Based on the company’s most recent earnings report, we’ve decided to remove GoodFood Market (TSE:FOOD) from the Bull List.
Before we state why, would just like to say I (Dan) do own the company and do not plan to sell right now. Results in a single quarter are often not enough to justify selling a stock, unless there is a reduction in outlook or guidance.
But, this large miss on earnings and a large reduction in margins has created enough uncertainty that I certainly would not be adding right now. The company is facing a significant sell-off post earnings in what we feel is one of the most “out of left field” earnings announcements in quite some time.
The company reported a significant miss on revenue and earnings, and also a significant reduction in margins. Considering GoodFood only missed top line estimates once in the past two and a half years, the large double digit miss was surprising.
We expected slowing growth from the company, and so did the market. GoodFood was valued at a price we felt more than priced in a post-pandemic slowing of overall sales. However, what we didn’t expect to see was shrinking revenue, as the company reported a 5% decrease in sales when compared to the fourth quarter last year.
This is significantly lower than our expectations, and is the main reason for removal. The company posted year over year growth of 33% on an annual basis, which is a very strong number considering its current valuation. However, it is very likely the market is becoming concerned as to whether or not that growth will be able to stick. The main question that will be asked about FOOD moving forward is how much of that 33% growth was because of pandemic-fueled sales in early 2021 due to extended lockdowns, and will its food delivery business be able to recoup lost growth from the inevitable slowdown of food box deliveries.
There is a chance this could be a one off quarter due to seasonality, and the stabilization of its food box sales combined with the growth of its grocery delivery in 2022 could continue to drive double digit growth. But there’s simply too much speculation in assuming this right now. So, a removal is justified.
As we’ve been talking about most of the year, it is a very difficult environment for small caps and growth stocks
This is evident by the large, post-earnings swings we are seeing such as the one from FOOD today. We’ve seen similar dips in other Canadian companies like Lightspeed and even some companies down south like Snapchat and Peloton.
This is why it is very important to ensure you have a strong foundation of good, reliable stocks. It’s a mantra we’ve been talking about all year, and one that we will continue to reinforce.
The hyper growth of 2020 was not sustainable, so be sure that if you are going overweight growth, you can withstand the swings. As a reminder, both of us (Mat & Dan) have built a strong foundation of blue-chip, dividend paying stocks before we jumped into growth.
Although we have our Growth Bull List, the vast majority of our Canadian portfolios is made up of companies on the Foundational Stock List and Dividend Bull Lists, both of which are performing exceptionally well in 2021, and providing somewhat of a buffer to a struggling growth portfolio.
We also keep our individual growth positions to 2% or less so that when these big negative swings happen, it doesn’t significantly impact our portfolio. Although it does suck when we purchase a company like Shopify, Lightspeed or Docebo that has ran up considerably and we only have low single digit exposure, when these large swings in price in the event of uncertainty happen, they become much more tolerable.
Remember, growth investing is inherently riskier and one should also proceed according to one’s risk profile.
So, if you have any questions feel free to head to the Q and A or the Discord, as we are readily available during market hours and even in the evenings and weekends when we can to answer members questions.
Dividend Bull List Stock Upcoming
Now that earnings have settled, we’ve narrowed our next Dividend Bull List stock down to a few selections, and will likely have it released to you early next week.
