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On today's edition of Stock Card Weekly, we are looking at three retailers at three drastically different share price points to see which one is worthy of a spot in our watchlist and ultimately will find its way into our long-term portfolios.
This is the second edition of watchlist-worthy battles. Last week, we looked at three car companies - Volkswagen, Geely, and Ferrari and chose the one that we believe has the most potential to generate wealth for its investors. If you haven't read last week's edition, you can read it on our blog.
Let's get to know today's contestants:
All numbers stated are based on the last available data on 8/24/2018. If you are reading this edition at a later date, the information might be drastically different. Be smart and check your numbers.
$ Target (Price to Earnings ratio: 15.26)
Target is such a surprising company. A few years ago, most people thought the company will go bankrupt while trying to compete with Amazon and Walmart. I remember, in 2014, the CEO of Target had to resign after there was a massive data breach and millions of Target customers' credit card information was stolen. The company had a lot of long-term debt and had you invested in its shares in the past decade, you would have lost to the average return of the market. Fast forward to the latest quarterly earnings call, the company is thriving. Under the management of the new CEO, Brian Cornell, same-store sales are at the highest-ever level. If you are new to investing, scroll all the way down to the "How to Invest section" to learn about the same-store sales definition and why it matters. Back to Target's latest quarterly earnings, the stock price is on the rise, and it appears that despite all odds, the company is growing and you can invest in Target on the cheap!
$$ Walmart Inc. (Price to Earnings ratio: 54.5)
By revenue, Walmart is still the largest company on earth. There is so much talk about Amazon and online retailing that it is easy to forget that. Just like Target, many investors would have never thought we still consider investing in Walmart in 2018. Recently, the company took the lead in India's eCommerce market and purchased a majority stake in Flipkart - India's #1 eCommerce player. Add the acquisition of Jet.com and a few other eCommerce companies, and it is no doubt that Walmart is, rightfully so, focusing on getting ahead of Amazon in a market where eCommerce hasn't found a strong foothold yet. The company is also being innovative. The initiatives such as 'buy online' and 'pick up at the store' are paying off so much so that Amazon has recently announced it is replicating the in-store digital order pick up option at its Wholefoods locations. Talk about how tables are turning! However, the growth for Walmart is coming at the expense of profitability margin. For Walmart to continue its growth, it still has to spend significantly on marketing and customer experience which means even lower margin. Lastly, at 54.6 price to earnings ratio, Walmart's stock is not even cheap compared to the average P/E ratio of the S&P 500.
$$$ Stitch Fix Inc. (Price to Earnings ratio: without trailing 12-month earnings, at any price, it is extremely expensive)
If I wanted to make an investment decision based on my personal taste, I would have invested thousands of dollars in Stitch Fix. From the excitement of receiving your subscription-based clothing box, to the happiness of going through and trying the outfits that your stylist has personally picked up for you, to a cool, Harvard-graduate female CEO who owns more than 17% of the company, everything about Stitch Fix exudes coolness! Dope! But, then let me come down and land back on earth. Stitch Fix only went public in November 2017. As is the case with all recent IPOs, there is less data available for investors to analyze and decide whether the company would grow in the future. It is a small company that is rapidly growing, and as is the case for most recent IPOs, the company is spending all its cash on growth and nothing is left at the bottom of the pot for shareholders to stick their teeth in. With no consistent trailing 12-month earnings, technically speaking, any price you pay for Stitch Fix's stock is considered too expensive.
Which is our watchlist-worthy pick?
Target was the cheapest, Walmart is in the middle, and Stitch Fix is the new retailer on the block that mathematically speaking is the most expensive stock of the bunch. All three companies are doing so well, that almost all three deserve a spot. Walmart is going to stick around for quite a long time. The company has no significant debt, generates free cash flow, and has enough money to spend to stay competitive in the market. Target, on the other hand, is a bit of a double-edged sword. It is growing, but that huge debt is still a burden. If we get to a situation where the interest rates go up, financing the growth of the company would become an issue, as the company may not be able to fund it without paying large amounts as interest. Because I have to choose just one winner, my watchlist-worthy winner is Stitch Fix. Only because, the growth opportunity is tremendous. The subscription-based, personalized retail market is a new market category that is growing dramatically. The company is not just a retailer but relies on deep analytics and personalization capabilities to keep its customers happy. At slightly lower than $4 Billion in market cap, the size of the company is so small that relative to the overall retail market, there is just so much opportunity left. One thing I have to say though, despite all the love I have for the company, I actually stopped my subscription for Stitch Fix. After a while, the novelty of opening the box and seeing the goodies inside fades away, and then you ask, why am I paying a bit more for clothing? So, the reason I'm adding Stitch Fix to my watchlist and not investing in it just yet is because I want to see their churn rate. I'm not sure how many people are like me, but when the company attains a significant number of customers, the question would be, for how long would these customers keep their subscription. While I may lose a chance to grow my investment with Stitch Fix in the next few quarters, I'd rather wait and see how well they keep their customers subscribed before I make a long-term investment in the company.
Hope you enjoyed this edition of Stock Card Weekly. If you are a premium member, log in to read about Stock Card team's final decision. For the rest of our community, hope you enjoyed this episode. Write back to me, or share your thoughts on our Facebook Group and let your fellow investors know which one is your watchlist-worthy winner.
Inspired by one of my favorite Youtube channels called Worth It by BuzzFeed, we are introducing a new series. Every week, we will evaluate three companies at three drastically different price points for a chance to win a spot on our watchlist and ultimately finding a way into our long-term portfolios.
Today is the first edition. Three car companies are battling it out. Let's see which one would reign supreme? Let us know through email or on Twitter or Facebook how you like it and send us any thoughts and ideas you have for the future episodes. With that, let's get to know today's contestants:
Before getting started, let me explain something, especially if you are new to investing. We are using price to earnings (P/E) ratio to identify the price point of each stock. If you need to learn a bit more about the price to earnings ratio, scroll all the way down and read the 'How To Invest' section. Also, remember that all numbers stated are based on the last available information on 8/17/2018. If you are reading or watching this episode at a later date, the information might be drastically different. Be smart and check your numbers.
$ Volkswagen (Price to Earnings ratio: 6.1)
Who can forget the Volkswagen fiasco! In 2015, the fact that Volkswagen was cheating US automobile emissions tests was shocking. The value of the company fell drastically then. Now, 3 years after the incident, the company is reviving its operations and building its value. If you had to think about what fiasco I am talking about, it's a sign that the management's TOGETHER – Strategy 2025, through which the company is improving its operations and working on building trust, is working. As you can see on the company's Stock Card, operationally, Volkswagen shows a few signs of weakness. While it has a positive sales growth and earnings per share, the company is struggling with cash, and free cash flow is on the decline. Despite all that, Volkswagen is still the largest car manufacturer in the world that can be bought on the cheap!
$$ Geely Automobile Holdings (Price to Earnings ratio: 14.8)
Alright, from the most well-known car brand in the world to arguably the least (at least in the United States). You can pick up some shares of Geely at twice the rate of Volkswagen, but still cheaper than the average price to earnings ratio of the S&P 500 which is around 23.8. If you don't know the company, let me have the pleasure of making an intro. Geely Automobile is a Chinese car manufacturer that is profitable, generates free cash flow, has no long-term debt, and operates in the emerging markets! Isn't that what Ford and GM dream of becoming? While the auto industry is competitive, and even in the Chinese market there are several competitors, Geely is a market player not to be missed. The joint-venture with Volvo to sell electric vehicles through a subscription model and part ownership of car manufacturers in the Malaysian market are some of the indicators of the company's long-term success. The stock has recently been on a decline, and hence you see its year-to-date return is dismal, mostly due to the tariff wars and not due to the company's operations.
$$$ Ferrari (Price to Earnings ratio: 32.8)
And now, ladies and gentlemen, put on your tuxedos and gowns, because we are getting fancy here. This car manufacturer's stock is as high roller as its product. At 32.8 price to earnings ratio, Ferrari's stock is one of the most expensive car company stocks I have come across recently. Is it worth it though? The company spends $1.15 billion to generate $4.01 billion in revenue and $0.34 billion in free cash flow. So far, so good! But, the rosy picture stops here. We are worried about Ferrari. A recent IPO with a vast amount of long-term debt, in a nice-to-have / luxury market. Unless Ferrari shows several quarters of free cash flow, manages its debt, and continues to grow much faster than the market, it's not difficult to say Ciao Bella to Ferrari!
Which is our watchlist-worthy pick?
Alright, fellow investors! There you have it. Three car manufacturers' stocks at three very different price to earnings ratios. Which one is finding its way to my personal watchlist? Geely (Ticker: GELYF) seems like a great long-term investment, but North American investors need to review the fees that they have to pay and the tax implications of buying a stock that is not directly listed on an American stock exchange. And you can only invest in the company using an over-the-counter stock exchange. That's extra fees and has tax implications. Ferrari (Ticker: RACE) is making me feel fancy, and has shown a few signs of strength since its IPO. However, I usually have an allergic reaction to recent IPOs with a lot of debt. In the end, the watchlist-worthy winner for me is "Volkswagen AG (Ticker: VLKAF)."
If you are a premium member, log in to read about Stock Card team's final decision. For the rest of our community, hope you enjoyed this episode. Write back to me, or share your thoughts on our Facebook Group and let your fellow investors know which one is your watchlist-worthy winner.
Scenario one: You invested in Tesla because you like Elon Musk
When do you sell? When you stop liking Elon Musk. I'm not joking. Be honest with yourself. Did you invest in Tesla because you liked Elon's crazy attitude and dreams? If yes, why are you panicking when the stock price falls 20% after a crazy tweet by Elon?
Scenario two: You invested in Tesla because it has the potential to disrupt the car and energy industry.
When do you sell? After 10 - 20 years. Industry disruption doesn't happen overnight, nor in one year or even in three years. It needs time. So don't check the price every day. Let Elon do his thing, and come back in 10, if not 20 years.
Scenario three: You invested in Tesla because it is a good company!
Really? You think so? I’m not judging! Anyways, when do you sell? Monitor the company’s sales growth, debt level, management stability, ability to raise cash, and such other data on an annual basis. If you see signs of weakness, time to sell. And, you might have already missed the boat! Tesla is not a well-managed company! A quick look at the company's Stock Card makes it easy to figure out how distracted and chaotic Tesla is.
Scenario four: You invested in Tesla because at some point, the price dropped and you thought it would soon go up!
Fair enough! When do you sell? Set a target in mind (let's say 10%), set an alert through your brokerage and sell when you hit your target. There is no math here! Tesla's stock fluctuates based on a myriad of things including what Elon tweets. So, there is no mathematical model to tell you when to sell. Sell when you reach your personal target.
Scenario five: You invested in Tesla and you don't know why!
Okay, I'm judging you now! When do you sell? Sell as fast as you can, hopefully with no loss! And learn the fact that a reasonable investor first defines why he or she is buying a stock, so that he or she can have a plan for how to manage it!
The bottom line is that the when-to-sell question doesn't have one answer. Having only one correct response to such questions is counter-intuitive to the existence of the stock market itself. If such was true, everybody would have known the right answer and acted accordingly. The interesting thing about the stock market is that investors are in it because of a variety of reasons. And everyone has a different timeline in mind. Therefore, you cannot really have one response to all of those. When to sell is a personal question and to respond you must go back to why you invested in a stock and evaluate whether such reasons still hold true. It reminds me of a word of wisdom my father shares with me from time to time:
Never buy or invest in anything without knowing when you will be selling.
You should always document the reasons you are investing in a stock so that you can use them to gauge when to sell.
In this edition of Stock Card Weekly, we are looking at the top four traits that made Apple a trillion-dollar company and introduce you to six companies that share such characteristics with Apple. If you tend to deny the superiority of any of these companies and want to be a contrarian, remember how Business Week had to make fun of itself by posting a picture of an old front-cover page when Apple's doom was predicted. Don't be like Business Week!
Four traits of a trillion-dollar company
There is no denying that Apple hasn't been the most innovative company on earth for quite some time. That's the main reason many financial analysts, technologists, and investors have been depriving themselves of a chance to invest in Apple. But, being innovative is just one factor to consider. While Apple hasn't been as innovative as it once was, it has been overcompensating in four other factors:
1) Diversifying sources of revenue
In the course of a few years, Apple has quietly reduced its reliance on selling devices. By the end of 2017, 19% of Apple's revenues was due to non-device services such as Apple pay, Apple Music, other subscriptions, etc.
2) A lot of cash
Cash is king, and in the case of Apple, the company has a lot of it... hundreds of billions... Even if the company is not the most innovative anymore, its cash has allowed Apple to back up its shareholders' investments. Just recently, the company has started to pay off its investors indirectly by buying back its shares in billions of dollars and has dramatically increased its investment in research and development efforts.
3) A strong brand
The company's brand is global and appeals to a large group of people around the world. The Apple brand is desirable, and people generally have a positive perception of its products.
4) A growing market
While consumer electronics is not the fastest market one can invest in, it is still a healthy market. More people around the world are ditching their old devices to upgrade to smarter and more digitally connected versions. It is not double-digit growth, but it still grows faster than the overall economy. And, being in such a market means the size of the pie is still growing, and the growth of the company doesn't always have to come through battling the competitors to death. Five years ago, none of us wanted or needed a digital watch, now, most of us want one. If not a watch, but a fitness tracker or similar devices.
Now that we know about such traits that have contributed to the success of Apple as an investment, as is the tradition around Stock Card HQ, let's run the machines and find other companies that share such traits with Apple. They may not become a trillion-dollar company, but they are at least worthy of your attention.