One of the Greatest Investment Opportunities...

[Cardboard]

I would like to find out as well what the company in question really is.

 

I would like to know also the company that Sanjeev mentioned trading in Canada a year or so ago at net cash, not burning cash and liquid.

 

Cardboard

[Ghost]

Has anybody figured out this riddle yet?

[jay21]

Has anybody figured out this riddle yet?

 

Last nite a plan was hatched. The penguin was brought to Blues Chicsgo on the pretext of listening to some great Blues. The penguin took the bait. He was then drowned slowly as the jagermeisters, baileys, gin n tonics and the rum and cokes flowed endlessly. He and his fellow penguins drank it all.

 

And then the tongue loosened up and the penguin went on and on and on about his love for skating on glaciers, about how glaciers were the best thing around. He loves glaciers to no end.

 

With the info nailed, we. Got him into a cab and bundled up to be ready for AGM Festivities

 

Pabrai spilled the beans in this post.  You should be able to get it form here.

[Ghost]

I didn't take that post very seriously. 

[ItsAValueTrap]

Regarding ARO:

 

I don't think that it's a very good company because the new CEO isn't that great.  You can see that same store sales has been declining after he came on.

 

In my opinion, you need to stay away from retailers with bad/average CEOs.  Companies like JCP, SHLD, and ARO.  I'm sure that's going to be a minority viewpoint on this board haha.

Go long retailers like TSCO, TJX, DLTR, CROX, DOL.TO, etc.  Those are the companies that are growing and have high returns on invested capital.  There's a reason why the first set of retailers is heavily shorted and the second isn't.

 

*I'm long CROX, TJX.

 

Time

is the friend of the wonderful business, the enemy of the

mediocre.

 

    You might think this principle is obvious, but I had to

learn it the hard way - in fact, I had to learn it several times

over. Shortly after purchasing Berkshire, I acquired a Baltimore

department store, Hochschild Kohn, buying through a company

called Diversified Retailing that later merged with Berkshire. I

bought at a substantial discount from book value, the people were

first-class, and the deal included some extras - unrecorded real

estate values and a significant LIFO inventory cushion. How could

I miss? So-o-o - three years later I was lucky to sell the

business for about what I had paid. After ending our corporate

marriage to Hochschild Kohn, I had memories like those of the

husband in the country song, "My Wife Ran Away With My Best

Friend and I Still Miss Him a Lot."

http://www.berkshirehathaway.com/letters/1989.html

[Ross812]

Regarding ARO:

 

I don't think that it's a very good company because the new CEO isn't that great.  You can see that same store sales has been declining after he came on.

 

In my opinion, you need to stay away from retailers with bad/average CEOs.  Companies like JCP, SHLD, and ARO.  I'm sure that's going to be a minority viewpoint on this board haha.

Go long retailers like TSCO, TJX, DLTR, CROX, DOL.TO, etc.  Those are the companies that are growing and have high returns on invested capital.  There's a reason why the first set of retailers is heavily shorted and the second isn't.

 

*I'm long CROX, TJX.

 

Time

is the friend of the wonderful business, the enemy of the

mediocre.

 

    You might think this principle is obvious, but I had to

learn it the hard way - in fact, I had to learn it several times

over. Shortly after purchasing Berkshire, I acquired a Baltimore

department store, Hochschild Kohn, buying through a company

called Diversified Retailing that later merged with Berkshire. I

bought at a substantial discount from book value, the people were

first-class, and the deal included some extras - unrecorded real

estate values and a significant LIFO inventory cushion. How could

I miss? So-o-o - three years later I was lucky to sell the

business for about what I had paid. After ending our corporate

marriage to Hochschild Kohn, I had memories like those of the

husband in the country song, "My Wife Ran Away With My Best

Friend and I Still Miss Him a Lot."

http://www.berkshirehathaway.com/letters/1989.html

 

ValueTrap,

 

Add PETM to the list of excellent growing retailers.

[Guest hellsten]

In my opinion, you need to stay away from retailers with bad/average CEOs.  Companies like JCP, SHLD, and ARO.  I'm sure that's going to be a minority viewpoint on this board haha.

Go long retailers like TSCO, TJX, DLTR, CROX, DOL.TO, etc.  Those are the companies that are growing and have high returns on invested capital.  There's a reason why the first set of retailers is heavily shorted and the second isn't.

 

*I'm long CROX, TJX.

 

The stocks' 5-year performance agrees with you:

CROX +525%

TJX +335%

COST +105%

WMT +41%

SHLD -8%

JCP -66.6%

 

I bought some SHLD and a bit of JCP this year, but I'm not disagreeing with you or Buffett. My problem is finding cheap stocks that can keep on growing, i.e. predicting the future. My worries are what happens with the stock:

- when the founder leaves? SBUX

- if revenue declines or growth slows? JCP

- when the product is a fad? CROX

 

ItsAValueTrap, how do you know when to buy a great growth stock. Do you follow Philip Fisher's strategy?

 

Maybe I should follow Peter Lynch's advice:

A quick way to tell if a stock is overpriced is to compare the price line to the earnings line. If you bought familiar growth companies – such as Shoney’s, The Limited, or Marriott – when the stock price fell well below the earnings line, and sold them when the stock price rose dramatically above it, the changes are you’d do pretty well.

http://www.forbes.com/sites/gurufocus/2013/06/26/the-powerful-chart-that-made-peter-lynch-29-a-year-for-13-years/

 

I've wanted to invest in Costco ever since I first heard Charlie recommend the company, but the price is always too high for me.

 

I remember the first time I heard about TJX. I was at the airport talking to a stranger about sights to see in the city we were visiting. The woman recommended TJX.

[Yours Truly]

I have great fondness for both TJX and ROST, the store(s) and the stock(s) that is.. great business model, and great capital allocation

[premfan]

I have great fondness for both TJX and ROST, the store(s) and the stock(s) that is.. great business model, and great capital allocation

 

+1.  Rost and TJX have a huge advantage in operating expense per percent of rev. They are the low cost operators in a commodity business.

[muscleman]

I have great fondness for both TJX and ROST, the store(s) and the stock(s) that is.. great business model, and great capital allocation

 

+1.  Rost and TJX have a huge advantage in operating expense per percent of rev. They are the low cost operators in a commodity business.

 

Yeah. Eddie Lampert is a retail expert but I am surprised that he got all in on SHLD and didn't buy any of these retail stocks. Is it possible that he made a mistake there?

[ItsAValueTrap]

ItsAValueTrap, how do you know when to buy a great growth stock. Do you follow Philip Fisher's strategy?

 

I read Fisher's book but I forgot most of it.  I remember that he recommends visiting the actual businesses, but I'm not sure about that.  Some of the best performing stocks have ugly stores.  Most dollar stores are tacky.  Dollarama (DOL.TO) is one of the tackier dollar stores out there (the logo is the ugliest in my opinion), but it has the highest return on capital of all the dollar stores out there.  Many of the restaurants owned by MTY Food Group are tacky.  Taco Time looks bad in comparison to Taco Bell.  MTY stock has gone up 100X in the last decade (!!).  Walmart was supposedly really ugly when it started.

 

Some retailers waste money on IT but it's hard to see.  You'd have to read the financial statements.

 

2- What happens if the CEO leaves:

Heh.  You're in trouble!

 

I think that has been Buffett's experience.  When Rose Blumpkin left Nebraska Furniture Mart to fight her family, she beat her own family.  There's another Berkshire retailer where the CEO left and things went bad.  When superstars like Questrom and Mickey Drexler leave, the company usually goes downhill afterwards. 

 

So most of the time, Buffett prefers stocks with moats over management-driven businesses.  Television stations used to have very good moats.  But the moat companies are sometimes run by really bad CEOs.  So Buffett ended up selling out of Kraft and Fannie/Freddie.  If he owns the business 100%, I think he'd prefer a moat because he can replace the CEO if things get really bad.

 

3- How to spot the really great businesses:

 

I'm not sure about that one. 

 

Perhaps just stick to the super obvious moats:  Visa (and to a lesser degree Mastercard), Ebay + Paypal, etc.

Superstar managers:  Buffett, John Malone (though Berkshire is more focused on DTV than LMCA, which I think is a mistake), etc.

Retail managers:  Christine Day, the Dollarama guy, TJX/Carol M. Meyrowitz, ROST/Michael Balmuth, Drexler, Questrom, etc.

 

I have a list on my blog with less obvious ones:  http://glennchan.wordpress.com/2013/10/11/quality-businesses-on-my-radar/

Ross' signature has some moat stocks in there too.

[ItsAValueTrap]

- when the product is a fad? CROX

Crocs actually didn't make much money when the fad was raging.

 

There was an accounting controversy/revision, the old CEO was pushed out, and then a turnaround guy came in.  He passed the reins over to his COO, John McCarvel.

 

Eddie Lampert is a retail expert but I am surprised that he got all in on SHLD and didn't buy any of these retail stocks.

In my opinion, his track record with Sears shows that he isn't a retail expert.  I'd say that he run a super concentrated portfolio (fueled by some leverage from the underlying companies) and got lucky.

 

If he's so smart, why isn't he making money?  Usually in retail you will see results in a few years.  I don't know of any superstar retail CEOs who had an incredibly slow start.  Amazon took a while to make money, though they grew revenue like crazy and weren't entirely trying to make money back then.

[premfan]

ItsAValueTrap, how do you know when to buy a great growth stock. Do you follow Philip Fisher's strategy?

 

I read Fisher's book but I forgot most of it.  I remember that he recommends visiting the actual businesses, but I'm not sure about that.  Some of the best performing stocks have ugly stores.  Most dollar stores are tacky.  Dollarama (DOL.TO) is one of the tackier dollar stores out there (the logo is the ugliest in my opinion), but it has the highest return on capital of all the dollar stores out there.  Many of the restaurants owned by MTY Food Group are tacky.  Taco Time looks bad in comparison to Taco Bell.  MTY stock has gone up 100X in the last decade (!!).  Walmart was supposedly really ugly when it started.

 

Some retailers waste money on IT but it's hard to see.  You'd have to read the financial statements.

 

2- What happens if the CEO leaves:

Heh.  You're in trouble!

 

I think that has been Buffett's experience.  When Rose Blumpkin left Nebraska Furniture Mart to fight her family, she beat her own family.  There's another Berkshire retailer where the CEO left and things went bad.  When superstars like Questrom and Mickey Drexler leave, the company usually goes downhill afterwards. 

 

So most of the time, Buffett prefers stocks with moats over management-driven businesses.  Television stations used to have very good moats.  But the moat companies are sometimes run by really bad CEOs.  So Buffett ended up selling out of Kraft and Fannie/Freddie.  If he owns the business 100%, I think he'd prefer a moat because he can replace the CEO if things get really bad.

 

3- How to spot the really great businesses:

 

I'm not sure about that one. 

 

Perhaps just stick to the super obvious moats:  Visa (and to a lesser degree Mastercard), Ebay + Paypal, etc.

Superstar managers:  Buffett, John Malone (though Berkshire is more focused on DTV than LMCA, which I think is a mistake), etc.

Retail managers:  Christine Day, the Dollarama guy, TJX/Carol M. Meyrowitz, ROST/Michael Balmuth, Drexler, Questrom, etc.

 

I have a list on my blog with less obvious ones:  http://glennchan.wordpress.com/2013/10/11/quality-businesses-on-my-radar/

Ross' signature has some moat stocks in there too.

 

Nice blog. I believe you made a really good point about scale. Most high return on capital companies cant scale well. Looking for business's that can scale and keep the high return on capital is the holy grail. Retail is a very easy business to scale and companies that have great ROIC the market usually gives a very generous multiple. Companies like pet meds express which has amazing ROIC but cant scale has to relie on great capital allocation for outsized returns. Just looked at dollarama very impressive ROIC. Are there any other dollar store competitors in Canada?

[Guest hellsten]

ItsAValueTrap, how do you know when to buy a great growth stock. Do you follow Philip Fisher's strategy?

 

I read Fisher's book but I forgot most of it.  I remember that he recommends visiting the actual businesses, but I'm not sure about that.  Some of the best performing stocks have ugly stores.  Most dollar stores are tacky.  Dollarama (DOL.TO) is one of the tackier dollar stores out there (the logo is the ugliest in my opinion), but it has the highest return on capital of all the dollar stores out there.  Many of the restaurants owned by MTY Food Group are tacky.  Taco Time looks bad in comparison to Taco Bell.  MTY stock has gone up 100X in the last decade (!!).  Walmart was supposedly really ugly when it started.

 

Some retailers waste money on IT but it's hard to see.  You'd have to read the financial statements.

 

2- What happens if the CEO leaves:

Heh.  You're in trouble!

 

I think that has been Buffett's experience.  When Rose Blumpkin left Nebraska Furniture Mart to fight her family, she beat her own family.  There's another Berkshire retailer where the CEO left and things went bad.  When superstars like Questrom and Mickey Drexler leave, the company usually goes downhill afterwards. 

 

So most of the time, Buffett prefers stocks with moats over management-driven businesses.  Television stations used to have very good moats.  But the moat companies are sometimes run by really bad CEOs.  So Buffett ended up selling out of Kraft and Fannie/Freddie.  If he owns the business 100%, I think he'd prefer a moat because he can replace the CEO if things get really bad.

 

3- How to spot the really great businesses:

 

I'm not sure about that one. 

 

Perhaps just stick to the super obvious moats:  Visa (and to a lesser degree Mastercard), Ebay + Paypal, etc.

Superstar managers:  Buffett, John Malone (though Berkshire is more focused on DTV than LMCA, which I think is a mistake), etc.

Retail managers:  Christine Day, the Dollarama guy, TJX/Carol M. Meyrowitz, ROST/Michael Balmuth, Drexler, Questrom, etc.

 

I have a list on my blog with less obvious ones:  http://glennchan.wordpress.com/2013/10/11/quality-businesses-on-my-radar/

Ross' signature has some moat stocks in there too.

 

Thanks.

 

Christine Day decided to leave Lululemon in July 2013:

 

Day's career decision may be right for her, but it has left the company's board scrambling -- and the company's shares fell 17% on the Tuesday following Day's announcement. She created a strong culture at Lululemon (last year, 70% of managers were internal hires), so it will be tricky to find a suitable replacement.

 

http://management.fortune.cnn.com/2013/06/14/lululemon-christine-day-3/

 

It's probably a good idea to sell ASAP when the CEO leaves, unless of course we're talking about a super-moat company like BRK or Visa. I didn't know a stock like Lululemon could fall 17% just because the CEO is leaving. What happened when Schultz said he would leave SBUX?

 

I'll stick to buying cigar-butts for now. I'll invest in companies with super moats when the price is right. I passed on both WTW and WU, but maybe I shouldn't have. WU is up ~60% since the crash and I'm speculating WTW will follow soon.

[ItsAValueTrap]

Yeah, you definitely can't have Day, Questrom, or Drexler work for you right now.

 

I've stayed away from WU because the CEO strikes me as bad.  Combined with high leverage, he could run the company into the ground.

The reason why Buffett liked Coke back in the day was because of the moat AND the really good CEO.

 

Are there any other dollar store competitors in Canada?

Of course!  Dollar Tree (DLTR) bought a Canadian chain.  Most supermarkets here have a dollar store section.  There are a number of dollar store chains in Canada.

 

One of the problems with retail is that you can't grow that fast.  Many retailers are unable to plow all of the cash flow back into the business.  I think the limiting factor is being able to source good people.  Retailers also have a very hard time growing once they saturate their own country.

 

Tech companies scale really well, but they also hit the point where they have too much cash and can't reinvest it into their own business.  Most excellent businesses throw off huge amounts of cash that they can't reinvest.  One exception is in television and cable, where you just buy up more and more TV stations and cable networks (e.g. Cap Cities, Malone).

 

I think that's one of the reasons why Buffett is brilliant.  He buys these wonderful companies and allocates their excess cash to buy more wonderful companies.  Look at Lululemon.  It is sitting on a huge cash hoard that isn't doing anything.  Capital allocation is poor.  With Buffett, all of his businesses have excellent capital allocation because Buffett handles the capital allocation.

[jay21]

 

I think that's one of the reasons why Buffett is brilliant.  He buys these wonderful companies and allocates their excess cash to buy more wonderful companies.  Look at Lululemon.  It is sitting on a huge cash hoard that isn't doing anything.  Capital allocation is poor.  With Buffett, all of his businesses have excellent capital allocation because Buffett handles the capital allocation.

 

Completely agree.  I like railroads a far amount right now, but instead of buying them I buy BRK where the railroad throws off cash to WEB who then allocates it.  It really is a wonderful structure because it opens up a lot more capital allocation opps.  You are not limited to dividends, buybacks, and acquisitions in the same industry, but you are not excluded from those opps either.

 

Also, much easier to get comfort with pensions because i think WEB, Ted, and Tod could actually exceed the actuarial return estimates.

[matjone]

Parsad, did you do the same thing you did with bank of america and go all in in your personal portfolio on this one?

[Parsad]

Parsad, did you do the same thing you did with bank of america and go all in in your personal portfolio on this one?

 

No, but it's big.  I didn't go all in with BAC in my personal portfolio, but close.  I've also found something else that I'm really intrigued by and think it could be even better...5-10 bagger in a relatively short period of time.  You guys would be surprised!  Has risk like anything, but I'm trying to take a big position.  What else am I going to do with all of this cash!  ;D  Cheers! 

[gg]

Parsad - Is the reason you don't want to mention the name due to liquidity, or you simply don't like having your picks publicized?

[plato1976]

5-10x !!!

must be a micro-cap

 

Parsad, did you do the same thing you did with bank of america and go all in in your personal portfolio on this one?

 

No, but it's big.  I didn't go all in with BAC in my personal portfolio, but close.  I've also found something else that I'm really intrigued by and think it could be even better...5-10 bagger in a relatively short period of time.  You guys would be surprised!  Has risk like anything, but I'm trying to take a big position.  What else am I going to do with all of this cash!  ;D  Cheers!

[Parsad]

Parsad - Is the reason you don't want to mention the name due to liquidity, or you simply don't like having your picks publicized?

 

Could be both, couldn't it?  ;D  This time I'm not even going to respond to any future guesses at all.  You guys are seriously too good at this, and any clues I give, somehow you will figure it out.  I've learned my lesson once now already.  Cheers!

[wachtwoord]

Parsad - Is the reason you don't want to mention the name due to liquidity, or you simply don't like having your picks publicized?

 

Could be both, couldn't it?  ;D  This time I'm not even going to respond to any future guesses at all.  You guys are seriously too good at this, and any clues I give, somehow you will figure it out.  I've learned my lesson once now already.  Cheers!

 

I really hate it when I cannot solve a puzzle and the answers aren't in the back for me to cheat  ;)

[xtreeq]

Parsad - Is the reason you don't want to mention the name due to liquidity, or you simply don't like having your picks publicized?

 

Could be both, couldn't it?  ;D  This time I'm not even going to respond to any future guesses at all.  You guys are seriously too good at this, and any clues I give, somehow you will figure it out.  I've learned my lesson once now already.  Cheers!

 

We need another treasure hunt  ;)

[SmallCap]

Parsad, do you have a estimated time frame that you think you would have filled your orders and could actually share the idea on the board?

[Parsad]

Parsad, do you have a estimated time frame that you think you would have filled your orders and could actually share the idea on the board?

 

LOL!  No.  They are coming very slowly to me. 

 

If we get to the point where we file our position, you guys will know then.  Cheers!