Pool Corporation short pitch from the 17th annual Pershing Square Challenge; Bill Ackman's fireside chat in Omaha; My interview after the Berkshire Hathaway annual meeting
1) Today will be the final installment of my series on the best stock ideas that Columbia Business School students pitched at the 17th annual Pershing Square Challenge...
I'll share the idea that won second place and a $50,000 prize from my friend Bill Ackman: a short of Pool Corporation (POOL), which distributes swimming pool supplies and equipment.
(On May 1 and May 2, I shared the stock pitches for TKO Group (TKO) and Valvoline (VVV), respectively – the latter won the $100,000 first prize.)
Pool has been one of the best-performing stocks of all time, rising nearly 40,000% since it went public at a split-adjusted $0.92 in October 1995. Take a look at the stock's incredible move higher:
However, the Columbia student team of Jennifer Ma, Morgan Zhang, and Yadong Wei argued that the company's best days are behind it... and therefore its richly valued stock, trading at 29 times trailing earnings, is likely to fall.
The first pillar of the students' bear case is that Pool's earnings doubled during COVID thanks to a surge in both revenues and margins. Here's the relevant slide from their presentation:
The students believe that this boom is in the process of unwinding, which will cause the company to miss earnings expectations:
The second pillar of the students' bear case is increased competition from Heritage Pool Supply, which took 12% of the market from 2021 to 2023 and was just acquired by Home Depot (HD).
This is already causing significantly increased competitive pressure, as they cover in this slide:
The final pillar of the students' bear case is that there is no room to grow, so Pool will only be able to open five new stores annually instead of the promised 10:
Lastly, to show what might happen to Pool's stock if the company misses expectations, the students showed what has happened to a competitor, Leslie's (LESL), over the past year:
(To see the students' entire 113-slide presentation, click here.)
I applaud the students' excellent work and agree that Pool looks like a stock to avoid.
However, I'm not making a recommendation on it beyond that. (It's a similar case to the other stock pitches I shared from the competition – I'm sharing what I think is good analysis that my readers might be interested in.)
Particularly in this case, it's a short idea. And given the risks of short selling, I think – as I've said many times in my daily e-mails over the years – that 99% of investors should avoid shorting.
2) Speaking of Bill Ackman and Pershing Square, he was the featured guest at a fireside chat in Omaha, Nebraska last Friday that was hosted by investment bank UBS (UBS).
He and Ryan Israel, chief investment officer at Pershing Square Capital Management, took questions from Solita Marcelli, chief investment officer Americas at UBS and then from the standing-room-only crowd for 75 minutes – covering a wide range of topics.
One of my friends said it was the highlight of the weekend. You can watch it here:
3) Shortly after the Berkshire Hathaway (BRK-B) annual meeting ended on Saturday, I did a 13-minute interview with a Chinese company, Southern Finance. You can watch the video here (the video is in English but the page is in Chinese – to read the transcript, open the page in a Chrome browser and use Google Translate):
Here's a transcript of the part in which I talk about the importance of investing for the long run:
Southern Finance: You just mentioned that Warren Buffett prefers to hold stocks for the long term. Is this value investing to you?
Whitney Tilson: That's what I preach to everyone and that's what I wish I did more of.
You know, most people think that Buffett is a genius and one of the greatest investors of all time because he has always been an outstanding stock picker and he can accurately pick high-quality stocks, but in fact, to make profits on these stocks not only do you have to buy the right stocks, but you also have to be patient and disciplined enough to hold them for the long term to let the magic of compound interest work.
The biggest mistake I made in my 25 years of investing was that I owned some of the best stocks ever. I owned Apple stock at $0.35 and Amazon at $2.40. I can't forget these numbers because they make me miserable. Also, I owned Netflix stock 12 years ago at $8 and it grew in value 90 times, but I sold the stock after making 7 times, thinking it was a stroke of genius on my part, but after that it rose another 10 times.
Charlie Munger once said: "Long-term investing is as immovable as a mountain." You have to be patient and disciplined. In fact, I am patient and disciplined 99% of the time, but there are always three or four days a year when I feel ready to make a move. Say, because a stock has doubled, I think I should sell half of it. I would say to myself, "Oh, I don't want to be greedy." But the crux of the matter is that as an investor, greed is necessary.
The key, I noted, is to not get spooked by short-term noise and instead let your winners run:
Whether you own 10 stocks or 20 stocks, all market research and portfolio studies show that only one or two stocks will give you 80% to 100% returns, but only if you continue to hold those stocks. It will happen next time. You have to hold it for the long term. So that's the most important lesson, but I think it's an underrated lesson because it sounds so simple.
People are generally anxious. They're worried about the economy, about what the Fed might do, about a public company releasing a weak quarterly earnings report, about stocks being flat for a year. They will lose patience and sell the stock. But in fact, you can't do this, because in your investment career, only a small part of the (high-quality) stocks you own will increase by 10 times. If you are lucky enough, you may own one that will increase by 50 times or even 100 times – but you must hold it during this entire period.
I have a friend at this meeting who bought Berkshire Hathaway stock 40 years ago at $170 and it went up 10 times and he bought it 10 years later at $1,700. He still holds it today, and the value has reached $600,000. This kind of investment will make you rich. If you don't have the patience to do this, then you should only hold index funds.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.