Jul 2019: CVB Financial (CVBF)

Later Than Usual

Sorry for posting later in the month than usual. I usually like to publish around the middle of the month, especially after non-farm payrolls which can move markets. But this month I am publishing at the end of the month because I am in the process of switching jobs (from healthcare to automotive data science) and due to a short vacation to visit my brother in Dallas, Texas. Two interesting excursions I was able to do in Dallas with my brother: (a) eat at Texas Roadhouse – the subject of last month’s blog post, and (b) visit a Nebraska Furniture Mart – the famous retailer owned by Berkshire Hathaway. Both were super-fun excursions, of interest to value investors! More to come on those excursions later!

Smallcap Treat

Following last month’s decision to take a break from writing about the S&P500 (focused on component of S&P Midcap 400 instead), this month I will be writing about a component of the S&P Smallcap 600. Smallcaps need to be evaluated even more gently than midcaps, because these are smaller companies and usually earlier in their stage of growth and maturity. I found a few companies worth writing about, and maybe someday a few of these companies will “graduate” to the midcap and largecap universe.

Time is a Friend

I like the company CVB Financial (CVBF). It is a holding company for a bank called “Citizens Business Bank” headquartered in Ontario, California (not to be confused with a different bank in Rhode Island with a similar name). In case you are wondering where the name (“CVB”) comes from, Citizens Business Bank used to be called “Chino Valley Bank” (CVB) and originally catered to milk farmers in Southern California. Looking back at the financial results to 1989, there is evidence of consistency and improvement (a bit rockier than other companies written about on this blog), but nonetheless impressive given the company’s size, dividend history, and industry sector (banks and financials tend to be affected by the short-term credit cycle). I do not try to forecast CVBF’s future stock price and/or future financial results, and I have no special secret knowledge about CVBF. Everything I like about the company is based on information out in the open. You can verify everything here by yourself.

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Jun 2019: Texas Roadhouse (TXRH)

Midcap Interlude

This month I have decided to take a break from the S&P 500, and instead write about a company in the S&P 400 Midcap Index. Midcaps tend to be smaller and less-established than largecaps, so we are going to evaluate with a lighter touch than usual. Having said that, midcaps probably have a longer runway ahead of them, if they turn out to be great companies. According to this article in Jan 2019, the midcap index has a great 25-year track record when compared to other indices. There are 400 companies in the index, and I found a few worth focusing on. Someday these companies may “graduate” to the S&P 500, as they increase in market capitalization. Next month, I may write about a company in the S&P 600 Smallcap Index, but I haven’t made a final decision about that yet.

Time is a Friend

I really like the company Texas Roadhouse (TXRH). I understand the business model: a casual steak restaurant with an American Western theme. TXRH is currently a member of the S&P 400 Midcap index. The company runs its own restaurants but also has a franchise model to license others to operate a location. Each restaurant has its own butcher onsite. (I have never been to a Texas Roadhouse, so I asked my brother — who lives in Texas — what the restaurant is like. He notes that each customer can hand-select the steak from a display case, and apparently (I found this video) the bread rolls are really delicious especially with the cinnamon butter. He says the steak quality is similar to an Outback Steakhouse, with a fun casual vibe and reasonably priced menu.) I evaluated TXRH as I would evaluate a long-term partnership, looking back at 18 years of historical financial results publicly available. The company only has results going back to 2001, so we won’t be able to look at the usual 30 year histories. TXHR pays out a significant part of earnings as dividends, so we need to talk about dividends. I don’t try to predict TXRH’s stock price, nor do I try to forecast their future financial results. I have no special secret knowledge of TXRH. Everything I like about the company is based on information out in the open. You can verify everything yourself.

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May 2019: Omnicom (OMC)

Time is a Friend

I like the company Omnicom (OMC). I understand the business model: an advertising agency that helps large clients run advertising campaigns. OMC is currently a member of the S&P 500 index. The perspective I use with OMC is the way I would evaluate a long-term business partner to manage an important venture for me, by looking at the 30-year history of OMC’s financial performance. OMC pays out a significant portion of earnings as dividends, so dividends are an important topic to discuss in order to understand this company. I don’t try to predict OMC’s stock price or forecast OMC’s future financial results. I have no special secret knowledge about OMC. Everything I like about OMC is based on information out in the open.

OMC is one of the most consistently improving companies in the S&P 500 based on 30 years of history, although it has experienced a few setbacks in recent years. Let’s start by looking at the diluted earnings-per-share (EPS), my favorite metric:

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Apr 2019: TJX Companies (TJX)

Time is a Friend

I really like the company The TJX Companies (TJX). I understand the business model: they sell discount clothes and home furnishings, often brand-name and designer products that are liquidated/clearance inventory from other retailers. TJX is currently a member of the S&P 500 index. (TJX runs a bunch of stores where I’ve shopped: TJMaxx, HomeGoods, Marshalls. I don’t do all of my shopping at these stores, but if I happen to find something worthwhile, the price is unbeatable. We have shopped at Marshall’s for my son’s toys, socks, shirts … at HomeGoods we found a great bench for our garage, and a stylish-looking full-length mirror.) I evaluate TJX as I would evaluate a long-term business partnership, with the lens of looking at 30 years of their historical financial performance. I don’t try to predict TJX’s stock price, nor do I try to forecast their future financial results. I have no special secret knowledge of TJX. Everything I like about the company is based on information out in the open.

TJX is one of the most consistently improving companies currently in the S&P 500, based on the past 30 years of performance. The first place I look is at the historical diluted earnings-per-share. Diluted EPS takes into account stock options that can be exercised, and that might dilute the shares outstanding in the future. This potential dilution is why I prefer looking at diluted EPS instead of basic EPS. Some companies issue lots of stock options to executives and employees, and so it’s important to account for that dilution when looking at earnings per share.

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Mar 2019: Autozone (AZO)

Time is a Friend

I really like the company AutoZone (AZO). I understand the business model: they sell car parts to people who want to fix up their own cars. I see AutoZone stores everywhere here in Southern California. AZO is currently a member of the S&P 500 index. The lens I use to view AZO is evaluating a business partner for managing an important business venture for me. And I have been impressed by the past 30 years of AZO’s performance. I don’t try to predict AZO’s stock price tomorrow. I don’t try to predict the financial results next quarter (or even next year). I’m not basing my view on any secret hidden information. Everything I like about AZO is based on information out in the open (you can verify everything below).

AZO is one of the most consistently improving companies currently in the S&P 500, based on the past 30 years of performance. Let’s start by looking at the diluted earnings-per-share.

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Introduction to Hardy Stocks

Rare Elephants

It is a rare and admirable characteristic for an individual to consistently improve over many years. Consistent improvement over many years requires a combination of discipline, vision, adaptability, teachability, resolve, and creativity.

Similarly, a company that consistently improves its financial performance over many years is a rare elephant. These companies should be enshrined in the Business World “Hall of Fame”. Unlike athletes, “Business Hall of Famers” can get better with old age, as they leverage advantages from an older era into a newer era. For the serious long-term buy-and-hold investor, identifying and studying these types of companies is a worthwhile endeavor.

Here is the simple question to frame a complex topic: which of the 500 companies currently in the S&P 500 has most consistently improved over the past 30 years? Which of these companies will continue to be great companies in the long-term future? That’s a great place to start. But since great companies are priced for continued greatness, there is a second important follow-up question: which of these rare elephants are priced attractively enough to consider for long-term investment?

Limiting our focus to the S&P 500 is an arbitrary limitation that emphasizes large market capitalization names (and exclude some smaller high-growth companies). But it is a worthwhile goal is to simplify a complex topic. Everyone knows the S&P 500. In the future, we have plenty of room to explore other avenues of analysis.

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