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.