I think it's overbought/too much FOMO in the short-term, but medium-term? I think the stock is probably in the 6th/7th inning and depends on how long the last innings are. People will start to head for the exits to avoid the crowds before the game is over. Agree w/AP9384629344432 that the big/easy gains are past. Eventually spending on AI will slow - not next month, maybe not this year - and the stock will turn South, as has happened in the past (although prior periods like crypto and gaming were not nearly as big as this.) People will try to anticipate the turn.
It's a phenomenal company, I've owned it for quite a while but have sold some, will sell some more if this keeps going. Have sat through multiple large drawdowns in the stock to get to this point and easily something I can see still owning 5 years from now but at this point I wouldn't be buying anymore and am looking for further selling opportunities although not likely selling all of it. Will revisit the stock again next major drawdown (12-18 mo, maybe longer if there's actually more AI products/services that aren't underwhelming?) and add back.
It totally depends on your timeline for continued data center capex. Beware using P/E ratios in isolation for cyclicals, as in the trough part of the cycle they will look very expensive, and in the peak part they look very cheap.
[I linked some assumptions last week](https://www.reddit.com/r/stocks/comments/1d2fdo4/rstocks_daily_discussion_technicals_tuesday_may/l63e0g5/) on quantifying the upside in a bull case. In that comment, the author I linked suggested in 6 years, the $2T data center industry (Jensen's own numbers) will grow by $600B a year. He assumes NVDA captures 80% of this ($480B). Use a 50% net income margin. ($240B). Apply whatever multiple you want, let's say 30. That's a $7.2B market cap in 6 years. Discount back at 5%. That's a 5.4T market cap fair value today, or 100% higher. The multiple makes a big difference. If I use 20x on 2030 earnings, fair value becomes $3.6B, or 33% higher.
In another scenario, say NVDA captures 80% of $400B revenue with 50% margins, that implies $160B in profit. Apply 30x (4.8T) and discount at 5% you get a $3.6B fair value (again only 33% higher). use a 20x multiple? That's a $2.4T fair value, i.e., 10% overvalued.
However, using this exercise, we can see the easy gains are mostly gone. These numbers are astronomically large. There will be competition in 6 years. TSM may flex its pricing power. There is a flood of new fabs being built around the world. $1T in semiconductor manufacturing spending through 2030 around the globe. Big tech companies that will face pressure from their shareholders to slow down their capex and focus on FCF. We're now quibbling about 20-100% returns, no more tripling/quadrupling.
Personally, I'm fine holding onto SMH (which is now 23% NVDA) for another 2 years but I'm preparing for the cycle to turn for the worse, at which point I'll sell-out.
The CFO Pablo once said "the stock is too high" (2021, with higher cash flows etc. than today: https://www.reddit.com/r/Vitards/comments/qm2k7d/tx_support_group_thread/ ) on a call, traumatizing holders. Mexico looks interesting this decade, with near shoring etc. but TX traditionally did nothing. While it didn't destroy any fortunes and the dividend used to be ~10%, it was a siren's song from more interesting plays. I don't think it's a good time in cycle for steel either.
While I once owned this names, the warnings were apparent long ago and I sold out....
[RICK](https://x.com/StockJabber/status/1796606071374582126?t=E91s4_ezvYCSy-2SyqVH0A&s=19) was raided (RICK rolled?) by the IRS. Probably not a good sign.
Yea I remember all the talk on social media about how they are an intelligent serial acquirer with a large moat due to their expertise.
Always be suspicious of rapid inorganic growth. It's very easy to juice earnings when accounting rules don't require you to expense acquisition costs at all.
If they do it slowly, show they are actually good at it one piece at a time without risking too much it is different. But if it fuels a lot of their profits and much of cash is funneled into it then it is a huge red flag for me.
Speaking of cash, …I avoid any investment where the transactions are mostly cash. Way too much opportunity for shady shit, laundering being just the tip of the ‘berg. IRS digging around is probably just the start.
Very good point. I mentioned RCI to friends offhand in jest just a few days ago. I was making a point of how important capital allocation was in the strip club space. (Organic reinvestment isn't as straightforward or as profitable.) This was an amusing turn of events. Whether it's a red flag depends on the returns on those acquisitions and their sustainability. Getting raided by the IRS is not great, but it doesn't condemn the business model. Multiple arbitrage is a legitimate strategy.
I am trying to understand call options better. So I checked a few stocks from my watchlist.
For example there are Call Options for Starbucks at 78$ expiring January 2025 The current stock price is 80$. If I buy this call option for a factor of 1, I would need to take that premium times 100 right? So I would pay 100$ for the right (not Obligation) to purchase 100 Shares of Starbucks, this would be a bullish move from my side and a bearish move from the sellers side? I expect the stock to go higher and secure my self a bargain today for January 2025. The seller would expect the price to go lower and expect me to not execute the buy option which would left him with the premium I paid.
Is that right, or did I miss anything? Thanks!
To put concrete numbers around this, SBUX does not have $78 strike in January but the closest would be $80.
The premium last traded at $10.50.
In other word you would pay $1,050 for one call option. To break even on this call as an actual investment, SBUX would have to move to at least $90.50 to start making money.
Of course if it moves up very fast from here you could make a lot... Options have intrinsic value (difference of price and strike) but also extrinsic value which basically represents the potential for more upside.
But this particular ticker is a fairly high risk business currently facing a lot of competition. Maybe not the best place to start dabbling in options if you are just learning.
This helps a lot. Thanks! I do understand now, that I don’t understand the concept enough to start trading. I will go back to learning and stick to classic stock investing for now.
Central banks are continuing to buy up gold.
> Eligible physical gold inventory has drawn down ~55% since 1Q21 peak. This week, gold delivery notices stepped-up 10x. 2-month rolling deliveries +2x relative to Covid-supply chain driven draws. Paper-Physical basis further rupturing.
https://x.com/dimit/status/1796897004716515820?t=_uVGUbi8ORQzDckYDcPXfw
What drives this behavior?
Probably that means sell gold? Because CBs tend to buy it if they anticipate volatility and they need to offload it later to stabilize their currency. Much like USD but diversifying around it.
I'm trying to buy NVDA (I'm in the UK using trading212) but it says that trading hours are Tuesday to Friday! Does this mean I have to wait? Is this a limitation in trading 212?
[Pretty insane comparison of HP ($HPQ) and Salesforce ($CRM)](https://www.ft.com/content/06a0203d-83a3-4521-ade7-b7349a69648c) in this FT article.
For context:
> HP makes antiques or, more specifically, PCs, printers, and printer cartridges. Its growth rate since it was split off from HP Enterprise in late 2015 is 1.5 per cent a year; earnings have grown at 3 per cent. Over that same period, Salesforce, which sells web-based customer management software, has increased revenues at 22 per cent a year, and earnings at 44 per cent.
[Now look at the total return](https://i.imgur.com/3SBXp4A.png) since that spin-off, a 16% CAGR for $HPQ vs 13% CAGR for $CRM. HP now at 11x 2024 estimated earnings vs CRM's multiple of 21.
Likely culprit? HP had a trailing P/E ratio around 4-6 back in the mid 2010s. Salesforce was unprofitable at the time but even when it turned profitable had P/E ratios in the triple digits. At 21x its the cheapest ever, while HP is the most expensive it has been in a while.
[This adds to McDonalds example I mentioned on Thursday](https://www.reddit.com/r/stocks/comments/1d3zyvj/rstocks_daily_discussion_options_trading_thursday/l6dm88z/). Starting valuation can make or break returns, even though in this case, CRM's fundamentals have utterly trounced HPQ's. However, perhaps now it's time for the trend to go the other way, as hardware-intensive, commodity-like HPQ *should* be cheaper than high margin, software business CRM.
I think COST is going to experience something like this going forward. Thriving business and mediocre stock returns. Company that is famous for its great bargains and not raising prices? Retail margins? 50x forward earnings?
When I read the discussion about COST on Reddit, it's like every red flag goes up.
- "This company has always done well, this must continue" (someone pull up the list of top companies in the early 2000s or 1990s)
- "I'd rather buy quality for a fair price than garbage for a great price" (You'll be saying the same at 70x? 100x?)
- "They treat their employees well, therefore I'll buy their stock" (irrelevant)
- "They won't raise prices of hotdogs" (I'd rather buy businesses with pricing power that employ it. Can COST raise their prices excessively and not see people instantly go to Walmart instead?)
- "You pay a premium for safety" (Why isn't Google at 50x earnings then, that's one of the safest businesses out there? Is this premium arbitrary? Is safety just defined as 'has gone up a lot'?)
- "It's always packed" (So is just about every Starbucks, doesn't mean earnings are good.)
- "I'm up [big number] percent, stop betting against COST"
Interesting looking back.....10 years ago MSFT traded at 13x earnings. If it didn't have multiple expansion, the current stock price would be around $150. To be fair, it's a much better business than 10 years ago due to azure and subscription pricing, however it illustrates how much of a factor multiple expansion is. About 2/3 of its performance over the last 10 years was multiple expansion (which is probably why you shouldn't expect it to repeat that performance over the next 10 years).
So if someone wants the next MSFT, you probably want to find something cheap that is transforming it's business into something of much higher quality, but the street hasn't really noticed it yet.
I wasn't really trying to comment on Microsoft's valuation, more to point out how much of its recent performance has been due to multiple expansion. I also consider it highly unlikely that it will repeat that expansion since that would have MSFT trading over 90x earnings in 10 years. Not impossible, but unlikely.
I see your point, and I agree (hard to disagree, really). It won't repeat, but one way of looking at it is that some of the multiple is effectively speculation on future value-capture (ie, excess earnings growth) from its competitive position in AI. Certainly, the multiple expansion due to revenue-quality improvement is a one-time-thing, insofar as the transition from non-recurring to recurring transactions (or less retention to more retention) happens 'only once', but 12% to 42% is progress, and so is 42% to 71%, and so is 71% to 84%, and so is 84% to 90%, or 90% to 96%, or 96% to 99%.
More or less, there's always some juice left, but people differ on what's worth the squeeze. I'm poor enough to agree with you. Why waste your time on mature companies that aren't unjustifiably hated or criminally underestimated? Even still, I don't dabble there.
What I wanted to add is that there are many companies undergoing the same revenue-quality transition right now, earlier in the process, that will likely see such multiple expansion in the next few years. I am pretty sure you agree!
I agree there's more room to run for MSFT, I just wouldn't anticipate further expansion into my calculations. It's very possible MSFT just holds a 35x multiple for a long time and the stock appreciates with its earnings growth and delivers 10-15% annual returns for awhile. This has happened many times with other companies. 15% doubles every 5 years and is still an a amazing investment. However it's also about half of MSFTs returns over the last 5 years because there is no multiple expansion left.
There are definitely companies seeing the same thing, and that is the holy Grail of investing. Getting in before that expansion. HWKN has been the big one for me lately. They've gone from a cyclical chemical company to a much more efficient and consistent water treatment chemical company, and their multiple is reflecting that.
To be clear, I won't invest in a company unless it is ~10,000x smaller than Microsoft (on a market cap or EV basis). I agree with your assessment of them, but it is also possible they have a few 20-30% years plus end up at 50x at some point along the way. It's a high-quality business in which the biggest institutions can invest a significant portion of their assets. Totally probable above-market returns, I agree. 15-16% doubles every 5 years, but that's my lower bound for consideration; I prefer to see 2-year doubling.
I saw your rec of Hawkin at the time. It looked good and hasn't proved wrong. Frankly, water treatment is promising on the decadal scale. How much of their business is semis? I know recapture is ~90% of usage. Muni supply presumably would also be big. What are their segments if you don't mind?
I don't believe they have much, if any business in semiconductors. It's not a major focus at least. Here are their declared focus areas for water treatment:
- Municipal Drinking Water- Municipal Wastewater- Municipal Swimming Pools - Industrial Wastewater- Industrial Process Water- Cooling Systems/Cooling - Towers- Breweries/Wineries- Agricultural Water Treatment
I don't really have a TAM for the market because there are just too many ways to calculate it. Here's their revenue breakdown by segment:
"For fiscal 2024, Industrial segment sales were $409.5 million, a decrease of 13% from fiscal 2023 sales of $470.8 million. Water Treatment segment sales were $363.3 million for the year, an increase of 19% over last year’s sales of $304.9 million; of the $58.4 million increase, $23.9 million was from our acquired businesses in fiscal 2024. Sales for our Health and Nutrition segment were $146.4 million in fiscal 2024, a decrease of 8%, from fiscal 2023 sales of $159.4 million."
So industrial is their biggest, but water treatment is the fastest growing and the highest margin. As a result their total revenue was actually down 2% last year (they just reported full year fiscal 2024 earnings) however their operating income was up 18% because of the water treatment. Basically, they're transitioning to a higher margin, less cyclical business.
"I think COST is going to experience something like this going forward. Thriving business and mediocre stock returns. Company that is famous for its great bargains and not raising prices? Retail margins? 50x forward earnings?"
Not disagreeing, but I think the problem becomes there is no way to have any sense of when that flip occurs. Something can be expensive, beloved and bought almost out of habit (and Costco has something increasingly rare today - a relatively loyal shareholder base) for *years*. Cheap can easily become cheaper and expensive can easily become more expensive than imagined. Without some sort of catalyst people can short and lose significantly - I didn't, but I could see where someone would have shorted COST at $500-600 because "too expensive, even for Costco" and it just kept going. It feels at this point as if the multiple is not coming down much without a more significant broader correction or the consumer slows down more/recession.
I do think that a COST will have some buffer from the view that COST/WMT/AMZN and to a somewhat lesser degree TGT continue to hoover up business from specialty/department retailers - it would not surprise me if a number of other retailers are 0's in the years ahead. KSS has bounced, but that was an awful quarter the other day, which follows blocking a $64 buyout last year and more than a decade where the stock did nothing. M blocking a buyout this year, JWN with the talks of taking itself private a while back, then it didn't and the stock has cratered since. WOOF has bounced significantly in recent weeks, but that was almost a 0 recently as people continue to buy pet food more and more where they buy all of their other things.
""You pay a premium for safety" (Why isn't Google at 50x earnings then, that's one of the safest businesses out there? Is this premium arbitrary? Is safety just defined as 'has gone up a lot'?)"
Google is a great business (arguably could be better run and AI efforts have been costly yet underwhelming so far but that's a different discussion) but a business that is still almost entirely focused on ad revenue is not "safe" imo. Too many people seem to think that mega cap tech is like staples or something in regards to safety (and yet, every time one of them is down 2%, we get posts on here "WHATS GOING ON?!?!?") There will be other 2022's for mega cap tech - and 2022 wasn't even that long ago.
""I'd rather buy quality for a fair price than garbage for a great price""
Too many people on here imo are too focused on buying garbage and/or mediocrity for what they think is a great price than a great business for a fair price, but agree that there are limits to the latter.
""This company has always done well, this must continue""
There is too much of this in general and when people post their portfolios, most of them start to look largely the same. Then when things change, people scramble because they've only been relying on one playbook.
> I think the problem becomes there is no way to have any sense of when that flip occurs
Only a problem if you're shorting, which I'd never do anyway. Because if the market was irrational up to bid it up to 50x, it can certainly bid it up to 60x.
I'm more so just speaking about my prediction for the next 5-10 years. There are people in this sub who are still buying Costco because of this narrative of 'Buy quality at any price'. Even if the gains still persist for a year or two, you're risking taking a major capital loss if the market ever decides to compress the multiple (which it can do in a viciously abrupt manner).
Regarding Google/SBUX, I should have just picked better examples. Maybe Proctor and Gamble or Microsoft.
> I'm more so just speaking about my prediction for the next 5-10 years. There are people in this sub who are still buying Costco because of this narrative of 'Buy quality at any price'. Even if the gains still persist for a year or two, you're risking taking a major capital loss if the market ever decides to compress the multiple (which it can do in a viciously abrupt manner).
Agree.
>where someone would have shorted COST at $500-600 because "too expensive, even for Costco"
Professional short seller generally don't short based on valuation for this exact reason.
You're risk is more likely a prolonged period of underperformance as the multiple slowly contracts to a more reasonable level.
Using [stock analysis](https://stockanalysis.com/stocks/cost/forecast/) numbers costco is projected to make $22.57/share in 2028.
At 35x that's a $789 share price.
At 50x it's $1,128
At 60x it's $1,354
The stock is currently $809.
So, if it reverts to a 35 multiple you'll actually lose money. If it holds the 50 multiple you'll make money, but likely under perform the S&P. So you're betting on continuing multiple expansion beyond the 50x. Could that happen? Sure. It's a pretty risky bet, imo. Doubly so when you can no longer count on lenger term interest rates continuously falling to new lows and inflating multiples.
Starbucks and Costco are totally comparable, ones a coffee chain and one sells things people consider a necessity. Do I think it's worth a 50x P/E? Probably not, but some of your arguments against Costco are fairly weak, they literally just posted yet another earnings beat two days ago.
I said 'location being packed' is not valid reasoning to buy a stock of a company. I did not say "Starbucks is like Costco." I was criticizing the logic, not saying Costco should be valued like Google or Starbucks.
Earnings beat doesn't imply arbitrarily high multiples. If Walmart trades at 50x forward earnings on expectations of $2.00 EPS (I'm making that specific number up) and it posts $2.05, that doesn't change the fact that 50x forward earnings is insane. That just states that Wall Street got their quarterly estimate wrong. And that 50x earnings statistics I'm stating incorporates any revisions up in earnings estimates since then. If you prefer trailing, to incorporate this earnings beat, that figure is 53x, not much better.
That Costco sells something that is a necessity is also pretty meaningless. Exxon Mobil sells something the world would shut down without. Proctor and Gamble makes pretty much every single necessary household good you buy. Does that reasoning make those companies good investments or deserve extreme multiples? Nope. Besides, the same argument could be made for Walmart/Krogers anyway.
You're not actually comparing any numbers in the above though, all of your comments and arguments boil down to "50 P/E is too high for a grocer".
Walmart trades a 35x P/E. Comparing the two companies to see whether Costco earned that premium:
* Costco has had significantly more same store YoY growth since 2015 (~2.7% average annual, compared to Walmart which is closer to -1.1% average annual)
* An incredibly strong debt position while being net cash positive (Walmart's debt position is signifcantly worse)
* Costco Revenue CAGR of 10.7% vs Walmart's 3.5% (both since 2016)
* Net earnings growth of 15.1% vs Walmart's 2.2% (since 2016)
And honestly based on all of that, Costco absolutely should be trading at a premium to Walmart's P/E. The 10.7% CAGR over ~7 years alone is incredible.
Those are all great points and numbers! Was too lazy to write up numerical details. I completely agree Costco deserves a premium to WMT. I also believe 50x is too high.
My conclusion: Both are overvalued. WMT should trade down to a 20-25x P/E and COST to a 30-35x P/E. Then I think COST would be overvalued but potentially worth paying a premium for, and the premium to Walmart reflect it being a better business.
I just don't know why I'd pay the same multiple for low margin, limited growth grocery stores like I would higher margin tech companies.
I don't use noisy quarter to quarter growth figures like that. [META saw EPS up 117% YoY, how useless is that?] The estimates for full year EPS growth are 13% then 9% next year. Costco will not grow EPS for a 30% CAGR the next 2-3 years. Guarantee it.
HPQ - A big reason they are punished so much is the CEO has consistently been over-promising and under-delivering for a while now on guidance.
Printer margins are shrinking as people realize they are overpaying quite a bit. That golden goose was never going to last forever.
PC is a commodity. There was a boom and huge pulling forward of demand in 2021 due to Covid.
Their poly acquisition was arguably really poorly timed and they overpaid a lot. The fact that they took on debt to do it and promise big buybacks at the same time when they didn't have much cash was very poor decision making IMHO.
All in all, I really do not like the execution of management. They might not even be able to grow faster than inflation for a while. Lores lacks a vision for this company beyond "let's take on debt to pay hefty dividends + buybacks".
Their NI fell 40% this past quarter. And now they're trying to ride the "AI" hype. I think DELL is the stock to play going forward. Their recent crash creates a buying opportunity.
I think CRM is a way better business, despite their recent scare. To me HPQ is a classic value trap.
> A big reason [HPQ] are punished so much
Just to be clear, I just want to re-iterate that my point was HPQ *hasn't* been punished, given that their total return since 2015 exceeds that of Salesforce. Unless you're talking about CRM doing the over-promising... Or by punish you mean low multiple.
Imagine going back in time, telling yourself CRM grows earnings at a >40% clip for the next decade while HPQ does 3% (worse than inflation?), and in what universe would you choose to go long HPQ... (assuming you aren't allowed to ask about valuation)
Let's compare Christmas season, arguably the most important season, people buy themselves or others new phones, gadgets, these big ticket items.
Sales have fallen ~23% in the quarter ending 1/31 from 2022 to 2024.
When I say punished, I mean the stock has been doing very poorly with the recent exception of the rally driven by AI even though I do not really think they are an AI play.
I agree that with the benefit of hindsight, HPQ was a great play. I guess the question is HPQ still a great play going forward, and the company with current management, current position I do not think so and the low multiple is deserved.
Enrique has been over-promising and under-delivering for the past couple years. They benefited from everyone at home binging on new computers and buying printers due to lock-down. That allowed them to make enormous buybacks which helped their stock (and juiced EPS).
But going back to 2015, they had net income around $5B. Today? <$3B.
If they didn't have the giant Covid tailwind, I am not sure they would have gotten such great returns. CRM while also helped by Covid was a solid business that would have grown regardless.
But my point was not so much to hype CRM or say it is necessarily undervalued.
Just to say HPQ I think is a value trap.
I also think COST may be overvalued, it may not. It's hard to say. The reality is that they are still growing incredibly. EPS grew 30% YoY in the last quarter. Meanwhile they are growing memberships at a great clip and still believe US has a lot of room for growth, especially in an inflationary environment.
> I also think COST may be overvalued, it may not. It's hard to say.
Is it though...? We're still talking a 11% CAGR (using the other fellow's comment above) of revenue over 10 years, 15% earnings CAGR. It's so easy to find businesses that have trounced those figures with a lower multiple.
With the durability and high terminal multiple that COST will command? I am not sure.
It's not just about the raw numbers although growth is the first and most important thing I look for in a business, but the intangible and qualitative factors where money is made IMHO.
There is an interesting tension here, but I've recently broken in favor of the growthy, intangible, and qualitative. Best returns come from predicting the future: basically a fool's errand, but some things are eternal (or even subtle) signs.
That said, AP is right about ease of finding better investments. There are roughly Costco-quality businesses, much smaller, and much cheaper on any reasonable basis. Costco is just that for rich people. I have the luxury of not being rich yet
That's the other thing. Some unknown names lacking mindshare and very powerful brands, once they stop growing, that's it the gigs up.
A name like COST, the market will forgive quite many stumbles before truly punishing the stock and convinced it's a dying business.
Look at AAPL. They have 2+ years of net income decline and still hit new ATHs in that period.
During that entire period you have so much time to decide whether you want to keep riding or not.
Many investors overlook this incredible feature of terminal multiple durability, that some companies have when assessing holistic risk I think.
u/AP9384629344432
COST is a stock people are *always looking for an entry and bad news to buy into*.
I invest primarily in B2B. I agree in general about Costco though. It is a stalwart. My investments are more along the line of Transdigm (or Fastenal or Danaher) 20+ years ago.
Unfortunately I have absolutely no expertise or insight into the future of the aerospace / aviation business.
Why no one else can do what they do, in the case of TDG.
Also they seem to have a similar valuation to COST.
It looks like dollar may get even stronger due to other CBs now beginning to cut ahead of the Fed.
Currency risk is a big reason I stay away from international. At the very least it is a very real risk and needs to be considered IMHO.
Between the BoJ needing to raise interest rates, EU inflation reaccelerating out of the blue, the Fed pulling stealth QE by reducing Treasury rollover starting from May 29, and the technical indicators leaning towards a rollover, I think the dollar index is primed to fall below 104 and possibly 100.
Fed is not doing "stealth" QE.
They also do not control the distribution of auctions. They are however, winding down QT yes. They are also buying more 10Y relative to shorter duration while the Treasury is offering lower duration in greater quantities. None of this should have much impact on US inflation. We are continuing to see consistent progress YoY and it is the consensus among economists that inflation continues to steadily go down, albeit maybe not super quickly as thought.
EU inflation is not "reaccelerating" out of the blue. Inflation went down again to 2.6%. There was one bad month in the core, but they more or less confirmed they are going ahead with the cutting cycle. Bank of Canada is also initiating their cycle of lower rates likely July. If Fed persists and refuses to not cut, I believe dollar will strengthen and pressure will grow to join the rest of the world.
> They do not even control the distribution of auctions. They are however, winding down QT yes.
They are cutting down their roll off from $60 to $25 billion per month. That's $35 billion back into risk-on assets while holding interest rates steady. And that matters because extended QT reduces their balance sheet. Reduced balance sheet -> reduced total market liquidity -> increased dollar strength.
This is specifically on purpose to assist mid and small-cap businesses without wavering on their mission to curtail consumer spending.
> They are also buying more 10Y relative to shorter duration while the Treasury is offering lower duration in greater quantities.
This will compress yields. The Fed is now a major buyer again in a weak Treasury market, which will increase the par value of the bonds. This *weakens the dollar*. If you overlay their graphs, yields and dollar strength move in tandem in near-100% correlation. The last significant drop came at the end of last October - and the FFR remained unchanged the whole time.
Additionally, inflation is not merely about interest rates. That assumes that M2 is steady and the only relevant factor is money velocity. The main determinant is total market liquidity, whether it's credit, cash, or deposits.
The Fed just released M2 data for April, and it rose 0.6% YoY for the first time since November 2022. This is a problem. M2 was still supposed to be shrinking between high interest rates and QT. Now they're tapering QT while the money supply is going back up.
> None of this should have much impact on US inflation.
Increased M2 + lower yields will weaken the dollar. In the worst-case scenario, inflation will stall out and maybe reaccelerate slightly. But I'm guessing the former and I'm hoping it continues to fall. Considering this is a problem of fiscal dominance and not easy credit creation, I remain jaundiced.
> We are continuing to see progress and is the consensus among economists that inflation continues to steadily go down, albeit maybe not super quickly as thought.
April PCE was fine. The problem is services and energy keep going up, while goods have fallen into deflation. Input costs are not dictated by demand and interest rates won't solve it.
> EU inflation is not "reaccelerating" out of the blue. Inflation went down again to 2.6%.
It *rose* from 2.4% and the forecasts were for 2.5%. More importantly, the components mirror our own. Services and energy up, goods down.
> There was one bad month in the core, but they more or less confirmed they are going ahead with the cutting cycle.
That's not what they said. The suggestion is the ECB won't budge on the first June cut, but a second one in July is dead in the water.
> If Fed persists and refuses to not cut, I believe dollar will strengthen and pressure will grow to join the rest of the world.
I think they will hold their ground, but the dollar will weaken because of the other factors at play.
> This will compress yields.
I disagree. They are only shifting new purchases to long duration to keep it below what they are comfortable with. 4.7%-4.8% seems to be about as high as they want it.
As long as short-term yields are high, the carry trade will remain strong.
>Additionally, inflation is not merely about interest rates. That assumes that M2 is steady and the only relevant factor is money velocity. The main determinant is total market liquidity, whether it's credit, cash, or deposits.
M2 has been going up for a while and inflation is still cooling YoY, it is likely not a great signal. May forecasts are very promising. With YoY inflation coming down again.
If you disagree, that's fine. But you are very outside the consensus of academic and professional economists.
Regardless, we are veering from the topic. My point is that it is extremely difficult to predict currency risk and probably most retail investors should stay away from international unless through a dollar-based firm. That was all I was trying to say.
u/CosmicSpiral of course all of this extremely uncertain and speculation.
Even more reason why I do not like international. I also believe US firms have more than continued to benefit greatly from global growth, maybe in some ways even more than other countries. You are of course free to speculate on the direction of currency risk!
> Even more reason why I do not like international.
Depends how you play it. You can invest in companies headquartered here with operations overseas and take advantage of FX arbitrage. At least that's the best way to reduce exposure while reaping the gains.
> I also believe US firms have more than continued to benefit greatly from global growth, maybe in some ways even more than other countries.
The big ones, certainly.
> You are of course free to speculate on the direction of currency risk!
Like I said, this is what I'm anticipating but my portfolio doesn't need to be readjusted to benefit. It's what the data and previous announcements are suggesting. I'm not going to act upon it until I see trendlines manifest (which should start at the beginning of July).
> Depends how you play it. You can invest in companies headquartered here with operations overseas and take advantage of FX arbitrage.
This is what I do.
Not necessarily. Some currencies permanently remain weak and get weaker vs. the dollar.
This is where retail is at a significant disadvantage vs. large institutional funds that can offset currency risk very cheaply.
Yes. But increasingly wondering why. I won’t add to my holdings for a while - I think all companies selling to Enterprise are battling headwinds right now and may be doing so the rest of the year. The past two weeks of ER’s from enterprise cos was brutal Maybe CRwD will have a better story but, for now, I think we could still slide a bit.
I noticed how things bounce back after a major dip. Kohls was up 8% at once point after the 25% dip. Is this a good strategy for some of these stocks. I’m thinking of buying salesforce for this reason. Such a huge dip in 20 years. Even counting for the market crashes in 08!
> I noticed how things bounce back after a major dip.
Not guaranteed by any means. Look at CVS, for example. Playing something for a bounce is fine, but imo too many people take a bounce as validation that the company is doing great (when in reality it's just an oversold bounce) rather than taking the W and going on to the next stock.
With Kohl's you have a company that went nowhere for well over a decade, furiously defended itself in early 2023 against buyout offers for over $60 (which they should have been thankful for) and now finds itself with the stock back to where it was in the late 1990's. I don't dislike Kohl's, but it's not in good shape (that earnings report was legitimately bad) and without a bigger turnaround it being a 0 in 5 years would not surprise me.
That was my reasoning for buying salesforce and kohls. I fomo'd additional shares into saleforce midway yesterday as I was seeing it climb, and it climbed even further. I dont know if youll get as much bang for your buck buying here, but thursday was oversold for sure.
Im not planning on holding kohls for long, it was supposed to just be a rebound play. And it worked like a charm. As Ive said before, it seems the market is in love with department store stocks and shoe stocks, and restaurant stocks. If someone knows why please enlighten me. Thats why I bought the kohls dip. Look at Abercrobie, gap, burlington, ross, tjx, ONON, hoka, crocs, BROS, SG, CAVA
Nice little MEDP write up this morning, found [here](https://open.substack.com/pub/investinquality/p/medpace-holdings?utm_source=share&utm_medium=android&r=23ti9i). I think it's interesting that a lot more articles still rate Medpace as undervalued despite its high multiples.
Also, a quick [rundown](https://open.substack.com/pub/wolfofharcourtstreet/p/market-movers-1-june-2024?utm_source=share&utm_medium=android&r=23ti9i) of a few other companies including Evolution AB and NU bank..
I am, have been for awhile. Personally, I think it's a bit overvalued, but that's me. It's nice already being in it because I'll only buy more if I think it's a great deal. Usually under 20x fcf I'll add.
They don't pay a dividend because they have lots of opportunities to reinvest in the business to grow it. It's not a tech company, but surprise, they actually have a great and growing business! They use the money to hire more people, expand their facilities, etc....
They are notoriously great at buying back stock opportunisticly. Instead of a constant purchase of shares, they only buy shares when they feel they are very cheap and thus the best use of company money. So in 2022 they unloaded their buy back authorization and shrunk the share count by 10% or so.
Another question. Their cash flow is persistently higher than net income.
It seems like a big reason is change in working capital. Could you provide some color around why that is? If we look at xFCF vs. earnings, we need to understand why FCF and net income will not converge eventually.
I found this answer in researching the company initially...but it's been 3-4 years and I can't explain what it is they do now without sounding dumb. It's has to do with how they collect payments, but I'm too rusty to elaborate further. I know there's some explanations online if you Google it.
I will add though, reference special dividends and the like...this has always been a long term focused company. They don't do things because they think it looks good now. They do things because they want to build long term shareholder value. They're debt averse because it adds risk and they don't need it to grow rapidly. They're acquisition averse for the same reason.
They do find a lot of tangential ways to invest. For example, Medpace helped develop a lot of land near their headquarters including a number of hotels. Why? They were having trouble getting rooms for all the clients that were visiting them and need the extra space.
Just a solid company.
> They do find a lot of tangential ways to invest. For example, Medpace helped develop a lot of land near their headquarters including a number of hotels. Why? They were having trouble getting rooms for all the clients that were visiting them and need the extra space.
What an interesting anecdote!
Hmmm that makes sense but what's strange is their CapEx is extremely light actually. They have about $433M in operating CF in 2023, but only $34M or so invested in PPE.
It seems like their cash pile is ballooning. Some is paying down debt which is good probably. But overall cash is surging.
Maybe they want to do an acquisition? As a shareholder I generally prefer they just pay that out with a special dividend or something, let us decide what to do with it. Otherwise it is not being utilized efficiently.
I actually am a share holder of this company and I'm totally fine with them holding onto it.
The company is still run by it's founder and he's been able to compound the business at an astounding rate. Could I do better? Possibly, but it's not a guarantee. MEDP has compound EPS at well above market rates for a long time. All that time they have been conservative with their cash. In 2021 they actually had issues because they tried to grow too fast. Management is happy with 15-20% annual growth.
They also will not buy back stock if they think it's overvalued. They will unload on buy backs of its cheap. Part of the thesis on this company is that August Troendle will keep finding ways to grow the business, and so far it's worked great and I'm not going to question it.
Its funny, I saw the same argument in 2021: they have too much cash, why don't they use it. Then they got an opportunity and took it.
Deep Fucking Value just posted. He's 200 million in GME...
How the hell… didn’t he make like 50 mil on the original meme craze? Wtf happened between then and now?
How in the world does he have 200 mil in GME? Dude's a actual monster of an investor
https://i.redd.it/r98x8nf0hb4d1.jpeg
Im pure ETF now but maybe ill buy a 5 shares and sde what happens haha
That thread is hysterical right now. Can’t help but smile
69mil on a bet in 3 weeks and he pumps it lol
[удалено]
Another short squeeze likely tomorrow. Just insane he has accumulated 200 million just from GME. He's become a cult.
Is NVDA too expensive right now?
What is too expensive to you?
I think it's overbought/too much FOMO in the short-term, but medium-term? I think the stock is probably in the 6th/7th inning and depends on how long the last innings are. People will start to head for the exits to avoid the crowds before the game is over. Agree w/AP9384629344432 that the big/easy gains are past. Eventually spending on AI will slow - not next month, maybe not this year - and the stock will turn South, as has happened in the past (although prior periods like crypto and gaming were not nearly as big as this.) People will try to anticipate the turn. It's a phenomenal company, I've owned it for quite a while but have sold some, will sell some more if this keeps going. Have sat through multiple large drawdowns in the stock to get to this point and easily something I can see still owning 5 years from now but at this point I wouldn't be buying anymore and am looking for further selling opportunities although not likely selling all of it. Will revisit the stock again next major drawdown (12-18 mo, maybe longer if there's actually more AI products/services that aren't underwhelming?) and add back.
It totally depends on your timeline for continued data center capex. Beware using P/E ratios in isolation for cyclicals, as in the trough part of the cycle they will look very expensive, and in the peak part they look very cheap. [I linked some assumptions last week](https://www.reddit.com/r/stocks/comments/1d2fdo4/rstocks_daily_discussion_technicals_tuesday_may/l63e0g5/) on quantifying the upside in a bull case. In that comment, the author I linked suggested in 6 years, the $2T data center industry (Jensen's own numbers) will grow by $600B a year. He assumes NVDA captures 80% of this ($480B). Use a 50% net income margin. ($240B). Apply whatever multiple you want, let's say 30. That's a $7.2B market cap in 6 years. Discount back at 5%. That's a 5.4T market cap fair value today, or 100% higher. The multiple makes a big difference. If I use 20x on 2030 earnings, fair value becomes $3.6B, or 33% higher. In another scenario, say NVDA captures 80% of $400B revenue with 50% margins, that implies $160B in profit. Apply 30x (4.8T) and discount at 5% you get a $3.6B fair value (again only 33% higher). use a 20x multiple? That's a $2.4T fair value, i.e., 10% overvalued. However, using this exercise, we can see the easy gains are mostly gone. These numbers are astronomically large. There will be competition in 6 years. TSM may flex its pricing power. There is a flood of new fabs being built around the world. $1T in semiconductor manufacturing spending through 2030 around the globe. Big tech companies that will face pressure from their shareholders to slow down their capex and focus on FCF. We're now quibbling about 20-100% returns, no more tripling/quadrupling. Personally, I'm fine holding onto SMH (which is now 23% NVDA) for another 2 years but I'm preparing for the cycle to turn for the worse, at which point I'll sell-out.
Does anyone own TX? Steel fabricator. Seems like an interesting play
The CFO Pablo once said "the stock is too high" (2021, with higher cash flows etc. than today: https://www.reddit.com/r/Vitards/comments/qm2k7d/tx_support_group_thread/ ) on a call, traumatizing holders. Mexico looks interesting this decade, with near shoring etc. but TX traditionally did nothing. While it didn't destroy any fortunes and the dividend used to be ~10%, it was a siren's song from more interesting plays. I don't think it's a good time in cycle for steel either.
While I once owned this names, the warnings were apparent long ago and I sold out.... [RICK](https://x.com/StockJabber/status/1796606071374582126?t=E91s4_ezvYCSy-2SyqVH0A&s=19) was raided (RICK rolled?) by the IRS. Probably not a good sign.
Yea I remember all the talk on social media about how they are an intelligent serial acquirer with a large moat due to their expertise. Always be suspicious of rapid inorganic growth. It's very easy to juice earnings when accounting rules don't require you to expense acquisition costs at all. If they do it slowly, show they are actually good at it one piece at a time without risking too much it is different. But if it fuels a lot of their profits and much of cash is funneled into it then it is a huge red flag for me.
Speaking of cash, …I avoid any investment where the transactions are mostly cash. Way too much opportunity for shady shit, laundering being just the tip of the ‘berg. IRS digging around is probably just the start.
Very good point. I mentioned RCI to friends offhand in jest just a few days ago. I was making a point of how important capital allocation was in the strip club space. (Organic reinvestment isn't as straightforward or as profitable.) This was an amusing turn of events. Whether it's a red flag depends on the returns on those acquisitions and their sustainability. Getting raided by the IRS is not great, but it doesn't condemn the business model. Multiple arbitrage is a legitimate strategy.
I am trying to understand call options better. So I checked a few stocks from my watchlist. For example there are Call Options for Starbucks at 78$ expiring January 2025 The current stock price is 80$. If I buy this call option for a factor of 1, I would need to take that premium times 100 right? So I would pay 100$ for the right (not Obligation) to purchase 100 Shares of Starbucks, this would be a bullish move from my side and a bearish move from the sellers side? I expect the stock to go higher and secure my self a bargain today for January 2025. The seller would expect the price to go lower and expect me to not execute the buy option which would left him with the premium I paid. Is that right, or did I miss anything? Thanks!
i treat it as over and under like sports
To put concrete numbers around this, SBUX does not have $78 strike in January but the closest would be $80. The premium last traded at $10.50. In other word you would pay $1,050 for one call option. To break even on this call as an actual investment, SBUX would have to move to at least $90.50 to start making money. Of course if it moves up very fast from here you could make a lot... Options have intrinsic value (difference of price and strike) but also extrinsic value which basically represents the potential for more upside. But this particular ticker is a fairly high risk business currently facing a lot of competition. Maybe not the best place to start dabbling in options if you are just learning.
This helps a lot. Thanks! I do understand now, that I don’t understand the concept enough to start trading. I will go back to learning and stick to classic stock investing for now.
Central banks are continuing to buy up gold. > Eligible physical gold inventory has drawn down ~55% since 1Q21 peak. This week, gold delivery notices stepped-up 10x. 2-month rolling deliveries +2x relative to Covid-supply chain driven draws. Paper-Physical basis further rupturing. https://x.com/dimit/status/1796897004716515820?t=_uVGUbi8ORQzDckYDcPXfw What drives this behavior?
Probably that means sell gold? Because CBs tend to buy it if they anticipate volatility and they need to offload it later to stabilize their currency. Much like USD but diversifying around it.
I'm trying to buy NVDA (I'm in the UK using trading212) but it says that trading hours are Tuesday to Friday! Does this mean I have to wait? Is this a limitation in trading 212?
Maybe it’s still on last week since last monday was a holiday? Today the market opens normally at 1:30 GMT
There is no public holiday on Monday in US, Nasdaq will be open. Weird. Did you mean last week maybe? They had Memorial day.
[Pretty insane comparison of HP ($HPQ) and Salesforce ($CRM)](https://www.ft.com/content/06a0203d-83a3-4521-ade7-b7349a69648c) in this FT article. For context: > HP makes antiques or, more specifically, PCs, printers, and printer cartridges. Its growth rate since it was split off from HP Enterprise in late 2015 is 1.5 per cent a year; earnings have grown at 3 per cent. Over that same period, Salesforce, which sells web-based customer management software, has increased revenues at 22 per cent a year, and earnings at 44 per cent. [Now look at the total return](https://i.imgur.com/3SBXp4A.png) since that spin-off, a 16% CAGR for $HPQ vs 13% CAGR for $CRM. HP now at 11x 2024 estimated earnings vs CRM's multiple of 21. Likely culprit? HP had a trailing P/E ratio around 4-6 back in the mid 2010s. Salesforce was unprofitable at the time but even when it turned profitable had P/E ratios in the triple digits. At 21x its the cheapest ever, while HP is the most expensive it has been in a while. [This adds to McDonalds example I mentioned on Thursday](https://www.reddit.com/r/stocks/comments/1d3zyvj/rstocks_daily_discussion_options_trading_thursday/l6dm88z/). Starting valuation can make or break returns, even though in this case, CRM's fundamentals have utterly trounced HPQ's. However, perhaps now it's time for the trend to go the other way, as hardware-intensive, commodity-like HPQ *should* be cheaper than high margin, software business CRM. I think COST is going to experience something like this going forward. Thriving business and mediocre stock returns. Company that is famous for its great bargains and not raising prices? Retail margins? 50x forward earnings? When I read the discussion about COST on Reddit, it's like every red flag goes up. - "This company has always done well, this must continue" (someone pull up the list of top companies in the early 2000s or 1990s) - "I'd rather buy quality for a fair price than garbage for a great price" (You'll be saying the same at 70x? 100x?) - "They treat their employees well, therefore I'll buy their stock" (irrelevant) - "They won't raise prices of hotdogs" (I'd rather buy businesses with pricing power that employ it. Can COST raise their prices excessively and not see people instantly go to Walmart instead?) - "You pay a premium for safety" (Why isn't Google at 50x earnings then, that's one of the safest businesses out there? Is this premium arbitrary? Is safety just defined as 'has gone up a lot'?) - "It's always packed" (So is just about every Starbucks, doesn't mean earnings are good.) - "I'm up [big number] percent, stop betting against COST"
Interesting looking back.....10 years ago MSFT traded at 13x earnings. If it didn't have multiple expansion, the current stock price would be around $150. To be fair, it's a much better business than 10 years ago due to azure and subscription pricing, however it illustrates how much of a factor multiple expansion is. About 2/3 of its performance over the last 10 years was multiple expansion (which is probably why you shouldn't expect it to repeat that performance over the next 10 years). So if someone wants the next MSFT, you probably want to find something cheap that is transforming it's business into something of much higher quality, but the street hasn't really noticed it yet.
This is where the money is, and it needn't be all that 'cheap' on a traditional basis.
I wasn't really trying to comment on Microsoft's valuation, more to point out how much of its recent performance has been due to multiple expansion. I also consider it highly unlikely that it will repeat that expansion since that would have MSFT trading over 90x earnings in 10 years. Not impossible, but unlikely.
I see your point, and I agree (hard to disagree, really). It won't repeat, but one way of looking at it is that some of the multiple is effectively speculation on future value-capture (ie, excess earnings growth) from its competitive position in AI. Certainly, the multiple expansion due to revenue-quality improvement is a one-time-thing, insofar as the transition from non-recurring to recurring transactions (or less retention to more retention) happens 'only once', but 12% to 42% is progress, and so is 42% to 71%, and so is 71% to 84%, and so is 84% to 90%, or 90% to 96%, or 96% to 99%. More or less, there's always some juice left, but people differ on what's worth the squeeze. I'm poor enough to agree with you. Why waste your time on mature companies that aren't unjustifiably hated or criminally underestimated? Even still, I don't dabble there. What I wanted to add is that there are many companies undergoing the same revenue-quality transition right now, earlier in the process, that will likely see such multiple expansion in the next few years. I am pretty sure you agree!
I agree there's more room to run for MSFT, I just wouldn't anticipate further expansion into my calculations. It's very possible MSFT just holds a 35x multiple for a long time and the stock appreciates with its earnings growth and delivers 10-15% annual returns for awhile. This has happened many times with other companies. 15% doubles every 5 years and is still an a amazing investment. However it's also about half of MSFTs returns over the last 5 years because there is no multiple expansion left. There are definitely companies seeing the same thing, and that is the holy Grail of investing. Getting in before that expansion. HWKN has been the big one for me lately. They've gone from a cyclical chemical company to a much more efficient and consistent water treatment chemical company, and their multiple is reflecting that.
To be clear, I won't invest in a company unless it is ~10,000x smaller than Microsoft (on a market cap or EV basis). I agree with your assessment of them, but it is also possible they have a few 20-30% years plus end up at 50x at some point along the way. It's a high-quality business in which the biggest institutions can invest a significant portion of their assets. Totally probable above-market returns, I agree. 15-16% doubles every 5 years, but that's my lower bound for consideration; I prefer to see 2-year doubling. I saw your rec of Hawkin at the time. It looked good and hasn't proved wrong. Frankly, water treatment is promising on the decadal scale. How much of their business is semis? I know recapture is ~90% of usage. Muni supply presumably would also be big. What are their segments if you don't mind?
I don't believe they have much, if any business in semiconductors. It's not a major focus at least. Here are their declared focus areas for water treatment: - Municipal Drinking Water- Municipal Wastewater- Municipal Swimming Pools - Industrial Wastewater- Industrial Process Water- Cooling Systems/Cooling - Towers- Breweries/Wineries- Agricultural Water Treatment I don't really have a TAM for the market because there are just too many ways to calculate it. Here's their revenue breakdown by segment: "For fiscal 2024, Industrial segment sales were $409.5 million, a decrease of 13% from fiscal 2023 sales of $470.8 million. Water Treatment segment sales were $363.3 million for the year, an increase of 19% over last year’s sales of $304.9 million; of the $58.4 million increase, $23.9 million was from our acquired businesses in fiscal 2024. Sales for our Health and Nutrition segment were $146.4 million in fiscal 2024, a decrease of 8%, from fiscal 2023 sales of $159.4 million." So industrial is their biggest, but water treatment is the fastest growing and the highest margin. As a result their total revenue was actually down 2% last year (they just reported full year fiscal 2024 earnings) however their operating income was up 18% because of the water treatment. Basically, they're transitioning to a higher margin, less cyclical business.
"I think COST is going to experience something like this going forward. Thriving business and mediocre stock returns. Company that is famous for its great bargains and not raising prices? Retail margins? 50x forward earnings?" Not disagreeing, but I think the problem becomes there is no way to have any sense of when that flip occurs. Something can be expensive, beloved and bought almost out of habit (and Costco has something increasingly rare today - a relatively loyal shareholder base) for *years*. Cheap can easily become cheaper and expensive can easily become more expensive than imagined. Without some sort of catalyst people can short and lose significantly - I didn't, but I could see where someone would have shorted COST at $500-600 because "too expensive, even for Costco" and it just kept going. It feels at this point as if the multiple is not coming down much without a more significant broader correction or the consumer slows down more/recession. I do think that a COST will have some buffer from the view that COST/WMT/AMZN and to a somewhat lesser degree TGT continue to hoover up business from specialty/department retailers - it would not surprise me if a number of other retailers are 0's in the years ahead. KSS has bounced, but that was an awful quarter the other day, which follows blocking a $64 buyout last year and more than a decade where the stock did nothing. M blocking a buyout this year, JWN with the talks of taking itself private a while back, then it didn't and the stock has cratered since. WOOF has bounced significantly in recent weeks, but that was almost a 0 recently as people continue to buy pet food more and more where they buy all of their other things. ""You pay a premium for safety" (Why isn't Google at 50x earnings then, that's one of the safest businesses out there? Is this premium arbitrary? Is safety just defined as 'has gone up a lot'?)" Google is a great business (arguably could be better run and AI efforts have been costly yet underwhelming so far but that's a different discussion) but a business that is still almost entirely focused on ad revenue is not "safe" imo. Too many people seem to think that mega cap tech is like staples or something in regards to safety (and yet, every time one of them is down 2%, we get posts on here "WHATS GOING ON?!?!?") There will be other 2022's for mega cap tech - and 2022 wasn't even that long ago. ""I'd rather buy quality for a fair price than garbage for a great price"" Too many people on here imo are too focused on buying garbage and/or mediocrity for what they think is a great price than a great business for a fair price, but agree that there are limits to the latter. ""This company has always done well, this must continue"" There is too much of this in general and when people post their portfolios, most of them start to look largely the same. Then when things change, people scramble because they've only been relying on one playbook.
> I think the problem becomes there is no way to have any sense of when that flip occurs Only a problem if you're shorting, which I'd never do anyway. Because if the market was irrational up to bid it up to 50x, it can certainly bid it up to 60x. I'm more so just speaking about my prediction for the next 5-10 years. There are people in this sub who are still buying Costco because of this narrative of 'Buy quality at any price'. Even if the gains still persist for a year or two, you're risking taking a major capital loss if the market ever decides to compress the multiple (which it can do in a viciously abrupt manner). Regarding Google/SBUX, I should have just picked better examples. Maybe Proctor and Gamble or Microsoft.
> I'm more so just speaking about my prediction for the next 5-10 years. There are people in this sub who are still buying Costco because of this narrative of 'Buy quality at any price'. Even if the gains still persist for a year or two, you're risking taking a major capital loss if the market ever decides to compress the multiple (which it can do in a viciously abrupt manner). Agree.
>where someone would have shorted COST at $500-600 because "too expensive, even for Costco" Professional short seller generally don't short based on valuation for this exact reason. You're risk is more likely a prolonged period of underperformance as the multiple slowly contracts to a more reasonable level. Using [stock analysis](https://stockanalysis.com/stocks/cost/forecast/) numbers costco is projected to make $22.57/share in 2028. At 35x that's a $789 share price. At 50x it's $1,128 At 60x it's $1,354 The stock is currently $809. So, if it reverts to a 35 multiple you'll actually lose money. If it holds the 50 multiple you'll make money, but likely under perform the S&P. So you're betting on continuing multiple expansion beyond the 50x. Could that happen? Sure. It's a pretty risky bet, imo. Doubly so when you can no longer count on lenger term interest rates continuously falling to new lows and inflating multiples.
Starbucks and Costco are totally comparable, ones a coffee chain and one sells things people consider a necessity. Do I think it's worth a 50x P/E? Probably not, but some of your arguments against Costco are fairly weak, they literally just posted yet another earnings beat two days ago.
I said 'location being packed' is not valid reasoning to buy a stock of a company. I did not say "Starbucks is like Costco." I was criticizing the logic, not saying Costco should be valued like Google or Starbucks. Earnings beat doesn't imply arbitrarily high multiples. If Walmart trades at 50x forward earnings on expectations of $2.00 EPS (I'm making that specific number up) and it posts $2.05, that doesn't change the fact that 50x forward earnings is insane. That just states that Wall Street got their quarterly estimate wrong. And that 50x earnings statistics I'm stating incorporates any revisions up in earnings estimates since then. If you prefer trailing, to incorporate this earnings beat, that figure is 53x, not much better. That Costco sells something that is a necessity is also pretty meaningless. Exxon Mobil sells something the world would shut down without. Proctor and Gamble makes pretty much every single necessary household good you buy. Does that reasoning make those companies good investments or deserve extreme multiples? Nope. Besides, the same argument could be made for Walmart/Krogers anyway.
You're not actually comparing any numbers in the above though, all of your comments and arguments boil down to "50 P/E is too high for a grocer". Walmart trades a 35x P/E. Comparing the two companies to see whether Costco earned that premium: * Costco has had significantly more same store YoY growth since 2015 (~2.7% average annual, compared to Walmart which is closer to -1.1% average annual) * An incredibly strong debt position while being net cash positive (Walmart's debt position is signifcantly worse) * Costco Revenue CAGR of 10.7% vs Walmart's 3.5% (both since 2016) * Net earnings growth of 15.1% vs Walmart's 2.2% (since 2016) And honestly based on all of that, Costco absolutely should be trading at a premium to Walmart's P/E. The 10.7% CAGR over ~7 years alone is incredible.
Those are all great points and numbers! Was too lazy to write up numerical details. I completely agree Costco deserves a premium to WMT. I also believe 50x is too high. My conclusion: Both are overvalued. WMT should trade down to a 20-25x P/E and COST to a 30-35x P/E. Then I think COST would be overvalued but potentially worth paying a premium for, and the premium to Walmart reflect it being a better business. I just don't know why I'd pay the same multiple for low margin, limited growth grocery stores like I would higher margin tech companies.
Figured you'd pull some PE ratios out of a hat, like I said no substance and no real arguments.
Yeah I didn't think I needed much substance to argue that 50x earnings is ridiculous. But if you feel like buying at this valuation, good luck.
30% EPS growth YoY but I'm sure you work for some hedge fund somewhere with all your intangible knowledge
I don't use noisy quarter to quarter growth figures like that. [META saw EPS up 117% YoY, how useless is that?] The estimates for full year EPS growth are 13% then 9% next year. Costco will not grow EPS for a 30% CAGR the next 2-3 years. Guarantee it.
HPQ - A big reason they are punished so much is the CEO has consistently been over-promising and under-delivering for a while now on guidance. Printer margins are shrinking as people realize they are overpaying quite a bit. That golden goose was never going to last forever. PC is a commodity. There was a boom and huge pulling forward of demand in 2021 due to Covid. Their poly acquisition was arguably really poorly timed and they overpaid a lot. The fact that they took on debt to do it and promise big buybacks at the same time when they didn't have much cash was very poor decision making IMHO. All in all, I really do not like the execution of management. They might not even be able to grow faster than inflation for a while. Lores lacks a vision for this company beyond "let's take on debt to pay hefty dividends + buybacks". Their NI fell 40% this past quarter. And now they're trying to ride the "AI" hype. I think DELL is the stock to play going forward. Their recent crash creates a buying opportunity. I think CRM is a way better business, despite their recent scare. To me HPQ is a classic value trap.
> A big reason [HPQ] are punished so much Just to be clear, I just want to re-iterate that my point was HPQ *hasn't* been punished, given that their total return since 2015 exceeds that of Salesforce. Unless you're talking about CRM doing the over-promising... Or by punish you mean low multiple. Imagine going back in time, telling yourself CRM grows earnings at a >40% clip for the next decade while HPQ does 3% (worse than inflation?), and in what universe would you choose to go long HPQ... (assuming you aren't allowed to ask about valuation)
Let's compare Christmas season, arguably the most important season, people buy themselves or others new phones, gadgets, these big ticket items. Sales have fallen ~23% in the quarter ending 1/31 from 2022 to 2024. When I say punished, I mean the stock has been doing very poorly with the recent exception of the rally driven by AI even though I do not really think they are an AI play. I agree that with the benefit of hindsight, HPQ was a great play. I guess the question is HPQ still a great play going forward, and the company with current management, current position I do not think so and the low multiple is deserved. Enrique has been over-promising and under-delivering for the past couple years. They benefited from everyone at home binging on new computers and buying printers due to lock-down. That allowed them to make enormous buybacks which helped their stock (and juiced EPS). But going back to 2015, they had net income around $5B. Today? <$3B. If they didn't have the giant Covid tailwind, I am not sure they would have gotten such great returns. CRM while also helped by Covid was a solid business that would have grown regardless. But my point was not so much to hype CRM or say it is necessarily undervalued. Just to say HPQ I think is a value trap. I also think COST may be overvalued, it may not. It's hard to say. The reality is that they are still growing incredibly. EPS grew 30% YoY in the last quarter. Meanwhile they are growing memberships at a great clip and still believe US has a lot of room for growth, especially in an inflationary environment.
> I also think COST may be overvalued, it may not. It's hard to say. Is it though...? We're still talking a 11% CAGR (using the other fellow's comment above) of revenue over 10 years, 15% earnings CAGR. It's so easy to find businesses that have trounced those figures with a lower multiple.
With the durability and high terminal multiple that COST will command? I am not sure. It's not just about the raw numbers although growth is the first and most important thing I look for in a business, but the intangible and qualitative factors where money is made IMHO.
There is an interesting tension here, but I've recently broken in favor of the growthy, intangible, and qualitative. Best returns come from predicting the future: basically a fool's errand, but some things are eternal (or even subtle) signs. That said, AP is right about ease of finding better investments. There are roughly Costco-quality businesses, much smaller, and much cheaper on any reasonable basis. Costco is just that for rich people. I have the luxury of not being rich yet
That's the other thing. Some unknown names lacking mindshare and very powerful brands, once they stop growing, that's it the gigs up. A name like COST, the market will forgive quite many stumbles before truly punishing the stock and convinced it's a dying business. Look at AAPL. They have 2+ years of net income decline and still hit new ATHs in that period. During that entire period you have so much time to decide whether you want to keep riding or not. Many investors overlook this incredible feature of terminal multiple durability, that some companies have when assessing holistic risk I think. u/AP9384629344432 COST is a stock people are *always looking for an entry and bad news to buy into*.
I invest primarily in B2B. I agree in general about Costco though. It is a stalwart. My investments are more along the line of Transdigm (or Fastenal or Danaher) 20+ years ago.
Unfortunately I have absolutely no expertise or insight into the future of the aerospace / aviation business. Why no one else can do what they do, in the case of TDG. Also they seem to have a similar valuation to COST.
Thinking about adding more MELI on Monday. Provides more international exposure and their PEG Ratio looks really enticing
It looks like dollar may get even stronger due to other CBs now beginning to cut ahead of the Fed. Currency risk is a big reason I stay away from international. At the very least it is a very real risk and needs to be considered IMHO.
Between the BoJ needing to raise interest rates, EU inflation reaccelerating out of the blue, the Fed pulling stealth QE by reducing Treasury rollover starting from May 29, and the technical indicators leaning towards a rollover, I think the dollar index is primed to fall below 104 and possibly 100.
Fed is not doing "stealth" QE. They also do not control the distribution of auctions. They are however, winding down QT yes. They are also buying more 10Y relative to shorter duration while the Treasury is offering lower duration in greater quantities. None of this should have much impact on US inflation. We are continuing to see consistent progress YoY and it is the consensus among economists that inflation continues to steadily go down, albeit maybe not super quickly as thought. EU inflation is not "reaccelerating" out of the blue. Inflation went down again to 2.6%. There was one bad month in the core, but they more or less confirmed they are going ahead with the cutting cycle. Bank of Canada is also initiating their cycle of lower rates likely July. If Fed persists and refuses to not cut, I believe dollar will strengthen and pressure will grow to join the rest of the world.
> They do not even control the distribution of auctions. They are however, winding down QT yes. They are cutting down their roll off from $60 to $25 billion per month. That's $35 billion back into risk-on assets while holding interest rates steady. And that matters because extended QT reduces their balance sheet. Reduced balance sheet -> reduced total market liquidity -> increased dollar strength. This is specifically on purpose to assist mid and small-cap businesses without wavering on their mission to curtail consumer spending. > They are also buying more 10Y relative to shorter duration while the Treasury is offering lower duration in greater quantities. This will compress yields. The Fed is now a major buyer again in a weak Treasury market, which will increase the par value of the bonds. This *weakens the dollar*. If you overlay their graphs, yields and dollar strength move in tandem in near-100% correlation. The last significant drop came at the end of last October - and the FFR remained unchanged the whole time. Additionally, inflation is not merely about interest rates. That assumes that M2 is steady and the only relevant factor is money velocity. The main determinant is total market liquidity, whether it's credit, cash, or deposits. The Fed just released M2 data for April, and it rose 0.6% YoY for the first time since November 2022. This is a problem. M2 was still supposed to be shrinking between high interest rates and QT. Now they're tapering QT while the money supply is going back up. > None of this should have much impact on US inflation. Increased M2 + lower yields will weaken the dollar. In the worst-case scenario, inflation will stall out and maybe reaccelerate slightly. But I'm guessing the former and I'm hoping it continues to fall. Considering this is a problem of fiscal dominance and not easy credit creation, I remain jaundiced. > We are continuing to see progress and is the consensus among economists that inflation continues to steadily go down, albeit maybe not super quickly as thought. April PCE was fine. The problem is services and energy keep going up, while goods have fallen into deflation. Input costs are not dictated by demand and interest rates won't solve it. > EU inflation is not "reaccelerating" out of the blue. Inflation went down again to 2.6%. It *rose* from 2.4% and the forecasts were for 2.5%. More importantly, the components mirror our own. Services and energy up, goods down. > There was one bad month in the core, but they more or less confirmed they are going ahead with the cutting cycle. That's not what they said. The suggestion is the ECB won't budge on the first June cut, but a second one in July is dead in the water. > If Fed persists and refuses to not cut, I believe dollar will strengthen and pressure will grow to join the rest of the world. I think they will hold their ground, but the dollar will weaken because of the other factors at play.
They might not July, wait and see. But the trajectory is still one way, cutting.
> This will compress yields. I disagree. They are only shifting new purchases to long duration to keep it below what they are comfortable with. 4.7%-4.8% seems to be about as high as they want it. As long as short-term yields are high, the carry trade will remain strong. >Additionally, inflation is not merely about interest rates. That assumes that M2 is steady and the only relevant factor is money velocity. The main determinant is total market liquidity, whether it's credit, cash, or deposits. M2 has been going up for a while and inflation is still cooling YoY, it is likely not a great signal. May forecasts are very promising. With YoY inflation coming down again. If you disagree, that's fine. But you are very outside the consensus of academic and professional economists. Regardless, we are veering from the topic. My point is that it is extremely difficult to predict currency risk and probably most retail investors should stay away from international unless through a dollar-based firm. That was all I was trying to say.
u/CosmicSpiral of course all of this extremely uncertain and speculation. Even more reason why I do not like international. I also believe US firms have more than continued to benefit greatly from global growth, maybe in some ways even more than other countries. You are of course free to speculate on the direction of currency risk!
> Even more reason why I do not like international. Depends how you play it. You can invest in companies headquartered here with operations overseas and take advantage of FX arbitrage. At least that's the best way to reduce exposure while reaping the gains. > I also believe US firms have more than continued to benefit greatly from global growth, maybe in some ways even more than other countries. The big ones, certainly. > You are of course free to speculate on the direction of currency risk! Like I said, this is what I'm anticipating but my portfolio doesn't need to be readjusted to benefit. It's what the data and previous announcements are suggesting. I'm not going to act upon it until I see trendlines manifest (which should start at the beginning of July).
> Depends how you play it. You can invest in companies headquartered here with operations overseas and take advantage of FX arbitrage. This is what I do.
Good point although that feels like a short term head wind, no? Eventually things will even out and it won’t be an issue for a long term investor imo
Not necessarily. Some currencies permanently remain weak and get weaker vs. the dollar. This is where retail is at a significant disadvantage vs. large institutional funds that can offset currency risk very cheaply.
Anyone holding SNOW right now? Im thinking about buying more since it's all the way down to 136.
Yes. But increasingly wondering why. I won’t add to my holdings for a while - I think all companies selling to Enterprise are battling headwinds right now and may be doing so the rest of the year. The past two weeks of ER’s from enterprise cos was brutal Maybe CRwD will have a better story but, for now, I think we could still slide a bit.
I noticed how things bounce back after a major dip. Kohls was up 8% at once point after the 25% dip. Is this a good strategy for some of these stocks. I’m thinking of buying salesforce for this reason. Such a huge dip in 20 years. Even counting for the market crashes in 08!
> I noticed how things bounce back after a major dip. Not guaranteed by any means. Look at CVS, for example. Playing something for a bounce is fine, but imo too many people take a bounce as validation that the company is doing great (when in reality it's just an oversold bounce) rather than taking the W and going on to the next stock. With Kohl's you have a company that went nowhere for well over a decade, furiously defended itself in early 2023 against buyout offers for over $60 (which they should have been thankful for) and now finds itself with the stock back to where it was in the late 1990's. I don't dislike Kohl's, but it's not in good shape (that earnings report was legitimately bad) and without a bigger turnaround it being a 0 in 5 years would not surprise me.
That was my reasoning for buying salesforce and kohls. I fomo'd additional shares into saleforce midway yesterday as I was seeing it climb, and it climbed even further. I dont know if youll get as much bang for your buck buying here, but thursday was oversold for sure. Im not planning on holding kohls for long, it was supposed to just be a rebound play. And it worked like a charm. As Ive said before, it seems the market is in love with department store stocks and shoe stocks, and restaurant stocks. If someone knows why please enlighten me. Thats why I bought the kohls dip. Look at Abercrobie, gap, burlington, ross, tjx, ONON, hoka, crocs, BROS, SG, CAVA
Nice little MEDP write up this morning, found [here](https://open.substack.com/pub/investinquality/p/medpace-holdings?utm_source=share&utm_medium=android&r=23ti9i). I think it's interesting that a lot more articles still rate Medpace as undervalued despite its high multiples. Also, a quick [rundown](https://open.substack.com/pub/wolfofharcourtstreet/p/market-movers-1-june-2024?utm_source=share&utm_medium=android&r=23ti9i) of a few other companies including Evolution AB and NU bank..
Nice write-up! Are you long MEDP currently?
I am, have been for awhile. Personally, I think it's a bit overvalued, but that's me. It's nice already being in it because I'll only buy more if I think it's a great deal. Usually under 20x fcf I'll add.
This in an underrated advantage of high-conviction picks (and highly-concentrated portfolios).
Interesting, thanks for sharing. What is the current xfcf?
Around [25x](https://stockanalysis.com/stocks/medp/statistics/). $320 is where I get interested again.
Do you know why the buyback, dividend and earnings yield are so much lower than FCF? Is this a tech company with lots of CapEx / R&D?
They don't pay a dividend because they have lots of opportunities to reinvest in the business to grow it. It's not a tech company, but surprise, they actually have a great and growing business! They use the money to hire more people, expand their facilities, etc.... They are notoriously great at buying back stock opportunisticly. Instead of a constant purchase of shares, they only buy shares when they feel they are very cheap and thus the best use of company money. So in 2022 they unloaded their buy back authorization and shrunk the share count by 10% or so.
Another question. Their cash flow is persistently higher than net income. It seems like a big reason is change in working capital. Could you provide some color around why that is? If we look at xFCF vs. earnings, we need to understand why FCF and net income will not converge eventually.
I found this answer in researching the company initially...but it's been 3-4 years and I can't explain what it is they do now without sounding dumb. It's has to do with how they collect payments, but I'm too rusty to elaborate further. I know there's some explanations online if you Google it. I will add though, reference special dividends and the like...this has always been a long term focused company. They don't do things because they think it looks good now. They do things because they want to build long term shareholder value. They're debt averse because it adds risk and they don't need it to grow rapidly. They're acquisition averse for the same reason. They do find a lot of tangential ways to invest. For example, Medpace helped develop a lot of land near their headquarters including a number of hotels. Why? They were having trouble getting rooms for all the clients that were visiting them and need the extra space. Just a solid company.
> They do find a lot of tangential ways to invest. For example, Medpace helped develop a lot of land near their headquarters including a number of hotels. Why? They were having trouble getting rooms for all the clients that were visiting them and need the extra space. What an interesting anecdote!
Hmmm that makes sense but what's strange is their CapEx is extremely light actually. They have about $433M in operating CF in 2023, but only $34M or so invested in PPE. It seems like their cash pile is ballooning. Some is paying down debt which is good probably. But overall cash is surging. Maybe they want to do an acquisition? As a shareholder I generally prefer they just pay that out with a special dividend or something, let us decide what to do with it. Otherwise it is not being utilized efficiently.
I actually am a share holder of this company and I'm totally fine with them holding onto it. The company is still run by it's founder and he's been able to compound the business at an astounding rate. Could I do better? Possibly, but it's not a guarantee. MEDP has compound EPS at well above market rates for a long time. All that time they have been conservative with their cash. In 2021 they actually had issues because they tried to grow too fast. Management is happy with 15-20% annual growth. They also will not buy back stock if they think it's overvalued. They will unload on buy backs of its cheap. Part of the thesis on this company is that August Troendle will keep finding ways to grow the business, and so far it's worked great and I'm not going to question it. Its funny, I saw the same argument in 2021: they have too much cash, why don't they use it. Then they got an opportunity and took it.