Irrationality at its Finest
When I find strong financial companies with a track record of stability, well managed, while trading at attractive valuations, I add them to a watchlist to keep tabs. When the market creates opportunities to buy these “like, not love” type of businesses, due to massive over reactions to short-term bad news, I take advantage of it. I’m not big on slim profit margins or businesses that are resource/capital intensive (think Honda & WalMart for example). So Target isn’t the normal type of company I add to my portfolio as a long-term hold; even though valuation, growth, and managerial efficiency are outstanding, and they’re a dividend king, with 54 consecutive years of dividend growth. These contrarian positions, betting against the crowd who thinks Target is only worth 75% of what it was the day before, has proven wildly effective in the past. As long as that drop offers a buying opportunity at fair value or with a margin of safety, and long-term prospects haven’t changed, it’s a go in my mind. On the rare occasion quality blue chips that meet these standards drop 25% in one session, I am taking advantage of the insanity, every single time. The more irrational, the stronger my reaction. These buys are usually meant to be shorter-term plays, 6-12 months, or until the market corrects its inefficiency. Initially I was buying good companies I planned to hold and thought I was getting rock bottom entry level prices. As quality standards have changed, I wouldn’t buy and hold what I once would, but I will take advantage of any opportunity in which I think I can make my money earn more money.

This is not a strategy I developed from any particular source, just accumulated knowledge of human behavior/overreaction in the markets and watching for easy swing trade opportunities. Still, as always, company has to be quality first. A crappy company dropping 25% overnight isn’t irrational, it may be well deserved. But a company like $FB & $TGT falling 25% overnight, due to short-term negatives (IMO meaningless, due to my long-term thesis) makes zero sense. This drop of ~25% left them at very attractive valuations and has created a high probability opportunity to outperform the market, with minimal risk of downside (it already dropped 25% from a price that represented close to fair value). It’s not a one size fits all rule, but after enough time in the market, “irrational” investor emotion/behavior really sticks out. Also helps grasp what is over and under valued and when. Currently, comparing Target to a few “quasi” comps, they look better than $DG, $DLTR, $WMT, $OLLI, $KR, and $BIG on almost every area of comparison. Ollie’s has SLIGHTLY higher growth rates & profitability margins, but falls so short in every other category, it’d be silly to go with them over Target. Of those retailers mentioned, only Big Lots is trading at cheaper valuations. Target looks the best to buy from that short list. I truly don’t understand when a company with 54 years of consecutive dividend increases, has superior 1, 3, & 5 year growth, ROE, ROA, and ROTC, similar or at least adequate profitability margins, and is trading at even cheaper valuations. I’ve always watched $WMT & $DG, due to Walmarts big city dominance and Dollar Generals growth and dominance in tiny rural communities too small for a Walmart. But I’m glad this drop exposed me to Target, seems like a great company to buy into at current valuations supporting P/S <1, EV/EBITDA ~8.5, with 3 year CAGR of 12%-24% in revenues, earnings, and net income. Was even more shocked to see ROE ~45%, ROA ~10%, and ROTC of ~17%. Favorable profits, average growth, exceptional price. Seeing margin of safety from 3 sources ranging from -5%, to -28%, all the way to -68%. These apps weight metrics differently depending on their propensity to favor growth/future prospects or value/past stability; all 3 rarely agree that there IS even a margin of safety.

Bottom line, it was a good company at a fair valuation and dropped 25% over irrational fears of short-term industry headwinds. If you don’t let short-term panic spook you, these opportunities present themselves relatively often.

It was a good company at a fair valuation, yes, based on trailing numbers.
The stock price cratered overnight and that doesn’t make sense, but Target also woke up one fine morning and completely changed their profitability numbers as a business. Both the earnings and stock took a huge shock overnight. So the reaction is justified.

Also, all the metrics you quoted, are projected metrics that we cannot assume to be “true” in the future. What $TGT just demonstrated was that those metrics CAN change overnight. Yes it’s cheap based on estimates, but the market is just saying we don’t like the trajectory you’re on, and we no longer believe in those old estimates. And it did the same thing with $FB and $NFLX.

You can bet on these management teams riding out the challenges and coming out stronger on the other end, but the market is right in holding these companies accountable for the risks they’re facing in the short term.
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Pat Connolly's avatar
$126.6m follower assets
Are Discount Retailers a Robust Business?
When I initially read about supply chain disruptions I assumed this would hurt discount retailer's ability to source inventory. This Wall Street Journal Article seems to disprove my assumption. GroceryOutlet echoed the reporting from the WSJ article where they said the supply chain issues provided opportunity.

I understand how shifts in fashion can render existing inventory obsolete creating opportunities to source discounted clothing but for other categories I am beginning to question why so much discounted inventory exists.

Are discount retailers levered to the notion that traditional retailers will always be error prone in their demand forecasts? There are a host of multi-billion dollar businesses reliant upon sourcing inventory from traditional retailers that couldn't sell the items on their shelves.

Do improved data insights & more effective inventory management techniques shrink the overall pool of discounted inventory?

Overall the stock performance of these businesses hasn't been great the last year. To dig deeper one could track inventory trends for each company to see if they have in fact struggled to source inventory. It all seems very counterintuitive to me.

A high level view of how some of the businesses source inventory;

$OLLI - "Brand name and closeout merchandise represented approximately 65% and non-closeout goods and private label products collectively"

$TJX - "We take advantage of opportunities to acquire merchandise at substantial discounts that regularly arise from the production and flow of inventory in the apparel and home fashions marketplace"

$GO - "Our flexible buying model allows us to offer quality, name-brand opportunistic products at prices generally 40% to 70% below those of conventional retailers"

$BIG - "we purchased approximately 24% of our merchandise, at cost, directly from overseas vendors, including approximately 15% from vendors located in China"
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Alberto Wallis's avatar
$23.6m follower assets
Upcoming Earnings Calendar (March 21st-25th)
Two heavy-hitters reporting next week: Nike and Adobe. Really interested in seeing what Nike has to say about supply chains after the recent events. Carnival Cruise and Nio should also be interesting. Full list of companies below.





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2021 was a great year for me, Thanks for supporting me!
Looking back at 2021, here is a list of some of the best ideas I have written about $BLND $HIMS $SEMR $SMWB $EJFA $ZIP $PCOR $OLLI $JAMF $FROG $SQSP $OLO

Let's Look at these, one by one:

Also, I own all of these, I share my portfolio here -

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Alberto Wallis's avatar
$23.6m follower assets
Upcoming Earnings Calendar (Nov. 29 - Dec. 3)
Happy Thanksgiving everyone!

This week was light on earnings reports, but next week is shaping up to be very interesting in the stock market. None of my holdings report, but I'm still interested in listening to the $CRM, $CRWD, $SNOW and $DOCU earnings calls.

I'm also hoping we get post-earnings commentary on $CRM from @gkotak, $DOCU from @invesquotes and $OKTA from @tolvkin so that I can learn more about these companies.

Remember, if you'd like an easier way to track earnings dates, you can automatically sync your portfolio's earning dates to your personal calendar with just a couple of clicks here.





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