If the position is over 15% of the portfolio I trim so I only have 10% left in the portfolio. But when I trim due to valuation I sell the amount needed for the new position.
So usually I enter positions at 3-5% and I try not to leave a position under 2% of the portfolio (sometimes I don’t enforce that rule but now I am trying to be stricter with myself :) )
In the case of DXPE, as it is 4.2% and I have 1% in cash right now, I may close the entire position to redeploy in the new pick.
However, please remember that I have other names on the trim list such as POWL, so on the week that I want to buy the new position I check all the names on the trim list and trim either a bit of all (if I see their risk-reward similar) or just sell the one with the worse risk-reward profile if it is materially lower.
Hi George thanks for the great write up! I saw you mentioned “92% of the capital it deployed this year went to acquisitions” and I was wondering if you think there are specific return thresholds or post-acquisition metrics investors should watch to determine whether DXPE is still creating value through these deals, particularly as competition for water assets increases?
Besides revenue growth and EBITDA margin, I would look at ROIC including goodwill as a proxy if acquisitions are adding value. Note that the ROIC declared in the company presentation is the 'clean' ROIC which is okay BUT you should also include goodwill in ROIC as it includes whatever DXPE paid over the book value of assets.
Thanks for responding! I’d love to connect further if possible. Would you be interested in jumping on a short call? What would be the best way to contact you further?
Very principled approach at capital preservation. you usually trim by 50% when a position doubles? Essentially gambling with house money afterwards?
Not necessarily.
If the position is over 15% of the portfolio I trim so I only have 10% left in the portfolio. But when I trim due to valuation I sell the amount needed for the new position.
So usually I enter positions at 3-5% and I try not to leave a position under 2% of the portfolio (sometimes I don’t enforce that rule but now I am trying to be stricter with myself :) )
In the case of DXPE, as it is 4.2% and I have 1% in cash right now, I may close the entire position to redeploy in the new pick.
However, please remember that I have other names on the trim list such as POWL, so on the week that I want to buy the new position I check all the names on the trim list and trim either a bit of all (if I see their risk-reward similar) or just sell the one with the worse risk-reward profile if it is materially lower.
Does it make sense?
Thank you for the detailed answer. risk management is very important - I need to learn this.
Hi George thanks for the great write up! I saw you mentioned “92% of the capital it deployed this year went to acquisitions” and I was wondering if you think there are specific return thresholds or post-acquisition metrics investors should watch to determine whether DXPE is still creating value through these deals, particularly as competition for water assets increases?
Hi Hedge Fund Guy,
Besides revenue growth and EBITDA margin, I would look at ROIC including goodwill as a proxy if acquisitions are adding value. Note that the ROIC declared in the company presentation is the 'clean' ROIC which is okay BUT you should also include goodwill in ROIC as it includes whatever DXPE paid over the book value of assets.
That ROIC is lower than the one on their decks (~13% vs ~34%) but it is still way above WACC so it is fine. Here (https://www.rankedstocks.com/charting?symbols=DXPE&metrics=roic&period=ttm&type=bar&labels=1&dec=1) you can see the ROIC all-in evolution...if that number starts to consistently decline, I would get worried.
Hope this make sense, if not, let me know!
Thanks for responding! I’d love to connect further if possible. Would you be interested in jumping on a short call? What would be the best way to contact you further?
Sure. I am busy these couple of days prepping for a last minute trip, but DM me and we can coordinate some time.