RiverPark Funds is bullish on CarMax, Inc (NYSE:KMX), an $11.65-billion market cap retailer of used vehicles. In its Long/Short Opportunity Fund Q4 Investor Letter, the New York-based investment firm discussed its investment thesis on CarMax, calling the company as “one of the most compelling and profitable unit growth stories in U.S. retail with an excellent management team and a fortress balance sheet.” Let’s take a look at the fund’s comments.
CarMax (Long): After four straight quarters of better-than-expected results, CarMax reported a mixed third quarter that led to its shares being a top detractor from performance for the quarter. While EPS grew 13% for the quarter, in-line with Street expectations, sales were a bit disappointing (same store sales increased 2.7%, below consensus of 4.5% growth). The ebb and flow of the value proposition for used vs. new cars appeared to cause some slippage in demand for the company’s late model, used car dominated inventory during the period (in contrast, the company’s wholesale division and its lending divisions each exceeded expectations). We have seen these swings between the new and used markets many times during the years that we have been following KMX as a public company and do not believe that they are predictive of the company’s growth prospects or of the industry’s long term trends. Nevertheless, we will be watching closely for signs of normalization in 2018.
It remains our belief that KMX is one of the most compelling and profitable unit growth stories in U.S. retail with an excellent management team and a fortress balance sheet. In the near term, we expect credit normalization as well as strong used car industry momentum to continue to support strong quarterly earnings comparisons while, over the longer term, we expect the company to double its store base and more than double its earnings, while also generating substantial excess capital to return to shareholders. For 2018, the new tax laws will be of material benefit to KMX as the company’s effective tax rate is projected to drop from an above average 37% to approximately 23%, providing a substantial lift to 2018 earnings and free cash flow. Following this recent pullback and incorporating the new tax rate, KMX shares trade at a substantial discount to the market for what we perceive to be a well above average growth business.
Public Domain
Richmond, Va.-based CarMax, Inc (NYSE:KMX) is the largest used-car retailer in the United States, operating more than 180 stores. For the third quarter ended November 30, 2017, the company reported an 11% year-over-year (YoY) increase in net sales and operating revenues to $4.11 billion, while net earnings rose 8.9% year-over-year to $148.8 million, or $0.81 earnings per share. Used unit sales in comparable stores increased 2.7% year-over-year, with total wholesale unit sales jumping 9.1%.
Shares of CarMax, Inc (NYSE:KMX) are up just 0.47% so far this year. The stock has dropped 4.6% over the past 12 months. Analysts, polled by FactSet, have an average rating of ‘Overweight’ and an average price target of $77.88 on the stock, which closed at $64.43 on Friday.
Meanwhile, a number of hedge funds covered by Insider Monkey also see a value in CarMax. As of the end of September, there were 37 funds in our database that hold shares of the used car retailer, including Immersion Capital, MIK Capital, and Giverny Capital.
In this piece, we will take a look at ten recent IPOs in micro cap stocks.
There are a variety of benefits and drawbacks to listing a firm’s equity for trading on the stock market. The single biggest benefit of the process called an IPO, is that it allows management to raise large amounts of funds and investors to potentially profit by seeing their existing stakes multiply in value. At the same time, the IPO process also brings in a variety of constraints. Publicly listed companies are subject to corporate financial reporting requirements of the jurisdictions in which their shares trade. At the same time, share prices can be a volatile affair, and while investors stand to gain significantly if their companies are well received by the market, they also risk equally massive losses should the opposite occur.
Warren Buffett never mentions this but he is one of the first hedge fund managers who unlocked the secrets of successful stock market investing. He launched his hedge fund in 1956 with $105,100 in seed capital. Back then they weren’t called hedge funds, they were called “partnerships”. Warren Buffett took 25% of all returns in excess of 6 percent.
For example S&P 500 Index returned 43.4% in 1958. If Warren Buffett’s hedge fund didn’t generate any outperformance (i.e. secretly invested like a closet index fund), Warren Buffett would have pocketed a quarter of the 37.4% excess return. That would have been 9.35% in hedge fund “fees”.
Actually Warren Buffett failed to beat the S&P 500 Index in 1958, returned only 40.9% and pocketed 8.7 percentage of it as “fees”. His investors didn’t mind that he underperformed the market in 1958 because he beat the market by a large margin in 1957. That year Buffett’s hedge fund returned 10.4% and Buffett took only 1.1 percentage points of that as “fees”. S&P 500 Index lost 10.8% in 1957, so Buffett’s investors actually thrilled to beat the market by 20.1 percentage points in 1957.
Between 1957 and 1966 Warren Buffett’s hedge fund returned 23.5% annually after deducting Warren Buffett’s 5.5 percentage point annual fees. S&P 500 Index generated an average annual compounded return of only 9.2% during the same 10-year period. An investor who invested $10,000 in Warren Buffett’s hedge fund at the beginning of 1957 saw his capital turn into $103,000 before fees and $64,100 after fees (this means Warren Buffett made more than $36,000 in fees from this investor).
As you can guess, Warren Buffett’s #1 wealth building strategy is to generate high returns in the 20% to 30% range.
We see several investors trying to strike it rich in options market by risking their entire savings. You can get rich by returning 20% per year and compounding that for several years. Warren Buffett has been investing and compounding for at least 65 years.
So, how did Warren Buffett manage to generate high returns and beat the market?
In a free sample issue of our monthly newsletter we analyzed Warren Buffett’s stock picks covering the 1999-2017 period and identified the best performing stocks in Warren Buffett’s portfolio. This is basically a recipe to generate better returns than Warren Buffett is achieving himself.
You can enter your email below to get our FREE report. In the same report you can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12-24 months. We initially share this idea in October 2018 and the stock already returned more than 150%. We still like this investment.
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