Today's Lesson: Equity Investing 101

There are certain principles, or rules for the road, in trading equities that are immutable. They almost always end up true if you have the patience and will power to let thing play out over time. Here are some of the things I've learned to be true after 43 years of investing in stocks. Nobody is capable of predicting short-term market action. Stocks tend to swing from cheap, to overpriced and then back again, sometimes with little to no correlation to their short-term fundamentals. Shares inevitably return to the proper values based on measurable business metrics. Making great gains is much easier buying out of favor names than chasing momentum, hoping to buy high and sell higher. Why am I so sure about this? I've watched it happen over and over again on the thousands of stocks I followed since 1978. Ideal conditions for successful trades can be summed up like this: Barring major corporate changes, you'd want to buy at substantially lower than the same stock's normalized price-to-earnings. With dividend-paying shares you'd be wise to buy when the current yield is well above that same issue's typical payout. Getting long at lower than average price to cash flow and price to book value ratios are good predictors of future gains. Left to Right growers (firms which consistently show increasing sales, cash flow, EPS and dividends over multi-year periods) are the safest bets. When you encounter truly superior opportunities you should not be afraid to take large positions. That is where life-changing profits are best obtained. Somewhat surprisingly, the data identifying these type stocks is right out in the open. Yet most people tend to ignore the best values due to bad charts and poor momentum. For illustration, here is a full life-cycle review of Tractor Supply . It was my single biggest dollar holding in the spring of 2017 and I wrote about it extensively when it was very, very good value. This was my graphic on TSCO from late October of 2017, when TSCO was still available around $57. Tractor Supply met all my criteria. It was selling for a below typical P/E and paying an above average yield. Its price to cash flow and price to book value ratios were the best since the very nasty markets of 2010 - 2011. Better still, TSCO was a confirmed left to right grower as shown below. TSCO bottomed under $50 in the summer of 2016 as analysts were calling for Amazon to put every other retailer out of business. That idea made no sense to me with TSCO as it sells lots of very bulky and heavy merchandise, the antithesis of what Amazon does well on with so-called free shipping. The graphic, which follows, is based on Value Line's latest full-page report on TSCO, released this week. Every major business metric escalated substantially since 2016. So did the shares. From south of $50 TSCO reached north of $207 recently. That represented better than a quadruple, plus dividends, over around just a four-plus year horizon. Along the way to that great gain TSCO offered four excellent buying opportunities for those who wished to take, or add to positions (green-starred above). The COVID-panic low of $63.90 turned out to be the cheapest valuation on TSCO ever, at just 9.3-times forward earnings accompanied by 2.35% in current yield. The valuation pendulum has now swung to overpriced levels on this fine company. As of Friday, Sep. 10, 2021, Tractor Supply was very pricey and yielding only about 1%. My own end of 2022 goal price for TSCO now sits at $187.45, and that assumes a slightly above typical P/E of 23-times. Yahoo Finance correctly called it overvalued and set an optimistic 12-month target price that was below TSCO's current quote. Value Line came to the same conclusion when assessing TSCO's three to five fear share price prospects. Quantitatively based FastGraphs was more conservative than my own view. It sees TSCO's fair value as $176.33 at Dec. 31, 2022 and only $189.87 by year-end 2023. Needless to say, I no longer hold any TSCO shares. The stock did exactly what you would have expected on the upside and now appears poised for a period of share price underperformance, despite being likely to continue its winning ways as a company. Over more than four decades of investing I've found that at least 80% - 90% of my highest conviction, top dollar holdings end up hitting my target prices over time. Here is my Lucky Seven list of some of my largest positions right now. I continue adding to these on any substantial pullbacks. I still recommend owning any, or all, of them at today's prices. I'm not looking for 10% - 20% rises. Every one of these is capable of doubling or better over the next year or two if things go well. All of these have changed hands at much higher prices in the past. Each offers option trading for traders who prefer to use that route to play. All that should be required for success is to allow 12 to 24 months for the market to come to its senses regarding these names.

Today's Lesson: Equity Investing 101

Here are four universal truths about equity investing, using Tractor Supply Co. as an example.

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