Being a city dweller, I'd never come across a Tractor Supply
But TSC had received a top-rated five stars from the Motley Fool CAPS community, and it scored in the 99th percentile of specialty retailers -- a notable achievement in the dark days of the recession. So I decided to look deeper anyway. I was intrigued by what I found:
- TSC doesn't target commercial farmers, but rather outdoorsy do-it-yourselfers and hobby farmers. These folks spend a lot of time in their yards, so they regularly need seed, fertilizer, feed, rugged clothing, tools, and power equipment. They generally own homes, have enough land for horses and livestock, and earn above-average income while enjoying a below-average cost of living. (Read: They have smaller mortgages and less reliance on credit card debt.) TSC strategically operates where these people live, in "second-city" rural locations.
- Direct competition in this niche is highly fragmented and limited. TSC is roughly three times the size of its next five private competitors combined. Of course, Wal-Mart
(NYSE: WMT) , PetSmart(Nasdaq: PETM) , and Home Depot(NYSE: HD) pose departmental threats, but the chains don't offer the complete range of farming and ranch supplies that TSC does. - Looking at the balance sheet, TSC had $37 million in cash at the time, and like most retailers, held no long-term debt with operating leases held off the balance sheet. Rent payments were affordable, and with real estate markets slumping, TSC could renegotiate leases even lower as they came due. Faced with a recession, TSC planned to slow store growth to a more measured clip, reduce expenses, and cut back on big-ticket items.
Armed with what I'd found, I visited some TSC stores in Virginia and Maryland. I found that sales of big-ticket items were down, but that more people were buying supplies to grow their own food in an effort to save money. The stores were well-designed, and the merchandise was weighted toward need-based (versus want-based) products, a strategy vital to success during a recession.
As impressed as I was, the price had to be right for me to recommend it for the Motley Fool Pro portfolio, where we have the lofty goal of closing 75% of our trades profitably. That meant making sure the fair value of the company exceeded the current market price and not making aggressive assumptions about future growth. Retailing is a cutthroat business, after all, with traditionally tight profit margins, so forecasting above-average growth for an extended period of time can be dangerous.
After careful analysis, I determined that TSC was worth between $44 and $49. On March 9, 2009, with TSC's stock around $30, we were all set to recommend a combination of buying the stock outright near $30, and simultaneously writing puts in an effort to buy more at a lower price. But that wasn't to be.
The best laid plans
As it turned out, March 9, 2009 marked the very bottom of the market. Within a week, TSC had jumped 13%; a week after that, another 11%, to about $37. TSC was far from alone during this surge. In two weeks, other retailers posted the kind of astounding gains normally achieved over the course of years.
Having experienced a very bumpy market during the previous winter, we patiently waited for another chance -- we weren't about to chase a retail stock higher in that environment. But before long, our window of opportunity was slammed shut. Since March 9, 2009 TSC shares have more than doubled, to $68.29 a share -- well above my original fair value range.
Yes, we missed out on some very nice gains, but we made a cautious and deliberate decision not to chase the stock higher. In a highly volatile market like the one we experienced early last year, patience is a double-edged sword: It can work for you, or it can work against you. And in this case, it worked against us.
Tractor Supply is a fine company with good growth prospects. But as with any company we consider for the Pro portfolio, we don't want to overpay for those prospects. Though we loved TSC at $30, we liked it less at $40. Now, with shares trading in the high $60s, we'll just shake our heads.
Don't pay it upward
Sometimes, good companies can get away before we have a chance to buy them at the right price. That's just a part of investing. Always keep in mind, though, that good companies aren't always a "buy" -- the stock price has to be right, too.
Accuracy is one of our top priorities at Pro -- and paying dearly for a stock only increases our odds of being wrong. What's more, our concern for consumer spending remains strong. A quick look at Best Buy's
Fortunately, over the past year our patient approach has worked more times than not. Over 90% of our open and closed positions are in the black. If you'd like to learn more about our strategy at Motley Fool Pro, where we use stocks, ETFs, and options to both long and short the market, simply enter your email address in the box below.
