Starting Earnings Season (10/20/19)
Earnings season is officially upon us again and Ally Financial Inc (ALLY) reported results this week. The stock is up 15% since I first mentioned it and it has performed well for a reason. I came into this stock on the back of its fantastic online banking model – and it’s been a great engine for growth for this name. Compared to this time last year, retail deposits grew 20% and customers grew 23% for Ally – this is impressive given these growth rates for most of the banking industry is in the single digits. According to the company, 60% of its customers are millennials – checks out, I haven’t walked into an actual bank in years and I wouldn’t want to change that anytime soon – who are just entering their early savings years. That aside, it’s prudent to note a significant portion of Ally’s business is tied to auto loans. This part of the business is significantly exposed to softness in the economy but the company has been quite rational with its loan underwriting and unless the economy falls off a cliff, they shouldn’t have to write off these loans too detrimentally. However, as long as the online banking business continues to grow as it has, the company’s business model should be able to weather the storm of a downturn.
I’ve talked about a few different healthcare stocks this year and wow it’s been painful to see their performance over the last few months. While healthcare companies may have stock-specific risks, the whole sector has been suffering from its longest losing streak in three years. The end of September marked the third straight month in a row that the sector closed in the red. This has been largely driven by the unfortunate target this sector has on its back because of the upcoming 2020 election in which many Democratic candidates are calling for sweeping healthcare reform and “medicare for all” types of solutions. This sector saw similar pressure in 2015 and 2016 as Hillary Clinton was advocating for similar policies. I can see this sector suffering from an extended period of pain until the election, after which we’ll have some clarity on the type of healthcare policies coming out of DC. Until then, I’m staying on the sidelines in terms of all things healthcare.
Take out or delivery? (10/6/19)
I love finding investment ideas driven by behavioral trends I observe around me. One of those is that of takeout and delivery being such a prevalent way of consuming food (and I’m no exception to that trend). It’s been further fueled by the plethora of tech companies moving into the food delivery space – so much so that there are now “dark kitchens” (topic for another week) that are popping up just to meet the insatiable demand for food delivery. All this food is delivered in plastic containers. My bet in the space, given current valuation and upside potential, is Berry Global Group, Inc. (BERY).
BERY has three main operating segments – consumer packaging, engineered materials, and health, hygiene, and specialties. BERY looks attractive right now for a whole list of reasons:
- The management team is working on deleveraging the balance sheet. The company has higher leverage than peers, which in this interest rate environment I don’t totally hate, but heading into a downturn, a stronger balance sheet will be helpful. Management recognizes this and is working toward addressing the issue.
- They just acquired RPC Group, making the combined company a global plastic and recycled packaging industry leader. RPC’s specialization in recycled solutions is especially important today as the market (and consumer) becomes more environmentally conscious. BERY is expecting $150m in annual synergies from this transaction. While this creates execution risk in the near-term, the successful integration of the platforms should drive higher volumes.
- Speaking of volumes, the trends in the last few quarters have not been favorable but management is executing on strategies to reverse those trends in the upcoming quarters. In the meanwhile, the company is delivering a 16% cash flow yield. Sign me up.
- This stock has gotten trampled recently because of the disappointing volumes in the last few quarters coupled with the acquisition. Time to buy low.
Look Ma, you can’t sit with us (9/29/19)
I talked about Chinese e-commerce giant Alibaba (BABA) earlier this year as a way to capitalize on the massive growth of e-commerce in China. While the company continues to accomplish some amazing things (in its e-commerce and many other business lines), the trade war with China has seriously influenced market sentiment toward this company. On Friday, we heard that the White House is in preliminary discussions to limit Chinese companies from trading on the US stock markets and restrict capital flows into China. Alibaba is a Chinese company that trades in the US and could be massively impacted by such restrictions despite promising fundamentals. The market reacted as would be expected and the stock took quite the tumble on Friday. This is a development to watch and could be cause for selling out of this name if and when there is more clarity around the outcome.
Mastering the market (9/22/19)
Mastercard (MA) hosted its Investment Community Meeting last week and highlighted the company’s incremental opportunities for growth. This name has run 17% since we first talked about it earlier this year and has outperformed the broader market by 11% in that time. The meeting highlighted the company’s strategy to become integral across all payment flows for businesses and consumers through these focuses that keep my initial investment thesis intact:
- Becoming a multi-rail payment network and offering solutions across all aspects of payments – infrastructure, applications, services, etc. through innovative products and digital solutions
- Leveraging partners and becoming a dominant player in B2B transactions
- Embracing digital commerce – this business is growing four times as fast as the retail business and the company’s positioning enables ecommerce, in-app, QR, text, and voice forms of commerce.
Fitness test (9/15/19)
In the middle of all the recent uncertainty, the market experienced a bit of mean-reversion – some of the best stocks fell while some of the worst stocks rose – as hedge funds unwound their books. One of my best-performing picks was no exception to this anomaly as Planet Fitness Inc (PLNT) gave back much of its outperformance. While the stock is still up 8% since I first talked about it in February, it was up closer to 39% earlier this summer. The company still looks solid and I’m still expecting a great earnings report for the third quarter, which should serve as a catalyst to push the stock back into the $80 range it was trading in earlier this summer. If anything, I might use this as another buying opportunity to double down on my position in this name ahead of a rally in the second half of the year.
Delivering ecommerce (9/8/19)
August has been such a stressful month as an investor, but volatility in the market creates some interesting opportunities, so the hunt for good investments never stops. Looking at economic indicators, it’s difficult to dismiss the possibility of an upcoming recession. As I think about stocks I’d want to buy ahead of and hold through a recession, I’m always looking for stocks with a good dividend yield and solid balance and I get most excited about a stock when those characteristics accompany a demand story that can fuel growth despite cyclical headwinds. One such name I’ve been eyeing recently is FedEx Corp (FDX).
FedEx is a relatively common household name so I’ll spare you the details of their business, but if there’s a way to capitalize on ecommerce demand, this is as good a name as any. When you’re expecting a world in 2026 where 100 million packages a day will be moving via ecommerce, not a bad idea to think about the companies that will be responsible for actually moving these packages. FedEx as an ecommerce bet is not new news, but at these prices, it seems a little more interesting. Thinking of their upcoming catalysts, FedEx recently ended its contract for air and ground delivery with Amazon (49% of the ecommerce market share) to focus on the other 51% of the market (like Walmart and Target) that’s expected to grow 12% every year through 2026. FedEx is already making strides with a strong relationship with Walmart and the roll-out of their FedEx Extra Hours program, which is a new next-day delivery service where FedEx picks up customer orders from a store and delivers them to the customers’ homes. In addition to riding this demand tailwind, the company offers a decent dividend yield and capacity on its balance sheet to increase leverage to continue upgrading its systems and support its dividend.
A Regulatory Hiccup (9/1/19)
In August, shares of Sarepta Therapeutics Inc. (SRPT) fell 13% in one trading day after news that the FDA had rejected the company’s marketing application for an experimental drug for Duchenne muscular dystrophy (DMD). The rejection was a surprise to the company and Wall Street as SRPT was pursuing accelerated approval. SRPT’s application showed the drug increased the amount of dystrophin in patients (DMD patients lack dystrophin, which is critical for muscle function) but it was not certain if the drug could slow disease progression or improve muscle function. The company was hoping for FDA approval prior to trials confirming this benefit given this drug’s chemistry is similar to an existing SRPT drug that was approved by the FDA in 2016. Some are speculating the FDA is using this as an example to send a message that the agency’s bar for safety is extremely high for cases in which an unproven surrogate is being used to facilitate an accelerated approval process for a drug. While this news sent shares lower, the CEO and a Board director have been using it as a buying opportunity, which is always good to see because it reaffirms the management’s confidence in the company’s ability to deliver.
A high flier (8/19/19)
I last spoke of HEICO Corporation (HEI) at the end of May and the stock has run 36% since then, outperforming the S&P 500 by 34%. The investment thesis on the name was two-fold – the general increase in air travel and the management team’s execution on external growth through acquisitions. On the external growth front, HEI recently completed two acquisitions that are expected to be accretive to HEI’s earnings within a year of their respective closings –
- 75% of Research Electronics International – REI is a leading designer and manufacturer of equipment designed to detect devices used for espionage and information theft.
- 80.1% of BERNIER – BERNIER is a leading designer of interconnect products used for aerospace and defense communications-related purposes.
In terms of air travel growth, this demand is fairly cyclical in nature – it accelerates and decelerates with the economy. Given the current situation globally, it’s not surprising that air travel has started to slow. While I’m still a long-term holder of this company, I wouldn’t mind tactically taking some winnings off the table given how high this stock has soared while the rest of the market has seen some serious headwinds recently.
For sale (8/11/19)
I had last spoken about Salesforce (CRM) at the end of March and the company has since announced two large acquisitions worth mentioning. The first was the $15.3B acquisition of Tableau, a data analytics and visualization platform, for $15.3B two months ago. The acquisition was at a 42% premium to Tableau’s share price at the time. The second was the $1.35B acquisition of ClickSoftware, a private company specialized in field service organizations and mobile workforces, just this past week. The acquiring company tends to pay a premium for the company being acquiring (Tableau’s 42% premium, case in point). The stock market tends to correct the prices of both companies to reflect this transaction price, which generally means the stock price of the acquirer decreases while the stock price of the company being acquired increases. Given these two large acquisitions in the last two months, CRM’s price has underperformed the S&P 500 by 4% since the end of March. However, the value proposition of CRM’s platform is even stronger with these recent acquisitions and provides even more support for why I believe in this company and its services long term.
Riding the ecommerce wave (8/4/19)
The ecommerce trend is undeniably changing consumer behavior and the enterprise supply chain. For years, companies were focused on minimizing their inventory but the amount of inventory on hand has increased dramatically as two-day, same-day, and two-hour delivery options have started to become the norm. As inventory increases, inventory management becomes increasingly important. This trend has a lot of room to grow and companies that enable inventory management have an impressive growth runway ahead. My pick here is Zebra Technologies Corporation (ZBRA).
Zebra Technologies is an enterprise asset-tracking company that produces RFID chips, rugged mobile computers, and barcode scanners and printers enhanced with software and services to track inventory and other assets in real-time. The company released earnings this week and their strong second quarter results were driven by strong demand for their solutions and they actually increased their guidance for the remainder of the year and announced a new share repurchase program. Additionally, this company continues to eat up market share from other larger players, giving me further confidence on their ability to harness this demand tailwind to continue solid value creation for the foreseeable future.
For the travelers (7/28/19)
I had talked about Expedia Group Inc (EXPE) at the beginning of the year – since then this stock has run 23% and outperformed the S&P 500 by 6%. The company’s business plan capitalizes on today’s consumer demand for travel and unique experience. EXPE reported earnings this past week and demonstrated healthy growth as revenues and earnings came in well ahead of expectations. The platform’s wide array of offerings allows for significant synergies across its services to capture every aspect of its customers’ travel plans – hotels, flights, experiences, etc. Additionally, the company’s alternate accommodation business, VRBO (same thing as Airbnb) is expected to start ramping up growth next year, providing some additional runway for this company’s earnings growth.
You’ve got a friend in me (7/21/19)
Along with earnings from the big banks this week, we heard from Ally Financial Inc (ALLY), one of my favorite names in the sector. Since I last talked about this company in February, the stock has run 25%, outperforming the S&P 500 by 15%, and this latest earnings report further boosted performance. Operationally, the bank beat estimates on the top and bottom lines despite hefty expense growth. The capital side of results was solid as the company completed its 2018 share repurchaseprogram and announced the acquisition of Health Credit Services, a company that provides healthcare financing for patients through unsecured loans. Ally plans to leverage this company’s point-of-sale payment capability to enhance its product offerings and get into the unsecured loan space. I continue to love this company’s consumer-focused model and remain a long-term holder.
Bonus points for those who caught the pun…
Keeping it cool (7/14/19)
Nothing makes you appreciate a good cooler like the 90+ degree and 120% humidity days we’ve been experiencing. My love for Yeti Holdings Inc. (YETI) products had brought the stock to my attention a few months ago and the stock has since appreciated 33%, outperforming the S&P 500 by 26% in the same period. This name should continue to run as it approaches its earnings release scheduled for August 1. Analysts are expecting strong growth on revenues and earnings. In fact, expectations have actually being rising for this name over the last month. While I wouldn’t buy more stock at current valuations, I continue to hold onto this name going into earnings. Given the high expectations already priced into the stock, if management’s outlook for next year isn’t as great as I’d hope, it might be a name where I take a victory lap on its fantastic outperformance so far and sell out of this lifestyle brand into something a little more defensive.
Aluminum prices have fallen ~3% in 2019, bringing Alcoa (AA) down 18% since I last talked about it. As an integrated aluminum producer, Alcoa is negatively impacted by the fall in aluminum prices. Additionally, this name has been caught up in tariff wars with China and Canada and demand has been slightly weaker for aluminum on lower Chinese demand for autos. However, aluminum is currently running at a global deficit and any trade resolutions should provide an additional boost to aluminum demand and prices. The potential for resolution has already caused the stock to rally throughout June. In the meanwhile, the company is expected to announce earnings in two weeks and I’m focused on the management team’s ability to improve on margins to continue operating in an environment with lower aluminum prices. The average price target for this name among analysts is $34.75, which still provides almost 50% upside. Pending first quarter results and my confidence in this company’s ability to continue generating long-term value in a lower price-point environment, this is a name I could look to potentially sell after recovering the losses.
I know I promised a new stock pick each month and you’ve already seen my pick for June, but I’m going to pull July’s one week forward because timing is important with this one. There has been a massive shift into passive index funds over the last few years and many of these funds are restricted from owning publicly listed partnerships (versus publicly listed corporations). This is causing several large partnerships to convert to corporations in an effort to expand the investor base. One such conversion will take effect on July 1 and while the name has run after the announcement of the conversion, it still provides an attractive entry point ahead of the fund inclusions in addition to the solid story that has paved a road for long-term upside potential in Blackstone Group (BX).
Blackstone is the largest manager of alternative assets in the world and has traded at a discount to other traditional asset managers because of its corporate structure but the C-Corp conversion should help rerate the stock. Past the conversion, the company still has a few avenues of growth and value creation – its fee related earnings are currently about $1.24 per share and management expects this to reach $2 per share and then eventually account for the majority of earnings. Fee related earnings are a much more stable stream of income for such asset managers and this stability should further rerate the company. The company is seeing some really attractive growth opportunities for its funds within life sciences, Asia, and real estate. Additionally, the management team is focused on improving operations – as the world’s largest alternatives asset manager, the company’s various funds have access to a wealth of data – being able to enact best practices on information sharing across the firm will further provide the company with a competitive edge in the competitive landscape. As the company continues to grow, improve its operations, and continue executing on its track record, I think this stock has significant upside potential.
Anything but Garbage (6/23/19)
The very first stock I had talked about was Waste Management Inc. (WM) and the stock has run 28% since then, outperforming the broader stock market by 12%. My initial thesis on this name was multi-faceted – it was attractively valued and the business itself was on solid ground as demand drivers on the residential and industrial front were robust and the company had several catalysts lined up for this year – share buybacks, refined fee structures, updated technology platforms, and external growth through acquisitions. The company has been delivering on all fronts and outlined their impressive growth plans through 2021 at their latest investor dayabout a month ago. My thesis stands intact and several Wall Street analysts have jumped onto this opportunity in the last month, with several upgrades and increased price targets.
Targeted Therapy Thesis Intact (6/16/19)
I first talked about Sarepta Therapeutics Inc (SRPT) in March and the stock has traded down from around $130 at the beginning of March to a range between $112 and $125 since April. Not only does my investment thesis still hold, there has also been a lot of M&A activity in this industry – at current prices, chatter on the street suggests SRPT could be up for grabs, providing serious potential upside for current investors.
This company provides targeted gene therapy for rare diseases and my investment thesis included a catalyst in the form of the commercialization of its gene therapy treatment of Duchenne Muscular Dystrophy (DMD) over the next 1-2 years. Based on the update from SRPT’s latest earnings release during the first week of May, they have mapped genomes from over 1,000 DMD patients and have now started supporting genetic testing in other areas around the world. Additionally, two other DMD focused therapies are currently in development – one has received priority review from the FDA for August 19, 2019 and should be ready for launch later this year, the second should be ready for launch next year.
New Season, New Me (6/9/19)
I’m going to change things up a little starting this week because, let me tell ya, there aren’t enough good stocks for me to be adding 52 new stocks to my portfolio every year. Going forward, I’ll be discussing new stock ideas on a monthly basis. The other weeks will contain commentary on previous stock picks that have moved significantly (up or down). We’ll start the commentary with one of my favorite holdings – BioXcel Therapeutics Inc (BTAI) – a clinical-stage biopharma company that uses AI to develop targeted medicines used on neuroscience and immuno-oncology patients. This stock has run up 104% since I last talked about it. Since then, the company has seen favorable results in Phase 1 testing for its lead drug that allowed testing to progress to Phase 2. My investment thesis for this name continues to remain strong with a target price over $20, leaving significant upside to its latest close at $10.95.
Best customer service. Ever. (6/2/19)
I’ve previously mentioned how much I love investing in companies when I love their product so much that I try to convince everyone to use said product. I have been keeping an eye on one such company because this company provided me the best customer service experience ever. I love the company, its platform, and its leadership team. Plus, its growth has been fantastic. The problem with this name is that not only has it won me over, it has recently been a darling of Wall Street as well, making it difficult to find a good buying opportunity. The recent sell-off of the market in May, however, has provided me with a more agreeable entry point for Wayfair Inc. (W).
The name saw a big boost after reporting first quarter earnings that showed revenues increasing 39%, well above management’s forecast, as the company continued to increase its market share by gaining almost five million new customers. However, the company is still experiencing hefty expenses as they prepare for the upcoming peak sales season. However, there’s a lot of room for operational improvements, especially on the international front where Wayfair’s shipping network isn’t nearly as robust and brand awareness isn’t nearly as strong. However, some of these key international markets should follow the same growth trajectory as the U.S. as Wayfair gains market share. While the company is still spending more than it’s earning, the company’s growth in sales is proving the value proposition of the investment in its various growth initiatives. Hopefully we can see a clearer path toward profitability in a few quarters but I am comfortable investing in this company and holding that position for the long-haul.
My Plan B (5/26/19)
I always tell people if I hadn’t studied finance, I would have studied aerospace engineering – I’ve always been incredibly fascinated by space and human flight. Technology here is developing in leaps and bounds, not unlike the technological advances happening in other sectors. There are a handful of established players within this sector but given this management team’s proven track record of execution and value creation for shareholders, one of my favorites here is HEICO Corporation (HEI).
Unlike some of the behemoths in this space (i.e. Raytheon, Lockheed Martin), Heico is a mid-cap name focused in two business lines – flight support and electronic technologies. The flight support group designs, engineers, manufactures, repairs, distributes and overhauls FAA-approved parts while the electronic technologies group produces electrical and electro-optical systems and components serving niche segments of the aerospace, defense, communications, and computer industries. The sector itself is seeing some really great demand tailwinds – air traffic continues to outpace historical relationships with GDP as traveling and searching for experiences becomes a bigger part of consumer spending. Additionally, the management team has a solid track record of execution. The company’s growth strategy has a large focus on external growth through acquisitions and the management team has been able to execute on this strategy swimmingly – the company has been growing ~12% annually for over a decade. Additionally, their organic growth is typically volume-based and driven by their ability to expand their product line to continue gaining market share. While the valuation on this name is fairly steep, it comes with a track record and growth potential that provides significant upside to the current price over the long term.
Risk on, risk off (5/19/19)
We’ve seen the market go through some fairly pronounced cycles in the last 12 months – we saw a rotation into defensiveness at the end of last year, followed by a massive correction right before Christmas, followed by a massive rally back as the market turned risk on again. The healthcare sector, which is generally regarded as being more defensive, hasn’t participated in the market rally this year and headlines of regulatory risk have created an overhang on healthcare stock prices. In the midst of renewed trade tensions, however, the safety of high quality, large cap, and high yield healthcare seems to be a good place to find some defensiveness given the cheap relative valuations for these stocks right now. I’m putting my faith here in the hands of Bristol-Myers Squibb (BMY).
Bristol-Myers Squibb is a global giant in the biopharmaceutical industry. The stock is currently trading at a very attractive multiple with a 3.5% dividend yield and 6% earnings growth rate, which means we currently have fairly limited downside risk coupled with about 10% annual returns from this name. This company also recently completed the acquisition of Celgene, a company with a strong near-term pipeline of products that are substantially de-risked and have the potential to generate a significant amount of value for Bristol-Myers Squibb. The company has a strong management team with a proven track record of exceeding market expectations and given all the uncertainty around global growth, it makes me feel relatively warm and fuzzy to invest into this name.
The P2P Club (5/12/19)
All this talk of China this week has me thinking about the Chinese economy and how it actually functions. The concept of consumer debt is quite different in China than it is here largely because of an entire shadow lending system that exists outside the banking system – Chinese consumers have a massive peer-to-peer lending system. This train of thought led me to a similar type of a concept here in the US, LendingClub Corporation (LC).
LendingClub is the largest online marketplace that connects borrowers (who access low interest rates through an online interface) and investors (who provide the capital to enable these loans in exchange for earning interest) with the purpose of transforming the banking system into a frictionless and transparent online marketplace. LendingClub is an entirely online system, so there is no additional cost for branch infrastructure, and these savings are passed onto the borrowers via lower rates and investors via attractive returns. The platform itself is quite interesting and the company continues to make updates, including its most recent one to position the company’s exposure to credit risk this late in the economic cycle. The best part of a good idea is when it actually results in a successful business model and is executed by a strong management team – LendingClub has all those pieces working for it. According to the company’s latest earnings release, revenues increased 15%, coming in above street expectations driven by an 18% increase in loan originations and 31% increase in loan applications – LendingClub makes money off the transaction fees, which jumped 22%. The company continues to improve its operating platform to generate additional efficiencies and if management’s expectations of profitability are accurate, this stock could easily rise to $5 or higher, leaving significant upside compared to its current valuation.
Cinco de G-o (5/5/19)
As we continue to increase the amount of data we consume and the speed at which we process it, technology companies that specialize in the hardware and infrastructure enabling this progress have seen a tremendous amount of growth. Semiconductor manufacturers have been high flyers, making it difficult to find a good entry point to invest into any of the names. The conversion of our mobile networks from 4G to 5G is going to provide a solid amount of growth in this space and I’ve had my eye on one name in particular. The cherry on top is that this company recently announced earnings and, while earnings were ahead of expectations, concerns about growth in a few business lines (not 5G) caused a huge price correction in the name, and I finally have a good entry point for Xilinx, Inc. (XLNX).
With this latest earnings release, management projected that their aerospace & defense, industrial, and test/measurement/emulation markets would be “down meaningfully” because of lower sales. Fine. But their wired and wireless group (where you’ll see the growth from the move from 4G into 5G) and their automotive, broadcast, and consumer group (where you’ll see the growth from things like advanced diver assistance systems, autonomous vehicles, etc.) are growing fast and will continue to grow at this accelerated pace. Long-term, this is a company with the ability to capture a ton of growth as technology advances and I’m happy to join the party with this recent price volatility reflective of shorter-term concerns.
Bio Schmio (4/28/19)
There is a tremendous amount of funding going toward the healthcare industry these days as a function of the amount of innovation in the space. Investments in the innovators in this sector generally come with a fairly high risk/high reward profile driven by the amount of uncertainty related to the R&D and approval process involved with most products. Earnings this week brought to my attention a name that provides exposure to the life sciences and biopharma space without the same level of risk (albeit probably also comes hand in hand with a lower level of reward) through Danaher Corporation (DHR).
Danaher is a large global conglomerate concentrated in a few different business segments, largely life sciences, diagnostics, dental, and environmental/applied sciences. The company’s earnings came in ahead of expectations driven by growth in their life sciences segment, which saw strong demand automation equipment and biopharma in addition to expanding margins. In addition to a solid performance across its core business segments, Danaher has a few catalysts pending – the spin-off of its low margin dental business later in 2019 and the acquisition of GE Biopharma – with the ability to improve revenues and margins. The GE Biopharma deal is especially interesting and management is confident about the ability for the deal to generate synergies and expand margins.
Better growth, lower multiple (4/21/19)
Fun fact, China leads the world as the largest e-commerce market, accounting for over 40% of the world’s e-commerce transactions. In 2017, online retail accounted for 17% of all retail sales in China (it’s only around 9% in the US today) and is expected to grow to 25% by 2020. This growth has been driven by the adoption of omnichannel technology and the online/offline consumer journey, the growth of mobile payments, the expansion of the digital ecosystem, and the strategic partnerships between search and social media. Going forward, cross-border e-commerce, the establishment of e-commerce special trade zones, the rise of Chinese influencers, and the growth of e-commerce in rural China are expected to fuel growth in the future. So generally, if we’re playing word association games and you said “e-commerce,” I would say “Amazon” but to ride this growth wave in China, I’m calling on Alibaba Group (BABA).
Alibaba dominates the e-commerce space in China and has a few different business lines. The company’s core business is similar to eBay (versus Amazon) where Alibaba creates a marketplace for buyers and sellers. The company has also expanded into the Chinese financial system through a secure payment system called Alipay and a micro-lending business catered toward individual borrowers. The company has a proven track record for harnessing the growth of the digital Chinese consumer and I don’t doubt their ability to continue doing so in the future. The cherry on top is that compared to Amazon, one can capture this type of e-commerce growth at a significantly lower multiple.
I’m going to be wildly cheesy and start this with my favorite quote from Kofi Annan (7th Secretary General of the UN, 2001 Nobel Peace Prize winner, all around inspiring human) – “Knowledge is power. Information is liberating. Education is the premise of progress, in every society, in every family.” I hope that gives you all the feels it gives me. While we have an extremely privileged education system in the United States, there are still some gaping holes in the equality of access to the best education. Enter the largest provider of full- and part-time online learning programs for pre-K through high school that’s improving inequitable access, addressing societal issues, and bridging economic problems and I’m here for K12 Inc. (LRN).
K12 currently provides partners with over 2,000 school districts in all 50 states and D.C. through turnkey programs that allow students to access public education from their home via a learning experience that’s tailored to their individual needs. This core business has a total addressable market of over $11B and the industry has only grown into about $3B (of which K12 is only about $900M), so there’s massive room to grow here. Another impressive aspect of this core business is that their revenue per enrollment has continued to expand over the last few years, which means better margins, love it. Funding for all this comes from the state and, despite the bickering that never stops in Washington these days, the policy environment is currently quite favorable at the federal and state level, which should provide support for increased enrollment with state-wide adoption. In addition to all this, which I’m thrilled about, they’re also working through a really exciting initiative called Career Readiness, which is effectively career training built into the high school curriculum that enables high school graduates to obtain certifications that would allow them to move straight into the workforce upon graduation in industries where we’re currently seeing massive labor shortages. The total addressable market here is even bigger – it’s over $15B, and the industry is currently only $150M of the way there (with K12 owning a third of that market share). Management believes they can capture hundreds of millions of this market over the next three to four years. I’m a big fan of what this company has been doing since 1999 and am willing to trust management’s bullish outlook toward what the future holds.
Here for the Avo Toast (4/7/19)
When I was younger, I used to vehemently dislike avocados, if something touched avocados I refused to eat it. I have since seen the light and changed my ways and eat an avocado or two every single day – in a salad, in guacamole, sometimes I just eat it with a spoon, but my favorite has to be avocado toast – it’s almost like I’m a millennial. As the focus on healthy living becomes more prominent and the health benefits of avocados become more widely accepted, it’s no wonder there has been such a large boom in the prominence of avocados in many diets. Market research is anticipating almost 80% growth in the avocado market through 2027. I’m trying to capture this growth with Calavo Growers, Inc. (CVGW).
Calavo Growers is a fairly small company (at a $1.5B market cap) with three business lines – fresh produce (mainly avocados), fresh-cut fruits/vegetables/prepared foods, and guacamole and salsa. They recently reported earnings at the beginning of March and saw a fairly solid expansion of its gross margin for the fresh produce business and cost controls, they realized a pretty solid 37% growth in earnings and provided optimistic guidance looking forward at 2019. Here for my love of avo toast and a solid operating platform.
The Biggest Data, Let Me Tell Ya… (3/31/19)
The amount of data at our fingertips these days is honestly a little scary. Used in the right way, it can inform great decisions. However, some of the biggest “big data decision makers” like Google, Facebook, and Amazon are facing a fair amount of regulatory risk because of the amount of data they have on consumers and their ability to monetize on influencing consumer behavior. I buy almost everything off Amazon, fairly certain Jeff Bezos knows way too much about me. Anyway, coming back to making smarter decisions with the use of data, I prefer a name that isn’t facing the same level of regulatory risk as the FAANG stocks – salesforce.com, inc (CRM).
Salesforce currently controls about 20% of the market share for enterprise CRM, which is more than the next three largest competitors combined. The company has been around for 20 years and largely pioneered the “software-as-a-service” business model but is still able to put up 49% growth in earnings (this past quarter) because of the consistent focus on innovation. They’re harnessing the demand tailwinds from companies becoming more digital and have a few platforms – Einstein AI, Salesforce Customer 360, and Salesforce Lightning – that are bringing sophisticated CRM systems to all businesses, big or small. I see this management team continuing to deliver on their innovative platform for years to come, can’t wait to see what this company is able to do in the next 20 years, I’m a long-term holder.
Broskis and Brewskis (3/24/19)
I had the pleasure of being back in Texas for a few days this week, and the weather was perfection – sunshine, 70s, bright blue skies. It just makes you want to be outside with the best company, drinking a cold beer (or another beverage of choice). If I could buy stocks of my favorite microbreweries, game changer, but I haven’t figured out a good way to directly play this trend in the public market quite yet so stretched a little to find tangential ways to make a bet. Whether you’re going to a brewery or just enjoying in your back yard, these drinks are increasingly being packaged in aluminum cans – and aluminum is something you can play with in the stock market. My pick here is Alcoa Corp (AA).
Alcoa struggled last year in the midst of worries on tariffs – while this overhang still exists, central banks across the world are now moving toward much more accommodative policy (read: do what it takes to continue economic growth). The name is highly exposed to changes in short-term commodity prices, but as long as the management team continues to execute on this industry-leading platform and maintain (or improve) margins, this company should be set up for long-term growth.
Tap, Swipe, Scan (3/16/19)
Cashless transactions are arguably becoming the norm today. I bank with an online bank, I make more than half my purchases online and for most of the rest I still use my credit card. I only use cash at some of my favorite neighborhood cash-only spots (I’ll argue this gives them a local, old-school charm – I’m an old soul and I love it). But the digitization of money is a massive change in how we’re behaving as consumers around the world. In China, it’s expected that by 2021, 79.3% of smart-phone users will be tapping, scanning, and swiping at the point of sale. Meanwhile, that statistic in the US is only 30.8% and 22% in Germany, leaving massive potential for expansion globally. My long-term bet to play this trend is MasterCard Inc (MA).
MasterCard’s business model is pretty simple – the company takes a fraction of every transaction through its payments network. The best part is that this company isn’t actually providing any “credit” to its customers – that risk falls on the banks actually issuing those loans. What’s left is an asset-light company with high margins and a long runway of demand tailwinds. Additionally, the company is working toward strengthening its relationships with banks and consumers on all fronts – security, rewards, data analytics, etc. Earlier this week, MasterCard announced the acquisition of Ethoca to help its efforts on digital commerce fraud detection. As the world continues to evolve with the digital economy, this name has positioned itself to cash in on the trend (couldn’t help myself).
The Future of Medicine (3/9/19)
If you think about the genetic makeup of humans, we are all made of the same basic code – adenine (A), thymine (T), guanine (G) and cytosine (C) – just in different themes and variations. So I’m basically the same as Blake Lively, right? Some of these slight differences cause diseases while others don’t. If you can sequence a person’s genome, find these harmful variations, and correct them, the benefits are enormous. Sequencing somebody’s genome currently takes a decent amount of time and even more money, but if you think back to the concept of Wright’s Law and the pace at which technology evolves, experts are expecting genomic sequencing to become relatively quick and inexpensive in the near future. Soon enough, it will be part of our annual check-ups. Thinking about the size of this market and business strategy makes me extremely excited about the prospects of companies succeeding in this space, and one of my favorites is Sarepta Therapeutics Inc (SRPT).
Sarepta Therapeutics provides gene therapy for rare diseases, and one of the biggest catalysts for this name right now is the commercialization of the first gene therapy treatment of Duchenne Muscular Dystrophy (DMD) over the next 1-2 years. There are three public companies currently testing gene therapies for DMD, but Sarepta Therapeutics is leading the pack, scheduled to start phase III trials early this year, and already demonstrating extremely promising data from a handful of patients, unlike its competitors.
The Coolest Coolers (3/2/19)
I’m wishing for warmer summer days at this point in the northeast winter and my thoughts immediately go to my favorite activities – concerts, tailgates, lakes, rivers, hikes – all things outdoors. Key part of being outdoors in the summers is staying hydrated. Best kind of hydration during the summer? Anything that’s cold. My favorite way to keep things cool? A Yeti (YETI).
I learned to love this brand almost instantly after using its product while living in Texas – it’s turned into a lifestyle brand I can get behind and became a public company last year. The company reported earnings a few weeks ago and surprised the market to the upside with a 24% increase in drink ware sales and a 10% increase in coolers and equipment sales. Management also provided guidance for 2019 that came in above street expectations. In a world where earnings expectations have been coming down for most companies, expectations have been moving the other way for YETI and the street is expecting 47% growth out of this name over the next five years every year. I’ve already bought into the lifestyle – tried their product once and then got myself a tumbler and then a cooler and then a coffee mug and then a wine tumbler – and haven’t been disappointed yet so cheers (with my wine tumbler, obviously) to taking a bet on the mothership.
Never Skip Leg Day (2/23/19)
There are a few trends that have appeared in a big way in recent years with the potential to stay for a long time – a focus around health and wellness (I think) is one of those trends. Yes, some of it has to do with maintaining a certain body image, but so much more today is focused on “living your best life” (how basic do I sound?). People are recognizing the importance of a healthy body for a healthy mind and putting in the work to maintain that lifestyle. Here, there are wide-ranging options for consumers to participate in the fitness revolution, from the cult-like atmosphere of $40/class spin studios to free running trails, but I’m going to sign up for Planet Fitness, Inc. (PLNT).
Planet Fitness’ brand is focused on providing customers with a judgment-free gym and is democratizing the fitness revolution with a seriously low price point ($10/mo). The gym itself attracts a wide range of demographics – while 35% of their members are under 35 years old, 22% of their members are over 55 years old – which provides the company with healthy demographic tailwinds. Additionally, while 29% of their members have incomes less than $50k, 27% of their members have incomes greater than $100k – their attractive cost structure provides a solid value proposition across the board. They have a great franchise system that’s built for growth, the benefits of a lifestyle trend that’s not going anywhere, and a proven track record for growth. Sign me up.
Enabling Innovation (2/16/19)
When it comes to innovation today, the process of creating the product itself is rapid – create, test, break, fix, repeat – in an iterative loop that allows quick feedback and action. This is fairly easy to do on the software side of things in the sense that it requires updating code. It’s a little more difficult on the hardware side of things – it requires a complete revamp of physical prototypes. There are companies, however, that specialize in digital manufacturing rapid prototypes and on-demand production parts to increase speed to market. My favorite here is Proto Labs Inc (PRLB).
Proto Labs offers customers the ability to get quotes within hours and parts within days. The process starts with a 3D CAD model that’s uploaded into their system, then using 3D printing, CNC machining, sheet metal fabrication, or injection molding, they can manufacture parts in anywhere from 1 to 15 days. In today’s world of innovation and focus on 3D printing, this company is set up to see some really strong growth. The company reported earnings last week and missed expectations because the sheet metal fabrication company (which was bought by Proto Labs in late 2017) didn’t perform as well as management had expected, and it sent the stock down almost 22% that day, making it an interesting time to get into the name, because the rest of the release was actually pretty solid.
Digital Everything (2/9/19)
When I use a product, feel the need to tell everyone about it, and convert a decent amount of users, I feel fairly confident in the company that’s creating said product. As a millennial used to digital everything, of course I want to also handle my banking digitally – deposits, transfers, everything at my fingertips via a great user interface and a savings account interest rate that’s more than a penny on the dollar. Yes please, sign me up, for Ally Financial Inc. (ALLY).
Ally is not just a consumer bank and wealth management platform, but it also has a large lending business for consumers, corporations, and auto dealers as well as an insurance business. Ally’s banking business is entirely online. They have no physical locations, which enables significant cost savings, and allows users to receive higher interest rates for deposits. Ally published earnings at the end of January and posted a 39% increase in earnings for the year and came in ahead of what the market was expecting because of credit improvements, cost management, and continued diversification of its revenue streams. The business itself is strong (and improving), with a steady balance sheet and risk that’s secured by real assets (vehicles) and can be recovered within 30-60 days. And especially given the recent M&A activity in the financial services space, this company could be an interesting acquisition target for a larger bank trying to launch a strong online presence, which could immediately unlock value for shareholders.
The Future of Healthcare (2/2/19)
Two weeks ago, I touched on the disruptive innovation that artificial intelligence is creating in effectively every industry. While almost everyone immediately thinks of the technology sector to find ways to invest in artificial intelligence, I’m actually most fascinated by the changes happening via artificial intelligence in the healthcare space. Healthcare is experiencing a whole transformation of its own because of genome sequencing. Technology enabled by artificial intelligence combined with genome sequencing has the power to dramatically change the way we approach healthcare and my pick here is a risky but long-term play on a very young public company that hit the market less than a year ago – BioXcel Therapeutics, Inc. (BTAI).
BioXcel is a clinical-stage biopharmaceutical company that specializes in neuroscience and immuno-oncology. The company uses artificial intelligence to synthesize big data from clinical research to analyze individual patients’ treatments, providing higher success rates for patients suffering from cancers or neuropsychiatric/neurodegenerative diseases that are rare or difficult to treat. Given this is such an early-stage company, it’s almost easier to analyze the value here similar to how you would analyze a VC investment. Does the founding leadership team have the skills and talent required? Do I believe in their vision? Does this company’s product or service address an opportunity to create or completely disrupt a market that’s in the multiples of billions of dollars? Is the product itself a good product? Yes, yes, yes, and yes. The best part is that a cash flow analysis using a range of scenarios yields a price target for this stock anywhere from $13 to $25, and even the lowest end of assumptions provides massive upside compared to where the stock is trading today.
The transition from combustion engines to electric vehicles is an inevitability. Aside from the fact that us millennials are all about reducing carbon emissions and therefore drive Priuses (Prii? Anyone know the appropriate pluralization here?), electric vehicles are going to become cheaper for consumers than comparable gas-powered vehicles by the early- to mid-2020s because of declining materials costs. What powers electric vehicles (and also all these scooters popping up in every other city)? Batteries. My pick here is Albemarle Corp (ALB).
Albemarle is a global specialty chemicals company and 51% of its EBITDA comes from Lithium – a key ingredient for batteries used in electric vehicles. In addition to the energy storage industry, their specialty chemicals (which also includes bromine specialties and catalysts) have major applications in petroleum refining, consumer electronics, construction, automotive, lubricants, pharmaceuticals, crop protection, and custom chemistry services. Albermarle is currently the global leader in lithium compounds and has a strong global sourcing model, which allows it to produce at much lower costs, giving this company a significant advantage over competitors. The applications for Albemarle’s products are going to see a massive boost in demand and this industry bellwether has the ability to capitalize on it in a big way.
The best part is that this name has gotten beaten up in a big way because of declining lithium prices, but this company has had a long history of improving EBITDA margins and its global scale should enable it to improve, or at least maintain, margins as it captures higher volumes from increased demand. Plus, over 80% of its lithium production is already under contract through 2021 at prices equal to or greater than the 2018 average, providing some downside protection to pricing power. TLDR: all this provides a great entry point for investors.
Safety First (1/19/19)
Safety and security are things we think about on a regular basis in the physical sense – locking the doors, being aware of our surroundings for things that seem dangerous. A place where I spend an increasing amount of time today is the internet (this new screen time feature on my phone is an eye-opener on this front, it’s kind of embarrassing) and being diligent about safety and security here is becoming increasingly crucial. Cyber security is also growing as a part of corporate spending and is expected to expand almost 9% in 2019. My pick to capitalize on this trend is through AI-enabled cyber security platform provider Palo Alto Networks (PANW).
The growth at this company has been pretty impressive – this past quarter, they put up 31% revenue growth as their billings increased 27% and their deferred revenue increased 34%. Plus, they were able to manage expenses and increase margins to expand the bottom line. One of the key factors here for the company has been the company’s shift toward a subscription business model, which brings them recurring revenues without any recurring customer acquisition costs. At the same time they continue to grow the customer count (which grew 25% last quarter) and customer spending, measured by lifetime value (which grew 45% for its largest customers). Looking forward, based on company guidance, this growth momentum is expected to continue at a solid pace.
Do it for the insta (1/12/19)
A common talking point recently has been the strength of the consumer – record low unemployment, increasing wages, and tax reform putting more money back in the consumers’ pockets. And then this week retailers told us that these same consumers with spare change to spend somehow didn’t spend it in their stores during peak holiday shopping season. Which makes total sense, because all us millennials are exchanging things for experiences. Favorite experience? Traveling the world. Must do it for the insta. How do you play this sought after experience in the stock market? Hotels, airlines, online travel agencies, cruise lines. My choice here is Expedia, Inc. (EXPE).
First thing to realize with this stock is that it’s actually a glorious buffet of literally all things travel related – flights, car rentals, hotels, vacation rentals, activities, and cruises for bargain, luxury, and corporate consumers – all on a global platform. They own Expedia, obviously, but also other brands you might recognize like Hotels.com, Orbitz, Travelocity, trivago, HomeAway and also a slew of others like Wotif, lastminute.com.au, ebookers, CheapTickets, Hotwire, Classic Vacations, CarRentals.com, Expedia Local Expert, Expedia CruiseShipCenters, VRBO, VacationRentals.com, and Egencia. If you can’t hear this conglomerate of platforms scream “experiences!!! travel!!!” go get your ears checked out stat, that scream is v loud.
To top it off, there’s some solid growth potential for the business and it’s trading at an attractive valuation right now. There are so many different ways for the growth in this business to continue – they’re going to keep building out their global reach through great marketing initiatives and the enhancement of the product portfolio. Additionally, the technological, consumer-focused product design should continue to boost the user base. This stock is currently down 18.3% from its high of $139.77 in July last year, which provides a good entry point into the name, and trades at a cheap forward multiple compared to industry peers. This low trading multiple also means that it will likely outperform in a tougher market for growth stocks.
Trying to find cover (1/5/19)
Since late September, the stock market has acted as if it is preparing for a downturn in the economy. In times like this, investors flock out of higher risk stocks (think technology stocks) and into stocks that provide more defensiveness. Defensive stocks are those that keep paying dividends and have stable earnings despite market conditions.
Assuming the market continues to move toward defensive stocks, I spent some time trying to find defensive stocks that 1) haven’t participated in the defensive trade since September (read: the stock price hasn’t increased a ton since September, which would happen if a lot of people were trying to buy that stock) and 2) have business catalysts that could generate outperformance next year. After doing some digging, I came to a really glamorous conclusion: Waste Management, Inc. (WM).
Thinking about the stock in the context of what I was looking for:
- The stock didn’t participate in the defensive rally in the last few months of the year, the stock price actually ended the year pretty much where it started. But investors did see positive total returns (change in price + dividends) thanks to quarterly dividends!
- The business itself is quite solid, it has a strong history of paying (and growing) dividends, and it has several growth catalysts.
- Demand for the solid waste business will continue to be robust on the residential and, especially, the industrial front. Industrial waste increases when you build more industrial/commercial space and construction is not slowing down anywhere.
- WM has a decent number of catalysts that could lead to outperformance next year: the company is going to buy back stock, continue to refine the fee structure of their recycling business, leverage new technology to optimize routes to generate operational efficiencies, and continue to grow externally by buying smaller operators because they have a strong balance sheet.
Hopefully this idea isn’t total garbage (pun intended, I couldn’t help myself), but I guess we’ll have to wait and see how it plays out.