Someone has explained nicely why I don’t own either NKE or UA. Me neither!
Sorry, I shouldn’t have been so flip, but I guess I just couldn’t resist. But this is supposed to be an educational board, so here goes. Most is straight from the FAQ (Post #7062).
Why I’m not in NKE
• I especially think of stocks growing at 30%-60% a year, and selling at 20 times earnings, as very secure because they have a big cushion. [Post 6092] (Nike Is no longer a fast grower)
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I look for a company that has a long way to grow. A company that I can hope will be at least a 3 bagger and maybe a 10 bagger.
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That means a company that has a long runway, that ideally can grow almost forever. What I mean is a company where the addressable market is so big that their share of it allows them to keep growing for the foreseeable future. That’s no guarantee that they will, but it’s better than a company that already has 40% of it’s total available market, for instance, and can only double once.) [Post 6]
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How do you know when a company is too big? Let me try some answers off the top of my head.
First, Look at SKX. Their market cap is less than 1/20th of Nike’s so you can easily imagine it doubling and doubling again, and if Nike just rises 5% to 10% per year with the market, SKX will still be under 15% of their market cap. On the other hand, can you imagine NKE doubling and doubling again? It’s impossible. They already have most of the market.
Now to generalize that: If a company owns just 5% of a market, it has a lot of room to double and keep on doubling, especially if the market is growing too. If the company already has 80% of the market, all that it can grab is the other 20% of the market (which is unlikely, anyway). If a company has most of the market because it just invented the market and has first mover advantage, and the market is hardly penetrated, it has plenty of room to grow (think Apple 10 years ago and the first iPod/iPhone). If it’s an old market and is saturated, that’s a different story. (I haven’t followed Starbucks, which you asked about, and don’t know how saturated their market is, but my guess is that they would have been a better buy a number of years ago than they are now, and that the coffee shop market doesn’t have too many doubles left.)
Finally, there is the problem of big numbers. If you have a chain of 200 stores and you can add 50 a year, the first year you add 25%, but the same 50 stores only adds 20% the second year and 16.6% the third year, etc. To maintain the same growth rate, you have to add a larger number of stores each year, and you run out of places to put them.
If you have another kind of firm, with $100 million in sales, and double it, the next year you will need to add $200 million to maintain the same rate of growth, and $400 million the next year, and it soon becomes impossible, except in rare cases.
Why I’m not in UA
• I especially think of stocks growing at 30%-60% a year, and selling at 20 times earnings, as very secure because they have a big cushion. [Post 6092] (UA is at some indecent PE ratio)
• Just out of curiosity I figured the average PE ratio of my eight biggest positions. These are rapidly growing companies but the average PE was 20.1. (This was back at Post #3943). Note that that goes against the Rule Breaker idea of picking overpriced stocks, or even ones with no earnings. Companies like Zillow, with a PE over 200 or something, may do just fine over the long haul, but I’ve decided “Not for me.” If I can find a rapidly growing stock with a reasonable PE, why buy expensive stocks where you hope they’ll grow into their price? [Post 3943]
I think that when UA is 5 times bigger, its PE could easily by 5 times smaller, because of slowing growth, giving you no increase in stock price at all. I’m not saying that would happen, but it’s certainly a very possible outcome.
I can buy Skechers, currently growing earnings MUCH faster than UA, at a price that is MUCH cheaper. At the midpoint of their outlook for the quarter just finished (which they are sure to beat), they will make $1.00 for the quarter, have trailing earnings of $3.42, and (with the current price of $71.50), have a PE of 21 !!!
Why would I pay 90 times earnings for slower growth than I can get for 21 times earnings? Just for hype? Hardly seems worth it.
Saul
For FAQ’s and Knowledgebase
please go to Post #7062