My portfolio at the end of August: Update

Investment Analysis Clubs Saul’s Investing Discussions
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I did my update on all my positions last weekend when I had more time, but it was three days before the actual end of the month. I can give a quick update on my monthly totals including the last three trading days of the month. Leaving out three days seemed like a lot. Here are the totals:

At the end of July my portfolio was at 99.9% for the year. I am now at 105.6%, so it was a very good month (up 5.7%), and I am at my highest level of the year. I’ve even caught up some on the S&P 500. The last I looked, at the end of June, it was doing 5.8% better than I was. As of the end of this month it’s doing 0.6% better than I am, so I’ve caught up 5.2% in the two months.

But who knows though how the rest of the year will go!

Best,

Saul

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Saul, I recall you mentioned why you prefer to have a concentrated portfolio.

I can see that you clearly have a knack for picking stocks that end up going higher. Even AMZN which is not traditional growth at reasonable price pick went up after you picked. I dont follow all your stocks, but some that I followed or bought after you did go up. E.g. LGIH. I remember, a long time ago you were a huge fan of ELLI. That stock has done well. I stayed away because of philsophical differences. I don’t like to buy companies with shoddy GAAP earnings and inflated adjusted earnings (I know you disagree, but leaving that aside, you had a great call on ELLI too)

Which brings me to the question, if you are so good at picking stocks (I know you are), then why not spread your eggs a little wider. Whether you have 6 stocks that go up 10% or 16 that go up 10%, the returns will be the same. On the other hand, likelyhood of massive loss is less when you have a portfolio with more than 20 or 30 stocks. I would prefer if you had 50 stocks. (as long as you didn’t have to compromise on quality to increase the quantity) Or is that too difficult to follow? Do you usually spend a lot of time understanding the ins and outs of your holdings?

Of course I ask for this with a selfish motive. My goal is to get more Saul ideas to pick from.

Huddaman

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Which brings me to the question, if you are so good at picking stocks (I know you are), then why not spread your eggs a little wider. Whether you have 6 stocks that go up 10% or 16 that go up 10%, the returns will be the same. On the other hand, likelyhood of massive loss is less when you have a portfolio with more than 20 or 30 stocks. I would prefer if you had 50 stocks. (as long as you didn’t have to compromise on quality to increase the quantity) Or is that too difficult to follow? Do you usually spend a lot of time understanding the ins and outs of your holdings?

Hi huddaman. Thanks for the compliments. You guessed all the answers:

  1. Fifty stocks would be too hard to follow. I keep track of them, and try to understand them, and read the earnings and conference call transcripts, and get news feeds on them, etc. Impossible with 50.

  2. Of course I’d have to compromise on quality. Think of it this way: If you were trying to average 20% for a year, you probably could find 10 good stocks that would give you a good chance of hitting that goal. On the other hand, you would probably have zero chance of finding 200 stocks that would average 20%. That’s more than the 50 you suggested but it’s for illustration. After the first 10, each one you added would dilute your chances somewhat. If it was as good as the first 10 it would have been in the first 10.

  3. There is the question of risk. If you only have 1 or 2 stocks, if it or one of them blows up you are very vulnerable. I therefore try to compromise at about 10 stocks at an absolute minimum, to 20 at an absolute maximum, to be able to have an assortment of excellent companies, but not exposing myself to excessive concentration risk. By coincidence, I’ve read that statisticians have studied this and decided that once you get to 15 stocks, the reduction in risk in going to 100 or 200 is minimal. (But, going back to point #2, in my opinion you would lose any chance of excellent gains, and would simply mirror the market, and might as well buy an index fund).

Hope that this helps,

Saul

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Of course I’d have to compromise on quality. Think of it this way: If you were trying to average 20% for a year, you probably could find 10 good stocks that would give you a good chance of hitting that goal. On the other hand, you would probably have zero chance of finding 200 stocks that would average 20%. That’s more than the 50 you suggested but it’s for illustration. After the first 10, each one you added would dilute your chances somewhat. If it was as good as the first 10 it would have been in the first 10. – Saul

My personal way of looking at it is this: Look at your investment ideas and rank them. You’ve put your money into your 20 very best ideas (as an example). Why would you put money into the idea ranked #50 instead of your top 20? Why invest in #100, your 100th best idea (meaning you think there are 99 better places to put your money? Yes, I know that some prefer to be “diversified” or to have many lines in the water in hope of doing well on some. And, no, it isn’t reasonable to take this thinking to the opposite extreme of placing all your money on your #1 idea, unless you don’t have much money invested at all.

I’ve got 58% of my portfolio in my top five (STMP, SKX, AAPL, PCLN, BOFI). Too much in #1, but I think it’s a bet I’m willing to take. For now. Probably sell some in the next year, especially if it meets my expectations.

Rob

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My personal way of looking at it is this: Look at your investment ideas and rank them.

I find that too rigid. As prices move up and down pitches become fatter or thinner. My method is to have a wish list (now containing about 60 stocks) and to buy and sell them opportunistically. I have ten to twelve positions at any one time.

Denny Schlesinger

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Danny your method seems intriguing and in part mirrors Sauls when he sells the positions doing well ( or over extended) and buys those that have fallen.

My question to you is how do you keep track of a list of 60 stocks such that you have enough info on them ? How do you “know” that Stock A is overextended and wont rise further and that stock B has fallen but not for a bad reason and should be bought in order to participate in the coming rise.

I think most of us would sell a stock only to see it rise further and put our profits into a fallen stock only to see it fall further.

Any insight would be appreciated.

Thanks

Craig

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>I’ve got 58% of my portfolio in my top five (STMP, SKX, AAPL, PCLN, BOFI). Too much in #1, but I think it’s a bet I’m willing to take. For now. Probably sell some in the next year, especially if it meets my expectations.

Assuming STMP is #1, care to share why Stamps.com excites you?

-Frick

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My question to you is how do you keep track of a list of 60 stocks such that you have enough info on them?

I don’t. Stocks get into the list because they have a long history of fast growth and they are not disqualified for some reason or other. When I have cash to spend I don’t have to look at hundreds of stocks, just these sixty or so and it’s more TA than FA that needs be done.

Yesterday Balchem Corp. (BCPC) came into focus because it made a new all time high. I could not remember why I had never bough it. Looking at the balance sheet it reminded me that the assets are mostly “goodwill” and “intangibles,” not the kind of thing I want to invest in.

How do you “know” that Stock A is overextended and wont rise further and that stock B has fallen but not for a bad reason and should be bought in order to participate in the coming rise.

I don’t. I sell mostly because a call gets assigned or because the price is way higher than the strike price. A funny thing happens when that is the case, there is almost no time value in the option, it’s mostly intrinsic value. This part of the discussion would take us into option trading and I’m not going there in this thread. I don’t “know” that a stock is going to rise, all I can know is that I like the company and FA says it’s a buy.

I think most of us would sell a stock only to see it rise further and put our profits into a fallen stock only to see it fall further.

I don’t sell stock A to buy stock B. I only sell if the stock gets called as I explained above or because I realize I made a mistake or the story has changed for the worse. One exception is when a stock reaches the end of the line in a buyout like ARMH being acquired by Softbank: end of story, sell.

Denny Schlesinger

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Assuming STMP is #1, care to share why Stamps.com excites you?

Funny, I’d like to know that too. I bought STMP at ~80 and it’s been going up, but I kept getting less and less excited about it. Finally sold and took profits today.

The main reason for my lack of enthusiasm is that the rapid growth seems to be in the rear view mirror. Not sure what the bull case is at this point. Perhaps it continue to will grow faster than expected.

Bear

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Looking at the balance sheet it reminded me that the assets are mostly “goodwill” and “intangibles,” not the kind of thing I want to invest in.

Unless a business like railways acquires another railway company, you will always have “goodwill” when you acquire another competitor. We live in a world of intangibles. Facebook is a giant intangible asset worth over 300B. Their balance sheet is much smaller and they trade for over 17 times book value.

If FB goes on and acquires Snapchat today for $3 billion, market will probably applaud it as a super cheap acqusition, but that would mean, there would be an increase in goodwill on FB’s balance sheet for almost $3 billion.

On the other hand, if a company acquires an profitable factory with a lot of heavy machinery for below tangible book value, then there will be zero goodwill for the accusation, but the market might deride it as an unfavorable investment.

When businesses are successful, especially the service ones, and when they get acquired, the acquirer has to account for the price paid in excess over the tangible book value as a goodwill, and there is nothing wrong or undesirable about that!

In case, you are still not convinced (I am sure you aren’t), look at Berkshire Hathaway’s balance sheet. They have 79 billion dollars worth of goodwill posted on their balance sheet.

Goodwill is not something you add to in normal course of business (from accounting standpoint). You only add (Debit entry) to the goodwill account during an acquisition. On the other hand, you can write off a portion of the Goodwill (but this amounts to a expense on the Income statement) if it is later determined, that the price paid to acquire an asset (For e.g. what Microsoft paid for Nokia or Skype could have been written off) was too much.

But the existence of Goodwill on the balance sheet in itself is not bad.

What matters is whether the company is good or not. If they are good and known to make decent acquisitions, then $1 billion worth of Goodwill on the balance sheet could be even worth $3 billion today. On the other hand, if the management has made foolish decisions (E.g. Yahoo paying something like $3 billion for Tumbler), then the amount shown on Goodwill could be a future candidate for write offs (not a good thing)

For e.g YHOO only has over $400 million in goodwill. You might get attracted to it. But don’t be fooled. They had over $5 billion in goodwill and they wrote off (called impairment of goodwill) most of it because you are supposed to write it off if the asset they acquired proves to be a bad purchase (there are ofcourse accounting rules governing this).

BTW this is another reason I don’t ignore GAAP earnings. Impairment is a non-cash charge. Companies typically report adjusted earnings where they add back the impairment charge to the GAAP earnings. However, the truth is, they paid that money back when they made the bad acquisition. Bottom line, they try to hide the one time charge of impairment under the carpet (the goal is to present a picture of the business potential). But one more goal is to present how you did in the past. Business potential can be presented by reporting projected earnings. I hate it when companies make large adjustments to GAAP numbers to present a false rosy picture.

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I suppose I might have been more explicit in my post but I often assume – wrongly – that people know what I’m thinking.

But the existence of Goodwill on the balance sheet in itself is not bad.

I agree entirely but that is not my issue with Balchem Corp. (BCPC). Take a look at their balance sheet and tell me if you would buy the stock. Hint: a huge pile of debt is backed by a huge pile of intangibles and it is a chemical company, not asset light like the companies you are using to support your argument.

Compare Balchem’s balance sheet ratios to Berkshire Hathaway.

Denny Schlesinger

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Danny,

I diagree. Any good business that can earn a sustainable economic profit will sell for a price greater than ( or significantly greater than) it’s book value. Naturally an acquirer of that business will record the excess as goodwill. Even a capital extensive businesse can be worth significantly more than the book value of its assets. The reason I used capital light businesses as an example was to simplify the concept. A chemical bsuiess or railway in a unique position to earn a high ROE will indeed sell for premium to book in a normal market.

I understand you won’t agree.

Cheers,

Huddaman

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I understand you won’t agree.

Do you read minds? :wink: BTW, it’s “Denny” with an ‘e.’

Let me start from the beginning. As an investor I have an investing strategy. I’m in the market for growth, I’m not a value investor. A value investor (among other things) dissects the financial statements in the expectation of finding great investments. This is a hangover from the days when bonds were investments and stocks were speculation. When Ben Graham started out, security analysis was doing the numbers on bonds: price, yield, maturity, interest coverage, etc. Determining the future of a company and it’s stock is not so easy. Having been a business owner and trained in accounting I don’t think that works. So I use a different approach.

The requirement (singular) for a stock to be added to my wish list is fast growth over an extended period of time, ideally over 20% compounded growth over more that 20 years. That’s it. Now come the hurdles that the company must pass to get put on the list. The most important ones:

  • A business model I like.

  • An industry I like: commodities and credit risk excluded (banks).

  • A solid Balance Sheet: Any blemish (too much debt, too much goodwill, etc.) excludes the stock.

These are not judgement against the company, they are safe guards for my investment. “Invest like an owner” is BS. Invest like an investor. Running my own companies was very different from buying shares in the stock market, you make no difference to the company whose shares you own, the most you can effectively do is to sell the things. So I want to buy the pieces of paper that will appreciate the fastest with the least risk.

Balchem Corp. (BCPC) could be a fantastic business but it didn’t pass the Balance Sheet hurdle.

My point is that I’m not arguing in favor or against the origins and merits of goodwill, that, for my investing strategy, is irrelevant. BTW, I have been talking about the creation of goodwill on technology company balance sheets for years. It’s the result of absurd GAAP accounting. According to GAAP the Windows OS is worthless! Mr. Market thinks there is value in Windows. Were someone to buy Microsoft, they would have to add a huge pile of goodwill to the balance sheet. Had the development of Windows been properly accounted for, capitalized instad of expensed, that goodwill would never have been created, Windows would show up under fixed assets just like a factory of a chemical company.

Think about it, Windows does not appear on the Microsoft balance sheet, it’s been expensed. But if someone buys Microsoft, Windows automagically reappears on the balance sheet disguised as goodwill. How reasonable is that?

Denny Schlesinger

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If you can open your mind for just one second, please read this next statement.
Goodwill on the balance sheet is good. Impairment of goodwill charge on the income statement is not good.

Do you read minds?

Only sometimes. :L

When Ben Graham started out, security analysis was doing the numbers on bonds: price, yield, maturity, interest coverage, etc. Determining the future of a company and it’s stock is not so easy. Having been a business owner and trained in accounting I don’t think that works.

OK…

The requirement (singular) for a stock to be added to my wish list is fast growth over an extended period of time, ideally over 20% compounded growth over more that 20 years.

Good luck with that. Sure, if you throw darts, in 20 years, you will realize that you picked a few lucky ones that grew at 20% for 20 years straight, though there is no way you can spot a company with reasonable accuracy that is expected to compound earnings or cash flow at 20% for 20 years.

Any blemish (too much debt, too much goodwill, etc.) excludes the stock.

Again, good will on the balance sheet is not a blemish. I knew you had closed up your mind. If anything, a good business with that kind of potential has a higher chance of goodwill on the balance sheet assuming it is an acquirer and the industry itself ha high value businesses selling for premium to book. There is no way a low ROE business trading for close to book is going to generate you 20% CAGR for 20 years straight!

Balchem Corp. (BCPC) could be a fantastic business but it didn’t pass the Balance Sheet hurdle.

This is where I actually turn to learning something from you. Can you educate me (being sincere here) what would attract you to BCPC at a PE that appears very rich, and where there the revenue grew only at 2% in 2015 and is expected to grow only at 5% in 2016. Even if BCPC was not an acquirer in the past (hence no goodwill) and presumably has debt under control, why would you expect it to grow at 20% for 20 years? Also, have you looked at their GAAP EPS vs Adj EPS? I dont know the reason for this difference. Whether it is merely depreciation greater than capex or a lot of stock based comp or a lot of non-cash goodwill impairment, but I dont like the difference.

Again, sincerely, I would urge you to re-consider your stance on Goodwill. Even Middleby, another serial acquirer has 600MM in goodwill on it’s own balance sheet.

I don’t know the nature of business you ran. But even in your own business, if you acquired another competitor, you would need to be willing to pay a goodwill. You can’t generally expect to buy a profitable competitor for the cost of buildings, materials and machinery. You have to come up with a price for the value added on top of those basic investments.

For e.g. when Berkshire bought PCP for an enterprise value of around 35B, PCP was selling for around P/B = 3. This means there was billions of dollars of Goodwill added on BRK/B’s balance sheet as a result of PCP acquisition.

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If you can open your mind for just one second, please read this next statement.
Goodwill on the balance sheet is good. Impairment of goodwill charge on the income statement is not good.

Let’s suppose Elon Musk rescues SolarCity by overpaying for it. The overpayment becomes “goodwill.” It certainly was Musk’s goodwill that rescued SolarCity. But the goodwill on the balance sheet is crap because SolarCity is crap. Sorry, you can’t make blanket statement like “Goodwill on the balance sheet is good.” It might or might not be depending on what it is. But it’s not itemized so we don’t know what it is.

With GAAP the original meaning of goodwill has been lost, it was, indeed, valuable stuff that was accounted for as goodwill. Now it’s just a number, the excess over book value that you pay for it.

Sorry, my mind is closed to absolute statements about accounting. You have to know what the number really means.

Good luck with that. Sure, if you throw darts, in 20 years, you will realize that you picked a few lucky ones that grew at 20% for 20 years straight, though there is no way you can spot a company with reasonable accuracy that is expected to compound earnings or cash flow at 20% for 20 years.

I didn’t claim I could. You better read my post again.

Can you educate me (being sincere here) what would attract you to BCPC (notice I omitted the conditionals that follow)

24.1% average yearly growth over a period of 30 years. They must be doing something right.

http://invest.kleinnet.com/bmw1/stats30/BCPC.html

Now it’s a question of whether BCPC passes the hurdles. It does not.

why would you expect it to grow at 20% for 20 years?

I never said I did. You better read my post again.

Again, sincerely, I would urge you to re-consider your stance on Goodwill. Even Middleby, another serial acquirer has 600MM in goodwill on it’s own balance sheet.

I’ll leave that for value investors. Goodwill is just a line item on the balance sheet which is very far down on my check list. I only use it to disqualify investment candidates.

I think we might be testings Saul’s patience with this thread…

Denny Schlesinger

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Let’s suppose Elon Musk rescues SolarCity by overpaying for it. The overpayment becomes “goodwill.” It certainly was Musk’s goodwill that rescued SolarCity. But the goodwill on the balance sheet is crap because SolarCity is crap. Sorry, you can’t make blanket statement like “Goodwill on the balance sheet is good.” It might or might not be depending on what it is. But it’s not itemized so we don’t know what it is.

This is where I should give up. But will give one last try.

Whether he overpaid or not will be clear in hindsight, not now. But more importantly, if he overpaid for it and the Goodwill is indeed posted, then this Goodwill will need to be written off as impairment as per accounting laws. This impairment will show up in the income statement as an expense. In other words, if the Goodwill paid turns out to be unjustified, then it won’t stick for too long!

24.1% average yearly growth over a period of 30 years. They must be doing something right.

How do you come up with this? I think that number is more like 18% including dividend reinvestment since 1986. But I get your point, its very impressive. I wish you could share more about the unique opportunities you see with the company. I would appreciate it.

Also, bear in mind that AMZN grew more than 100 times in price over last 18 years or so. Law of law numbers will prevent AMZN or for that matter BLCM from repeating that performance.

I think we might be testings Saul’s patience with this thread…

Oh come on, you think we can’t discuss the concept of Goodwill on this board? You brought it up. I think your idea was misleading, so I decided to do a public service by clearing it up. If nothing else, an inquisitive reader will read up and decide for himself how to interpret goodwill.

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Whether he overpaid or not will be clear in hindsight, not now.

I evaluated SolarCity quite a while ago and it is my opinion that it is a terrible investment. Anything Elon Musk pays for SolarCity is wasted money, IMO. I don’t need to wait for confirmation. Now, should I be wrong, and it has happened, then all I lose is an opportunity but I don’t lose capital.

24.1% average yearly growth over a period of 30 years. They must be doing something right.

How do you come up with this?

I read the numbers off the chart:


BMW METHOD SCREEN, 30-year history ending 09/2016:
   * Using MIN RETURN FACTOR threshold of 2.000x
   * Using MIN RMS BELOW AVE CAGR LINE threshold of 2.000

          AVE      CUR     RETURN                    6-MO
TICKER   CAGR     CAGR     FACTOR      RMS   PRICE    CHG
---------------------------------------------------------
BCPC    24.1%    23.3%       1.20    -0.57   70.02    12%   Balchem Corporation

http://invest.kleinnet.com/bmw1/stats30/BCPC.html

I think that number is more like 18% including dividend reinvestment since 1986.

24.1% is the slope of the red line, it’s a calculated best fit curve. You probably are getting the 18% because you are using actual starting and ending prices.

I wish you could share more about the unique opportunities you see with the company. I would appreciate it.

I read the SEC filings and I didn’t like what I saw. I can’t recommend this company or this stock.

Also, bear in mind that AMZN grew more than 100 times in price over last 18 years or so. Law of law numbers will prevent AMZN or for that matter BLCM from repeating that performance.

This is a terrible argument, not because it’s not true, but because it makes you waste opportunities.

I watched a very interesting interview with Jeff Bezos where he talks about Amazon’s strategies and business model. If I had to rank the various brilliant businessmen of the Internet Age, Bezos would head the list, certainly the most successful retailer since Sam Walton. Consider that Amazon’s start is US centric with some 300 million inhabitants. Now he is tackling the two most populous countries in the world. China’s economy will soon overtake America. While I had my doubts about India on account of their over populist policies, it seems they have finally seen the errors of their ways. A freer democratic economy should be more efficient than the planned economy the Communist Party runs in China.

http://invest.kleinnet.com/bmw1/stats16/AMZN.html

Not all companies grow the same way. Retail has the peculiarity of drawing “S” curve price charts. Roughly speaking their lifetime is divided into three equal parts: a slow start taking up about a third, then the company ramps into high growth painting the curve in the hockey stick, the bottom of the “S” curve. As the business reaches around 80% market penetration growth slows painting the top of the “S” curve at around the second third. Then the company plateaus and it can remain a cash cow for quite some time. This is where WalMart is now.

http://invest.kleinnet.com/bmw1/stats40/WMT.html

So, yes, growth will slow, but there are many good years ahead before Amazon reaches 80% worldwide market penetration.

Denny Schlesinger

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I wrote
"Also, bear in mind that AMZN grew more than 100 times in price over last 18 years or so. Law of law numbers will prevent AMZN or for that matter BLCM from repeating that performance. "

You called it a terrible argument. Thank’s for the complement!

This is a terrible argument, not because it’s not true, but because it makes you waste opportunities.

By your “excellent” argument, if AMZN grew 100X over the next 18 years, it’s market cap would be a whopping $37.3 trillion. I like your spirit (or should I call it pessimism). In case you weren’t aware, the total of all 500 companies in the S&P500 have a market cap of $20 trillion.

To be fair, the only way AMZN’s marketcap could reach $37.3 trillion in the next 18 years is, if the US Dollar lost it’s value and we had hyper inflation, where $37.3 trillion does not mean much.

I guess you can reply to this and have the last word and we move on.

Cheers!

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I guess you can reply to this and have the last word and we move on.

Cheers!

I told you we should move on :wink:

I think we might be testings Saul’s patience with this thread…

Denny Schlesinger

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Retail has the peculiarity of drawing “S” curve price charts.
Denny,
It seems you’ve had your eye on the retail industry for quite sometime. Where do you place Skechers in the S curve? Early after the first knee?