Patience is a Virtue, So Always Keep a Shopping List
Whether It’s on a Post-It on Your Desk, a Note in Your Phone, or a Spreadsheet… Make the List!!! Keep the List!!!
Picking the right stocks to invest in is usually only half the battle in generating good returns… the other big piece is buying the right stocks at the right price. I personally think it is nearly impossible to time the market consistently and effectively, but I do think you can add a lot of value by choosing when to buy your stocks.
For great buy and hold stocks, it’s always a good time to own them. But there can be better or worse times to initiate or add to a position. I always buy stocks with some general sense of what I think they are worth based on their future cash flows, the consistency of them, the company’s margins and competitive moat, and a bunch of other factors. My concept of what a stock is worth is constantly evolving with the addition of new information – whether hard data points like earnings or squishier factors like the announcement of a new product or key addition to the management team. But I have a price target in mind, even if that target is a moving one.
Similarly, I think about what my risk could be in a stock if everything goes wrong. Sometimes – like with a highly leveraged company – the risk price is $0… it could go down 100% (I don’t buy too many of those, and certainly when I do, they are very small positions). Normally though, that risk price will be anywhere between 20% and 50% lower than the current quote, depending on the quality of the company’s competitive moat, its core profitability, the volatility of its earnings stream, the level of financial leverage it has, and its current valuation.
The Simple Math of Reward-to-Risk Based Trading
I ideally like to buy stocks when the upside, or potential reward, is three times the risk, although for a company I feel really confident in, or when the market is universally kind of pricey, I may have to settle for upside that is just twice what I think the risk is.
To illustrate with an example: Say Stock XYZ is trading at $10, my target is $15, and my risk price is $7.50. I have $5 up, and $2.50 down, for a reward to risk ratio of 2x. Acceptable, but not as exciting as if the stock is $9. If it takes a 10% dip from $10 to $9, and nothing has changed in terms of its long-term outlook, I now have upside of $6 to downside of $1.50, for a 4x ratio.
If I already had a position when the stock was $10 and I had incremental funds to invest, this stock wouldn’t be at the top of my list to buy, with only a 2x reward-to-risk ratio. I would want to put the money in something that was a 3x or a 4x, if I had such an opportunity.
I also know that 10% pullbacks aren’t that rare – especially in smaller cap names – so I would wait for a more opportune time to buy more of that stock. But if it did drop to $9, and was suddenly a 4x reward-to-risk, I would want to pounce on that… using available cash to buy more, or if I didn’t have any cash, perhaps trimming a stock with a less compelling reward-to-risk ratio to buy more of this stock that had fallen to a great entry price.
This kind of price and valuation driven investing is pretty much the opposite of momentum investing, where you buy what is going up. Momentum investing is definitely what’s popular these days, but my contrarian method has worked for me over time, even when momentum investing is what’s hot.
Part of this process is keeping my shopping list up-to-date, knowing what I would buy if it was just a lit lower.
On My Shopping List If It Dips: Google
In my last post, I shared a brief write-up on Alphabet aka Google (GOOGL) that I had included in my Money Show Top Picks 2024 submission. I also shared a longer GOOGL write up on Value Investor Club and included a caveat on timing.
Here’s how I talked about when to buy in the context of GOOGL shares, which were obviously up a ton in 2023. So I was posting my recommendation after a big bull run:
“While the price of entry will be set for the day of idea submission because that’s the way VIC works, I would offer the following advice for entering or adding to Alphabet shares, given the recent run: wait for the inevitable swoon. Twice this year, the stock has toppled 10% or more on an overreaction. The first instance was when Google’s AI Chatbot Bard was initially released in February and it made a factual error in a demo, and there was a panic that Google was far behind Microsoft in AI and would lose share in search as a result. The stock went from $108 to $89 in three weeks on the panic. It recovered that dip within six weeks, and is sitting now at $139.69, 57% higher than those February lows.
Another buying opportunity came with the third quarter earnings report. Even though advertising revenue growth in both search (from 5% to 11%) and YouTube (from 4% to 12%) had accelerated meaningfully from Q2 to Q3, the market sold off GOOGL shares because growth in the cloud division came up short at 22% versus expectations of 27%. This is where being a value investor comes in handy when looking at this kind of stock. Growth investors sold off the revenue shortfall (in a division where Google barely makes any money) and ignored the acceleration of business in the division that is a cash cow. And for a value investor used to picking through piles of no growth or cyclical companies, 22% growth in anything is a straight up dream, even if that 22% misses a slightly higher bogey arbitrarily set by the sellside and growth investors. We know that “only” 22% growth is not the sign of a business in collapse. On that sell-off in October, GOOGL shares dipped from $139 to $122, and recovered that swoon within eight weeks and went on to end the year 1% higher than the price going into the Q3 report.
At some point, people will freak out over something, and that is when you buy this compounder.”
Reward and Risk Based Investing Means Always Having a Shopping List!
I have a bunch of positions that are smaller than I would ideally like them to be. Either I was being a wimp when I put them on and didn’t size properly, or my confidence has grown in the investment over time – but the stock has also gone up a lot since I got in. Stocks I want to buy more of – but ideally at a lower price – make up my shopping list.
I keep my shopping list in a spreadsheet, and I also have Bloomberg alerts set up to tell me if my ideal price comes up. Of course the trick is bringing yourself to act and buy when you get your shot – because that shot typically happens when either the market is melting down or the stock on your shopping list delivered a piece of particularly horrid news.
Keeping your shopping list is therefore only half the battle – acting on it is the other half, and a triumph of psychology, not of financial analysis. Several times in the past two years my alert for Airbnb (ABNB) shares under $110 went off, and exactly zero times did I buy it. It’s just under $160 now. My bad. I did not trade the plan, and I paid for it.
That said, these alerts have gotten me into plenty of other stocks at the opportune time. There are plenty of websites and probably even some brokerage sites that have similar tools to the ones I use on my Bloomberg for alerts.
Also on My Shopping List: Academy Sports and Outdoors (ASO)
I wrote about Academy Sports and Outdoors in April last year, shortly after attending its first investor day in Houston. The shares were around $68 when I wrote about the company. As I draft this piece roughly 10 months later, they are also around $68. Along the way though, ASO shares went to under $50 before rebounding back to $60. Then they went to under $45.
My alerts went off. Unlike when I was a dumbass and ignored my ABNB alerts, I did buy more ASO on these dips. I obviously regret not buying even more – not only because the trade worked, but over time, my confidence in this company has only grown.
Here’s my short write up on ASO that I contributed to the Money Show Top Picks 2024 report:
“Academy Sports and Outdoors (ASO) is a sporting goods retailer that sells a wide variety of athletic apparel and footwear for both individuals and team sports, sports equipment, as well as a broad array of products that support the outdoor lifestyle.
Products include everything from equipment for fishing and hunting to outdoor grills, coolers, and camping equipment. If you live in Texas or surrounding states, you probably know Academy—it’s an institution in the region.
The pandemic led to a surge in interest in outdoor sports and activities, and Academy was a large beneficiary during that time period, seeing its earnings per share (“EPS”) double from calendar 2020 to calendar 2022 (like many retailers, Academy’s fiscal year ends in January).
But unlike many companies that went through a pandemic boom, Academy has enjoyed a soft landing post-pandemic. Earnings this year are expected to be down just 10% off the 2022 peak, and next year, earnings should again reach the peak 2022 level of $7.70.
Moreover, in an era when most proven retail concepts have been fully exploited already, Academy’s management plans to open 120-140 stores over the next five years. That represents a roughly 50% growth opportunity over the current 275 store base.
Academy’s wide breadth of product as well as its on-point merchandising that emphasizes everyday value while also offering curated opportunities to upgrade into premium products is the right positioning for success and to compete with its larger primary competitor, Dick’s Sporting Goods (DKS).
DKS has greatly narrowed its focus in recent years and pulled back from many of the outdoor leisure categories where Academy excels. Academy currently outperforms Dick’s on key metrics like sales per square foot and EBITDA (earnings before interest, taxes, depreciation, and amortization) per store.
Academy’s management team has also shown incredible financial discipline since the company went public in 2021. In just over two years, management has bought back approximately 14 million shares of stock, reducing the float by around 15%. Management capitalized on the pandemic opportunity by streamlining operations and increasing margins in a way that generated a ton of cash which they used to aggressively buy back shares.
By returning excess cash to shareholders through buybacks while at the same time prudently allocating capital to self-fund mindful store growth, Academy has managed to maximize short-term EPS growth without sacrificing long-term growth from expanding the business.
Academy is a stock with great growth ahead, yet it trades at a value price. At the recent trading price of $61, ASO shares changed hands at less than nine times the expected earnings of $7 for the fiscal year ending January 2024. Taking into account the company’s expected future growth, the stock looks even cheaper.”
ASO Shares are still very much on my shopping list. My current alert is set for $55. If it goes there because the overall market is down or because of an earnings blip that doesn’t impact my long-term outlook for valuation, I will be ready to pounce.
Meme of the Week
In my professional investor chat circles, the subject of whether we are in an AI Bubble is never ending. Not surprisingly, this graphic has been making the rounds with valuation sensitive, seasoned investors:
My take is we probably are in an AI bubble, but it also seems nowhere near popping, so I’m not going to try shorting it.
When it comes to AI, I have only one certainty: the people who are most adamant about this being a crazy bubble have 100% overlap with the people who don’t own Nvidia (NVDA) shares and are trying not to be bitter about it. NVDA shares were famously up 239% last year and are up about 50% seven short weeks into 2024. I wish I owned them. Unfortunately, semis aren’t my jam, and I missed this trade.
I am no expert on Nvidia, so I won’t opine on it. I leave that to the 4000 other stock commentators eager to share their Nvidia thoughts.
I did enjoy the Super Bowl though, and I really enjoyed this meme:
Nvidia closed $727 tonight. 🤣
While I am on this particular meme theme, I gotta share the best of the rest and their loose market connections… they are too good!
Next up, because what self-respecting media analyst and Murdoch watcher can resist a good Succession reference?
I have been know to bash on Paramount (PARA), especially during its inane run to almost $100 when it was the subject of some epic market manipulation back in 2021, but I have to give the company all the props in the world for its incredible execution of the Super Bowl broadcast, Nickelodeon’s Version. With a press box populated by SpongeBob SquarePants and his buddy Patrick, Dora the Explorer on the field explaining terms like “holding” for the football novices, animated green slime flooding the end zone with every touchdown, and player descriptors such as “#87, Tight End, Taylor’s Boyfriend, Good at Football,” the effort was a creative triumph and an excellent entry point for football newbies. All context for enjoying this next one:
I can’t even make a loose connection to the markets for this one, but this should give the Gen Xers and movie buffs all the feels…
Some Interesting Things I Read Recently
Mostly, I’ve been reading earnings press releases!
But here are a couple of interesting links….
Malls have rebounded thanks to an unlikely source: Gen Z
Los Angeles Times, 1/19/2024
I’m a skeptic and have been off and on short mall REITs for several years, so I thought this was pretty interesting. Still a skeptic but keeping an eye on this possible trend.
Fat, Sugar, Salt… You’ve Been Thinking About Food All Wrong
Wired, 2/22/23
This article is a year old, but I stumbled on it when looking at Pocket’s “Best of 2023” list. It addresses what ultra-processed foods do to our health. I’m heading to Florida next week for CAGNY’s (Consumer Analyst Group of New York) annual CPG company conference. It is a mecca of packaged foods and beverages… Conagra (CAG), Mondelez (MDLZ), Hershey (HSY), Coke (KO), Pepsi (PEP), General Mills (GIS), and a host of others will all be there, with their fat/salt/sugar in tow for investors to sample. So a timely read for me.
Prosperous Investing!
Disclaimer: This content is for informational and educational purposes only and does not constitute financial advice or a recommendation for a particular investment.
Disclosure: The author may have a personal financial interest in the securities mentioned. At the time of publication, personal investments included GOOGL, ASO, and MDLZ.
Big fan of ASO (and have the same target price to round out my position, which has a current cost basis at 40). Also GOOGL, which along with MSFT is my only Mag 7 exposure. I could see buying ABNB if it dropped. Like it at 130, love it closer to 100. Would you buy in those ranges, if it gets there again?
So true - everyone should have a shopping list !!