How to Improve Investment Strategy?

What can help us to improve our investment strategy? No doubt, it will be learning from our own best investments. In our case it was an investment in Domino’s Pizza Inc (DPZ). I purchased 57 shares of Domino’s Pizza for $190 each back in October 2017.

So we hold this investment for 4 years and three months. Our unrealized profit from this investment is 267%. Not bad for four years return. To make the deal even sweeter we received $712 in dividends. We can easily sell our initial investment of $10,830 making this investment lossless. The arrow points to our purchase point in time on the graph.

improve-investment-strategy

How did it start?

There was a Domino’s Pizza store close to our townhouse and we were occasional customers of that store. Sometimes we picked up or directly ordered pizza with kids. On one such occasion I asked my older son what he thinks about investing in Domino’s Pizza. I always try to discuss investment ideas with our kids. My son told me that there are other pizza stores around and maybe the pizza itself is not the best but we do get the best deal considering the price and the quality of pizza. Then I checked revenue of the company and EPS, both were increasing so a decision was made and we bought 57 shares. How I am proud today, talking to my kids, reminding and showing them this investment.

What we did after buying the shares?

Absolutely nothing. I have a friend at the poker table, when we asked what he had when he won a hand without showing the cards, he always replied “Absolutely nothing”.

It is perfect, doing nothing, maybe only watching how your investment grows.

We can see that the price went down by about 15% in about six weeks after the purchase. Did we worry about that? No, if nothing has changed in the underlying business we knew that the market might be irrational for a long time. It paid out to do nothing.

Closer look at the asset prior to our purchase

Revenue in millions went from $1,463 in 2007 to $2,788 in 2017.

Operating margin improved from 13.26% to 18.7% at the same period of that decade.

Net Income in millions increased from 38 in 2007 to 278 in 2017.

Earnings per share (EPS) increased from $0.61 in 2007 to $6.05 in 2017.

Return on invested capital (ROIC) was also impressive

improve-investment-strategy

I liked it then back in 2017 when I was looking at these numbers and I like them now as well. I am going to set these as search criteria for the new stocks I am going to buy.

We bought the shares when PE ratio was 32 and PS ratio was 3.23.

The shares have been in uptrend starting from the end of 2008. There were little pull ups in the price just giving the investors opportunity to load more shares.

improve-investment-strategy

Current DPZ valuation

It is easy to see that the trend is up, the price is above 200 moving average all the time.

The Forward PE ration is 32.79 and it was about the same ratio at our purchase time.

The 3-Year Dividend Growth rate is 19.2%. These are big hikes and we love them.

Analysts estimates are positive, revenue, EPS and dividends heading north.

How can we improve investment strategy based on analysis of our top winner?

Revenue did not increase from year to year, there were years with slightly declined revenue, but revenue almost doubled within 10 years time frame. So for the search criteria I will be using median 10-y revenue growth rate of about 10%.

Earnings per share (EPS) grew up from year to year. I will set EPS growth rate of 10% for the last 10 years in the screening.

I am throwing another parameter into the search 10-y median ROIC (return on invested capital) to be above 25%.

Market capitalization greater than $1.0B to exclude companies with small capitalization.

So the final gurufocus.com screener is as follows:

  1. Market capitalization above 1.0B
  2. Revenue 10-y median growth of 10%
  3. EPS growth rate of 10% for the last 10 years
  4. ROIC is higher than 25%

28 companies showed up running this screener in gurufocus.com

Some of the companies on this list are worth attention to and potentially research them so we can include them in our investment portfolio.

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