In late July of 2021, I posted my latest investing experiment based on reviewing some habits with my individual stock portfolio. Overall I tend to sell winners too quickly while holding on to stocks that haven’t gone up as quickly hoping my thesis will play out. In this experiment I’ve done the opposite, I looked at some of my biggest portfolio winners.
I’m beating the market! But just barely. I’ve included two funds to test the performance, the Vanguard Total Market ETF and the lower risk, lower return Vanguard Dividend and Growth ETF .
The Biggest Winners:
Sherwin Williams (SHW) and Home Depot (HD):
The long term bet on an aging housing inventory is the biggest winner. Older houses require more work and the average age of a home in the US has grown from 31 years old in 2005 to 39 years old in 2019. Builders are closing the supply gap, but the age is not expected to come down.
Sherwin Williams is the #1 paint company in the world and Home Depot is a #1 home improvement store. Both of these companies continue to grow earnings, pay a small dividend, and consistently reduce shares outstanding. The risks with these two companies are similar, there will be some short term disruptions with supply chain issues and inflation may require more working capital and reduce the capital available to repurchase shares. There’s already signs of this with share repurchases decelerating at Home Depot.
The Average Performers:
Alphabet (GOOG) and O’Reilly Auto Parts (ORLY):
This is the single biggest winner in my portfolio over the last twenty months. I bought eleven shares total between March 5th and 6th in the early stages of the pandemic market collapse. As of November 12th, 2021, these shares are up 124%. The company has more than doubled operating earnings on a trailing twelve month basis while repurchasing shares. It’s amazing to me that you can still purchase a company that has a 28x PE, 100%+ earnings growth, and barely any debt relative to its cash flow and cash position. The valuation is mainly depressed in the market due to antitrust concerns, but the more I research the company the more I want to add to the position. The company would be well suited to issue long term debt at these rates and use the proceeds to repurchase shares.
O’Reilly Auto Parts and the Auto Parts Market:
Much like the housing inventory in the United States, the average age of cars on the road continues to increase. Older cars equal more repairs. The car parts business is dominated by four companies in the United States, with O’Reilly being my choice because of it’s even split between retail and auto shop business and consistent shareholder returns. (AutoZone is an equally strong stock with a heavier retail mix). The rising increase in car prices help increase repair business as less vehicles are sold for scrap.
Unfortunately almost all auto parts are sourced from overseas and the supply chain shortages are causing issues with the earnings for all auto part companies. There’s also a tail risk in this investment in the form of international trade, as a significant portion of auto parts consumed in the United States are manufactured in Taiwan. Other critics of investing in the auto parts business will point to the lower number of parts in electric vehicles vs. internal combustion engines, which may reduce the number of SKUs available for sale.
O’Reilly’s has been disciplined in returning cash to shareholders, repurchasing almost 7% of it’s outstanding shares over the past twelve months. I like good businesses where I won 5% – 8% more of the business each year.
The Facebook / Meta Companies Underperformance:
I included Facebook in the buying the winners group and immediately bad news started pouring in. I’m torn on Facebook as a platform. The Groups feature is the only reason I use it, but everything else about the classic Facebook platform has turned into something for people 50+. Instagram still has appeal to a younger audience, but TikTok seems to have taken over. Personally I’m not sure why the United States allows a Chinese data gathering app to be downloaded in this country while China bans Facebook. Facebook also has it’s strange censorship issues going on, trying to balance “disinformation” with outright censorship, especially when it censors certain news that subsequently turns out to be accurate.
Even with all that going on, it’s advertising business is solid and should produce twice the revenue in 2022 as it did in 2019.
Earnings are currently estimated at $14.25 for 2022, giving the stock a 24x multiple on next year’s earnings. This is beginning to be priced like a slow growth company. My bet is that shareholders can be rewarded in two ways, Facebook turns out to either still be a growth company or they can begin to reduce their share count as a slower growth company. The reduction in share count has started, with FB reducing share count 1.11% from 6/30/2021 to 9/30/2021. The company will also produce $40bil in earnings this year against only $10bil in long term debt. Facebook could easily borrow 20-30% of it’s current $950bil market cap and use that money to reduce the shares outstanding. Even if the company doesn’t grow much, my proportional ownership increases as the total shares outstanding goes down.
Would I add to any of these positions? Yes. I believe all of these outside of Facebook represent a good buying opportunity. The level of uncertainty for Facebook seems high when you compare being able to buy lower risk businesses for a similar valuation.
What about mutual funds vs. individual stocks? Our portfolio remains evenly split between mutual funds and individual stocks, which is a balance we’re comfortable with.
Is individual stock investing worth the time? I think that depends on if you enjoy it. Part of this experiment is to test this theory: What happens if you buy a small piece of 20-30 companies, research and be familiar with those companies, then start adding to the companies that perform quarter after quarter. Costco was a significant winner for us on our route to early retirement and this can be a viable route for those who enjoy research.
What do you think of the investing experiment? Do you do something similar? Leave a comment with your thoughts below.