Graco Part 2

FY15 Q2 result

In my first post on Graco, I mentioned that I bought the shares (at 66.98 per share) on 17th July 2015. One week after that, the Company released its FY15 Q2 result, which beat the market expectation, pulling the share price up to 70s. Since then, the Company continued to achieve decent financial performance, and the share price rose accordingly to 80s until mid 2016.

FY16 Q2 result

One year forward, this time for the opposite, Graco’s FY16 Q2 result was below the market expectation, causing the share price to plunge by nearly 9% from 80.28 to 73.37 in one day. Again, like what repeated happened to many great companies, there wasn’t anything wrong with Graco. It’s the market expectation that was too high at that time, and the share price ran ahead with the high expectation. Hence, when the financial result was below the market’s high expectation, the share price got corrected.

I saw that 9% fall as an opportunity to buy at dip and double my position. I bought additional shares at 72.47 on the same day. This raised my average purchase price to 69.725 before trading costs. My fair value estimate of Graco is around 70s, so I was buying with very little margin of safety. I understand that given Graco’s competitive strength and stability in its business, I will not be able to buy it cheap at current time.

FY16 Q3 result

Three month forward, Graco beat the market expectation again on its FY16 Q3 result. Its share price rose by 5% on that day from 72.46 to 76.15. Thanks to US election and Donald Trump’s unexpected win, Graco’s share price received further boost to 81.4 now. This gives my second investment 12% return in 4 months. Based on my average purchase price of 69.725, the overall paper return is 16% before dividends.

Taking Profit

I decided to cut my position by half today. The reason I doubled my position in July was to buy at dip after disappointing Q2 result (well, disappointing relative to the market expectation, not to a rational investor). I’ve realized 12% return in 4 months, which is not something I expect to get from a stalwart like Graco. Adjusting for a stronger USD against SGD over the past 4 months, I can add another 3.5% point, giving a total return of close to 15.5% in 4 months.

Also, at 81.4, I think Graco is fully valued to slightly overvalued. Its current valuation at 23.3x P/E is quite high for a Company that is expected to grow its earnings at an annual rate of 5-10% for next few years. My intrinsic value estimate is around 70s. I will discuss how I value it and what assumptions I use in other post next time.

I’m keeping the other half of my position because Graco is still a good Company and may continue to show surprises in future. I have experienced many times that I sold a stock because I thought it was overpriced, only to see the price rising way higher because of the company’s continued outperformance. This is always the interesting part in the stock market.

Graco - Share price - 2016-11-15.PNG

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