April 11, 2012 Comments

North American markets were up about 0.7% today after ALco reported better-than-expected earnings.

Of note, Canadian Tire was up 3.0%, Toll Brothers 4.0% and Bank of America 3.7%. Melcor was down 2.7% to $14.37 which I think is a buying opportunity.

Dollarama was up 6.9% to $51.70. It released very strong earnings and raised its dividend 22%. It same store sales were up a very impressive 7.9% and it has increased the store count by (coincidently) also 7.9%, which suggest sales growth of about 16% as a run rate at the moment.

Perhaps I was too conservative thinking it was already fully valued at $43.49 in January. I am definitely impressed with it as a business. It appears to nbe extremely well managed. I just thought it looked too expensive. It is now valued at very close to $6 million per store. Clearly that value is not just for the existing stores but also reflects the ability to continue to open new stores. Dollarama has established itself as a brand in Canada. I must confess I completely missed it and I wish I had looked at it much earlier..

Despite all this performance (actually despite the growth performance but BECAUSE of the stock price performance) I cannot see it as a Buy.

In theory we would expect competition to erode their high margins. But to my knowledge other dollar stores have not posed a big challenge (they lack the scale and the management skill it seems). And the likes of Wal-Mart has not responded. And Zellers has decided to sell off its leases to a better operator (Target). So perhaps the best I can do is to copy those academics who refuse to admit that some people (like Buffett)¬† CAN beat the market and I am left to sniff that that “What Dollarama is doing might work in practice, but it will never work in theory!”

I am not going to worry much about missing out on Dollarama, it simply did not pass my screens. There will always be lots of stocks going up that I don’t hold. What is important is that the stocks I do hold and rate as Buys do well. And they have been.

I look forward to seeing the earnings from Shaw Communications on Friday. I also understand that Wells Fargo will report on Friday.

Speaking of Wells Fargo which is going to benefit from any housing recovery in the States, I notice Warren Buffett’s Home America company has been in the news buying up three fair sized real estate agencies in the past few months. Buffett has said he is absolutely confident houses will recover somewhat (new households are forming as teenagers come of age and this is happenings quite¬† a bit faster than houses are being built and so Buffett argues that house construction has to pick up at some point and prices too). Buffett also argues that when house construction recovers the impact on thee unemployment rate is going to be noticeable.