Thomas Kennedy

Value, growth, growth at reasonable price, etf investing
Thomas Kennedy
Value, growth, growth at reasonable price, ETF investing
Contributor since: 2013
Yeah I'd read that article as well and was impressed with the authors complimentary discussion. It was a very thorough bottom up analysis relative to my somewhat top down article.
Regarding the margin growth, I believe somewhat more than half of the margin growth would be achieved via gross margin expansion of 100-130 basis points with the remainder coming from SG&A reduction. Gross margin increases have been consistent over the last decade and I believe they will continue when AAP resumes normal purchasing trends (they have been undergoing an inventory shift due to their acquisition, causing decreased margins and increased inventory levels).
SG&A reduction also seems attainable since AZO has the highest SG&A per square foot amongst peers, despite having the lowest SG&A per dollar of sales. As its mix moves more toward commercial sales, SG&A margin will naturally decrease as these sales will occur with minimal increases in rent and staffing.
I factored this 200 bps increase in operating margin over the next decade then assumed no further growth beyond that period. Although I think its possible that operating margin could grow as high as 25%, this is much more difficult to project and would depend on the changing competitive dynamics and acquisitions that occur within the industry going forward.
I too believe there are only rare companies that can increase margins almost in perpetuity (maybe CL, PM and V as rare examples) and that it is much more difficult to sustain margin growth for retail companies.
Thank you for reading
Good article, I've liked this company in the past but feel its overpriced now
Good article, thanks for the interesting perspective and data. That makes a good case for ETFs vs mutual funds due to their ability to more tax effectively handle the churn in their portfolio.
I would be less inclined to change my overall risk exposure by owning a greater proportion of small cap stocks (by owning a total market portfolio instead of the S&P 500), but it does make the case for owning a total market index instead of a small cap fund and a large cap fund.
I'd far prefer owning the franchisor than the franchisee. At 2.5 times book and a similar yield to MCD, I see no compelling reason to own ARCO instead of MCD.
I plan on initiating a position in the near future. Thank you for reading.
Thank you for reading
I respectfully disagree.
I believe the QE programs had a large indirect effect on the stock market. By preventing a collapse of the banking system it reduced uncertainty and prevented significant unemployment/low capacity utilization.
The effect of an end to QE will be somewhat uncertain. It will almost certainly increase earnings within the financial sector, will have a mixed impact on much of the rest of the economy, and may have a modest negative impact on overall valuations.
I 100% disagree that the market is in a bubble
I actually agree that the market is modestly expensive, and I'd prefer investing after a pullback (of course, I'd always prefer investing after a pullback). I, however, wouldn't expect much more than a 10-20% pullback over the next few years and much more likely is simply below average returns over the next economic cycle.
This article wasn't meant to discuss the finer points of valuation, it was more about dismissing people claiming the market needs to fall 50% to get back to normal, or that we've went "too far too fast".
Thank you for reading, if I needed to summarize the article in a sentence that would probably be it.
Wow, I wasn't aware of this methodology. Its obviously wrong but I'm not sure how easily a market weighting could be done.
If you use a simple weighted average at any given date to determine aggregate earnings it would skew values positively. All else equal, if a company reports lower earnings (relative to concensus, etc), its price will decline and when the earnings are later calculated there will be less of a hit from the lower earnings. The reverse would occur with positive earnings as they will then be calc'd at a higher weighting. If all companies reported at the same time this could be easily remedied by using the weightings pre-announcement, but since this isn't the case the effect of this skew would be somewhat difficult to remove.
Currencies have a tendency to enter into longer term trends. Many of the factors mentioned in the article will still benefit the dollar going forward
2 perfectly negatively correlated assets would not "completely offset."
An asset with a correlation coefficient less than 1 helps reduce risk more than an asset with a correlation coefficient of 0; assuming similar return prospects it makes sense to invest in an asset with a negative correlation coefficient relative to your portfolio.
I'd be curious to see backtesting as well. I would say a fair amount has to do with valuation especially over the short term and during bubbles, but a number of people on the current list have remained there for a while and their company's have reasonable current valuations.
I'd say this list finds companies with:
A) attractive fundamentals and growth
B) bubble like valuations
Also, in a backtest, I'd say the weighting of the portfolio would significantly affect its results. A market cap weight or equal weight portfolio may underperform or market perform, especially if the start year is during a bubble, but if its fundamentally weighted (by earnings, cash flow, etc) that would help filter out the companies with outrageous valuations and keep the better performers.
Thank you for reading.
I had addressed that above with: "This figure [revenue growth] is backward looking, however, and many of these companies' growth rates are bound to slow in coming years. In order to find a worthwhile investment, investors must look to the future. Companies which have entered the more mature phase of their life cycle, such as Fox , Wal-Mart (NYSE:WMT), and Nike (NYSE:NKE) may not be able to create as much wealth going forward. Even Buffett has stated that Berkshire's growth going forward is likely to be significantly lower than past rates due to the difficulty in sustaining fast growth as a larger company."
A lot of people would say that many of the companies mentioned in the article still have impressive returns ahead, however.
Thank you for reading, its tough to find much thats not near its highs at this point!
I was considering adding a comparison to a small cap ETF, but felt it was less relevant than comparing it to a midcap ETF as CSD's average market cap is as much as 4 times that of small cap ETFs.
Agreed gemfinder, this fact can't be expressed enough. The fund has tended to underperform during economic contractions and outperform during expansions, with a net result of outperformance over the last economic cycle. Especially now, this fund should be seen as a long term investment.
That depends... I look to vary position weights over the economic cycle so as to reduce exposure to smaller cap and higher beta positions after protracted market gains and add to them after significant market corrections. For an investor already long csd I would recommend reducing exposure to half or a third of the maximum amount an investor would want to put into the fund. For someone without a position I would recommend adding a small position (similar to above) with the expectation of adding to the position during a market decline.
I would say this is largely due to the funds impressive performance the year prior. With a fair amount of the fund remaining the same year to year its difficult to lap good results, but overall 2 year performance was stellar, as well as results over longer time periods.
Thanks for the comment Ibex. In my research for this article I hadn't seen much info on longer term performance, but it makes sense that the company will continue outperforming given that it still benefits from the same tailwinds. Would you be able to provide any additional info or links?
Just found the company through researching WYDE, a new CDS ETF based on one of their indexes. I'm very interested in the company and appreciate your timely analysis. I too think the valuation is attractive (especially relative to MSCI, MORN, etc) and look forward to researching more about the company.
As stated above the terminology is just somewhat reversed for CDS as shown by the names of the contracts and the notional principal stated on the proshares site
Actually this is just because of odd terminology for CDS contracts where the short is the party betting against the credit of the party/index.
Its "decay" should be significantly less than that of VIX products for a number of reasons. First, most VIX products roll far more frequently than WYDE's annual rolls. Secondly, I would expect the roll costs to be relatively smaller due to the differences between the future products, with the current roll costing only 0.5% per year.
The ETF has grown quickly so far so hopefully so its liquidity should imrprove over time. I'd also expect options to be available on it sometime soon as well.
Hi Robert,
You have some amazing analysis and descriptions of the product but I disagree with your conclusion (on WYDE, I agree 100% on TYTE). I, like Burt above, feel WYDE is a good hedge for a high yield or equity investment due to its high negative correlations with both. I also believe that the 100 securities covered by the fund are adequate to protect a diversified high yield bond fund, and that holding the 2 series (and being able to actively switch to new series over time) is a fair method of extending the duration of credit exposure.
I am considering writing an article on WYDE; if I do, I plan on linking to this for a contrary perspective and its thorough analysis.
Very good, very approachable article with a lot of my favorite companies mentioned. As to your question on the Modern Portfolio Theory's factors (Profitability, Growth, Safety, and Payout), these follow very closely to that of the "justified P/E ratio" (see This calculates, based on the classic gordon growth model for valuation, an acceptable P/E ratio for a company. The formula is P/E = (Payout ratio) x (1 + growth rate) / (discount rate - growth rate). This includes all of the 4 factors but profitability, which as described above, is the return on equity and a very important factor in determining long term growth rates.
I hadn't seen his name before, but I always enjoy a good discussion. I've felt the quality of the comments on this site is far above any other I've seen and I appreciate comments that agree or disagree with my opinions as both can help me grow and learn as an investor.
It was $2,124 of KMI's "Debt Fair Value Adjustments" balance sheet item, less KMP's $1,332 to unconsolidated KMP.
I understand the confusion; I was simply going for a valuation of KMI in terms of KMP and EPB, which is somewhat unique in that it is not possible for other companies. I was not trying, as you know, to value all 3 entities. Because of this unique property, there isn't a perfect term for this analysis and I felt the title accurately represented it.
Thanks again for reading and commenting
Hello Phil,
Thanks for your comments and bringing up some interesting points.
As for the difference in debt figures, my numbers are different from the one you quoted since I included in KMI's portion of debt fair value adjustments.
As far as breaking down the "Other Net Tangible Assets" further that wasn't done for simplicity. I broke out the investments that they will likely drop down shortly as I felt these should be separated and valued differently, and considered further. As for the other items owned by KMI, I decided that PP&E and deferred taxes, etc. are reasonably approximated at book value, especially since they didn't have a significant effect on overall valuation.
I was considering breaking down the investment value of drop down assets further but instead decided to leave that element to the reader to decide. There was not enough of a breakdown for me to be comfortable approximating a fair value for these assets, especially off the quarterly reports, the annual broke these down better. With their $6.2 billion drop down done at book value I felt it was a safe choice to leave it at book value but to allow the reader the option to adjust the value further.
I was also considering further valuing the IDRs but, as you know, this involves considerable assumptions. Instead of trying to predict the uncertain nature of KMP/EPB's future growth, acquisitions and other dilution, etc I felt it was worthwhile to simply show how much the market is valuing this growth through my sum of the parts analysis (and give the reader historic values and management's predictions). If I were to attempt to do a fair value analysis I would have not only done that, but also came up with a fair value for KMP and EPB instead of using the market values.
This article was less about trying to value KMI, and more about showing where its value comes from. Its easy to disagree with the details, valuation isn't an exact science. I instead wanted to give the average layman the tools to make a more informed decision between Kinder Morgan's stock or its partners on their own instead of presenting my own opinion on the matter.
I am considering doing a write up on the warrants. I am a big fan of long term options, usually leaps, and use them regularly in my portfolio. I would like to do an analysis into what kmi and it's lps would look like at that point and come up with a fair value approximation.
You could define risk by beta or look at it in absolute terms (in the article, kmi has excess risk equal to the growth premium). Either way a combination of kmi and it's lps allows more options for risk exposure.