIC’s business model is to takeover distressed real estate businesses, do upgrades, and lease them out. They look for supermarket and drug store anchored shopping centres, focusing on locations with positive population trends, densely populated areas, with mid-income neighbourhoods. It’s top gun is Stuart Tanz, a guy with a superb history of success in real estate. He grew Pan Pacific Retail Properties from a $400 business to a $4B takeover candidate by Kimco Realty. The company has been doing well. They continue to find attractive properties and they continue to have very high lease occupancy rates (97%). Around current prices, it pays a 4% or so dividend, and the dividend plus share price appreciation continues to beat the market.

• STAG manages a portfolio of industrial building. The crux of their business model is to buy so called class B, single-tenant, industrial warehouses in secondary markets where there is a risk adjusted mis-pricing. It goes for high yield properties (e.g., ones where it can make 8 - 9 % rental yield) and that’s pretty solid when it can borrow monies at around 4%. As the property portfolio grows, so does the profits. There’s of course interest rate risk on this one, and one would need to watch how the lease renewals and rental rate respond to increases in borrowing costs. The other risk is paying too much for properties. CEO Benjamin Buther’s team have so far done a good job. Watching this one with a small position, and enjoying the 5% dividend.

• HHC is one of the largest owners of master planned communities in the US. They generate monies by selling residential lots to homebuilders and uses this cash to reinvest into commercial properties in these communities. The commercial properties are leased out and provide steady cash flow. HHC owns some prime real estate and high value assets in the Houston and Las Vegas area. The financials for this one are a bit complicated to follow, but Hidden Gems provide very good coverage of this stock. The general thought is that the assets are understated in the books, the management team is excellent, and that value will be unlocked when the prime commercial properties will be fully leased out. I ‘m starting to build out a position in this company. It’s one of the harder ones to follow and i ‘m relying on Hidden Gems coverage for this one. Over time, I should learn enough to be able to follow it as and when needed.

8. Sector: Communications Services (3.5%)
o Holdings: NFLX (2.1%), LBTYK (1.4%)

• NFLX, nothing much to say here. It continues to grow its video-on-demand catalogue and client base. Catalogue is growing through a combination of original shows and deals with production houses. Client base continues to grow because of the secular trend towards anytime viewing, increased broadband penetration, and massive International interest in Netflix’s catalogue of shows.

• LBTYK (LIberty Global) is the largest cable provider in Europe with 25 million customers in 14+ countries. They provide cable TV and broadband Internet services. While the cable TV subscriptions have been down, the Internet subscriptions have been going up. Going forward, broadband is expected to be the driver and given its size Liberty is adept at folding smaller players into its mix, strengthening its position via scale, and essentially consolidating the industry. This is an opportunistic jockey play in the cable industry. Malone, the chairman who has 25% or so voting stake in the company, has a track record of making big bucks out of cable. The risk here is the debt load and interest rate risk associated with it. The high debt load is probably okay for a business such as this because of the steady revenue stream from subscribers. This position came via Inside Value and they have excellent coverage on the stock.

9. Other Holdings (5.1%)

o SCTY (1.9%): Solar City is the leading US solar installers. They have an interesting business model. They buy PV panels and install them on residential/commercial rooftops of their customers, with the customers signing long -term contracts to pay for electricity generated by Solar City installed & owned PV panels. This is great for customers because they don’t have to pay the upfront cost and solar city prices electricity use at around 15% discount to retail rates. This growing recurring revenue model is good and the company can become more efficient over time by integrating and building out its supply chain. Now, one worry can be that solar might not be able to compete with other energy retailer if the cost for gas stays low. However, one would also expect PV panels to become less expensive and more efficient over time, and consumers to become more environment conscious. These two trends should drive the demand for Solar City for years to come. There’s also the opportunity to expand internationally, essentially bringing the experience and expertise developed in the US to similar developed markets. I really like SCTY for the long-term.

o CSTE (2.6%): Caesarstone is a pioneer in quartz countertops (these are used in kitchens and bathrooms). CSTE has done very well in Israel and Australia, where it has very high penetration. The US quartz sales have been low and CSTE is looking to accelerate sales in the US. So far, the company has made good progress in the US, and both sales and earnings have been growing at a rapid clip. If CSTE can do half as well as it did in Australia, CSTE would be a winner.

o CLNE (0.5%): Clean Energy is building a comprehensive network of natural gas fuelling stations across the US. The slower transition of trucks to natural gas is hurting this business. The low oil & gas prices have added further pressure. This is a small holding, and I ‘m planning on just letting it be. So far, it has been a big looser in the portfolio.

[vanliew]

Anirban,

Even before I read this whole thing, I know it is gonna be good, because your Past is Precedent. Thanks for all the insightful commentaries, analysis, and Foolery.

You got my ‘rec.’,
KLVanLiew

[WealthRatio]

Some random comments…

I started investing in BRKB in 2005-6. I still remember by split adjusted price of ~$100 which was a peak at that time. For 3 years it was dead money and then the market bottom fell off at which point I added more ~45. I later added at $80 and $100 again. Today at ~150, this is beating the market for me by good margin. I also participated in highly profitable synthetic covered call trade by MFO for the last 2 years. This is a keeper firm and I would not worry about the P/B much since Buffet has made some amazing deals and this is one firm where the parts are worth more than the sum. At some point, if this firm is broken up after Buffet era, it could be worth a lot more. But until then it offers considerable safety relative to market and creates a nice portfolio anchor.

I wonder if you managed to lower your cost based in LNKD and WETF by adding to them at their lowest points. I did it via puts.

Your capital allocation is risky by my standards, I hope it works out for you. The INBK stake is just too high and so is Mzor - acquisition based thesis are generally a gamble which is ok as long as position is adequately sized. So 5%+ portfolio in high risk situations and diversified in only 2 stocks. If I add other high risk situations like YNDX, CLNE etc… I suspect we may get upto 10% with just a handful of firms.

Among restaurant stocks, the best performers from Fooldom - BWLD/CMG are missing. PNRA is worth the hold in my opinion as it has great culture and management despite the ongoing hiccups.

Entertainment stocks - the best performers of SA are missing - DIS, ATVI. These are low risk as well.

AAPL seems to have pretty low relative weight despite its ongoing performance and risk profile.

Also missing are large number of the lowest risk stocks of Fooldom that returned well over the last few years including last year. In general, over the years, the low risk stocks have done very well for me. I once plotted a histogram of SA/RBS risk ratings vs beat on the market and found that those stocks in the risk rating < 9 provided the lion’s share of the results. I just ran it again and found it to be true even today. 347 data points is significant data (considers multiple recs as individual recs). Maybe some food for thought.

anurag

[XMFgoLong]

Hi Anurag,

Thanks for your thoughtful comments. I think it’s definitely worth thinking more about the risk-reward tradeoffs. Also, I agree that it would be nice to more weight on the less risky ones.

MZOR is definitely risky. At the same time, they have a novel solution for minimally invasive spinal/brain surgery and they are pretty much unchallenged. It’s only 2.3% or so my portfolio, and as I add more funds, I won’t really be adding them to MZOR, so MZOR’s share will be decreasing over time.

However, I don’t think INBK is as risky as one might think. It’s probably a pretty safe stock considering its valuation, conservative management, long operational history, and substantial insider holdings. I would be comfortable with a larger stake in INBK.

I know you like the risk ratings and have a methodology for using them. I have tried using them, but I always seem to find data points that intuitively don’t make much sense. Some examples:
o FIVE is one of the lowest risk stocks with a rating of 6. It’s apparently less risky compared to SBUX (8), CELG (10), and LUK (11).
o GTLS has a risk rating of 7.
o TCS has a risk rating of 10, same as GILD, TWTR, and MKL.

The other, potentially, bigger issue I have is the rating is of course lower for stalwarts and higher for the upstarts. A CMG now has a rating of 5. The risk rating, however, would have been much higher during CMG’s early days. A 1-2% allocation in the early days would have been enough to make a solid difference to the portfolio. Right now, if I decide to invest in a CHUY’s or ZOE’s, I do enough digging around and then put my monies, and I start with a 1 to 2% allocation of my portfolio’s current NAV. I try to mitigate some of the risks by following these closely. My goal is to limit exposure to higher risk stocks by limiting overall exposure to about 20%.

All said, I agree, there’s a fair amount of risk in the portfolio. Below are the ones I think are the ones I would think enjoy a risk rating of 12 and above.
o MZOR - an early stage company that’s not yet profitable
o TTS - local to national might not work out, although current prices mitigate risks to a large extent
o INVN - I don’t think they have a very capable management and the area seems to be getting commoditised, but I will watch one or two more quarters before deciding to dump them.
o NUAN - was risky at the valuations with was recommended, but considering valuation is probably not that risky
o SWIR - valuation!
o CLNE - this will probably go to zero!
o YNDX - solid business in a rocky geography
o GTLS - I generally avoid stocks that are closely tied to mining, oil & gas, so I 'm not really sure how I fell for it! I would have sold this one but the valuation is rock bottom.
o AMBA - valuation and it’s in the semiconductor industry
o FIVE - valuation, somewhat tolerable following pull back; niche concept might turn out to be a fad.
o TCS - good concept, but purchased at poor valuation point. Now cheap enough that holding it makes sense.

With respect to BRK, I 'm thinking selling was the right thing to do. I really don’t see BRK returning 12-15% annualised over the next 10 years. I prefer MKL, LUK, and many other recent Inside Value recommendations over BRK. In general, I would like to be more weighted towards mid-caps, not large caps.

With respect to lowering cost basis for WETF & LNKD: I have a pretty low cost basis for WETF. I think I got in pretty much at the bottom and added once around $8. I have not written puts on WETF. I did write BPS on LNKD on couple occasions and that worked out fine. I also added some when it pulled back to $140’s.

With respect to restaurant stocks: I did own PNRA, but I just can’t see where they will get growth. They have 1700 odd stores, and almost nil Same Store Sales growth. I think it’s best days are behind it. CMG is expensive. I can’t pay 50x trailing earnings more a mid-cap, mature, concept. It’s on my watch list to buy if it pulls back. BWLD I have not followed enough, so I have no idea about it. I should probably check the recommendations.

Disney I would like to own but it’s currently trading towards the upper end of its historic PE range. I think there will be better entry points for DIS, may be following a earnings miss or something.

You noted that I 'm not holding many of the low risk stocks from Stock Advisor? Which ones do you recon are currently selling fairly valued and worth adding to balance the higher risk components?

Thanks,

Anirban

[WealthRatio]

I don’t think INBK is as risky as one might think

Microcaps are inherently risky regardless of the underlying numbers. In last 10 years, I have been through a train of such stocks with mostly bad results. The only lucky few I have seen are those who managed to time their exits. In any case, I hope this becomes a multibagger for you. But as a process it is more likely to sink the investor than otherwise.

I know you like the risk ratings and have a methodology for using them. I have tried using them, but I always seem to find data points that intuitively don’t make much sense.

No risk rating can ever be perfect. This one must be taken with a grain of salt as well. I like this one due to its transparent and intuitive nature and yes one can get occasionally wrong or puzzling results that may be right. Also note that risk ratings in SA/RBS have little to do with valuations. They are more in tune with business itself. And on that standard, TCS is pretty safe.

The risk rating, however, would have been much higher during CMG’s early days.

It was always rated low. It was always expensive. I have been in it since $35. At HG, when it was $160, it was valued for a 30% growth for many years ahead. It was deemed surreal. They put it on hold for 2+ years during the march from $140 to $400+. I protested on the boards and eventually left HG. That is how it always is with multibaggers. Markets hate multibaggers. Multibaggers are always made on the back of deep contrarian bets gone right.

You know why DIS is a multibagger on SA boards? It is because of Marvel being rolled into Dis after acquisition. MVL was recommended when it had negative cash flow in 2002. It was the first SA 10 bagger. It ended up needing monumental patience during the last few years before acquisition as the stock became a seeming value trap that wasn’t.

By focusing on value on the highest quality firms, you are missing out on a great opportunity. High quality firms will always sell for more. Compare WMT to COST over the last few decades and tell me why COST trades at significantly higher multiple than WMT.

GTLS - I generally avoid stocks that are closely tied to mining, oil & gas, so I 'm not really sure how I fell for it! I would have sold this one but the valuation is rock bottom.

Well, financials have large blackboxes adn timebombs buried in them but these are just cyclical. So the logic here makes no sense to me. In 2008, I had 15% of my invested capital in financials that I lost. It is a different matter that I did not abandon the sector and instead kept buying the best in class and have eventually recovered and made some but it was painful. You could see the first post from my profile that I made 10 years ago. That firm was the bleeding edge of 2008 crash. That was the first real domino to fall in that era.

If you don’t know why you are in GTLS, you must sell. By focusing on valuation on a stock or industry that you don’t care, it is devoid of logic or you are just price anchoring. I agree with you that it is trading low. I will also add that it is not exposed to spot price of oil and its balance sheet is clean. I added more to this one and CLB. I have made substantial money in the oil patch for the last 10 years by just timing the cycles right. I was able to time them right because they were slow and long. I sold most of my oil last year and wrote board posts when I did but now I am back again. The bottom line is that is not a hold situation. You must add if you think valuation is at rock bottom otherwise check your convictions. If rock bottom valuation assessment is true then making good money is guaranteed from investing here.

o CLNE - this will probably go to zero!

Then you must sell. You are a scientist and must trust the probabilistic procedure. I am into it too and I speculate on the side of success. Purchased deep OTM leaps. Small capital, so inconsequential loss but good gains. Asymmetry at play here. I don’t think it will go kaput as it is backed quite well and business is doing fine if not exploding its way to success.

I really don’t see BRK returning 12-15% annualised over the next 10 years.

Let is compare notes on this 10 years later. You are betting against a company of doing exactly the opposite for the last 50 years. This firms is the smartest capital allocator and risk manager the world has ever seen. That kind of book value enhancement with $30-$50B in cash and for that long is quite surreal. There is no mojo lost so far.

You noted that I 'm not holding many of the low risk stocks from Stock Advisor? Which ones do you recon are currently selling fairly valued and worth adding to balance the higher risk components?

Again, valuation is fairly meaningless in SA/RBS world. This is not how the stocks are picked. And the highest performers have always stayed at insanely high valuation. I see another process inconsistency here. You care for value and yet hold TSLA at 1.8% of the port. TSLA is overvalued by any metric out there. P/S is common metric on autos. TSL is ~4x expensive than BMW and 20X over Ford. For myself, to escape the conundrum, I long gave up emphasis on rules. That way it is easy to be logically consistent. The fewer the rules I live by the easier it gets. Some of the greatest investors out there, especially Soros, had no rules. In a practical sense, those with seemingly high valuation but good firms get low capital allocation for me and I let the market do the heavy lifting (learnt from TomE). Future multibaggers don’t need much capital. The simple rule I follow to add to my stocks - winners or losers - is via price/value anchoring from my last purchase. Value metrics are different for different firms. This allows me to add to stocks at both rising and falling prices. Again, learnt from TomE. This allowed me to add to AMZN more than 18 times over last 8 years from $15 to $350. I got more than a dozen examples like this one.

I suggest using the sort on risk rating and checking out all stocks rated <= 8 in SA and consider taking a starter positions in all of them to build upon later with time. You will do quite well and with ease.

Anurag

[sweetadeline]

I suggest using the sort on risk rating and checking out all stocks rated <= 8 in SA and consider taking a starter positions in all of them to build upon later with time. You will do quite well and with ease.

Where can I find this list rating stocks based on risk? Or is this a premium pay service?

Thank you for your time,
Sweetadeline

[XMFgoLong]

I suggest using the sort on risk rating and checking out all stocks rated <= 8 in SA and consider taking a starter positions in all of them to build upon later with time. You will do quite well and with ease.

Wow! If one adds RB to the mix, this will add some 80 odd stocks to the portfolio. I can’t imagine running a portfolio that essentially buys all stocks recommended by SA. Sorry, your process of buying everything just does not for me.

The only other thing I will add is - valuation is important for well established, companies. Valuation is going to impact rate of return. Valuation is less important for disrupters. So no point really asking about valuation for TSLA; it’s fundamentally trying to change the automobile industry. Upstarts also have a large addressable market so you pay for the potential to grow into the market. Paneria has 1700 plus stores. How big can it get? 2000 stores? 2500? It can still be a good investment but at an appropriate valuation.

Anirban.

[XMFgoLong]

Where can I find this list rating stocks based on risk? Or is this a premium pay service?

Anurag is talking about the “risk ratings” (a numerical score b/w 1 and 25) that’s assigned to each Stock Advisor and Rule Breakers stock pick. Stock Advisor and Rule Breakers are newsletters that present two new stock ideas each month. They are well worth the subscription for ideas on what I could consider adding to a portfolio with a 3 to 5-year investing time frame.

Anirban

[utahchris]

Anirban,

How did you decide on CHUY? I think the nation is due for a really good sit-down Mexican food chain. And I like the Peter Lynch-based thesis.

I love Mexican food and wanted to try Chuy’s but unfortunately there is not one anywhere near where I live. When I spot-checked the Yelp ratings they are only 3.5 stars for the most part, with a couple of 4 stars. I guess on checking now that’s better than some other chains like Olive Garden, Applebees, Chili’s. Hmm.

[XMFgoLong]

How did you decide on CHUY? I think the nation is due for a really good sit-down Mexican food chain. And I like the Peter Lynch-based thesis.

This is a Hidden Gems recommendation. Since I live in Australia, it’s a bit difficult for me to try them out. They have opened one in Washington, DC, and I might be going there in March for some work, so that might be the time to try them out.

When HG recommended CHUY, in addition to looking at the recommendation, I looked at the investor relations website, checked up financials, etc. They have done very well in their core market of Texas and are slowly expanding across the US. They have about 60 restaurants in 14 states. The unit economics is good. Check out their presentations (the one from Q3 would be useful). Their average unit volume is $4.9M. For comparison, note that BWLD’s average unit volume is $2.9M. In their earnings reports, they talk about restaurant-level EBITDA, which is very high for CHUY ($1M) versus say BWLD ($0.5M). They have also been showing strong comparable restaurant sales momentum.

It looks like a good risk/reward tradeoff. Recently, Wells Fargo upgraded CHUY to a buy, which caused a one day price spike:
http://www.benzinga.com/analyst-ratings/analyst-color/15/01/…

As an aside - you could consider subscribing to Hidden Gems. They have been running a special on it and you could possibly lock in a 2/year sub for $50 or so. Hidden Gems has some interesting recommendations; some of them are going to be big winners. Among the newsletter services, I 'm now finding more and more interesting ideas there than anywhere else.

Hope this helps. Click the email tab if you want to know more.

Anirban

[WealthRatio]

The only other thing I will add is - valuation is important for well established, companies. Valuation is going to impact rate of return. Valuation is less important for disrupters.

What about CMG, AMZN, NFLX or LNKD? All are “well established” large caps at high growth level, higher than most small caps, and still continuing the disruptive path but valuation is out of whack from any traditional metric. They have also provided the highest rate of return for those invested for many years with them.

Valuation is indeed the key to successful investing. No exceptions. The puzzle always is valuation in the future or in the past. Those firms with high current valuation that end up providing shareholder returns that stick end up having a growth that creates the low valuation in hindsight. On this logic all successful growth firms are value firms but only in hindsight. A high conviction valuation exercise can only be run on those firms that do not have a potential disruptive path staring ahead of them. It has little to do with established aspect. Few SA/RBS firms are amenable to valuation exercise. That is why a subset of these firms are used at MFO/PRO/IV services. I use those services to determine relative capital adjustment.

Wow! If one adds RB to the mix, this will add some 80 odd stocks to the portfolio. I can’t imagine running a portfolio that essentially buys all stocks recommended by SA. Sorry, your process of buying everything just does not for me.

Well, these low risk are not all the stocks but < 50%. Secondly, these are generally good buys when they figure in best buy lists. They are awesome buys when they figure in core as well as best buys. Food for thought…

Anurag

[Btscheufler]

Anirban,

The Chuy’s here in Birmingham, Alabama is always ridiculously busy FWIW. I don’t go there often because of that but I do enjoy the food.

Brian

[XMFgoLong]

What about CMG, AMZN, NFLX or LNKD? All are “well established” large caps at high growth level, higher than most small caps, and still continuing the disruptive path but valuation is out of whack from any traditional metric. They have also provided the highest rate of return for those invested for many years with them.

You are confusing what I meant by “well established”.

AMZN is probably a good value, considering the price over sale multiple. AMZN is also a highly diversified company, still disruptive, as they keep making moves into new areas. They navigated into cloud, now went into on-demand streaming, they are talking about drone delivery, etc etc. This totally puts it in a different class, and it’s price over sale is not out of whack at least not now.

Netflix is changing television from live to on-demand viewing. It’s shown that it can successfully expand into international territories. They have a large addressable market and they are positioning themselves to become a media company with their original shows and movie deals. Here, I agree, valuation isn’t that relevant, although it makes a difference when one gets into it.

LNKD, again, same story. It’s disrupting how people search for jobs, how companies recruit, and their use base allows for expansion. I can see how it will grow into a bigger company 5-years out.

With CMG, my issue is that it’s a mature concept in that their growth will now have to come from introduction of new concepts, or international expansion. There’s no proof yet of their ability to successfully expand internationally. There’s some proof of their ability to introduce new concepts.

Note that I do hold AMZN, LNKD, and NFLX, just not CMG.

Putting CMG aside, there are others like DIS, NKE, MKC, MSM, SHW, to name some of the SA lowest risk rated stocks, where I think valuation is important. I just ran some of these through Better Investing’s SSG Plus Tool. Some food for thought:
o DIS, trading with trailing PE of 22. That’s at the high end of the PE it has traded in a the past 5-years. The average high is 20 and the average low is 12. At current valuation, it’s not a good buy IMHO.
o NKE, which is now nearing $80B, is even crazier. It’s trading at 28x trailing earnings. The average high PE over the past 5-years is 23 and the average low PE is 16. Sales growth estimated to be 7% and eps growth estimated to be 12%. Not a good buy IMHO.
o SHW, crazier at 32x earnings. Average high PE is 22 and low PE is 15. Someone buying now is surely going to hurt. Average sales growth estimates two year out is 7 or 8% and eps growth estimate is 15%.

You should check out SSG Plus from Better Investing. They have a good process for investing into blue chips.

Anirban

[XMFgoLong]

Hi Brian,

Thanks for that information. You like their food and they are super busy, looks like two good reasons to invest in CHUY

May be, this is a stock we can collectively study. I could try to write down an analysis based on their recent earnings releases and 10K. I would do it if there’s enough interest to discuss CHUY.

Anirban

[WealthRatio]

There’s no proof yet of their ability to successfully expand internationally.

There is always a price to be paid for cheerier consensus.

You should check out SSG Plus from Better Investing.

Is their 10 year track record better than any of the TMF services like SA/RBS/II/IV/HG? I doubt it even without checking. But if they are better and please do tell me if that is the case, I would not mind quitting TMF altogether and taken my business elsewhere. I pay TMF a lot annually with ~7 subs.

In my early days, I used to have other services besides TMF - prudent speculator (very good value based service with a published and impressive track record) and also track the stuff published on Kiplingers but over time I realized that it is important to focus on highest SNR that comes with a long and successful track record that many of these TMF newsletters now have. So my confidence level has increasingly gone up over the last 10 years at TMF.

Some specifics:

a) On what data driven basis is P/S 1.69 of AMZN a good value? Comparative retailers WMT/COST have it < 0.6. I consider AMZN as a retailing company although it has approached it from the technology side. Much of its technology side of things is not making it money (and their CEO explicitly says he doesn’t care) other than via the retail channel. One TMF newsletter that I respect and follow has put an intrisic value 35% higher than current price without providing much rationale or data behind it but it is sure not a simple metric like P/(S,E,B or CF). Even TomE gave up arguing for AMZN on the basis of cash flow yield and subscription based revenue as those factors vanished long ago. With my foggy eyesight, I can only see ongoing growth as the only metric and all the technology development as a means to keep up with the moat to maintain the growth edge. So what does SSG Plus say on AMZN valuation? I am curious. If they take all P/S to mean the same, then clearly the entire methodology is flawed, so I hope not.

b) CMG - on what data driven basis is maturity defined? The on going growth has not slowed so far.

You are confusing what I meant by “well established”.

True. I still don’t get. Please define it for me.

Someone buying now is surely going to hurt.

If I am “sure” of the hurt, I always short it somehow using leap sort of options. One can limit capital with spreads as well. I have had my lumps but I follow through my convictions since it helps me improve process and the returns. Over time, my convictions have become tempered. I am no longer overwhelmingly bullish or bearing or anything. I look deeper in myself now to determine the strength of my conviction, analysis the reward to risk ratio - [mainly parasitically by reading up others’ work. You are much better man than me here as you create original content via your painstaking analysis. I am thankful. I only lap it all up and sometimes throw darts] - analyze the consequence of my capital at risk and then chose an appropriate instrument for investing (stocks or options) or do nothing.

I think stocks in general are trading at high end of their multi year valuation. DIS or NKE are no exceptions. So I agree with you on this fact - solid data behind it. The only cheap eats seem to be certain financials and commodities. I am putting my money where my mouth is by adding aggressively to both these sectors. Commodities provide the best results when invested in a low cycle that we have today. I requires many years to see the ends of the cycles but at least it is deterministic unlike many other speculative plays. I have diagonalized my $60 DIS calls to extract some cash while the going is good. They all come down from their highs eventually. We discover highs only in hindsight. I am thankful for being able to use options. I have deployed the index hedge trade from PRO newsletter and it seems to be working so far as the market edges lower.

Anurag

[XMFgoLong]

Hi Anurag,

I 'm afraid the thread has gone sideways into investing philosophies and what not. You have evolved an investment approach that works for you. I 'm evolving mine, and as you might agree, there are many many different ways to skin the cat. There’s no one size fits all here, and many different approaches can win. My approach is highly influenced by Saul’s analysis-driven approach; with respect to options, I follow MFO but I really like Vish’s approach to writing puts.

That said, I don’t mind talking stocks and investing approaches with you.

With respect to some of the specific points you raised in your earlier post.

1. Better Investing Magazine, SSG Plus etc

The National Association of Investors Corporation is also known as BetterInvesting. It’s a Michigan-based non-profit organization (a not-for-profit organization whose aim is to teach individuals how to become successful long-term investors. They have some 13,000 member investment clubs, and approximately 120,000 individual members.

They don’t provide investment recommendations but have what is called stocks to study. Each issue has one “undervalued” stock and one other stock, which could be a “growth” stock. They also provide interesting reviews on investment club holdings.

They advocate a methodology that looks at buying good companies for a fair price using earnings, estimated growth rates, historical earnings/revenues, and comparison with the industry.

Their December issue featured Gilead Sciences as an undervalued stock, a check up on IGP Photonics (which they had called out in the beginning of the year), Caterpillar as a safer play on the mining investment cycle, and a look into Apple and why it might still be a great stock to hold.

Better Investing stays away from exotic stocks one finds in RB and HG, and occasionally in SA, is a bit more fundamentals driven. From the results of investment clubs, it appears people have done very well using their approach.

The SSG Plus tool provides access to 10-years of financial data along with various sales/eps estimates, allows you to check where the stock with respect to its historical trading range etc. This approach works well for blue chips like DIS, NKE, AAPL, and might I say CMG. It won’t work for a bulk of the RB/HG stock picks.

2. With respect to Amazon, P/S ratios, and Better Investing

I don’t think of Amazon just as a retail play. It’s got a growing and strong web services segment, which includes the Kindle platform, streaming service, and cloud computing. It’s still a disruptor IMO.

With respect to P/S for AMZN, note that it’s averaged a P/S of 2 in the last 5-years. Given it’s scale advantages, IT exposure, one would think it deserves a significantly higher multiple than WMT or COST.

Better Investing, however, stays away from companies that don’t have earning. I have not seen it featured in the 2-years or so I have subscribed to Better Investing.

3. CMG and Maturity

Doesn’t CMG have some 1600+ restaurants? That makes it a mature concept. Something like CHUY’s has less than 100 stores. And yes, on-going growth has slowed down. Just look at the revenues:
FY13: $3,215M
FY12: $2,731M
FY11: $2,270M
I.e., 17.7%, 20.3%, 23.6%, which is decline in revenue growth

For this kind of declining revenue growth, investors are paying 55x trailing earnings. Actually, the 10-year revenue growth for Amazon is 30%, while that for CMG is sitting at 23%. With respect to CMG, the earnings growth cannot forever be at a higher rate than sales growth. I would think a bad earnings report or two is going to cut this stock hard, somewhere to the 30x range.

Anyways, I like to not worry about what I don’t hold and lost opportunity etc. I focus on what I hold and their opportunity.

3. With respect to stocks trading at all time high and commodities being at the lower end the cycle

I agree with you.

I do hold some commodities (Copper, Nickel, Rare Earths, Gold) through my holding on the Australian stock index. These are tiny holdings. Historically, commodities have traded in boom & bust cycles and this has been explained using demand/supply principles. The only worry here is that it’s hard to project the duration of the cycles. Having a long timeframe helps. Companies in the commodity business are price takers so that’s a big big disadvantage and one reason I don’t really like investing there.

Anirban

[WealthRatio]

Good luck,man! I’d love to see at least one individual replicating half the success of either Saul or Vish on the portion of capital allocated to their line of actions.

I am not saying it is not possible, I am just enjoying the work in progress. So thanks for spending time discussing your results. It takes time and effort something that I have not done even once in 10 years. It is always easy to throw darts at others.

In any case I dont wish to impose my philosophy on you and I appreciate the evolution you are undergoing something that everyone needs. I only wanted to ask some probing questions and make suggestions.

[SaulR80683]

I 'm afraid the thread has gone sideways into investing philosophies and what not.

Hi Anirban, No problem. That kind of discussion is what the board is for!

Saul

[SaulR80683]

Hi Anirban, This is referring back to your initial post “A Review Of my Holdings” rather than to the subsequent discussion. Sorry it’s taken me a while to get to it but we had some unexpected crises (now taken care of).

First, I am amazed at how organized you are and how you are able to follow 53 stocks. How can you do it? You seem to know what is going on with each one, and I know from the beautiful write-ups of individual stocks that you have posted elsewhere on the board, that you extensively analyze each one. But how can you have the time to follow 53 earnings releases and 53 conference calls, for instance, in addition to any other stocks that you are following as possible additions??? I am retired but I couldn’t do it.

Then on some of your positions, I have some questions. These are meant in the sense of true questions, not criticism of your positions:

Technology:
Why are you holding YNDX? Surely there are other stocks growing at 46% where you don’t have the political risk of losing it all (CRTO jumps to mind just off the bat).

Why are you still holding half of INVN when all the news is so-so to poor? Surely there are better places for your money.

Financial:
I don’t follow it any more so I’m not up to date on it, but I was in WETF for a while and got out because it seemed to be over 50% dependent on one Japanese fund. Seemed too risky for me.

Consumer:
Why in the world are you still in TTS? I took a little position to put it on my radar and sold out after a couple of weeks. A MF letter that I won’t identify had recommended it three times, but now sold out saying the following:

It might be tempting to wait around and see whether things improve. After all, at slightly more than $8 per share today, Tile Shop is trading near an all-time-low. Insiders have been buying shares on the open market, and the U.S. housing market appears to be back on somewhat-stable ground. But we’re not fans of speculation, and we don’t think Tile Shop is a good business.

Specifically, we’re having a tough time seeing Tile Shop fulfill any of the six criteria we look for in our investments:

A clearly defined and compelling mission. Although “creating home fashion in a construction industry” might sound inspirational, we don’t think it’s a strong vision statement.
Significant competitive advantages. Tile Shop is void of any intangible assets, switching costs, or network effects that would distinguish it from rivals or give it pricing power against them.
Superior growth in revenue, cash flow and/or dividends. Revenue has grown at a steady clip in recent years, but net margins are stuck in the low single digits. Given this notoriously low-margin industry, we’re not sure how those could improve.
Large and growing market opportunities. Tile installation is (we hope) a one-time event for homeowners. It’s nearly impossible to establish a recurring revenue stream with existing customers, and we don’t think the addressable market will grow significantly any time soon.
Financial fortitude. Tile Shop’s balance sheet is a complete mess — with more than $90 million of long-term debt and less than $6 million of cash. More than 80% of the company’s assets are tied up in the stores and their inventory. We’d expect any prolonged recession to wreak havoc on shareholders.
Capable, incentivized leaders with capital allocation chops. Tile Shop’s founder/CEO stepped down in October and was replaced by its COO, who previously worked at Best Buy which, last we checked, does not sell much tile. Tile Shop also admits that it hasn’t done enough to develop and promote talent at the store level.

This is from the MF, which never sees a stock they won’t hold forever.

And why in the world would you still be in TCS? Every quarter is a disappointment, and there is no reason to think that will change. It’s another that I took a brief look-at position when it was recommended, and quickly got out when I read the CEO’s well-intentioned remarks. Something like “Our employees come first, and then our customers”. I figured stockholders come last, and that’s the way it has turned out.

And I know CLNE is a tiny position, but it seems like a failed company. Why not reallocate your assets.

Looking back at what I’ve written, I guess I’m asking why you would carry so many positions, and given that, why you haven’t exited a number of failed positions: TTS, TCS, CLNE, and even INVN. They seem to have little going for them except that you are already in them. I doubt you would dream of buying them now if you didn’t already have a position in them. Just wondering.

I’ve always had trouble buying restaurant chains. They seem inherently limited. How many outlets can you build without getting to a point of diminishing returns. I know the Fool has done well with some of them but it’s just not my thing.

Best

Saul

[WealthRatio]

This is from the MF, which never sees a stock they won’t hold forever.

That is not factually correct. LTBH was preached and largely practiced in only some of the newsletters and/or by very small set of individuals. Over time (last 10 years), in SA, LTBH came to mean as “LTBH as long as the company stays great”. The only LTBH at portfolio level is being practiced by Tom Gardner’s EP where every stock will be held for 5 years no matter what (even if company is sold - yeah that is how irrational it is) and I challenged him on the boards with the question that what happens after 5 years - whether a company is automatically qualified for a sell after 5 years. Also, how is 5 years of hold everlasting? He did not have satisfactory answers to any of these questions. Bottom line LTBH is preached and practiced to some extent only in limited quarters of TMF. BTW, the service that sold TTS, also sold APPL and SWIR with different logic of course. the services that originally recommended these stocks are still holding them tight. So all of this sell business has little to do with LTBH by a long shot.

The only individual that I came across that truly practices LTBH at a large scale and a multi decade basis is TMF1000 and he managed to retire at 40. He has been playing the LTBH game for last 50+ years with over 100 stocks now with extraordinary results that really pop out.

I am not contending the virtues or demerits of LTBH here, just pointing to the factual situation on the ground around here.

Anurag