There's a couple of fundamental questions that every investor
asks at some point and these questions are often repeated all
throughout investing. One of the questions is simply
what do we buy? What do we buy?
There's so many options of different Investments to make
what should we focus our time on?
And then of course, the other questions are when do we buy?
And when do we sell, if we buy high quality Investments but we
buy them at the wrong time. We may actually have inferior
returns. We may actually lose money by
buying at the wrong time and going at the wrong time and
likewise, if we buy at the right time and we sell at the right
time, we can have very favorable returns.
So a lot of investing comes down to not only what we buy, but
when we buy it and when we sell it and out of those questions,
I've been thinking about one in particular and that is, when do
we buy? I recently purchased a pretty
large position into Starbucks. This is a high quality company
that's fallen down in price significantly from its peak.
But regardless I'm in the red by over four thousand dollars so
far This looks like it could be a mistake and I've received a
lot of feedback and a lot of comments over the previous
episodes of how this may in fact be a mistake, let me just
highlight one of them for you. This is a real comment left on
one of the previous episodes. The commenter here says Joseph,
you're trying so hard to justify your purchase in the Starbucks.
Talk just like you did in Ali Baba.
I made a similar mistake in the past but learn quickly to cut my
losses and move on. I appreciate the viewer for
leaving that comment because I got a chance to think about it
and see if I am. In fact making the Same mistake
is Starbucks going to be another repeat of Ali Baba.
A stock that falls precipitously for months on end and never
fully recovers is at the situation that we might go into
a Starbucks and then that got me thinking more Starbucks
obviously is a high quality company.
It has good brand value. It has excellent fundamentals as
very high Returns on invested Capital but that still leaves
the question. When do we buy?
When do we buy a high-quality company like Starbucks?
And did I buy this one at the wrong time?
Now? For a fundamental investing
question. It's brought up.
Like, when do we buy? I like to turn to The Experts.
The ogs of investing like Warren Buffett and he has a lot to say
about when to buy a stock. Here's his input on the subject.
I'm not recommending that people buy socks today or tomorrow or
next week, or next month. I think it all depends on your
circumstances, but you shouldn't buy stocks, unless you expect in
my view, you expect to hold them for a very extended period and
you are prepared financially and psychologically.
A logically to hold them the same way.
You would hold a farm and never look at a quote and never never
pay it. You don't need to pay attention
to them. The first thing that he mentions
is, he's not going to give specific timing on when to buy a
stock, not, which day, or which week to buy it, but he does
mention mentality that you should View a stock the same way
that you would view owning a farm.
If you owned a farm, you're not going to look at your farm every
day and get price quotes. It what you're going to be
focused on is the yield of the farm.
How much fruit is it producing are the crops producing.
A lot of fruit is everything going well and am I getting a
good yield at the end of the year but with stocks most
people's mentality is entirely different.
We might do some research initially when buying the
company focusing on the fundamentals, the same store
sales growth, the unit operations.
How many stores are opening so on and so forth.
But after buying the position many people change gears and
focus solely on the bids. Type of bids.
Are you getting on the company as the price declined?
Has a price gone up this all of a sudden becomes center stage
and most investors focus on these prices every single day.
We go up and filter by the one day and see if the stock is
trading up or down every single hour, a lot of people are
fixated on the daily price changes of a stock.
In fact, we're so focused on price that the suggestion in
many cases is if the price Falls too fast too quick to cut your
losses and move on but of course, Buffett advises into
having a different Quality and treating it more like a farm
where you're not focused on The Daily price quotes and he goes
on to give some other valuable advice.
I mean, the main thing to do then you're not going to pick
the bottom and you're not going to nobody else can pick it for
you or anything of the sort. He also mentions that you are
not going to pick the bottom, nobody else can pick it for you.
So experts that try to pick bottoms and pick tops.
They're not going to be able to do that accurately.
And even the best investors in the world have never really been
able to time the bottom perfectly.
It just doesn't happen. Even so if you buy into a stock
that's fallen in price, a little bit, that should be expected,
that shouldn't change your thesis.
Now he goes on to share, even more valuable advice, you've got
to be prepared. When you buy a stock them,
haven't been down 50% or more and be comfortable with it.
As long as you're comfortable with the whole, you have to be
prepared for stock to go down 50 percent or more.
And he goes on to say that even Berkshire Hathaway considered to
be one of the strongest and most resilient companies in the world
has had its stock price drop over 50% 3.
Times throughout its history. So no matter what stock you own,
you have to be potentially prepared for to drop
significantly. So I think Buffett shares, very
good advice of having the right mentality.
Focusing on long-term ownership, not being concerned about trying
to time the bottom, but he doesn't really specifically
answer. The question of when is the best
time to really enter into a position and buy a stock?
And that is where I continue to search for what I think is the
best example of when to buy a stock, an example that we're
going to be looking at is yes, Chipotle the Quick Service
burrito. Restaurant most of us are
familiar now with Chipotle in their modernized menu.
But if we go back in time, this highly successful stock started
off as just a small Mexican Grill, it was founded in 1993
and soon. After in the late 90s, it
received an investment from McDonald's McDonald's.
Initial investment in Chipotle help this company, expand to 16
different stores. And then continue to grow from
there. And even though the stock price
had its ups and downs, the company continued to grow
throughout the years. In fact, from 2007, The 2015
Chipotle went from 704, locations to 2010 and likewise
every metric of the company was growing at an incredible Pace,
their earnings per share of Chipotle were growing.
At an incredible Pace. They went from just a couple
pennies to over four and a half dollars and the stock price
followed. In fact, after around Two
thousand, thirteen, a lot of people are suggesting that
chipotle could be the new McDonald's.
This amazing company, that was growing store counts like crazy.
It had high Returns on invested capital, And everyone seemed to
like their food and investors couldn't get enough of it.
The price of the stock went from a couple dollars up to above 700
dollars per share. It was one of the greatest
stories in the market but in 2015, when things were seemingly
too good to be true for Chipotle things quickly reversed, they
had an outbreak, a food poisoning outbreak, when they
poisoned hundreds of people with E coli.
And this story was plastered all across the news from CNN,
Chipotle shutters, dozens of locations as more MD coli, cases
emerge Bloomberg, had huge spreads on the front page saying
inside Chipotle's contamination, crisis, Collins was among 53
people in nine states, who are sickened with the same strain of
E coli, 46 had eaten at Chipotle in the week before they fill
ill. So, Chipotle found itself having
a food contamination, crisis and poisoning, dozens of people all
across the country, 20 of them, got sick enough to be
hospitalized. Now, as news spread that
chipotle was poisoning, people all across the country
Chipotle's earnings dropped like a Iraq.
They were cut in half the very next quarter and then they went
into the - earnings per share, the quarter afterwards, this is
because people stopped eating their same-store sales had huge
declines. That a shutter entire
restaurants, completely to investigate what's going on.
Now as this terrible news is unfolding for Chipotle it
catches. The interest of one investor who
is Bill Ackman. He's looking at all of this
stuff unfolding and he becomes interested in the stock we have
a timeline here. Late 2015.
It's breaking news that chipotle poisons hundreds of People with
E coli, the stock drops 44 percent within a year as
investors and customers lose confidence in the company, then
we have breaking news and 2016. Bill Ackman just spot a huge
stake in Chipotle and a filing with the u.s.
SEC ackman's Pershing Square management.
Disclose it had bought nine point, nine percent of Chipotle
shares, and what enter into discussions with the chains top
management. So, moving on with our timeline
here, we can see that after the 44 percent decrease in share
price bill Lachman became interested enough in Chipotle
to, by almost 10% of the company mid-2016, that's when he built
his position. Now on, Big Time investors, like
Bill Ackman jump into a stock a lot of times.
You see that nice bump afterwards, we see it with
Warren Buffett, we see it with Elon Musk and we see what Bill
Ackman. And with this Chipotle by it was
no different Chipotle shares. Rose up almost 9%, right after
it was revealed that Ackman bought into the company.
So he had this nice bump up soon after the purchase, but in this
Case after that initial bump up and share price, once it was
revealed, he bought a position, things didn't go all that.
Well for Ackman, the company's earnings were frankly, terrible,
they fell by another 50% down into the - and then they only
rebounded partially, and then they fell back down.
Again, it seemed like the company really wasn't recovering
from this outbreak. In fact, you see the little
spike in stock price in early 2017, and then it started to
plummet afterwards and Bill Ackman.
Still Held his entire position after Ackman, initially bought
into a pulley, the stock fell, another 35%, and he was down
over 200 million dollars on his investment.
And keep in mind, his investment was falling losing 200 million
dollars in value. While the S&P 500 was racing
upwards. So the Delta between the two was
very large all the while negative criticism for Bill.
Ackman and is Chipotle by was abundant on social media and
through the analysis channels. Chipotle Mexican Grill.
Don't catch Falling burrito. Sell rating on Chipotle.
Why Ackman is wrong about Chipotle, another sell rating on
Chipotle, we'll Bill. Ackman design, a new clock
autopia program, another sell rating on Chipotle, and this
negativity and criticism towards Chipotle and Bill Ackman.
During this time, was not unique.
This was a commonly held view at the time.
So this was a situation that Bill Ackman was in.
He bought Chipotle the stock continued to plummet 35% the
earnings per share were not growing at a fast pace, in fact,
on paper. Even after the 35 percent
decline, Chipotle looked very expensive.
Add a PE ratio above 30 because a future expected earnings were
so terrible and all the while he's lost two hundred million
dollars on his investment. The S&P 500 is racing upwards
and he's facing a ton of criticism and negativity online
with different analysts. And this is where things get
very interesting November of 2017, Bill Ackman appears on
CNBC with all the guys there to discuss his Investments and
Chipotle's one of the focus. Points, and keep in mind, the
context here, he's down over 200 million dollars, the stock
continues to plummet. It looks expensive on paper and
there's wide criticism towards Bill.
Ackman and his holding, this is the questions that he's getting
asked during this time. Let's talk about Chipotle Bill.
If we could sure she has got crushed again last week on
earnings. Now what makes you still
convinced that you can turn this thing around?
So we're early. We joined the board in the last
year and we're going to work hard to make it.
Help the company turn but it's work.
This work to do, for sure. He says that he was early to the
stock and there was work to do but they don't let him get off
by just saying that because it's a great courage.
Short answer to a short answer, is it go to the stores?
Are plenty of still long lines. Still people buying the product,
the stores are still doing 2 million Revenue, a 2 million.
Revenue concept is a great concept.
Now, they were doing two and a half million of Revenue before
they had their the various issues.
But I think the issues they've have are all addressable through
better operations and better oversight.
Now notice It right away. Bill Ackman doesn't seem overly
concerned with the current stock price.
His Focus immediately goes to the fundamentals of the
business. There's lines out the door
people like the concept. So Bill ackman's, focus on the
fundamentals while everyone else is focus is on the stock price.
And as you'll see, Bill Ackman during this time, was the only
one that seemed to be bullish on this stock.
Listen to the other analysts here, ask him, questions
disclosure. And since we have, you know,
some of the gang here today, Josh, you've been - aunty Boat
lay. Steve, you've been - on Tripoli
suggesting that there's no reason why this stock can't
continue to go lower. I love the, by the way, I love
the restaurant. I just think I just think there
was a magic about the company and sometimes the magic wears
off and once it wears off, then people say okay, it's quick
service restaurant. Why am I paying 30 times
earnings for it? Why does it for growth multiple
if it's not growing etcetera? So I don't think it's not
salvageable. I just think like this thing was
looked at as oh my God, it's the Donald's by a generation of
investors. Now, I like Josh Brown.
I think he's one of the better ones on CNBC, but he references
the Ford multiple being at 34 a company that's going through a
lot of distress seemingly. It's very expensive and people
previously viewed it as McDonald's which in his view
it's not anymore. And again, listen to Bill
ackman's responds to this by from oversexed.
That's why anyone thinks that anymore.
So that's when it was at 700 something dollars, a share,
right today. People are looking at me.
Look at McDonald's. McDonald's is certainly had it's
cycles of people. Really loving it.
People hating it. Yes.
And today they're involving at mode.
That's look at Burger. King Burger.
King was the dog of of all restaurant companies.
We're a major shareholder Burger King.
We help take the company public again.
When 3G bought Burger King and took it private at a thirty
percent premium. But and same store, sales were
declining. I think, Sam's ourselves had
declined like each quarter for the previous three years when we
bought the business, and they've made magic with Burger King.
So, I think, you know, here, the company's been, you know, stock
was 500 as they're making progress.
They had a, you know, one employee sick in a Or a bunch of
people got sick and everything like you know, through the
thing, out of the stocks down, almost 50% from that kind of
near risen high. But this is, this is still a
bunch more than that, they didn't have to spend money on
marketing, the way they now have to.
And so that's not going to be great for margins long-term.
There was a time when the only ad they needed was the line out
the door and they had that for years now, but there's still
lots of other ways. What's interesting about
Chipotle in one of the reasons why we're involved is not just
betting on a recovery from the, the food safety issue it's at.
This is one of the least optimized of the Quick Service
restaurants, right now, drive-throughs Is no driver
breakfast. I'm with you.
No breakfast, no, no mobile app where you can, you know, the
lines and stand in front of a supposedly today they're still
lines, people see the line and then they go someplace else.
But I think this is such an interesting conversation because
Josh Brown is focused more. So, on the current valuation of
the company, the margins being suppressed and the fact that the
stock price may very well go down in the short term, but he
does realize that Bill Ackman at least has a point Bill Ackman.
I think resembles a lot more of what Warren Buffett's advice.
Is the focus on the actual business.
Bill Ackman looks at the lines and he sees that the business
can be optimized. They could have drive-thrus they
can have mobile apps. They can have all those things
that chipotle currently has that.
They're benefiting greatly from, but back during this time it was
more difficult to Envision, all of that.
So you see the differences between focus is here.
Bill Ackman is very much focused on the farm and the yield of the
farm. He's not so focused on The Daily
bids and the daily price changes.
But as you can see, when the discussion changes from One
analyst to another, they're all focused on the current
valuation, the current price and the short-term Outlook.
How much am I paying for that in the current multiple?
I mean, it's still a skit about with the stocks done that and
that doesn't really matter. What matters is one of the
earnings done and what's the valuation and a 30 x, next year,
giving the benefit, they hit their target for once first time
in three years, it's still very expensive in a competitive
space. I would his concern about
Chipotle during this time is the same concern that most
investors. Tab any time they buy a stock,
they look at the next year PE and they value the company based
off of next year's earnings. And this has been proven time
and time again to not be a way to have Alpha in the market by
simply looking at the next 12 months of earnings and Bill
ackman's, fully aware of this problem.
The opportunities in the stock market are created because most
investors are focused on what our next year's are in is going
to be, what's an appropriate, multiple?
And first story like this, when we're company's been through
what they've been through sales of gone from Two and a Half to
Two million, the right way to look at in our view is not just
about a multiple next year. You're like, okay, what's a
reasonable trajectory for a recovery and what will the
earnings be two years out, four years out?
Six years out, and then discount those earnings back in time on
that basis. It's a very cheap stock.
If they can perform the lachman's preferred method to
look at these Investments is rather than look at next year's
earnings. He looks at the next four or
five years. He tries to see how things will
actually change and evolve for the company and then he
discounts that backwards to present day.
And so even though today, Looks expensive at a 30 PE ratio.
He goes on to explain different changes in Evolutions in the
company that he thinks will make today's price very cheap.
And hindsight, if you can make a recovery from the food, safety
crisis, which in almost every fast-food companies been able to
make a recovery and to you start layering things like online
ordering breakfast longer hours, you know they just had their
first drive through. You know, there are lots of
different ways. And also I think what he does
here is highlight a fundamental problem with just looking at
next year's P/E ratio without looking at the fundamental
development. Elements of the company he
highlights that they could be open for longer hours.
They could have breakfast, they could have drive through.
They could have a mobile app and delivery and so on and so forth
that will fundamentally change the company.
And so this next 12 months PE ratio that doesn't factor in
any, of those changes might not be the most accurate way to look
at this stock. Now, having said that Josh goes
on to bring up an entirely new concern for Chipotle.
Also in 2006, when they spun out of McDonald's did the IPO, there
were no real competitors on a national basis.
That were doing Very Fresh Mexican food.
That is obviously not the landscape today actually.
Competitors on National don't feel like Del taco is legitimate
competitor. It's a suppose you do mean these
are huge chains getting bigger and arguably feasting off of a
concept that chipotle really created Rising competition.
Another challenge, and bear case for Chipotle at the time and
most investors were referencing. All of these bear cases when the
stock price was in the gutter. In many times.
You'll see that sentiment Follows stock price, Chipotle
stock was moving downwards. People are referencing the
increasing competition, the problem with their earnings, how
expensive the stock is and how everything is going wrong for
it. But, Bill Ackman had to
repeatedly justify and rationalize his investment in
Chipotle limited to competing against other Mexican can take a
look at Burger King. Okay?
Wouldn't Burger King did their turn around?
You don't think there was competition and the hamburger
space, did they turn it around? Or did they shrink the size of
the food? And, and really just focus more
on. Shareholders then no Burger King
looking at. Look at the sales per box
wrapped 30-something percent from where they were, look at
the quality of the stores. Look at the international growth
of the business. So Brokers clouded is so and
it's still worth, but there's also to put the presents.
Are there are there taco places in every Community?
I'm sure there are other taco and Mexican Concepts and but
it's very difficult to do with Chipotle has done as 2300 unit
scale and by the way, we haven't talked about International right
that done. Nothing internationally, right?
So there are lots of different levels.
That can be pulled here to make this a successful company and I
have to give him credit for sticking to the stock during
this time. I think that the majority of
investors would have a very difficult time doing this.
The negativity and bear cases were Relentless.
It's one - objection after - objection took some given the
health issues does this really scale because isn't that the
problem that they're trying to do fresh food in a format that
the other chains have looked at and said we really can't do
that? Yes, okay.
And they put in, they put in place, very good and they're
getting making me. I think this latest issue they
had was not an issue of a supply chain problems.
An issue of a sick employee, who came into work, right?
And they didn't identify the management board anywhere.
It could happen anywhere by the way, because it's Chipotle gets
attention. I mean, when they, when the
Chipotle issues were happening, there was a story of the press
that there was fecal, matter in the ice cubes that, you know, I
won't mention the the hamburger chain, but people largely
ignored it, right? But because this is supposedly
and where the focus is yes to continually rationalize and
defend his position and remind other people that it's not
always dark days ahead for these companies to that magic is that
we talked about the reason, why magic and come back.
Just like it's, by the way McDonald.
So that's why it was a check in the box.
They have this social media presence, young people,
fetishized it pencil, that is chain.
He says the magic can come back and the magic did come back for
Chipotle. Since that interview, the stock
price is only raced upwards to all-time highs over, triple the
price of his initial purchase in fact, since the time of that
interview Chipotle Averaged, a 32 percent yearly return
doubling, the S&P, 500 and firmly beating out the QQQ.
In fact, even in his initial, by back in 2016, before the large
drop in price, his position has steadily beaten, the S&P 500 and
even beat the QQQ by over 50% today.
Chipotle share price is up 3% to 1556 dollars, the future looks
bright as ever as they open up more and more stores every
single year. Almost reaching 3000 at this
point and Bill a Woman continues to hold the stock as his third
largest holding with an 18% waiting, and the earnings per
share of Chipotle haven't just surpassed their 2015 levels.
They're hitting all new highs. So this brings me again, to the
question of, when's the best time to buy a stock for
Chipotle? It was Claire that between 2016
and 2018. That window a very bad - news
and negative outlook was an opportunity that some investors
like Ackman took advantage of. He didn't time the purchase
perfectly, he certainly didn't buy the And he may have had to
hold on to it for longer than expected.
But, ultimately, he reaped the rewards of buying a high quality
company at a very low price. And I see the same kind of
example, repeated, over and over again throughout history.
The best time in history to, by Marriott was a time when their
hotels weren't being used. Everybody was locked in the best
time to buy oil companies over the past five years was during
the time when oil had no demand. The investors that bought during
these dips of bad forecast, and bad news.
Reap the returns one of the best times by Costco stock throughout
its entire Our history was one of the big news came that Amazon
was buying Whole Foods. Many people thought this would
be a new competitor. It dropped, Costco stock, double
digits and the investors, it took advantage of this dip reap
the rewards. So when I make buys into
companies that I consider to be high quality, they have good
brand value, they have decent moats.
I realize that I'm not going to time the bottom with these
purchases. I know that going in with
Starbucks. I bought some of it at ninety,
six dollars a share. Some of it at eighty, five
dollars, a share. And the price is currently 80
dollars a share. It's be.
Both my current buys and the stock price may continue to
drop. In fact with the news coming out
of China it's pretty likely that it will drop at least in the
short term Starbucks, is a company that's under distress
right now, it has the combination of unions and
concerns in China. The stock is down 36 from its
all-time high. It's trading 16 percent below
where it was in 2019, that is pretty incredible for company.
That's continued to grow to put it another way.
Starbucks has increased its store count by over 4,000 from
19 to current day and the earnings per share of the
company have gone from 60 cents per quarter to earnings per
share of around a dollar. The company has substantially
increased, its earnings and it's store count and it's down 20% so
maybe this is another Ali Baba situation may be.
This is the ultimate downfall of Starbucks and the company will
never be able to recover. But right now that's a bet I'm
willing to take, I think that over the next three or four
years is company will be much more attractive.
It will have far more stores and I think that many of the
concerns that it faces right now.
How will fade into history? I share a similar view with
Domino's. This company recently traded
down over 30% from just a couple months ago because of a decline
in same-store sales to me. That's very short-term thinking
and I think the company will rebound from it.
They increase prices on some of their items by a dollar, which I
think will help with their same store sales.
So I expect to see an improvement with Domino's over
the next couple of years and I think this company is very
attractively valued so I'm not suggesting for anyone to follow
me into these trades or by these companies.
We ones welcome to buy the S&P 500 or the QQQ that way.
You can follow the index and not have to concern yourself with
individual buys. But when I see high quality
companies fall dramatically in price in a short amount of time
because of what I consider to be mostly temporary and overblown
news. I think that that's an
opportunity that I like to take advantage of and in terms of
seeing the stock price drop quickly after buying a company,
a lot of people have said comments to the extent of man,
that seems like so much stress. I'd rather just buy the S&P
Hundred. If that's the case if it causes
you stress to buy individual companies, then you shouldn't be
buying individual companies. I've been buying individual
companies for over five years and that's never cause me stress
what I'm doing on this channel, and what I'll continue to do in
the future is, share my thoughts on investing and show you what
I'm buying with transparency. So, I hope you enjoyed that
little story. That's all for this time.
I'll see you in the next one.