Here's How Tractor Supply Became My Top Holding

Months like October test the soul. Stocks suffering bad news got absolutely pummeled. Many shares of companies with good news got clobbered, too. Watching your portfolio value go down, day after day, makes you doubt your reason for owning those stocks, in particular, and maybe even equities in general. The best defense against throwing in the towel at terrible prices is actually knowing what your shares are worth. Then you can laugh at the crazies selling ridiculously low. Perhaps you'll even buy more at asking prices you never expected to see. Regular readers of my columns know that I trust a stock's actual past trading history to guide me regarding its proper valuation. Rather than decide what I think a company's multiple should be I see where it generally traded in past years. I also key in on a normalized yield for each dividend paying stock. I then compare the present day current yield to the same stock's normalized payout. Tractor Supply became my single largest dollar holding over the past year and half. I didn't buy it all at once, though. Here's the story of how it became my top holding. Like many good companies I didn't recognize how good it was until it shares had already gone up a lot. That was the case from late in 2013 through around mid-year of 2017. TSCO reeled off great numbers from 2010 through 2017 but the stock got very pricey as more and more investors caught on. From 2010 through 2017, TSCO's average P/E was about 23.1x. A typical yield ran around 0.96%. That made Tractor Supply too expensive for me from late 2013 through early 2017 as its P/E was elevated and its yield was subpar. By the spring of 2017, though, TSCO started falling despite fundamentals that were still improving, albeit at a slower than normal rate. By mid-summer of that year TSCO briefly dipped below $50. At that price TSCO was asking just 15x that year's EPS while paying a 2.10% yield due to the severely depressed quote. Wow. I could finally own TSCO at a substantial discount to its typical multiple while collecting more than double its average yield. That was the cheapest entry valuation on the shares since early 2011. Things started picking up and, by Jan. 26, 2018, TSCO had rebounded to almost $84. I sold a bunch of covered calls at $90 and $95 fully expecting a further rise which would get me out near TSCO's old peaks. Oops. Instead of continuing higher, Tractor Supply started regressing. By mid-April it was painfully back to the high $50s with me not having sold any near the top. Did I give up in disgust? No. I worked out a rational target price. At that time the fiscal year 2018 estimate was running about $4.10 per share. A normalized multiple on that estimate suggested $90 - $95 as a reasonable end of fiscal year 2018 goal. Rather than giving up, I went to town buying lots more TSCO. Getting that second chance, below $60, allowed me to bulk up my position into something really substantial. After all, from the high $50s TSCO's well-defined upside was more than 50%. Happily, TSCO rewarded my confidence, by rising again. As of Nov. 8, 2018, it actually exceeded my goal, establishing a new all-time high of $97.57. Its shares closed at $89 on Wednesday. This time my position size was more than twice the original stake. It was painful seeing my statement values decline through last April. That final, and unjustified, selloff ended up making me a lot of extra money. I'm hoping TSCO hangs on near $100 until my long-term holding period kicks in on the second batch of shares bought last spring. If TSCO can come through on its fiscal year 2019 estimate, I could see it gradually rising to near $109 by January of 2020. The easy money, though, has been made. Having a fact-based target price above $90 got me in originally. It gave me confidence to hold on tightly when the stock pulled back to under $60. It motivated me to more than double my position when I got that second opportunity to buy cheap. Without that guiding light I could easily have made a mess of the position rather than booking a huge gain.

Here's How Tractor Supply Became My Top Holding

Tractor Supply became my single-largest dollar holding over the past year and a half.

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