The Biggest Investing Miss of My Career (So Far)
It may be decades before we see an opportunity like this again...
My favorite “Chit Chat Money” (soon to be Chit Chat Stocks!) episode in 2023 was our discussion on the luxury sector with Best Anchor Stocks and Sleepwell Capital.
You can find the episode transcript and links to the podcast here:
During that time, Ryan and I also did an episode specifically covering Ferrari:
After recording that episode, I realized I had made a huge mistake. Not then, but years ago.
I have known about Ferrari stock for a while. Ryan would talk to me again and again about its qualities and why it wasn’t just another automaker. We even had someone come on the podcast back in 2020 to discuss the company.
But I never bought shares. And wow, has it been an error of omission. From its spin-out in 2016 to the time we recorded our Ferrari episode, the stock has posted a total return of 620%, or a 27% compound annual growth rate (CAGR).
These are home run returns. In hindsight, it was clearly a fat pitch. But why?
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Perpetual pricing power and a reasonable price
The big takeaway from our luxury discussion was the fact these companies have perpetual pricing power. They do so for a few reasons:
Product supply is well below customer demand. This creates a sense of scarcity that allows for price hikes.
A customer expectation of high prices.
Resale prices well above retail prices. A good luxury company has the ability to raise prices up to resale value without losing customer demand (although they almost always stay below this value in reality).
If you study Ferrari, it clearly has all these qualities. Especially back in 2016. Then, it sold less than 10k cars a year with resale prices significantly higher on a lot of models. It was also doing much more to build and reinvigorate its luxury brand.
This means in 2016 Ferrari could:
Significantly grow unit volumes. and,
Consistently raise prices even while growing unit volumes
Higher volumes at higher prices = margin expansion. And that is what happened at Ferrari from 2016 to today. From our friends at Finchat.io:
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Ferrari has consistently grown its shipments and raised prices over the past decade. This has led to operating income growth of 16% since December 2013.
So where did the 27% stock price CAGR come from? Well, what was even better about Ferrari back in 2016 was its earnings multiple: it was under 20.
According to Finchat.io, Ferrari’s EV/EBIT was 19.6 at the end of 2020. Today, it is 37.7. If you understand the brand’s extremely wide moat, this earnings multiple makes sense. Under 20 was an absolute bargain.
Volume growth, price increases, margin expansion, multiple expansion…
There may never be another Ferrari
I think about missing Ferrari a lot.
It clearly was a fat pitch. And, it was one where I could understand what would drive returns. I hope to take the case study we did and apply it to another brand someday.
The problem is, an opportunity such as Ferrari in 2016 may never appear again. As we discussed in the luxury overview episode, there are very few true luxury companies. A lot of them are private and don’t want to be public.
Will Patek Phillipe go public? Will Chanel? Why would they? There’s no reason to. Even if they do, I doubt they would trade at sub-20x earnings like Ferrari did after its spin-out.
Even worse is how easy it would be to HOLD Ferrari. If you bought the stock at the right price, you can hold Ferrari and never sell. It is similar to the people who hold Costco at 40x earnings. You can sleep easy at night knowing that — unless management royally screws up — you are guaranteed to get a great return on your cost basis over the long haul. Perhaps in perpetuity.
Over the next 10 - 20 years, Ferrari can probably produce solid returns for investors. Revenue can grow at 5% - 10% a year, and I think it deserves to trade at 40x earnings. For some reason, I don’t want to buy shares today. I think at sub 30x earnings I would be all over this thing.
Does Ferrari’s chart in 2050 look like Hermes today? I think it might:
Been there done that! Just off the top of my head: DPZ, ADBE, NVDA, NOW, and TSLA. All of these companies I invested in between 2014-2019 and sold out early due to valuation worries, or in the case of TSLA I never invested in because I did not believe it would ever be successful or make money. Even missing the bigger opportunity of not 'backing the truck up' in March of 2020 when the market plunged hurts as well. Remember, everyone makes mistakes and misses, but applying what was learned from those mistakes and misses is far more important. Fat pitches will always come around again and it is our job to keep at it and be prepared the next time opportunity slaps us in the face! Great reflection article!
Great read.