Now I was looking and they’re now Bread Financial?
I actually used them to buy a new Weber gas grill, it was like $1,200, but the BBQ Guys site had this deal, no interest for 12 mos, just a monthly payment, so I said sure, I’d done one before just for S’s and giggles.
There are a lot of these pay over time deals now, any comment on the economics? Either BBQ Guys or Weber had to eat something to discount the present value to offer me 0% interest. I’m 800+, but not everyone is. Interest must enter the picture somewhere, I don’t recall any sort of credit check.
For starters, the alternative is usually accepting a credit card that would charge BBQ Guys a fee for the transaction, so they are normally discounting maybe 1.5% to 2.9%. I think they’d easily agree to this discount to Bread Financial.
But then there is the fact that allowing payments like these increases the amount of sales BBQ Guys can make today to people who would be saving up the money otherwise (and buying 6 months from now or possibly making a decision to buy from someone else). So I think they could even justify paying Bread Financial more than they would a credit card company.
On the Bread Financial side, I’m sure penalties are severe for missed payments just like you’d have for credit cards.
It’s not that they are Bread, exactly.
In late 2020 they bought the company that does business under the Bread name.
It seems the latest thing is just renaming themselves for their subsidiary, a pretty common thing.
Especially when you think the subsidiary is more attractive than the parent for some reason.
Of course, precisely why the ADS parent (under the ADS name, the Bread name, or any another name --“Rose”?) is so disliked by the investment world continues to mystify me a little bit.
Trailing earnings yield 17.4%
Current year estimated earnings yield 19.9%
Next year analyst consensus earnings yield 20.3%
precisely why the ADS parent (under the ADS name, the Bread name, or any another name --“Rose”?) is so disliked by the investment world continues to mystify me a little bit.
Perhaps because over the last 5 years it has dropped from 200 to 59?
Yahoo rates it “undervalued”, though.
A rare “shoot first, read 10-K later” if you will.
I like it~~
We’ll make a quant of you yet!
There are many investments that have some quite risky outcomes, but some other outcomes that are very good.
If the good outcomes are sufficiently good and/or sufficiently probable, the “expected value” can be quite high.
(expected value in a fairly strict sense: the sum of all possible outcomes, each one weighted by its probability of occurring)
A collection of such positions, appropriately sized, and whose risks are not correlated, can make a very nice portfolio indeed.
The quant view example:
e.g., the top 40 stocks from the Value Line 1700 ranked by reported ROE returned 5.6%/year more than the S&P 500 in the 20 years 2002-2021 inclusive, after trading costs.
(under certain assumptions, ask for details if you’re interested)
And beat the S&P 500 in 2/3 of rolling years.
Lots of individual picks were losers, 36% of them, which makes sense since there is zero vetting of the candidates.
But if each individual pick was a “pretty good bet”–had a good central expected return–then why not?
Your reasoning on ADS is very much in keeping with this.
The “base rate” is probably good: the average outcome starting from this class of situation.
Buying stocks with earnings yields over 10%, rising earnings and not in trouble.
That doesn’t mean any specific opportunity will work out, so position sizes have to be considered carefully.
But if somebody is giving you better than even odds, you’ll do better in the long run taking the deal.
Just don’t bet the rent.
Buying stocks with earnings yields over 10%, rising earnings and not in trouble.
Such simple criteria does seem like a no-brainer. Have you previously run a VL backtest on such a screen? How does it compare to the top 40 by ROE example?
But I wonder about the possibility that the “smart money” has priced in some kind of disastrous outcome to earnings a few years down the road. One example that comes to mind: strong competition on the verge of entering a market. Current and even near future earnings might be growing, but a new player with a strong advantage could scoop up market share rapidly (in theory).
Some contrarians might even argue that the death of WEB could fall into this category - if BRK’s success was due to some innate ability of WEB that could not be transferred to the next in line heir, the stock could look really undervalued right up until the point of death where earnings begin to stagnate/decline.
I wonder how common these scenarios are - how much credit we can give to collective market intelligence, and how much that intelligence has grown with the ever growing accessibility of big data.
But I wonder about the possibility that the “smart money” has priced in some kind of disastrous outcome to earnings a few years down the road.
The last 5 years are good economic conditions. In those conditions, they had 10% of their receivables in doubtful, and charged off.
Now, we have a determined Fed (!?) trying to break the back of the inflation with rate raise, and willing to engineer a recession. IN a recession what kind of charge-off we are looking at?
When you are carrying $18 B in debt against $15.5 B receivables, which could face higher charge off than the normal 10% (if you know the credit card industry you will know how high that is to begin with), on a $3 B market cap, what can go wrong?
The turkey is so gracious to overlook occasionally the farmer is not that disciplined in feeding it on time, and noticed of late the farmer is getting his act together. The winter is coming err Thanksgiving is coming…
Buying stocks with earnings yields over 10%, rising earnings and not in trouble. … Such simple criteria does seem like a no-brainer. Have you previously run a VL backtest on such a screen? How does it compare to the top 40 by ROE example?
Yes, I’ve tested such things a lot.
It has more moving parts, so the answer depends on exactly how you construct the test.
The quick answer would be “not as good”–at least not without so much tuning that you begin to doubt it.
As a general rule, I find that high earnings yields (low P/E) make a good “final sort” when you’ve
already limited yourself to a modest number of value firms using other meaningful criteria.
e.g., cutting a list of 15 or 30 stocks down to a list of 10, or something like that.
But not particularly good as a first cut thing to look for. Too many ways it can be misleading.
High ROE is quite odd in that it is so simple yet works so well.
Even without what we call “crap filters”.
For example, the specific first example ROE approach mentioned in this post … https://discussion.fool.com/isn39t-mi-nothing-but-backtests-on-a…
… has returned 23.5%/year in the subsequent 30 months since the post, versus 17.8%/year for SPY.
I find ROE combines very nicely and flexibly with high rate of growth in sales per share in the prior 5 years.
It also combines well with the tiniest little bit of momentum:
First, eliminate the 10% of stocks closest to their 52 week highs. That crowd sources the “crap filters”: these stocks are deeply out of fashion for some reason.
Quite often it’s a good reason.
Then from the remaining 90%, find the 20 or 40 or whatever number of highest ROE firms. Buy, hold 1-3 months, repeat.
Example: Jan 2000 through Feb 2022 inclusive, 20 stocks reconstituted and rebalanced monthly beat the S&P by 9.7%/year after trading costs.
(assuming 0.4% round trip cost to trade)
That’s quite a bit. The difference between turning $10k into $44k in 22.2 years, or turning $10k into $304k.
Admittedly January 2000 was not a particularly lucky starting date for SPY, but that doesn’t dominate the result.
It did better than SPY in 76% of rolling 12 month periods.
In backtest, anyway : )
I was listening to an interview with Greenblatt and quite surprised to hear the magic formula had underperformed the S&P since 2011? Perhaps I heard that wrong.
For example, the specific first example ROE approach mentioned in this post … has returned 23.5%/year in the subsequent 30 months since the post, versus 17.8%/year for SPY.
And a nice thank you for that post. I used a slightly modified version of your suggestion for almost 2 years and my records show a 5%/yr advantage over the S&P before I moved a significant portion to safety.
I was listening to an interview with Greenblatt and quite surprised to hear the magic formula had underperformed the S&P since 2011? Perhaps I heard that wrong.
It’s worse than that.
Sometime around 2006 or 2007 I did a backtest on his Magic Formula. My backtested results were about half of his claimed results. So, yeah, he finally admitted it.
It’s worse than that. Sometime around 2006 or 2007 I did a backtest on his Magic Formula. My backtested results were about half of his claimed results. So, yeah, he finally admitted it.
Indeed.
A lot of very competent people really tried to duplicate the results he reported from the strategy he reported in the time frame he reported.
The performance wasn’t there, despite many wanting it to be there.
So, either there were some key criteria that he used that weren’t disclosed, or his tests had bugs.
I don’t suspect him of fibbing.
But the opportunities for fooling one’s self with an overtuned backtest are far greater than one supposes, even for those who know this rule.
The Value Line timeliness model claimed to smash Mr. Market all while the Value Line fund using that model performed pathetically. There’s an endless line of intelligent people lured into these mental shortcut scams.
First, eliminate the 10% of stocks closest to their 52 week highs. That crowd sources the “crap filters”: these stocks are deeply out of fashion for some reason.
Jim, thanks for the informative reply. Was this line a typo though? I assume so, I’m just not able to discern what the correction should be. Is your test based on eliminating the 10% of stocks closest to 52 week low or keeping the 10% of stocks closest to the 52 week high?
Sometime around 2006 or 2007 I did a backtest on his Magic Formula. My backtested results were about half of his claimed results. So, yeah, he finally admitted it.
Do you mean the absolute results were half, or the outperformance was half?
IIRC, the Magic Formula is: choose stocks with good returns on capital (quality) and good earnings yields (cheap), buy an equal-weighted slate of them, hold for a year, repeat.
That sounds an awful lot like some of Jim’s screens.
IIRC, the Magic Formula is: choose stocks with good returns on capital (quality) and good earnings yields (cheap), buy an equal-weighted slate of them, hold for a year, repeat. … That sounds an awful lot like some of Jim’s screens.
It is, indeed.
And, it does seem to be market beating on average, depending precisely how you construct the test.
But the tested level of outperformance was very small, and the claimed level of outperformance was huge.
Working from my wildly fallible memory, wasn’t the reported return something like 29%/year?
Not gonna happen.
“Sometime around 2006 or 2007 I did a backtest on his Magic Formula. My backtested results were about half of his claimed results. So, yeah, he finally admitted it.”
Do you mean the absolute results were half, or the outperformance was half?
The backtested CAGR was half what he claimed in the book. Still outperformance, just not as eye-popping as claimed.