In the last couple years I made a massive investing mistake. This mistake was extremely costly, yet on paper, I didn’t lose any money. It was a sin of omission, not a sin of commission, hence there being no loss on paper. But again, this was a massive mistake.
One of my biggest investment strategies is cloning investors who are smarter than I am. Mohnish, Buffett, Ted and Todd, Lou, and the list goes on. I see what these investors are doing either from interviews or regulatory filings, and then I follow them into companies at a similar price that they went into the company. I read about the company, try to backtrack why they made the investment, and I always try to understand the business, have an exit strategy, and have a plan for what to do if the stock price falls. But overall, it’s a very simple and straightforward process. Monkey see, monkey try and understand the investment, monkey do.
Even though it’s a simple formula, it just shows how not-bright I can be sometimes by how I failed to follow the formula when it came to Mohnish Pabrai and Fiat Chrysler over the last couple of years.
A couple years ago I saw in regulatory filings that Mohnish was loading up on Fiat Chrysler (FCAU) and I probably heard him talk a lot about it in interviews and lectures. But I failed to act on it. Monkey saw. But monkey did not do.
For over a year FCAU traded in the $6 to $10 range, and I did nothing. I didn’t get off my ass and try to understand the investment or buy the stock. And since then, Fiat Chrysler went from $6 to $20 and they spun off Ferrari as a separate company to Fiat shareholders, and the Ferrari stock has gone from the spinoff price of $56 to $137.
So if I had just followed my own cloning strategy and looked into FCAU and bought when Mohnish bought, I could have seen my Fiat stock go from $6 to $20, a three-bagger, and I would also have Ferrari stock that has more than doubled. Someone cue Homer Simpson. Doh!
Life Is Full Of Second Chances
But now I have a second chance. Another pitch, as Warren Buffett would say. Mohnish liked his Fiat investment a few years ago because the company was telling investors how much it planned to earn in a few years, and based on the price at the time, that means Mohnish was buying Fiat and all its wonderful assets like Jeep and Ferrari (Ferrari, at the time) for a “PE of 1 in just a few years.” Mohnish liked the investment because of how cheap it was.
Fiat ended up earning what they said they were going to earn and the stock appreciated accordingly. It was a big win, as described above, for anyone who owned Fiat.
But now we have a second chance to get this investment right. The same thing is going on as before.
Fiat is now forecasting 2022 earnings and traded cheaply on those earnings, if they hit them of course.
Here is what Mohnish had to say in a recent Forbes interview:
The interesting thing is that in 2018, just a few weeks ago, Fiat again precisely told us what they would deliver in 2022. And if you look at the forecasted 2022 numbers, in effect Fiat Chrysler is trading at two times earnings. From my perspective, that is really good for something that is 30% of our portfolio. I don’t think that in 2022 it will trade at two times earnings. I think it will trade at a significant multiple of that. The best investments are the ones that are the biggest no brainers. Fiat has been a no brainer for 6 years and you’ll probably see it in our portfolio for another 3-4 years if not more. It’s been the gift that keeps on giving.
So here we are in 2018 with FCAU trading at $20 a share with a market cap of $31 billion.
According to this financial presentation from their Capital Markets Day on June 1, they plan to earn 5.9 to 7.3 euros per adjusted diluted share in 2022. That’s basically between $7 and $8.50 in US dollars. Their stock in the US trades for about $20. So if FCAU does earn $7 to $8.50 in 2022, at its current price it’d be trading between a PE of 2 to 3. It’s not likely Fiat will trade at a 2 to 3 PE in 2022, let’s say it trades hands at a PE of 8, then the shares would be worth $56 to $68 in 2022, about a three-bagger from today’s price of $20.
Loading Up On FCAU
This time, I’m not missing out on Fiat Chrysler, and I’m putting my cloning strategy to work.
According to the Forbes interview, Mohnish like Fiat at the current price. He’s comfortable holding it at this price, and that makes me comfortable enough to purchase.
The company is trading for about a PE of 5 in terms of 2018 expected earnings, and a PE of 2 to 3 on 2022 earnings if they hit what they say they’re going to hit. And in 2022 if they hit those earnings numbers, the price of the stock will likely be trading higher than a 2 to 3 PE.
The debt seems under control as they have about $20 billion of debt with sales of over $150 billion in 2018, and $14 billion in cash.
The CEO Sergio Marchionne is respected as a genius and great CEO.
And it’s cheap. It’s a PE of about 5 right now, and based on numbers they plan to hit in 2022, it’s a PE of 2 to 3. So in 2022 it’ll likely be trading for a PE of 5 to 10 (or more?) and for around $35 if they earn $7 a share in 2022 and sell for a 5 PE and on the high end $85 if they earn $8.50 and sell for a 10 PE. And who knows, maybe a lot more. But either way it looks like a great investment for a short, four year time period. And in the mean time they also have crown jewels assets like Jeep, Ram, Maserati, and Alfa Romeo that can be sold or spun off.
Maybe they hit their numbers, maybe they don’t, but they’ve got some great assets, a great CEO, debt looks under control, and it currently is a cheap price at a PE of 5 and trades for a little over book value.
I understand the company, I understand the theory on why this stock price should be a lot higher, and now monkey is going to do, and I’ll be loading up on Fiat Chrysler as long as it’s around $20 to $25 or less, I’ll hold it, and we’ll see what happens in 2022.