15 December 2024
I. Corporate Cannibal: the winner of Pershing Square Challenge
Company: Valvoline, Inc.
Ticker: VVV (NYSE)
Share price: $38.36
Market Cap: $4.92B
Ticker: VVV (NYSE)
Share price: $38.36
Market Cap: $4.92B
Valvoline came on my radar at the beginning of the year when I ran Corporate Cannibals Screen. I was glad to learn that the winning team at the Pershing Square Challenge (for students) pitched Valvoline. You can read the full 2-page thesis in the latest Graham & Doddsville publication (pages 30-31).
In short, Valvoline is one of the largest operators of auto service stations in North America. The company does not appear cheap, trading at over 20x forward P/E (consensus) and only a 2-3% FCF yield.
However, it has consistently delivered strong top-line growth (8-year revenue CAGR of 17%), with consistent margin and positive same-store sales growth even in 2020).
In short, Valvoline is one of the largest operators of auto service stations in North America. The company does not appear cheap, trading at over 20x forward P/E (consensus) and only a 2-3% FCF yield.
However, it has consistently delivered strong top-line growth (8-year revenue CAGR of 17%), with consistent margin and positive same-store sales growth even in 2020).
Source: Valvoline Q4 2024 Earnings Presentation
In addition to that, VVV has been actively buying back its shares, reducing the share count by 37% since 2014.
The key risk is the EV transition, making traditional services such as oil replacement obsolete. The company has been adding new services to cater to EV cars to address the challenge.
The stock is worth researching further.
The stock is worth researching further.
II: Becoming a better investor (Interview with Anthony Bolton)
I highly recommend this latest interview with the investment legend Anthony Bolton, whose Fidelity Special Situations Fund delivered 19.5% compound annual returns over almost a 28-year period.
What resonated with me was Bolton’s emphasis on avoiding mistakes. When asked what differentiates a good investor from an average one, he immediately said "avoiding mistakes." Specifically, he noted that "all managers get successes, but if you can avoid the disasters, learn from your mistakes and try to avoid making them you can get up into the top quarter."
This is quite a rare thought worth reflecting on as we are constantly searching for stocks with higher upside, more growth, better dividends and so on.
Bolton provided some practical tips on how to make less mistakes:
What resonated with me was Bolton’s emphasis on avoiding mistakes. When asked what differentiates a good investor from an average one, he immediately said "avoiding mistakes." Specifically, he noted that "all managers get successes, but if you can avoid the disasters, learn from your mistakes and try to avoid making them you can get up into the top quarter."
This is quite a rare thought worth reflecting on as we are constantly searching for stocks with higher upside, more growth, better dividends and so on.
Bolton provided some practical tips on how to make less mistakes:
- "Always try and hear the other side of the story. I think it's really important to know the counter-thesis of a stock that you own and to be able to address why you think that is wrong."
- "It's terribly important to be unemotional, to be flexible. I think arrogant people and people who so much believe that they're always right will make bad investors, because things are constantly changing in this business."
- "I always say that investing is as much about understanding yourself as it is about understanding the outside world…Know what your strengths and weaknesses are. And I think if you know that you're emotional, you've got to try and control that."
- "Nearly always when something went wrong, and I lost a lot of money [on a stock], it had a weak balance sheet."
- "The other dangerous thing, and particularly when you get into the emerging markets, is investing with people who you don't trust, you know, who don't have integrity."
- "When things are very popular and they're very over-owned, that is risk. I think you just need to be aware of it."
- "I think one mistake people make in general, they're always talking about the outlook. They say, “The outlook is good for America, the outlook is bad for China.” That's not what this industry is about. What we're about is what view of the future is discounted in prices today."
- "People always want the opportunity and they want the catalyst. Occasionally, you get that, you see a really good opportunity and you see a very clear catalyst to make it happen. But in most of my experience, if there's a catalyst, there isn't an opportunity because the stock has already moved to anticipate it. So I would always rather have a portfolio, a spread of things that I thought were really cheap and really undervalued, not even not knowing what always what the catalyst was going to be.”
- More efforts do not mean better investment results. "You know, it's like sports or for a musician, effort comes into it. Well, there's an element of effort, but you can't say to yourself, you know, try harder and you're going to do better. You just have to keep on re-examining what you're doing and be honest with yourself because, and I think that's where this sort of insecurity, conviction, having conviction, but always willing to be open to the fact that you're wrong is important because things change."
III. Charting Perspectives
Here is a chart that I found peculiar. The US fiscal deficit (currently at 7.6% of GDP) is a widely discussed issue, although not a concern for the current market rally. I wonder if one conclusion to draw from this is that focusing on macro is not very helpful for a long-term track record of stock market investing.
Source: @VladBastion
Some weaker markets have enjoyed more benign fiscal positions, but this has not helped investors there.
But perhaps it is just a matter of time before fragile macro conditions catch up with corporate earnings, leading investors to reassess the risk/reward opportunities.
One may even wonder if there are enough active investors left to take such fundamental factors into consideration, as the rise of passive just expands price-agnostic stock trading.
In any case, here at HVG, we prefer to focus on bottom-up factors, assuming that in the long run, macro conditions become just a cyclical factor rather than the determining driver of ultimate returns.
But before I finish this post, let me share one more chart, which is also fairly well-known.
But perhaps it is just a matter of time before fragile macro conditions catch up with corporate earnings, leading investors to reassess the risk/reward opportunities.
One may even wonder if there are enough active investors left to take such fundamental factors into consideration, as the rise of passive just expands price-agnostic stock trading.
In any case, here at HVG, we prefer to focus on bottom-up factors, assuming that in the long run, macro conditions become just a cyclical factor rather than the determining driver of ultimate returns.
But before I finish this post, let me share one more chart, which is also fairly well-known.
Source: SocGen analysis of the US BEA data (found on X)
It shows that the share of domestic corporate profits in the US GDP (17%) is at an all-time high now, exceeding all other records.
I would not be surprised if a higher budget deficit is one factor that boosted corporate profits, essentially borrowing growth from the future. It is hard to expect more fiscal stimulus in the US, given the level of both debt and deficit. With less tailwind, businesses may find it harder to grow at the previous rate.
If you found this post useful, the best thing you can do is share them with anyone who might benefit!
I would not be surprised if a higher budget deficit is one factor that boosted corporate profits, essentially borrowing growth from the future. It is hard to expect more fiscal stimulus in the US, given the level of both debt and deficit. With less tailwind, businesses may find it harder to grow at the previous rate.
If you found this post useful, the best thing you can do is share them with anyone who might benefit!