OT: Jim & DG

All power to Jim again. Unfortunately I was not brave enough to follow him, but do you notice what his last tip is doing? DG is at $230. When Jim recommended it just some weeks ago it was where, at or even below $200?

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I like Jim’s KMX mention as well after it’s nosedive and basing since November. Seems like a solid value and reasonable risk/ reward here (33% off its high, FPE 13.5, PEG<0.8, ROE 26%). Interesting here.

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When Jim recommended it just some weeks ago it was where, at or even below $200?

It was at $192.43, so up about 20% in a bit over three weeks.
https://discussion.fool.com/well-ot-not-a-table-pounder-35058103…

I was about a day and a half early for the (most recent) low.
It’s better to be lucky than smart.

For alternatives—
I keep waiting for a big dip on Dollarama, DOL.TO, and keep being disappointed. Now it’s really expensive again, so (once again) I’ve missed out.
Canadian dollar store chain. Better returns, but more debt.
Unlike the two big American chains, it doesn’t seem to be on sale as often.

The progression of EPS is very smooth for all of these fellows as a rule, so old fashioned P/E isn’t such a bad metric, with the occasional exception.
Dollarama dipped only as low as 19-21 three brief times in the last decade, now at 34.
Too rich for me.

Which points to one of the odd things I like about DLTR and DG, the big Americans.
For some reason their steady earnings are ignored by the market, and the swing in valuation multiples in any given two year period is usually huge.
Great pick for a swing trader. Buy low, sell high, repeat.
But the long run returns are great too, so you can do that in addition to a long term core position.
e.g., Dollar Tree was trading at $85 in September and is now at $157. (just sold my last bit yesterday)
But the business has not really changed that much.

Another chain that I like is the one that can’t be named, ATD.TO. Different business, but the model rhymes in some ways.
Probably still not a bad buy at current prices (C$53), though any dip would be a good time to add.
It would not surprise me to see 15% lower, for a bit more attractiveness.

Jim

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Jim, can I ask why your views on dollar stores are different from your general view on retailers and fads previously discussed and not touching the sector? (retail) etc

Jim, can I ask why your views on dollar stores are different from your general view on retailers and fads previously discussed and not touching the sector? (retail) etc

There are industries that are generally too risky or on average losers, and best avoided.
Concept restaurants, miners, banks, and so forth. Retailers as well.
I avoid those industries…in general.

But there are rare exceptions within those industries that are outstanding businesses.
To make such an exception you have to know and trust that specific company very very well.
Extraordinary claims require extraordinary evidence.
That might come from a lot of study and contemplation, or it might be borrowed by piggybacking on
the due diligence of someone who you believe has done that work and is good at it.
As a general rule I would (almost) never invest in a bank that Mr Buffett hadn’t invested in, for example.

A good example is insurance, an industry that I always eliminate when doing quant investing.
Management has the means, opportunity, and motive to mess with apparent earnings and book value…for a while.
But Berkshire is/has a very good insurance business. I know them and their reputation enough to trust that this is so.

In the case of dollar stores, I was involved in the business for a while as a venture capital investor,
and I therefore knew and worked with some people that understood the business very deeply.
(for example they offered their opinion that Dollar Tree had the best merchandising in the business, at that time)
My opinions are based on those inputs, and of course the impressive financial results of the companies.
And there are also the very large profits I’ve made over the years…a bit of positive feedback which is probably at least partly a good thing.
Together, they lead me to believe that the dollar stores are a worthy exception to a “no chain retailer” rule.

The risks are few, and very obvious. The most often cited one is the China heavy supply chains.
And, more generally, that they are importers: a big US dollar fall would not be good for them.
Though it might hurt their competitors as much or more, which might mean a wash.
The advantages are quite compelling, though. A simple business to understand, vast profitability and cash generation, anti-cyclical.
DG’s EPS have risen about 22%/year in the last decade, and the share count is down by a third, with low debt: they could pay it all off with 18 months of profits.
Return on total capital around 24%: not to be sneezed at.
Dollar Tree has managed EPS growth of “only” 16%, for one-time specific reasons, but is still a fine business.

Jim

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Jim makes some real interesting points about the Dollar stores vs retailers.
I spent my career in enterprise software sales - and anytime I had to deal with
the corporate teams at the Dollar stores - it was absolutely brutal. From the
moment you walk in the door - it’s all about price. Even the IT guys, I’m not
talking about the buyers or the purchasing teams. They are always demanding
the lowest price even before they understand your product. I came away with
the assumption that all employees that had any contact with vendors were
trained to do so. And you knew once your user buyer had selected your product
you’d be handed off to the professional purchasing staffs for further abuse!

I hated selling to these guys.

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“And you knew once your user buyer had selected your product
you’d be handed off to the professional purchasing staffs for further abuse!”

I was in IT at a very senior level for quite a while. Some clients are not worth having. Also, when clients are setting your prices, you are screwed.

Best to simply walk.

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Is the current DG fall because of the Target miss and general retail downdraft, or is something else going on?

A high level view: I can never figure it out.
The range of 52 week low to 52 week low for these companies just seems to be wider than for other firms.
The drift in and out of fashion for no deserved reason I have ever spotted.
Each time there seems to be a plausible back-fit rationale, but it’s different each time, so is it the real reason?

Great for traders. Or “dynamic position sizing” if you want to sound fancy.
I sold 80% of my position at an average exit price over $250.

Excuse me, I need to go look at maybe making a buy order…

Jim

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DG a buy?

DG a buy?

One possible view:
Not a screaming buy.
But I think one will do well from here over time.

The current valuation multiple is not stretched; historically speaking it’s pretty average.
EPS trend in the last decade up inflation + 14.8%/year compounded.
That could slow down by a whole lot and still offer a very pleasant return.

The bonus things:
Simple to understand and relatively predictable business.
Mammoth cash generation.
Great balance sheet.
Recession resistance.

Jim

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Is the current DG fall because of the Target miss and general retail downdraft, or is something else going on?

Perhaps it’s because of the reasons for the Target miss and the general retail downdraft?

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Perhaps it’s because of the reasons for the Target miss and the general retail downdraft?

Walmart posted earnings (miss) yesterday and now Target today - this is dragging the entire sector down as it’s viewed as a more systemic issue for all retailers. I feel fortunate that I sold all my COST, DLTR and DG in the past few months.

tecmo
…

Hi Jim,

Looking at beaten up retailers that are selling at average multiples, what do you think about Costco at $430? It peaked at $612 just six weeks ago and is now down 30% from that all time high. It’s trading at about 34x ttm earnings, so not cheap. I sold in March and am tempted to buy back at these prices.

PP

BTW: COSTCO, DLTR, and DG all report on May 26th.

tecmo
…

BTW: COSTCO, DLTR, and DG all report on May 26th.

To me that seems like a good reason to sit it out for now. I wouldn’t expect a surprise on the upside that would move the stock up. I would say there is a 60% chance for a surprise on the downside that moves them down. I’m saying this without having actually looking at any guidance on those stocks in particular, just based on general economics.

Looking at beaten up retailers that are selling at average multiples, what do you think about Costco at $430?
It peaked at $612 just six weeks ago and is now down 30% from that all time high.

I’m not an expert on Costco. Ask someone who knows them better.
But, like my mom, I’m never at a loss for an opinion.

With hindsight their historically high valuation has been deserved, but it has always been high enough that I have stayed clear…
I don’t accept that much optimism without a lot of analysis time, which I haven’t put in.

But from what little I know, it seems that it has fallen from “pretty overvalued even for Costco” to “not as badly overvalued, given that it’s Costco”.
Based on VERY primitive analysis, it’s not [yet] cheap enough to expect a reliable double digit return in the next 3-4 years if ending multiples and growth rates are typical.
Emphasis on “very primitive analysis”. Ask someone who knows them better.

In other news, strangely on topic, Berkshire’s most recent trade was $305.44 per B share.
At that price, history suggests one might reasonably expect a one year return of inflation plus 10.6%, plus trend value growth thereafter.
That figure will certainly be wrong, but the idea is that it’s a 50/50 shot whether it’s too high or too low.
That’s not bad.
I was nibbling. In fact, I bought a little stock after hours.
At even that price, Berkshire is still up 2.2% year to date. S&P total return -17.1%.

Jim

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In fact, I bought a little [BRK] stock after hours.

So, that’s not as aggressive as DITM Calls. On the thinking that, given the market conditions, you surmise that the stock has the potential to follow the market down some, so it’s not the time to add leverage?

Tails

So, that’s not as aggressive as DITM Calls. On the thinking that, given the market conditions,
you surmise that the stock has the potential to follow the market down some, so it’s not the time to add leverage?

A simpler explanation is that the options market was closed : )

More seriously, when you have a meaningful pile of cash, it makes sense to buy stock on wildly down days rather than options.
That’s because time premiums tend to be very high during panicky day. Why waste money buying time value on a day that time value is expensive?
If you like you can switch that to calls some later day when the market is calmer and the stock price is higher, saving a whole lot of money on time value.

And, as you note, Berkshire is a good pick at these levels but not quite a screaming deal at the moment.
Current price is $303.78 per B as I type.
At that level, it has been cheaper than this 34-39% of the time since the newer/lower valuation era started in 2008.
(depends on what valuation metric you use)
Forward returns starting from this valuation level, again in the modern low-valuation era, have been around inflation + 10.9% in the subsequent year.
Pretty good. But not screamingly good [yet].

Jim

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And, as you note, Berkshire is a good pick at these levels but not quite a screaming deal at the moment.
Current price is $303.78 per B as I type.

I’m holding out for the $215 that I got it for in 2019. Too bad I didn’t sell it at 350.