Flying higher (4/24/22)
Among the earnings releases this past week was my favorite airline name Alaska Air Group Inc (ALK). I had mentioned ALK earlier this year as we were able to see a clear path to the recovery of air travel (the latest step on the “return to normal” was recently announced end to the mandate for airplanes, trains, and other public transportation). The company’s results confirmed that thesis – the airlines are in the early innings of growing their revenues and returning to pre-COVID levels. ALK’s revenues started the year in January lower versus 2019 levels and ended the quarter in March 1.5% above 2019 levels despite 8% lower capacity, indicating really strong pricing power. A lot of the airline recovery so far has been driven by leisure travel but recently there’s been a clear return of business travel. For ALK, the bulk of their business travel is driven by the west coast’s tech sector, which has seen a “staggering increase” in flying in the last two weeks – with some companies that were down 80%+ in volume compared to pre-COVID levels now already recovered to only 25% lower than 2019 levels. Despite the really strong demand, pilot shortages are keeping a lid on the company’s capacity, which will keep a slight hinder near-term growth but long-term, their initiatives like new credit card agreements, fleet renewals, and new network alliances should continue to drive sustainable long-term growth. In today’s inflationary environment, that is definitely the name of the game – sustained long-term growth – and I’m here for the ride.
Water solutions (4/17/22)
One of my favorite companies dealing with the very real issue of water management is Zurn Water Solutions Corp (ZWS), which was the water business that got spun out of one of the earliest UnBenchd picks. Since becoming a pure-play water company, the Zurn released its first Sustainability Report that sets out the company’s goals and targets across five pillars (environment, health & safety, people, community, and governance), including commitments to reduce their Scope 1 and Scope 2 Greenhouse Gas emissions intensity by 50% by 2030. Reporting actual numbers and targets is the most important, so we as shareholders can hold these companies accountable for achieving these targets. In addition to making great strides on setting targets, the company also announced the launch of Waves, which is an employee-led social impact fund. The company will provide financing and resources for ideas from employees that help Zurn advance the initiatives identified in their sustainability report. In the meanwhile, the company continues to execute on a fantastic mission and vision, and I’m looking forward to additional information in the coming years on how they’re able to make progress on their environmental and social goals.
Website successes (4/10/22)
I had first brought up GoDaddy Inc (GDDY) because it was showing great growth despite the woes of the pandemic, and I continue to like what I see from this name. The company is currently benefitting from demand across all its various business segments. They’re seeing higher subscriptions for their websites + marketing and managed offerings while also seeing increases in their commerce offerings. They recently acquired Pagely, which is an enterprise managed WordPress solution. This offering is only going to add to GoDaddy’s commitment to helping small businesses grow their omnichannel retail capabilities to sell anything, anywhere. However, supply chains aren’t helping here either as their hardware efforts are a bit under pressure due to lack of parts. The stock has been slightly under pressure, as has the rest of the market, so far this year, but it’s actually done much better than the rest of its peers and the broad market overall as this positive news has been incorporated into investors’ expectations for the company.
It’s electric (4/3/22)
The Biden administration has been highlighting their plans for electrification of our vehicles in the context of gas prices skyrocketing, but this strategy has been building for a while. Just last month, they announced $5b in spending over the next five years for a national EV charging network. Auto companies are also declaring their own targets – for example Ford is targeting 40% EV sales by 2030, GM is expecting to only sell EVs by 2035. And all of these cars require energy storage in the form of batteries. These batteries all require lithium. One of the companies most exposed to lithium production is Albermarle Corp (ALB). Though the stock is down about 5% so far this year, it’s up nearly 50% in the last year as lithium demand soars and it continues to be one of my favorite ways to invest in the electrification trend.
Smart choices (3/27/22)
SPACs went out of style in the last year, and unfortunately the baby got thrown out with the bathwater and pretty much all stocks coming out of the SPAC world got decimated. I’m sure you’ve heard the term, but for those needing a refresher on what a SPAC is, here’s a good summary. When the market reacts this way, there’s always a little fun out there for investors willing to look for the hidden gems in that mess. I’ve been following one of those gems for a while now, waiting for the last shoe to drop, to find a good entry point into the stock. And I think the time has finally come to get into SmartRent Inc (SMRT).
SmartRent is a smart home technology platform designed to provide property managers with seamless visibility and control over all their assets while delivering cost savings and additional revenue opportunities through all-in-one home control offerings for residents. It’s basically a one-stop-shop for a technology solution for the operation of an apartment building – it can control access to the building and individual apartments, it can streamline maintenance requests, it can largely automate leasing, it can maintain security, it can detect leaks in pipes, and the list goes on.
SPACs are all priced at $10, and this stock is trading today at a juicy discount – only $5.51 – a new 52 week low after the company posted earnings that fell short of expectations, but with a great runway of demand ahead. SmartRent expects to achieve positive EBITDA by the end of 2022. Eighty percent of the company’s revenue projections for 2021-2022 come from contracts already in place for committed units. From the impact perspective, the product this company is creating is helping drive an incredible amount of efficiency in the utilization of resources in apartments – smart appliances and thermostats help drive down energy usage, leak detection can help prevent water waste, etc. The product is being adopted en masse by all the largest apartment operators out there, and is the market-leading solution. I’m pretty excited to be getting into something like this at such a nice discount.
Return to travel (3/13/22)
One of the more interesting changing tides right now is the transformation of COVID becoming more endemic (like the flu) than pandemic – basically the world is emerging on the other side of this which means people are itching to do a lot of things that we couldn’t do in the last two years. A big piece of that is travel – so demand is coming back in a big way for both leisure and business travel. One of my favorite stocks in the space has been Expedia Group Inc (EXPE). The company is seeing the benefits of improving travel trends globally and has outperformed its peers in the last year. The stock has actually outperformed the broader market so far this year as well. At the same time, there are building uncertainties on European travel given the war in Ukraine and inflation could dampen what should be a strong return of travel demand. We’ll see what happens there but in the meanwhile, I’m happy to be riding the rising tide of travel returning (clearly taking advantage myself this week) through this stock.
For times like this (3/6/22)
The conflict between Ukraine and Russia has created disruption across the commodity markets given the two countries are such large producers of oil and grains. On top of that, inflationary pressures that have been building across the US. As a result, we’ve seen a lot of volatility in interest rates (aka bonds) and commodities as investors try to figure out how things are going to eventually shake out. This means a lot of trading of financial products to try and hedge exposures across portfolios. By default, this means there’s been a stark increase in volumes being traded across exchanges, like the Chicago Mercantile Exchange (Chicago Merc), which is the world’s leading derivatives marketplace. I had first mentioned CME Group Inc (CME) for this reason – capturing some upside when markets go completely bananas, and we’ve seen it happen literally way too many times in the last few years. Anyway, the CME Group reported their stats for the month of February this past week and wow – average daily volumes were up 19% for the month, and it doesn’t even include the full impact of what we’ve seen this week because of the conflict in Ukraine. Happy to have this in my portfolio for times like this – we’re in a volatile time period right now and this is one of the best ways to play that.
Give me all the cyber security (2/27/22)
I had first talked about Palo Alto Networks Inc (PANW) in early 2019 as a focus on cyber security was becoming increasingly important. That became an even bigger issue during COVID when work went fully remote and companies had to ensure that their networks were safe even in that environment. The company released earnings this past week and posted results ahead of expectations with revenues up 30% and, importantly, an improved outlook for higher revenues. The company has been on a shopping spree the last four years, adding to its wide catalog of services, but it seems like they’re ready to take a break and are reaping the rewards as those acquisitions are driving their improved growth outlook. The acquisitions are now all integrated across their platform with strong organic growth. Adding to that, the increased level of conflict in Europe means the potential for heightened cyber security threats from Russia – this realization actually sent PANW even higher this week. The years of acquisitions made for a bumpy ride in this stock and I’m more confident than ever that the platform is set up for a strong growth trajectory from here as cyber security becomes a bigger and bigger focus for companies every day.
Get outside (2/20/22)
One of my favorite names, back from the very beginnings of UnBenchd, turned out to be a COVID winner – Yeti Holdings Inc (YETI). When we stopped being able to do things indoors during the height of the pandemic, it’s almost like a whole new group of people realized there’s a beautiful world outdoors to explore. And you obviously can’t explore the great outdoors without the proper accessories – enter Yeti. Unfortunately, Yeti, along with every other COVID winner out there, has had a rough time since Thanksgiving.
The company reported earnings this week with sales growing 18% and management expecting growth of 18-20% throughout this coming year. Demand still seems to be really strong globally, allowing the company to pass through some of their cost increases by increasing prices by about 2%. They’re also focused on new products with new soft coolers expected to launch in the first half of this year with a new tote launching in the second half of the year. One of Yeti’s avenues for growth is the expansion across international markets, which currently only make up 10% of the company’s sales and have lots of room to grow. On the other hand, similar to what we’ve heard across the manufacturing industry, Yeti is grappling with supply chain issues. Over half their product inventory was somewhere in transit at the end of the year and it’s limiting their ability to meet the high levels of demand for their products. It’s also increasing their freight costs. Despite these two issues will impacting the company’s profitability in the coming year, better than expected demand is driving investors’ expectations for earnings higher in the coming years. Given the strong growth prospects for the company, coupled with the recent stock performance, I’m ready to add more to my position here.
Turning lemons into lemonade (2/13/22)
One of my favorite stock picks pre-COVID was the Coca-Cola Co (KO) as the company had a solid balance sheet and improving operating margins that were driving steady cash flows and gave me the confidence that this company could weather the storm of any typical economic downturn that might be coming our way. And then COVID shut down bars, restaurants, events (aka all these avenues through which this company sells its products) and the JOKE WAS ON ME for not foreseeing the economic downturn that was, in fact, headed our way. The stock has recovered to its pre-COVID levels and has actually handily outperformed the broader market so far this year. Anyway, they released earnings this past week and results for the last quarter were ahead of Wall Street’s expectations. However, like everyone else, they’re dealing with the impact of inflation on rising transportation and packaging costs that could weigh on their profits in the coming year. Their brands are expected to generate pretty solid growth in the coming year – I’m most excited about their partnership with Molson Coors to release a Simply Spiked Lemonade this summer. Inflation is driving costs higher for pretty much every company but I’m happy to sit here and trust this management team to continue driving cost efficiencies across its global platform and collect a pretty little dividend on the way.
Managing returns (2/6/22)
The OG UnBenchd stock pick reported earnings this week that were ahead of expectations. Waste Management Inc (WM) seems to be really optimistic about what’s coming for the company in 2022 despite cost pressures. On top of the steady growth, the company is also going to increase its dividend and authorize a $1.5b stock buyback plan (both really positive for investors) and the management team continues to prove its ability to manage capital really well on behalf of shareholders. I’ve been a happy investor in this company and the general pullback in the stock market has created another nice little entry point to add to the position.
Mastering consumer spending (1/30/22)
I had first talked about MasterCard Inc (MA) in 2019 as the company was making big moves into the world of digital transactions. The touchless transaction trend has only been accelerated during the pandemic, and the company continues to see the benefits. MA reported fourth quarter results this week that came in well ahead of expectations as revenues rose 27% and profits rose 43%. More promising was the company’s reiterated objectives of achieving at least 50% operating margins (aka keeping all the cost pressures under control really well) and growing earnings by 20%+ each year through 2024. This company remains a great way to get exposure to the strong consumer spending and digitization trends happening globally and the latest earnings report is only strengthening my conviction in the name.
Data storage (1/23/22)
Stocks are on sale, and I’m out shopping. Especially in the technology space, some of my favorite stories are companies focused on B2B (instead of B2C) business models – they have large-scale enterprise contracts that create recurring revenues, and the scale tends to come with lower cost structures (aka higher profits). This typically tends to create stronger businesses than those dependent on attracting consumers who tend to have shorter life spans as customers and higher acquisition costs, leading to lower levels of profitability. One of the biggest trends to come out of this pandemic has been the acceptance of remote work – the more we work remotely, the more we depend on data. Enter a company like Pure Storage Inc. (PSTG), a leading provider of enterprise-level storage and hybrid-cloud solutions. They provide data storage as a service, enabling their business customers to run operations seamlessly across multiple clouds.
The company has a few different revenue generators – subscription services is a big part of their story and momentum is strong here with the latest reported annual growth of 38%. The other big update that moves the needle for this company is their recent entrance into hyperscale deals. Last quarter, one single hyperscale deal accounted for 5-6% of the company’s total sales and it seems likely that customer is going to continue making purchases, preferring Pure’s services over its own in-house solutions. This is likely to create a whole new addressable market for the company to pursue. They already serve about half the Fortune 500 companies and have a $50b+ market opportunity out there. The best part? The stock is down 24% since the beginning of the year and looks like a really interesting opportunity.
One of the best parts of this company’s story comes in the form of its social impact through the Pure Good Foundation. The foundation was started by a small group of Pure employees who wanted to make a difference in the community and approved/funded the creation of the foundation by donating their shares before the company went public. It’s an employee-seeded foundation that works across three main areas – philanthropy across the community, environment, and workforce development. They’re doing some really amazing things, more on that here if you’re interested in feeling the fuzzies.
Confirming that thesis (1/16/22)
Ally Financial Inc (ALLY) is the OG UnBenchd financial stock pick – I’ve been such a happy customer and shareholder for a long time. One of the biggest positives on this company is a management team that is top notch as it relates to capital allocation (aka spending the company’s money in ways that will increase its efficiency and maximize its profits). They continued to prove themselves this week by announcing two big things – a new $2b share repurchase program and a 20% increase in their quarterly dividends. The higher dividend is indicative of higher cash flows for the company, which is great. The share repurchase plan is going to go into effect starting in the first quarter of this year and is great because:
- It’s a positive signal to the market. The company is choosing to allocate its capital toward its own stock, so they must believe that the returns associated with that capital allocation decision are superior to others.
- It increases the value of the remaining shares outstanding. When a company buys its own shares, they are reducing the shares outstanding in the market, which tends to increase the share price because of few technicalities. It reduces the supply of shares while demand remains the same aka prices rise. Shares are also typically valued as a multiple on earnings per share – when you reduce the shares outstanding (aka reduce the denominator on that earnings per share), the fundamental value associated with each share increases.
Health & Wellness FTW (1/8/22)
I’ve been a big fan of Planet Fitness Inc (PLNT) for years, and it’s not a surprise that the stock has had a wild ride in the last two years. The stock has recovered past its pre-COVID high and continues to be a brand and business that is leading the health and wellness revolution happening across this country and the world. In a fantastic update this week, PLNT announced it is the first fitness brand to achieve the WELL Health-Safety Rating, which recognizes PLNT’s leadership in ensuring a safer and healthier environment for its employees and members across its nearly 2200 facilities. Providing a healthy space has always been important, but it’s something that’s been under scrutiny after our experiences with COVID and gym-goers are increasingly concerned about air quality and cleaning protocols. With this new commitment, PLNT has become the first fitness brand to pursue holistic aspects of health from improved air flow, hygienic hand washing practices, reduction in hand contact of high-touch surfaces, effective cleaning protocols, robust emergency preparedness and response across all its facilities. This management team continues to push best practices in the industry and I continue to be a happy camper in this stock.
Delivering all the gifts (12/19/21)
I’ve been talking about FedEx Corp (FDX) since 2019 – it’s a great company that’s deeply ingrained into the ecommerce revolution we’re experiencing in this country and around the world. It’s also a key player in the supply chain, which means that their earnings report this last week gave us some insight into the status of the situation. From a supply chain bottleneck perspective, the biggest issue for FedEx has really been a lack of labor – they need truckers, drivers, and other workers who can actually get goods from point A to point B. To compete for labor in the current tight market, the company raised its hourly wages for package handlers to $20/hour (bonus points to this company’s social license to operate) and they’ve literally been overwhelmed with job applications – they had 111,000 job applications just last week – it’s the highest level they’ve ever seen and it’s significantly higher than the 52,000 job applications they received in the month of May. This pace of hiring allowed the company to put up stellar results for the quarter with earnings and revenues increasing far above Wall Street’s expectations. Even more encouraging was the commentary from management about their outlook going into the next year (the second half of their fiscal year is the first two quarters of 2022) –
“The first and most important point is the demand for our services is very robust. The pricing environment is very robust. The labor headwinds start to recede in the second half. The investments that we have made to get more efficient as we go into the second half and the technology investments that make us more efficient as well. So, we expect in the second half, our profit and operating margins to improve year-over-year and we get double-digit [growth].”
Even more exciting, FedEx received its first 500 electric delivery trucks from BrightDrop (GM’s EV unit). Though this is a very small part of FedEx’s fleet of 87k vehicles, it’s the beginning and part of the company’s plan to buy only EVs after 2025 in an effort to electrify its entire fleet by 2040. These EVs are being rolled out across the LA area next year, which is actually really efficient for FedEx from a cost perspective – gas prices in California are the highest in the country – near $4.70 a gallon – and the cost to charge these EVs is 75% less expensive. EVs are also half as expensive from a maintenance standpoint. All of this is not only great from a financial perspective but underscores the company’s focus on sustainability. The stock reacted fantastically to the earnings release as well as the EV news and rose nearly 5% on Friday. I’m a big fan of the tailwinds at the back of this company, the management team’s ability to navigate through the changing environments, and the company’s focus on being more sustainable and socially responsible – consider me a happy happy hippo sitting in this stock (Yes, I know it’s supposed to be hungry).
Streaming wins (12/12/21)
I had first talked about Roku Inc (ROKU) after a year of being a big fan of the product – it happened to fall into the “stay at home” stocks that really skyrocketed during the pandemic. A lot of those stocks have also really struggled this year (moral of the story: portfolio diversification so you can balance out the good and the bad!). But this past week was a big one for this name, the stock jumped 18% on Wednesday after announcing it had reached a multi-year agreement with Google to keep YouTube TV and YouTube on its platform. Google had initially threatened to pull these two apps from Roku by this week. Given Amazon’s Fire TV and Apple TV both would have still carried these two apps, not surprising to imagine that the lack of this agreement could have been less than ideal for Roku’s user base, which currently sits at about 56.4m active users. The crux of the issue was on ad revenues (shocking, it was about the money) because Roku was claiming Google required it to show preference to content on YouTube over other providers as part of its search results. Given regulatory scrutiny over big tech, this obviously caught the eye of Congress, with many coming out in support of Roku standing up against the big bad Google. The actual terms of the agreement between Roku and Google weren’t actually disclosed, so tbd on whether the big bad wolf blew the house down. In the meanwhile, I’ll be a happy shareholder and customer of Roku, who coincidentally uses YouTube TV (exclusively for football season, yay for streaming services that can be turned on and off).
Not getting boxed in (12/5/21)
As investors become increasingly worried about interest rates rising, tech stocks have been getting totally smashed. The reason – high-growth tech stocks are valued based on their future earnings that are then discounted back to what they’re worth today. The rate at which those earnings are discounted is a function of a few things, one of those being an interest rate. So, if you’re discounting those earnings at a higher rate, they will be worth less today. This can be an unfortunate scenario especially for those tech companies not even generating profits today. One of the companies that I’ve been a fan of (tbh it’s about as painful as being a NY Giants fan), is Dropbox Inc (DBX). Dropbox has been caught up in this tidal wave but it has a few things that set it apart from its peers – it actually generates cash flow and it has a management team that knows what it’s doing. The company’s latest earnings report was really strong with revenues and profits ahead of expectations driven by growth in the number of users as well as the revenue per paying user. They continue to ship more products and enhance the suite of solutions they can provide for customers, and have a nice runway ahead. The recent performance has been v annoying for me to watch but I’m confident in the business model and the management team’s ability to continue generating value for shareholders and customers in the long-run.
Ready for take-off (11/21/21)
I’m always watching for companies that operate in resource-intensive sectors with plans to become much more efficient (Caterpillar is an example of this). One of those companies I’ve been watching for a few months has been Alaska Air Group (ALK) after the company announced its commitment and, importantly, roadmap to achieve net zero carbon emissions by 2040. The company’s roadmap to net zero by 2040 is focused on five key areas:
- Renewing its fleet with more fuel-efficient aircrafts.
- Driving operational efficiencies like single-engine taxiing or using preconditioned air at airports.
- Sustainable aviation fuels (SAF) that can be blended with traditional fuels – each gallon of sustainable aviation fuel can have up to 80% lower carbon emissions over its life cycle than traditional fuels. This is one of the more interesting aspects of their roadmap because it’s not currently produced in mass scales and that needs to be addressed in order for this to be a meaningful piece of this company’s decarbonization puzzle. Interestingly, ALK has already entered into a contract with Microsoft to use SAF to help offset the carbon footprint of Microsoft employee travel between Seattle and California.
- Novel propulsion aka increasing the use of electric or alternative power vs fossil fuels.
- Carbon offsetting technology (aka those RECs I mentioned earlier) until SAF and novel propulsion become much more viable solutions in the aviation industry.
On top of their longer-term carbon reduction program, the company has committed to reducing waste through more sustainable packaging and recycling as well as offsetting 100% of its operational water use through investments in high-quality habitat projects. And arguably one of the coolest parts of their overall carbon strategy is the fact that every one of their 22,000 employees is part of it – carbon emission targets are part of every employee’s incentive pay program. I haven’t seen this level of engagement across a company for a carbon strategy and I’m here for it.
Their magnificent ESG strategy aside, the company is currently set up to see big upside from here from both financial and operational perspectives, and I think the stock is pretty undervalued right now. Despite the impacts of the delta variant (and now this week’s COVID fears) impacting bookings, before delta really took hold, ALK was seeing bookings for July 4th and Labor Day approaching pre-COVID levels. Interestingly, throughout the quarter, premium bookings (first class and business class) were actually higher than pre-COVID levels. On top of that, the company’s recent alliance with American Airlines and additional progress on the loyalty program front are boosting their bookings related to business travel. Even though some COVID-related pressures are likely going to persist through the end of this year, the company is set up for a strong 2022. So much so that the company is hinting at restarting its dividend program next year after halting it during the pandemic, which would be a huge win. I’m fully expecting some choppy waters as COVID worries impact airline stocks in a big way, but the current price looks like an attractive entry-point for this stock as a long-term holding in my portfolio.
Singles’ Day (11/14/21)
China just celebrated “Singles’ Day” on 11/11 – it’s basically an anti-Valentine’s Day where unmarried people treat themselves to gifts – and it’s actually become the largest online shopping day in the world (think Prime Day but on steroids). Unsurprisingly, Alibaba Group Holding Ltd (BABA), participates in this day in a big way. Last year, the company expanded the single day to an 11-day event, with celebrity performances and ended the scoreboard with $74b in orders. This year, the event has shifted its focus from pure sales to more sustainable growth by encouraging eco-friendly consumption and inclusiveness across vulnerable populations. At the end of its 11-day period, Alibaba totaled $84.5b in orders this year and despite the rate of growth starting to slow (off larger bases), the stock reacted positively to the news.
Last chance (11/7/21)
The concept of peer to peer lending had first brought me to LendingClub Corporation (LC) in early 2019. Since then, the management team has really put my trust through the wringer – there were a lot of operational missteps that had sent the stock into the 7th circle of hell but from the ashes, a completely new business has risen and it’s really taken the market by storm as the stock is up about 380% this year alone. They basically pivoted to being a hybrid lending model since the acquisition of Radius Bank last year, and this point, is a unique fintech business that also has a bank charter. This hybrid model has allowed the company to improve unit economics (they’re generating 30% more revenue on the same amount of loan volume) and also offer the flexibility to cover any gaps between the demand and supply in its peer-to-peer lending business. Management and investors are really encouraged by the growth and stability afforded by this new business model – I’m taking a few chips off the table here and watching intently for any indication of missteps from this management team – any more strikes on that front and I’m taking my wins here elsewhere to a team I can trust a little more.
Here for the long-term (10/31/21)
Waste Management Inc. (WM) is the UnBenchd OG – the first stock I ever talked about way back in the day – and the company reported earnings this week. The stock is up about 37.5% this year, outpacing the S&P 500 by about 13.5% and its peers by closer to 19%. Results were ahead of expectations on strong pricing power, higher volumes, and higher pricing on recycled materials. It was, however, not immune from the elevated cost pressures (labor, repairs, maintenance, etc.). The inflationary pressures are likely to impact their costs for the next few years but management plans to push pricing by 7-10% to help mitigate some of these impacts. In addition to pushing pricing, they’re working on automating more of their processes. For example, they’ve seen a 35% reduction in labor at recycling plans that have been automated – and this alone could reduce costs by $1m per month per plant. The future looks bright with continued pricing power, increasing volumes, and growth in the recycling business. Higher costs will be a slight bump in the road but not enough to change my mind on this being a long-term hold in my portfolio.
Planning ahead for the holidays (10/17/21)
There are a bunch of competing factors impacting the world of retail right now – supply chain bottlenecks and lack of labor availability are impacting how much supply retailers are able to provide for the consumers on the other side who are flush with cash and ready to spend. This dynamic of not enough supply and lots of demand is also causing some serious price inflation and also means the retailers generally have the upper hand on pricing right now (aka there aren’t going to be many sales this holiday season). In an environment when retailers aren’t running any sales, the natural place to find “sales” happens to be off-price retailers…haaave you met T(ed)JX? I talked about The TJX Companies (TJX) earlier this year and they’re in a great position to really thrive this holiday season. First, they’re likely to be the first off-price retailer to think about raising ticket prices on their goods – even a 1% increase, which would be almost negligible to their customers, would add 1% to their operating margins and increase their earnings by 8%. The stock has recently been under pressure on worries that supply chain bottlenecks are negatively impacting TJX’s inventory levels – though it’s true in isolation, it also means that inventory levels across the industry are low and TJX isn’t alone, and it’s creating the low promotional activity across retailers and highlighting the affordability of the TJX family of stores. The recent pullback in the name is more an opportunity than anything else to me.
Spinning water (10/10/21)
I had first talked about Rexnord Corp (RXN) at the beginning of last year and I had found the company while I was going down this rabbit hole of water management solutions. The company, at the time, also had a process and motion control business line that was pretty exposed to Boeing and therefore impacted as the 737 Max production was halted. Rexnord just underwent a pretty meaningful corporate restructuring this past week – they spun off the process and motion control business line and sold it to Regal Beloit (the new resulting company is Regal Rexnord Corporation) and the remaining water business is now known as Zurn Water Solutions Corporation (ZWS). The water business is what brought me into this company to begin with, so I’m happy to have just the remaining ZWS in my portfolio. This new company is solely focused on designing, procuring, manufacturing, and marketing products that provide and enhance water quality, safety, flow control and conservation. They’re driven by a goal of providing innovative and smart technologies that can address sustainability challenges associated with water utilization and I’m here for it.
The comeback kid (9/26/21)
One of those reopening stocks that actually performed really well this week (up almost 13%) in the middle of the volatility is a reopening play that I’ve been banking on for since the beginning of 2019 – Expedia Group Inc (EXPE) – on the premise of our collective love of traveling and seeking new experiences. Shocking 0 people, this stock got totally demolished during COVID as travel restrictions significantly impacted the business. However, the recovery is shaping up to be quite strong across their businesses. This summer was solid across domestic travel, next summer is shaping up to be even stronger, and the company is set to benefit as restrictions are being lifted for international travel in November. Plus, the business itself continues to improve and management is focused on testing and streamlining their marketing platform to continue capturing customers are competition remains pretty healthy across online travel platforms.
The benefits of diversity, in action (9/19/21)
I had first talked about Interpublic Group of Companies Inc (IPG) toward the end of last year with the thesis of this marketing company participating in a big way in the recovery of the economy and because of the diversity of the company – not only across its workforce overall but all the way to the top across its executive team. The stock has since outperformed its peers and the overall market pretty handily, and fundamentally proven out the thesis pretty well. One of the key factors of success for this company has been its ability to attract, develop, and cultivate diverse and talent, which is allowing the company to strengthen its geographic reach across international markets. In addition, the company continues to enhance its digital capabilities, develop direct-to-consumer relationships, and deliver on its high-growth acquisition strategy. Over the last few years, IPG has acquired companies across the marketing industry specializing in everything from data analytics to healthcare communications to build a stronger, full-service platform. This management team was able to use the last 18 months to come out on the other side stronger and leaner, and I’m looking forward to continued successes from this team. It’s almost like having a diverse workforce results in a better performing, more sustainable growth company…
Positive Inflection (9/12/21)
Concerns about the delta variant and its impact have been really weighing on “reopening” stocks – those that will benefit most when the economy is open and running again. Planet Fitness Inc (PLNT) is pretty much a quintessential reopening stock. Despite falling **hard** during the market downturn, the stock has recovered 100% from its lows but has been pretty range-bound this year and is effectively flat so far this year. Its price chart this year looks like a sine curve with the peaks and troughs basically representing market sentiment toward the impact of the delta variant on the economy. Despite this, the fundamentals on the ground at Planet Fitness are finally inflecting positively as traffic at their gyms has officially surpassed 2019 levels. As gyms continue to remain open for longer (aka no local restrictions requiring them to shut down), traffic trends are likely to march upward. All signs pointing to a strong recovery for this company to close out the third quarter and bring in a strong finish to this year (separately, how is it already September? I can’t believe we’re so close to the last quarter of this year).
Hunting for bargains (9/5/21)
The market has been stuck in this “good news is good news” but also “bad news is also good news” cycle basically all year – we’ve hit 53 record highs for the S&P 500 and the index hasn’t had any meaningful corrections. In general, it makes sense – lower interest rates and 95%+ earnings growth means that stocks still have room to run higher. In that environment, however, it’s difficult to find a lot of new interesting opportunities. While the broader market is up over 20% this year, a really interesting company is only up about 6.4% and I think it has some great upside potential from here. It combines the best of several worlds from a consumer standpoint – experiential retail with a great value proposition – The TJX Companies, Inc. (TJX) – the parent company for discount retail brands like TJ Maxx, Marshalls, HomeGoods, HomeSense and a few others.
The company has been able to grow the HomeGoods category at a really impressive pace – with 40%+ growth year-over-year and plans to roll out an online platform for this brand in the next few months that should provide another avenue of growth. The HomeGoods brand aside, the company overall posted a really solid second quarter earnings report with 20% growth across the overall portfolio. Unlike many other retailers that are having to shutter stores, TJX is actively opening new stores – they opened 26 new stores in the second quarter and anticipate continued store openings throughout the year. In addition to the organic growth from their stores, investors can expect additional returns through dividends and share buybacks, which are expected to be $1.25-1.5b during 2022. As we continue to come out of this pandemic, we’re in the early part of an economic cycle with a consumer that has a super healthy balance sheet and an enormous appetite to spend money. In that context, a retailer that provides a great value and the experience of bargain shopping is set up to experience really great demand. Plus, it’s trading at a reasonable valuation. I’m here for it.
Now getting to the fun part – the company also has a great focus on their environmental and social impacts. From the environmental perspective, they are focused on their energy usage and waste generation. In this effort, the company had a target to reduce their greenhouse gas emissions per million dollars of revenue by 30% by 2020 (vs a 2010 baseline) and they actually meaningfully surpassed the target by achieving a 47% reduction. They have set their new emissions target to be a 55% reduction by 2030 (vs a 2017 baseline) that’s aligned with the Paris Agreement. From a social perspective, they’re focused on working toward UN Sustainable Development Goals 2 (zero hunger), 3 (good health and well-being), and 4 (quality education). They do a great job reporting on their targets, progress, and overall philosophy around corporate responsibility on their website in case you’re interested in some light reading.
One of the really exciting aspects of the Biden administration’s infrastructure plans (to me at least) is the focus on tackling the actions required across the transportation industry as we try to combat climate change. Earlier this month, Biden announced his goal of making half of all vehicle sales in 2030 electric. The administration also announced new emissions standards starting with 2023 models. While the target of achieving 50% electric vehicle (EV) sales by 2030 is not a law, GM, Ford, and Chrysler have all made statements of targeting 40-50% EV sales by volume by 2030. To put that goal into context, EV sales as a percentage of total car sales in 2020 was in the low single digits, implying a massive acceleration in the production of EVs. The growth in EVs was the thesis behind Albermarle Corp (ALB) and it’s been reacting in line with the accelerated expectations, up nearly 61% so far this year alone. Happy to be here for the (electric) ride.
It has been a long and bumpy road with LendingClub Corp (LC) but it seems like there might finally be smoother sailing waters ahead. The company reported earnings for this past quarter that blew past expectations. The company reported revenues and earnings of $204m and $9m, respectively, well above expectations for $131m and -$40m. The blowout quarter was driven by loan originations well above expectations driven by customers returning to a growth mindset, increasing customer values because of rising use cases of their services (home improvement, larger capital purchases, etc.), and a broader economic recovery. Loan originations are recovering much faster than expectations, and were 84% higher than the second quarter. In fact, the company is expecting to reach 2019 levels in the second half of the year, which is over a year faster than investors were expecting. Remember, the company was working on becoming an official bank, which recorded $40m in profits for the quarter, and could provide a new earnings growth trajectory for the company. All in all, this was a fantastic quarter for the company, and the stock, which had lagged meaningfully for a while, rallied over 83% since the report was released as the street is much more confidence in the future trajectory of the company’s earnings and cash flows.
Busting myths (8/8/21)
I first talked about Wayfair Inc (W) last year, after a little pullback that had provided an opportunity for a fairly attractive entry-point. The stock seems to be a little range bound this year as the market has oscillated between being excited about the reopening and then being nervous about rising rates and then being excited about the reopening and then being nervous about the delta variant (so on and so forth). Wayfair, being an ecommerce player, has largely been put into the “COVID stocks” – those that did really well during the lockdowns and will not do as well when the economy reopens. However, the company reported results this week defying that logic. The company reported earnings that came in well above expectations and revenues were above pre-COVID levels. Their total active users of 31.1m, up almost 20% compared to the same time last year, were also spending slightly more as the net revenue per active customer increased 8.6% over the last year. Their repeat customers now represent 75.6% of their total orders and the company effectively acquired 18m new customers during the pandemic, despite expectations for those customers to go back to physical retailers after the reopening, Wayfair is demonstrating its ability to hold on to them. It’s no surprise the market reacted really positively to this earnings release, sending the stock up nearly 10% on Thursday.
Supply chain bottlenecks (8/1/21)
Guys. This week was a doozy of earnings that I survived by using food as a treat for making it to another day – lots of sushi and baked goods (and obviously coffee) were consumed as a survival tactic. Anyway, I had first mentioned Caterpillar Inc (CAT) as a way to play the global recovery (and investing in a company making great strides in more sustainable business practices, especially being a major manufacturer) and the company reported earnings this week basically confirming that thesis with the slight caveat (which was expected tbh) of supply chain challenges causing some headwinds. Though earnings for the quarter were strong and indicated a strong recovery, there will be some challenges in the near-term as supply chains get sorted out, and the stock has seen some downward pressure on this realization. However, once we get past that, there will be years of persistent growth for this global company, which is likely to be further boosted another 2-3% by the Biden administration’s infrastructure bill. While the recovery might be a bit choppier than expected, happy to take the ride up with this company.
A strong recovery (7/25/21)
I had first talked about Coca-Cola Co (KO) because of the strength of its balance sheet to weather the storm that turned out to be the last 18 months of our lives. The company reported earnings for the second quarter this past week and crushed it. Their revenues are actually higher than 2019 levels at this point and it prompted management to further increase their outlook for 12-14% organic revenue growth and 13-15% earnings growth for this year. India and Southeast Asia are really the only markets for KO where sales are still being impacted by the pandemic but elsewhere volumes of sales are booming. For example, the company’s Costa cafes reopened in the UK and they saw a 78% growth in coffee volumes alone. To be fair, this revenue growth has also come at the cost of higher marketing spend. KO is also being impacted by higher commodity prices, which is likely to cause the company to raise prices for its products in the back half of this year. Anyway, this earnings release is definitely indicative of the recovery we’re seeing across the global economy. Fingers crossed we don’t see any meaningful impacts from the delta variant that derails the progress we’re making.
Short sellers (7/18/21)
Guys. Remember how I talked about Oatly last week? Well an activity short seller report was published about the company this week by a firm called Spruce Point that basically accused the company of accounting shenanigans that inflated the actual performance of the company. Whenever short sellers publish these types of reports, I’m super skeptical to begin with because short sellers make money when the stock price declines, so their reports are super biased to make prices fall. Obviously, I went digging and found a lot of accusations made in the report were completely garbage. There are also a few ways in which this company, which has operated as a private company for decades, could improve as a publicly traded company. However, none of it changes the fundamental story and value of this company being a meaningful winner in the movement of plant-based dairy producers.
Things about the report that are complete nonsense:
- Spruce Point accused OTLY of inflating US sales for 2018 using data from NielsenIQ, which measure retail sales to consumers vs wholesale shipments to OTLY’s actual customers, so it’s comparing apples to oranges. Then Spruce Point quotes an employee saying that US sales in 2018 were close to $4-8m and then buries in the footnotes that another employee had said the sales were $11m.
- Spruce Point accused OTLY of “burying” outbound shipping in its selling, general, and administrative costs though in OTLY’s filings, it’s clearly outlined as such. Also, many other consumer goods companies do the same thing.
- Spruce Point accused OTLY of not providing sufficient disclosures about promotions (literally no companies provide the types of disclosures Spruce Point was referencing) and product mix (this was definitely provided to all investors who were underwriting the stock at IPO because I saw it across most analyst reports and would have been provided to Spruce Point had they asked).
- Spruce Point accused OTLY of not saying a single word about commodity risks for the company, but the publicly filed prospectus for the company includes three entire paragraphs about commodity risk, so…
- Spruce Point makes the argument that pea milk, not oat milk, is the future. I wonder if they’ve actually ever had pea milk and what forms this opinion because pea milk has been around for a while and gained nowhere as much traction because…wait for it…it’s not as good as oat milk. Their report also claims that Califia is the actual winner in the oat milk category, not Oatly, and again, not sure if they’ve actually tried both brands and made the informed decision because Califia is not as good from a taste and texture perspective.
- There were concerns about additional disclosures on capital needs, revenue building blocks (breakdown between volume, price, and currency) on a quarterly basis, management structure, and environmental processes – all of which are fairly valid things to ask of a public company, but nothing that screams as a red flag for a company that’s only been public for two months. These are all disclosures the company can improve upon in the coming quarters. Investors and analysts are typically forthcoming with areas for improvement, especially with new companies that are doing the right thing but just took off their training wheels, without making a public spectacle about it.
Haulin’ oats (7/11/21)
I’ve been off the milk train for several years now. My go-to alternative has been oat milk and I’m definitely not alone haulin’ oats (see what I did there? Hall & Oates? Haulin oats?). Oat milk has a great texture and taste compared to other alternatives, which means it works perfect for all the baristas in the world. And from an environmental perspective, it not only screens favorable versus cow’s milk, but also alternatives like almond or soy milk (uses the least amount of water). Though oat milk seems like a more recent staple in the dairy section of most grocery stores, one of these brands have been manufacturing oat milk for decades. Good news for investors, the OG of oat milk, Oatly Group AB (OTLY), just became a publicly listed company in May this year.
Oatly was founded in the 1990s with a purpose-driven philosophy when a group of scientists at Lund University in Sweden realized that two-thirds of the world’s population couldn’t process cow’s milk due to lactose intolerance. Their patented process uses enzymes to break down the oats without losing any of the nutritional benefits. They launched the first oat milk product in 2001 and since have expanded into Europe, Americas, and Asia, growing revenues and profits by 80% and 61%, respectively, on an *annual* basis since 2017.
The company’s purpose-driven mission addresses, at its core, that traditional food production is one of the main drivers of our environmental impact and today’s food system doesn’t meet the nutritional needs of the global population. In 2012, Oatly launched a strategy focused on sustainability, trust, and health – getting ahead of the curve on these issues that consumers are becoming increasingly aware of today. On its packaging that’s made with 86% renewable materials, the company lists all their ingredients, where they come from, and also the carbon footprint impacts (in only Europe right now) so consumers are aware of the impact of their food on the environment. Oatly was also the first company in Europe to shift to a completely electric fleet for commercial shipping. The result of their efforts means that their oat milk results in 80% lower greenhouse gas emissions, 60% lower energy use, and uses 80% less land than traditional cow’s milk.
In the US, dairy alternatives accounted for 17% of total “milk” share last year and that’s expected to grow to 23% by 2025. Similarly, in Western Europe, the share was 11% last year and expected to reach 16% by 2025. And of the dairy substitutes, oat milk is eating the lion’s share of the market growth – oat milk sales grew 111% in the last year while other dairy alternatives grew in the single digits (coconut milk +12%, almond milk +7%). Not only is Oatly the market leader, but they have the ability to turn people onto oat milk in general – after they launched in Germany in 2018, oat milk’s share of the total dairy alternatives in the market grew from 23% in 2018 to 60% last year. Though new players are entering the market, Oatly is expanding its production capacity and remains the largest player in this category – it’s not only well-positioned for sustained growth long-term as the market share of milk alternatives, especially oat milk, expands rapidly but also as they grow into other dairy products (ice cream, yogurt, etc.).
ROKU rumors (7/4/21)
Rumors were running rampant last week that Comcast was considering acquiring Roku Inc. (ROKU) in an effort to become a streaming giant. The news was first reported in the Wall Street Journal and sent Roku shares flying, but the excitement has since faded a bit. The acquisition seems unlikely as it doesn’t make much sense from the perspective of Comcast for a few reasons:
- The acquisition would be quite dilutive for Comcast earnings
- Acquiring Roku (shares have rocketed up from under $80 just last spring to $430 today) would require Comcast’s debt levels to increase beyond management’s comfort levels
- Comcast has already been trying to build something similar inhouse through their Flex hardware and the acquisition would just be duplicative
- Comcast is already trying to partner with Walmart to pre-install its software on smart TVs sold through the store, which might be a better and more cost-effective way to further Comcast’s own streaming platform
Regardless of the outcome of this potential rumor, Roku remains a winner in my book (I’ve been a happy user for years) as cord-cutting continues and I’m happy to be along for the ride.
Remote work ftw (6/27/21)
The continued prevalence of remote work has meant great things for the technology platforms that enable a distributed workforce to continue collaborating – Dropbox, Inc. (DBX) is no exception. The company’s focus on innovation continues but at a slightly different tune under newly promoted President Timothy Young, who is focused on smaller, higher-confidence types of investments versus riskier, much larger investments like the company has made in the past. The company’s continued focus converting basic users to paying users, margin expansion, and partnerships with small businesses and entrepreneurs (which is a large and underserved market versus larger enterprises) provides continued runway for growth. The stock’s performance has followed suit, up over 36% this year alone, compared to the S&P 500 up less than 15% in the same time. Separately, activist investor Elliot Management has taken an interest in the company – though I’m unsure they can actually do anything meaningful given the Dropbox CEO’s large stake in the company, this opens up the possibility of the company getting bought out altogether, which could be a catalyst as the stock’s current valuation presents upside from here, especially compared to its direct peers.
Solar Power (6/13/21)
I’ve been watching the solar technology space for a while now, trying to find a good entry point. After it became clear that Biden was taking over the White House and had plans for a greener future, solar-related stocks had a massive run up. This year, many of these stocks are down 30-40%. The solar stocks have seen this type of rerating down only two or three times in the last decade, and it’s been driven by worsening growth prospects. This year’s sell-off is bizarrely not related to fundamentals, which are pretty much unchanged and for some names even slightly better. The sector has been caught up in the rotation the market has seen from growth into value stocks as well as the threat of higher interest rates. That threat of higher interest rates though seems to be under control at this point – inflation is running high and interest rates are haven’t really followed. Meanwhile, demand for solar is quite strong, which was underscored by the earnings releases from most of the solar names for the first quarter. Further, expectations are for the growth to continue. Solar, which only accounted for 4% of global energy sources in 2016, is expected to reach 17% by 2030, which implies an annual growth of over 11%. Plus, at these prices, the market is effectively assuming no further policy-driven catalysts, which seems illogical given the current administration’s focus on reducing carbon emissions. In this sector, my preferred name is SolarEdge Technologies Inc (SEDG).
SolarEdge creates an intelligent inverter solution that maximizes power generation at the individual PV module-level while lowering the cost of energy produced by the solar PV system. Their focus on manufacturing low-cost solutions has allowed them to win market share from competitors over the years. They’ve also been investing in developing new products related to energy storage and management, and this broader set of offerings should help grow their revenues associated with each installation. Importantly, the management team has a strong focus on their cash position and maintaining a healthy balance sheet, which is always a big plus. Solar demand has a massive runway ahead and I think SEDG is set up to capture a lot of the coming growth.
Solving all the problems (6/6/21)
I had first mentioned Zebra Technologies Corporation (ZBRA) two summers ago as a great way to play the ecommerce trend. The company 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 also now owns Reflexis Systems, which is a provider of intelligent workforce management and execution solutions for retail, food services, hospitality, and banking sectors. Just this week, Maverik (convenience store brand across 11 states in the mountain west part of the country) announced that they had selected Reflexis to provide store execution and labor scheduling services for over 6k employees across over 360 locations. With the labor shortages we’re seeing across the board, this is just another way ZBRA can provide value across its asset management (inventory and labor!) for customers. I’ve been a happy holder of this name and not looking to go anywhere anytime soon.
All the squares (5/30/21)
ICYMI, Elon Musk made an appearance on SNL because apparently that’s something in his purview now, and of course cryptocurrencies got pulled into the conversation. Cryptocurrencies have been under attack in general for a few weeks now, falling 36% in May and down 8% on Friday alone, and the pressure has spilled over into stocks related to cryptocurrencies, including Square Inc (SQ). Despite the pressure, I continue to see this company as a great way to invest in technological innovation in finance. In fact, it came to light earlier this week the company plans to roll out business checking and savings accounts, which have traditionally been dominated by traditional banks. The launch of this business was a clear positive to the markets as the stock jumped 5.5% on the news.
Securing the web (5/23/21)
A couple stragglers are still releasing earnings and Palo Alto Networks Inc (PANW) was one of those. It was worth the wait given the company delivered a solid earnings report that came in well ahead of expectations as they benefitted from an overall heightened awareness of cyber security in the market (unfortunate necessity and the driver for my investment thesis). Their Network Security business has performed better than expected so far this year as the company has been shifting toward software solutions and focusing on continued margin expansion. Management has also been buying back a nice chunk of shares, highlighting favorable capital allocation. Based on their performance so far and management’s expectations for future growth, this name continues to be a core holding to invest in the world’s increased dependence on cyber security.
Recovering nicely (5/16/21)
I had mentioned Darden Restaurants, Inc. (DRI) in the depths of the initial pandemic lockdowns when restaurants were just figuring out how to do business during a pandemic and their stocks had been completely trampled. I was drawn to this specific company because of its plentiful liquidity, lower price-point services, and operational flexibility that would allow it to survive the pandemic and emerge through the other side – and they’ve definitely delivered. The company has been benefitting from its increased focus on sales-building initiatives across its brands and technology-driven operational transformations. They’re also working on upgrading the customer experience, which is coming through in the form of new core menu items and additional customizations. They’re then utilizing that data to make smarter marketing decisions to bring even more customers to their brands. The stock is up 100% since then and I continue to see this company as a winner as the reopening continues.
Bright future for BFAM (5/9/21)
Government-mandated shutdowns acutely impacted schools and childcare and highlighted a key thematic – it’s really difficult to work, whether you have to go somewhere for work or if you can work from home, while taking care of kids at home. Because of this, I’m quite convinced parents are going to attribute a **much** higher value to childcare in the future, and companies are going to leverage corporate-provided childcare as a recruiting and retention tool to attract the best talent. Millennials are aging into their household formation years and tend to be dual-income households. This is going to create a pretty meaningful demographic tailwind in terms of demand for childcare in the coming decade. A really interesting way to invest in this thematic is Bright Horizons Family (BFAM). In addition to providing a great investment opportunity to ride this thematic wave, this company also excels from a gender diversity perspective, with women making up 71% of management positions, 33% of executive positions, 86% of the top 10% of earners in the company, and 53% of the Board of Directors.
BFAM is a leading global provider of child care and early education, back-up care, and workplace education services. They partner with employers through ~1,000 child care centers in the US, UK, the Netherlands, and India and serve more than 1,300 of the world’s leading organizations, including over 175 Fortune 500 companies. Their key business line is their full service offering, which provides customized child care and early education centers at or near the workplace. They also generate 14% of their revenues through back-up services, which tend to be in-home support services for dependents of all ages. Lastly, have a smaller education advisory services platform that generates only 4% of their revenues but provides advisory services for adult learners and prospective college students, and manages tuition assistance and loan repayment programs for employers.
It’s not difficult to see how BFAM’s business was disrupted during the pandemic, but their latest earnings results showed a really healthy recovery in their full-service child care centers. At the end of March, 89% of their centers were open and as restriction ease, we should see that number continue to recover. Of their centers that are open, they should see utilization back to pre-COVID levels by the end of 2021. One thing to watch for this company is how working from home might impact childcare needs. BFAM has a massive network of community centers that would typically be closer to home, and the company is working to build a platform that allows a seamless experience for the kids and families alternating between on-site and community centers based on the parents’ workplace schedules. Additionally, they have a fairly large back-up care platform that can be leveraged to provide childcare at home while the parents are working from home.
Long story short, I think there is a meaningful demand wave coming for quality childcare and I think this company is set up to reap the benefits.
Leveraging the recovery (5/2/21)
Among the big earnings this week was Caterpillar Inc. (CAT), which reported a nice beat on earnings, mainly driven by significantly better than expected margins. Even better, management is expecting revenues to grow by 30% in the second quarter, which is about 10% above ahead of expectations. This company is massively correlated with economic growth, which means many brighter days ahead as GDP rebounds this year. Plus, with the construction market red-hot and supply chains being disrupted, the inventory of construction machinery is really low while demand is elevated, which should drive pricing higher and help the company pass-through inflationary pressures to its customers.
Break out the bubbly (4/25/21)
I had first talked about Coca-Cola Co (KO) at the beginning of last year because of the strength of its balance sheet to weather a downturn. Joke’s on me that said downturn came in the form of a global pandemic that resulted in the annihilation of the food & beverage services industry. Anyway, the company announced earnings this week and TLDR a rebound in business is expected to be stronger and sooner than initially expected out of this company. They ended the first quarter with volumes in-line with pre-pandemic levels, which is astounding given half their business is associated with out-of-home spending at restaurants, bars, sporting events and concerts, which are still limping along trying to get back to pre-pandemic levels (except in Texas, where folks have apparently decided COVID doesn’t exist). This recovery in volumes is likely 3-5 months ahead of expectations. This drove higher revenues for the quarter, allowing earnings to handily beat Wall Street’s expectations by about 10%. Aside from driving revenues, the company has been working on driving cost lower across the organization by shifting to a global procurement structure and driving efficiencies in their supply chains. Part of this process includes shifting the company off a 20-year old SAP system later this month. As the digital transformation continues across this company, there’s more upside to the platform than what’s currently being priced into the stock imo. This is going to be a great way to play the recovery of the global economy post-COVID and in the meanwhile I’m sitting happy here with a 3% dividend yield as a cherry on top.
Banking on the future (4/18/21)
We’re back in earnings season mode (how?!), and the banks kicked us off as per usual. Ally Financial Inc. (ALLY) has long been one of my favorites in the sector and the company’s latest results were much better than expected with an improved outlook pointing to further upside, pulling shares to a new 52-week high this week. There could be additional upside for the firm as they look to release reserves (credit reserves taken during the pandemic assuming hardships for customers) and credit trends generally improve with the improving economy. Management is guiding investors to expect a nice 20% growth in financing revenues this year and continuous improvement of operations should help drive high single-digit growth into 2022 as well.
In addition to operational upside, the company has had a strong track-record of share buybacks, and should be able to continue share repurchases of $1.6-$1.8b over the next few years, which could reduce shares outstanding by about 25%. Share buybacks are great for many reasons – they indicate to the market that management believes shares are undervalued (have additional upside), they reduce the supply of shares (even if demand remains constant, that implies the price will increase), and result in higher earnings per share (the denominator decreases) which increase the long-term valuation of the remaining outstanding shares. I continue to be a believer in this company and management team in delivering a banking solution for the future, and am happy to be a long-term shareholder.
Securing all kinds of growth (4/11/21)
I had first talked about Palo Alto Networks (PANW) in early 2019 as a way to capture the growth expected in cyber security. This week, the company announced a partnership with Dish Network to secure its 5G wireless network in the US. Palo Alto will provide 5G container security, secure network slicing, real-time threat correlation, and dynamic security enforcement. The transition to the 5G network is not only about increased browsing speeds, but is expected to be huge from the perspective of connected devices in general – think mass adoption of the Internet of Things, autonomous vehicles, smart manufacturing, smart supply chains, etc. The security market for the 5G network is expected to grow from $580m in 2020 to $5.2B by 2026, which is a massive annual growth rate of 44% – and Palo Alto is maintaining its position as an industry leader with the ability to capitalize on the lion’s share of this growth.
Science rocks (4/4/21)
I went digging in the healthcare space this month – and with stocks reaching all-time highs recently, I’ve really had to dig deep to find some diamonds in the rough. I landed on Global Blood Therapeutics, Inc. (GBT). GBT a biopharma company transforming the treatment and care of sickle cell disease (SCD), which is a lifelong inherited blood disorder. The company produces Oxbryta, which is the first FDA-approved treatment that directly inhibits sickle hemoglobin polymerization, which is the root cause of red blood cell sickling in SCD. GBT also has a few other promising therapies in the pipeline. There are a few pieces to my thesis on this company –
- Oxbryta is the first of its kind treatment for SCD, especially for patients without the option of stem cell transplant donors. It also has a ton of growth potential as it expands outside the US and into the pediatric population. The pandemic has definitely been a headwind for uptake for this treatment, but sales should start picking up meaningfully in the second half of this year. The disruption from COVID has put downward pressure on the stock, which now looks like a great opportunity for investors with a long-term thesis that can look past temporary pressures.
- There are three other treatments in their pipeline and all complement Oxbryta in managing SCD while diversifying the company’s assets outside just the one product (aka reducing risk).
- The company has a top-notch management team with a great track record in the pharma industry.
- From the responsible investment perspective, this company shines brightly in two big areas. First, they’re making a massive impact in the SCD community. Most obviously through the therapies they’re providing but also through their GBT Community Fund, which has been providing support to patients and families throughout the pandemic. They also work closely with patient advocacy groups, community-based organizations, SCD treatment centers, and government organizations to support programs, education, and awareness activities. In that effort, they’ve launched a national campaign focused on breaking down stigmas associated with SCD called Sickle Cell Speaks. Second, they screen really well on gender equity metrics as a company – 55% of their workforce, 41% of their management, and 30% of their board is female. I also love that 67% of their promotions have been for women.
The gift that keeps giving (3/21/21)
I had first mentioned FedEx Corp (FDX) in the fall of 2019 (it’s actually hilarious looking back on my first post about FDX because I was complaining about the volatility in the stock market in August 2019 and then the last 14 months were like “oh wait hold my beer”) because of its dividend yield and balance sheet and also we’ve all been getting everything shipped to our doorsteps. The company reported earnings this week that came in ahead of expectations despite negative impacts from the polar vortex last month, which both reduced revenues and increased costs. The company’s express and ground services showed significant growth, up 20.9% and 36.5%, respectively, compared to this time last year. Revenues from its freight business line were a little less glamorous, only growing about 5.6%. Investors have had high expectations for this company (the stock is up 150% over the last year), and this earnings release exceeded those expectations despite some headwinds. Looking forward, there are a handful of things that make me excited about the prospects of this investment –
- Ecommerce should continue to grow
- Industry pricing should improve as the increased focus on ecommerce highlights the importance of the company’s services
- Continued margin expansion moving forward, especially for its ground business (which leads to higher profitability, so it’s a great thing).
- The customer mix had shifted away from the more profitable business-to-business traffic toward less profitable business-to-consumer traffic because of COVID, but we should start to see that start to normalize as the economy starts to reopen
Acquiring more boxes (3/14/21)
I had first mentioned Dropbox Inc (DBX) last fall when I was looking for a way to play the digitization of how we work. Earlier this week, Dropbox announced its acquisition DocSend for $165m. DocSend is a secure document sharing and analytics platform that gives customers visibility into what happens to their documents after they send them, adding a layer of intelligence on top of the scale and distribution of the Dropbox content platform. Strategically, this adds to the company’s self-service products (like Dropbox and HelloSign) that will help manage electronic document flow. Plus, it moves them further into the secure document management segment and brings DocSend’s 17k existing customers into the mix. I’m liking this acquisition for DBX and continue to see a lot of potential for this company becoming a bigger part of how we work in the future.
Cleaning up the mess (3/7/21)
The volatility in the markets has been exhausting, but it’s also created some muddy waters that are perfect for fishing for some hidden opportunities. I was on the hunt for something that’s 1) underperformed since pre-COVID times (aka hasn’t fully participated in the recovery yet), 2) has a strong balance sheet that wouldn’t be too impacted by rising rates, and 3) is a fundamentally good business that aligns with a sustainability theme. I landed this month on Clean Harbors, Inc. (CLH). This company provides environmental and industrial services like end-to-end hazardous waste management, emergency spill response, industrial cleaning and maintenance, and recycling services. Through their Safety-Kleen subsidiary, the company is also North America’s largest re-refiner and recycler of used oil and a leading provider of parts washers and environmental services to commercial, industrial, and automotive customers. Given the nature of the business, it fits squarely into the UN’s Sustainable Development Goal that addresses responsible consumption and production. On an annual basis, the company’s services reduce 3.5m metric tons of greenhouse gas emissions and collect 235m gallons of used oil.
The company provides services to a wide variety of end-users, and they haven’t been immune to the impacts of COVID on their demand for environmental services. However, the returning strength in industrial production across the country should provide a nice recovery wave for CLH’s environmental services business line while management continues to expand margins across all business lines. As the business recovers, they also have the advantage of having the lowest leverage they’ve had in a while, which means potential acquisitions or share repurchases could be in the near future, both of which would be a nice catalyst.
Confirming this thesis (2/28/21)
I first brought up Salesforce.Com, Inc (CRM) almost two years ago on the thesis of using big data to help businesses make smarter decisions about effectively everything. CRM’s ability to continue innovating in this space has allowed them to grow at elevated levels despite being a “mature” business. The company released earnings this week and outperformed expectations across all key metrics. The company’s revenue target for 2026 of $50B implies a 17% annual organic growth and doesn’t even include growth from additional product lines. Importantly, it confirms my thesis on its ability to sustain high-teens organic growth at least through the medium-term.
The digital transformation of businesses has only been accelerated by the pandemic and CRM offers customers one place find solutions for managing client relationships across sales, service, marketing, ecommerce, analytics, AI, customer applications, and seamlessly integrates the whole thing. CRM’s recent acquisition of Slack also provides additional upside to the company’s results as they onboard the platform and continue to find operational efficiencies and drive margin expansion. With other acquisitions like Tableau that facilitate business intelligence offerings (in addition to their wide array of customer relationship management offerings), CRM continues to expand its total addressable market.
Last, but not the least, the company remains focused on its ESG strategy. They achieved net-zero greenhouse gas emissions in 2017 and are working toward 100% renewable energy for operations globally. I continue to be a long-term believer that this company will be an integral part of how we do business in a smarter, more data-driven world.
Checking all the boxes (2/21/21)
I had first mentioned Dropbox Inc (DBX) in the fall last year when I was hunting for ways to play the digitization of how we work, but at a reasonable valuation. The company has not disappointed in capturing this trend. Their earnings release this past week showed higher-than-expected demand, with 230k net user adds, resulting in revenues and margins well above Wall Street’s expectations. Despite the strong operational performance for the quarter, management guided to a slightly weaker revenue growth outlook for 2021 (10% growth guided vs 10.9% expected), resulting in a pull-back in the stock price. At the same time, management guided to a 6.1% expansion in margins, which is much higher than expectations. I think their revenue guidance has upside depending on demand for HelloSign (their e-signature offering), which grew 70% in 2020, as well as other offerings like Passwords and Vaults. Importantly, the management team continues to deliver great results – they’re continuing to improve their business by expanding margins and producing stronger cash flows (expected to reach $1b by 2024) while also allocating capital well through share buybacks and M&A opportunities. I continue to see solid upside to this stock from its current levels.
My first tenbagger (2/14/21)
I’ve mentioned Peter Lynch’s One Up On Wall Street several times. It was one of the first investment books I ever read and is still one of my favorites. The book exposed me to the concept of a “tenbagger” – any investment that appreciates ten-fold. Any investor will be lucky to find a few tenbaggers throughout their career and Peter Lynch was gifted in finding many of these during his time managing Fidelity’s Magellan Fund, which is how he grew it from $18 million in 1977 to $19 billion by the time he left in 1990. Anywho, at the moment at least, I officially have my first tenbagger in the form of BioXcel Therapeutics Inc (BTAI), which I had first mentioned two years ago, and I’m excited for its growth prospects even from here.
The company has been making strides in several areas but of interest right now is BXCL501, which is used for treatment of agitation across several different neuropsychiatric conditions. The company expects this to be submitted for a new drug approval later this year and anticipates commercialization across hospitals for schizophrenia and bipolar associated treatments by the end of this year into 2022. They’re also moving forward with clinical development of this drug for use with dementia patients, which has potentially even more growth than the existing uses. Additionally, they’ve recently released encouraging clinical data for BXCL701, which is a treatment for metastatic castration-resistant prostate cancer.
Sustainable Aquaculture (2/7/21)
I touched on sustainable aquaculture a few months ago and have been digging into this a little more recently and came across a company in the public markets that specializes in land-based aquaculture and the use of technology for improving its productivity and sustainability – AquaBounty Technologies Inc (AQB). The company’s objective is to ensure the availability of high-quality seafood to meet global consumer demand while addressing critical production constraints in the most popular farmed species. Not only are they addressing this sustainability issue, they’re doing it through innovation in genomics. Their AquAdvantage fish program is based on a specific molecular modification in fish that results in more rapid growth in early development. At their facilities in Canada and Indiana, AQB is raising its disease-free, antibiotic-free salmon in land-based recirculating aquaculture systems, offering a reduced carbon footprint, and no risk of pollution of marine ecosystems as compared to traditional sea-cage farming.
I think their AquAdvantage Salmon (AAS) is one of the most innovative proprietary technologies out there in the food chain today with the ability to totally disrupt the salmon industry (sounds silly, I know but it’s a $17B global market). It’s the first of its kind, genetically engineered animal approved for consumption by the FDA and Health Canada. It also offers significantly better product economics vs. traditional salmon by enabling 70% more harvest output while using 25% less feed, which generates 2x higher EBITDA margins versus conventional salmon in land-based farms.
They had the first successful harvest of conventional salmon in the second quarter of 2020 and the inaugural AAS harvest by the end of 2020. Plus, they’ve completed a significant amount of work on the development of their third farm, a 10k metric ton commercial scale farm, that’s supposed to begin construction in the first half of this year. This company has a meaningful first-mover advantage (regulatory framework for approvals on this type of stuff gives them a sizeable lead on anyone else planning to enter the space) and is being led by a team that has a ton of experience in the food service, biotech, and aquaculture fields.
The stock has performed well on the back of the successes in 2020 – their first harvests and the announcement of their third, and commercial scale, facility. They’ve reached that key inflection point as it relates the commercialization. But they’re just getting started – they already have plans in place for international expansion through a 4th farm in Israel via a joint venture partnership. All this growth means they have to raise money to do it – they’ve been leaning on the stock market and issuing a lot of equity. Fortunately for me, that has caused the stock price to pull back a little, creating a great buying opportunity.
For the long-term (1/31/21)
I first mentioned Danaher Corporation (DHR) in the spring of 2019 to get exposure to the life sciences and biopharma industry with the added benefit of this company’s higher stability as a large global conglomerate with several different business segments like life sciences, diagnostics, dental, and environmental/applied sciences. The company reported earnings this week and really ended 2020 on a high note with 20% organic growth for the quarter. Management’s tone, unsurprisingly, sounded super positive. They’re expecting to see continued growth in COVID testing and therapeutics throughout 2021. At the same time, the rest of the business is also chugging along well. The environmental and applied sciences division saw positive growth for the first time since the first quarter of 2020. Their life sciences division is finally seeing an acceleration of instrument orders as institutions and labs start to slowly reopen. Happy to see really solid results from this company and it remains a long-term conviction for me.
Buybacks ftw (1/24/21)
I had first talked about Ally Financial Inc. (ALLY) almost two years ago but have been following the company for much longer. The company has pretty consistently driven shareholder value through sizable buyback programs, and they recently announced a $1.6b buyback program for 2021. In the simplest sense, buybacks reduce supply, so even at the same level of demand, prices increase. In a more technical sense, the market likes to value shares in terms of multiples, like a stock’s price-to-earnings (P/E) ratio. Buying back shares increases the earnings per share (EPS) by reducing the denominator. If the EPS increases and you apply the same P/E ratio to the stock, by default the price increases. In addition to the mechanics, the action is a clear indication of management’s confidence. If the management team decides that their capital is best invested in share buybacks, it means that it generally provides, in their mind, the highest rate of return for their capital at that time. If the management team is willing to bet on itself, it gives investors a boost of confidence as well. ALLY also had the benefit of its earnings report boosting investor confidence. Their earnings per share came in over 50% higher consensus and 68% higher than the same quarter last year, as its provisions for credit losses declined and consumer auto originations increased 12% versus last year. Loving this journey for them.
I had first talked about SRPT in the spring of 2019 when I had started exploring some ways to invest in innovation in gene therapies. One of the biggest catalysts for the name, even then, was the commercialization of the first gene therapy treatment for Duchenne Muscular Dystrophy (DMD) over the upcoming years. Unfortunately, SPRT announced that even though its gene therapy produced a large amount of the key protein needed for muscle function and strength, it didn’t lead to statistically signification improvement in muscle function in one year. However, the findings were different for younger patients, whose results did demonstrate statistically significant improvement. Regardless, this news effectively pushes the commercialization of this therapy back probably another two years. In response, the stock plummeted 51% in one day, which was a bit of an overreaction given the other parts of SRPT’s portfolio are actually doing fine. The company also just this week announced a research collaboration with Genevant Sciences to develop muscle-targeted lipid nanoparticles (LNPs) for the delivery of LNP-gene editing therapeutics in SRPT’s pipeline for neuromuscular diseases (like DMD). The stock has retraced some of the overcorrection and since gained about 10%. The statistically functional improvements in younger patients is encouraging and the treatment continues to demonstrate no safety concerns, so I’m not too worried about riding out this story.
Missing Ma (1/10/21)
If you remember, I had mentioned some regulatory tensions in November surrounding Chinese e-commerce giant Alibaba Group (BABA) and the IPO of Ant Group, a Chinese fintech company that’s 33% owned by Alibaba. In an even more exciting turn of events this week, Alibaba founder Jack Ma was rumored to be missing. He hasn’t been seen in public since he criticized Chinese financial regulators at a forum in October. Though it was later confirmed that he was “laying low” and not actually missing, his absence reminded me of similar situations we’ve seen in China in the past. Here’s a little trip down a scary memory lane for stories of business icons and movie stars going missing in China…
No need to turn into a butterfly (1/3/21)
Throughout 2020, we saw a wide dispersion of returns across different sectors. Sectors like technology and consumer discretionary (includes Amazon) were up 42% and 32%, respectively. While other sectors like financials and real estate posted negative returns for the year. I’ve been most interested in going hunting in less-expensive sectors with a strong comeback story as life returns to normal after broad-based vaccine distribution. I was also looking at stocks this month through an environmental lens – focusing on companies with policies and strategies to reduce their environmental impact in a meaningful way. At the end of the day, I landed in the industrials sector with Caterpillar Inc (CAT).
From a fundamental perspective, CAT is set up to see a nice recovery in 2021. A lot of CAT’s end-user demand saw massive disruptions because of the pandemic – spending money for new engines and turbines wasn’t a priority for companies in the industrials, transportation, airline, or energy sectors. However, there are several catalysts for this name going into 2021:
- Demand for construction equipment is already starting to improve
- Biden’s plan for $2T in infrastructure spending could provide funding for years past 2021
- Commodity prices have recovered while the mining equipment overall is aging across the industry and needs replacement
- Importantly, dealers ended up de-stocking in a big way through 2020, which means inventories are running lower and the stage is set for solid demand from restocking throughout 2021
In addition to the demand tailwinds coming for the company this year, management has been doing a fantastic job refining the operational efficiency of the company and managing the balance sheet to continue delivering strong cash flows. This backdrop, coupled with a 3% dividend yield sounds like a great place to be from a financial perspective.
From the environmental perspective, it should be no surprise that this company has a fairly large carbon footprint, given it’s in the manufacturing industry. However, the company has a great strategy in place to continue reducing the impact of their operations on the environment. In 2019 alone, the company sourced 35.5% of its energy from renewables and reduced greenhouse gas emissions by 20%. The website has fantastic disclosures demonstrating targets and progress on managing people, resource utilization, emissions, responsible supply chains, and philanthropy.
All the batteries (12/20/20)
I had first talked about Albemarle Corp (ALB) last year as a way to indirectly play the electric vehicle and renewable electricity stories – the company is the world’s largest producer of lithium. The stock has been on an absolute tear this year, up 90.17% year-to-date. Through the end of 2019 and going into 2020, the market was worried about lithium oversupply, which had been weighing on lithium prices globally. However, lithium fundamentals are beginning to rebalance (demand is catching up with supply) and prices should begin recovering more meaningfully through 2021. ALB has been able to put up solid financial and operational performance despite the pressure on lithium prices because of the diversity of its other business lines and the ability of the management team to execute successfully. As demand for lithium continues to grow – driven by 1) electric vehicles and 2) mass-grid electricity storage as we move through a green recovery out of the mess that is 2020 – ALB is well-positioned to continue reaping the rewards and I’m here for it.
New highs (12/13/20)
I had first talked about Roku Inc (ROKU) this summer. It’s a great way to play the cord-cutting trend and this summer provided a great entry-point for the stock from a valuation perspective. The stock has since had an incredible run and reached new highs this week on the heels of a positive report from one of Wall Street’s top media analysts who identified ROKU as one of the top trades for 2021. She identified several catalysts like the acceleration of cord-cutting (viewer numbers are 43% higher than last year), which is also bringing advertisers to the platform. More importantly, the platform is attracting the younger demographic that advertisers love to target. Last week I talked about increase in marketing and advertising spend from companies that should come with the economic recovery next year – that should drive healthy advertising revenue growth for ROKU as well. It’s been a good ride with ROKU so far and I don’t plan on leaving anytime soon.
Gender Lens Investing (12/5/20)
I’m starting a new thing – looking at my investment ideas moving forward through a few different thematic environmental and/or social lenses. This month, I started out with looking through a gender equity lens by first applying a screen to filter companies with a high percentage of women in leadership and executive roles. Then, going back to fundamental analysis and looking at the overall trends for the company’s business and the financial strength. This month, I landed on a global advertising and marketing company – Interpublic Group of Companies Inc (IPG) – where a third of executives are female. While the number isn’t as ideal as it should be, that same statistic for the S&P 500 is closer to 20%. Of the company’s top 10% of earners, 41% are women.
The upcoming business recovery in 2021 should be accompanied by a recovery of marketing and advertising. More importantly, as companies and brands start to leverage more digital and direct-to-consumer channels (like YETI has been doing), agencies that offer the best data- and technology-driven solutions should be best positioned and IPG is suited to capture that demand among its peer group. The company’s fundamentals look promising – they’re able to generate solid organic revenue growth and have opportunities for growth in emerging markets around the world. In the meanwhile, management’s capital allocation decisions have resulted in steady dividend growth (4%+ dividend yield) and value creation from stock buybacks. The biggest risks to the company at this point are the economy overall as well as their elevated debt levels. But the company is still trading at a lower multiple compared to its historical average and has some upside as valuation catches up.
Gimme more avos (11/22/20)
I first mentioned Calavo Growers, Inc (CVGW) last spring and the stock started 2020 much like most of us – with clear eyes, a full heart, and the belief that we couldn’t lose (read: 20% earnings growth with a new CEO at the helm). And then COVID-19 happened. The stock is down about 22% so far this year because of its exposure to the food services industry and lower avocado pricing. However, the company recently published a business update that highlights its growth opportunities over the next few years despite the near-term 2020 headwinds.
CVGW recently appointed a new COO who seems to be making money moves – lower sourcing costs, improved operating efficiencies, and in-house manufacturing improving profit margins for their packaged goods business line. Importantly, the company is aggressively focused on organizational efficiencies that can be achieved as they shift from a historically siloed structure of their business lines to a more centralized system that creates synergies across the entire business. Given they’re still in the early innings of this transformation, it’ll take a couple years to actually bear fruit but I’m encouraged by the steps in the right direction. In the meanwhile, they’re still boasting strong dividend growth and a clean balance sheet.
Additionally, they’ve highlighted a few initiatives on the environmental, social, and governance (ESG) side as well. The company is trying to improve its corporate governance by making the board more independent and diverse. They have also recently created a Sustainability Committee to enhance the focus on ESG initiatives across the company, including energy and emissions, resource utilization (waste and water), fair labor, and sustainable agriculture. If you know me, this is literal music to my ears.
Finding the way (11/15/20)
E-commerce companies were among those who had benefitted in a big way through the stay-at-home mandates and, therefore, were some of the worst performers this week. I had first mentioned Wayfair Inc (W) last summer and through the pandemic – as traditional furniture stores were closed and everyone was staying at home and finding new home projects – Wayfair gained market share and increased new revenues by 67% for the third quarter. It’s easy enough to see why this name is up over 160% this year alone, despite the 11% pull-back this week.
Even though this stock has benefitted from the pandemic, its growth can also be attributed to the massive amounts of relocations we’re seeing across the country. More people are moving from dense coastal cities with high costs of living into more affordable cities in the southeast as working remotely becomes more acceptable. Millennials are moving from the dense urban environments into suburbs as they get older and need more space for their growing, young families. As long as these trends continue, which is honestly likely for the coming decade, Wayfair should continue to experience elevated demand. Importantly, Wayfair has finally figured out its cost structure and is demonstrating profitability – the path to which had been under question in the past. All of these factors have propelled the stock this year and should continue to provide upside in the future.
Unexpected regulations (11/8/20)
I first mentioned Alibaba Group (BABA) last spring because of its exposure to ecommerce growth in China. Alibaba owns a 33% stake in Ant Group, a Chinese fintech company that was supposed to make its public debut in the largest IPO ($34.5B) ever this week. The IPO was suspended by the Shanghai and Hong Kong stock exchanges due to “significant issues such as the changes in financial technology regulatory environment.” While tech companies have been under regulatory scrutiny in the US, this is a concerning harbinger for similar issues in China as well. It’s also worth noting that Alibaba’s CEO made some critical comments of China’s financial regulator last month and could be driving some of this pushback. The news of the halted IPO brought BABA shares down 7% but shares have regained some of those losses throughout the week. Despite the bump in the road, BABA shares have soared 41% higher this year.
Confirming rumors (11/1/20)
Rumors had been flying recently that Advanced Micro Devices Inc (AMD) was in talks to acquire Xilinx, Inc. (XLNX), a company I had first talked about early last year. The rumors were confirmed this week and AMD announced a hefty $35b price for XLNX, a 25% premium to XLNX’s stock price just prior to the announcement. The transaction is happening in all stock – so each XLNX shareholder will receive 1.7234 shares of AMD and I think being a shareholder of the combined AMD + XLNX offers a really exciting opportunity.
AMD is a classic semiconductor name and makes central processing units and graphics processing units that compete with products from Intel and NVIDIA. In what seems to be a run against the industry giant Intel, AMD’s acquisition brings in XLNX’s industry-leading capabilities in field-programmable gate arrays, which is a more flexible chip that’s used in many different types of equipment and computing systems including data centers but more importantly 5G wireless networks, autonomous vehicles, etc. In addition to the $300m in annual savings this merger is expected to generate in less than two years, the combined R&D capabilities should prove to be meaningfully accretive for both companies’ growth.
Trimming excess fat (10/25/20)
Coca-Cola Co (KO) reported earnings this week that exceeded Wall Street’s expectations by nearly 20% despite revenues falling 9% compared to last year. Even though sales at movie theaters, restaurants, and office buildings were down by mid-teens (they were down by 50% at the height of the lockdown measures, so demand is increasing), at-home consumption remained elevated. The company is expecting these trends to continue as Europe enters lockdowns again and North America’s case counts increase. They have always been anticipating the winter months to be the worst in these markets. At the same time, the company is cutting the number of its master brands by 50% in order to focus its efforts on the most successful brands – hopefully this leads to superior revenue growth and reduced expenses (read: higher profits). KO is not going to be the only company using the lessons learned from this past year to trim some unnecessary fat around the edges.
Digital winning (10/18/20)
Bank earnings week brings with it an update from Ally Financial Inc (ALLY). Earnings easily topped Wall Street’s estimates, coming in at $1.25 (vs $0.68 expected), 24% higher than the same quarter last year. In their consumer and commercial banking business, deposits increased 13% compared to last year and their retail deposit customer base increased for the 40th straight quarter. Two-thirds of new accounts continue to be from younger demographics and those new accounts continue to transfer funds from traditional banks. In their Auto segment, the company generated the highest volume of originations in the last five years. The company also saw continued progress in the Ally Home, Ally Invest, and Ally Lending platforms. ALLY was an early mover in digital products in the banking space and I think will continue to win in this regard. The market seems to be appreciating this as ALLY has recovered much of its ground and is only down about 6.3% this year, compared to its more traditional banking brethren down anywhere from 10-30%.
Part II (10/11/20)
Ok so here’s part 2 of the Square Inc (SQ) analysis to see if the stock screens to be a good buy. As I mentioned last week, an investment management firm I follow recently shared their SQ model and using their assumptions, the stock could be worth $375 in 2025 (it’s currently trading at $187) and that’s not even considering potential international growth. After going through some scenario analyses, I’m feeling much more confident about the company’s growth potential justifying the current valuation, especially for the long-term so I’m here for it.
A big part of putting together is making assumptions on the growth potential for a few different revenue streams for Square – transaction-based revenues from the company’s seller ecosystem, the Cash App, Square Capital, the Online Store and Weebly (they own this btw), Instant deposits, hardware, and bitcoin. Even with conservative assumptions about the growth for these revenue streams over the next five years, there’s a 9% annual return built in for the stock through 2025. However, I think the network effect associated with the Cash App is going to drive meaningful adoption (i.e. the growth will be exponential vs linear). Additionally, the ability for their Cash App and seller platforms to eventually converge means businesses would be able to transact directly with consumers through the Cash App versus going through any third-party intermediaries (i.e. credit card companies), which unlocks a new value proposition all together. Using more realistic assumptions, I get closer to a 14% annual return on the stock through 2025, and that sounds gucci to me.
Trying something new (10/4/20)
I’ve mentioned the power of the digital wallet before – mainly through Mastercard Inc (MA) but I’ve been looking at Square Inc (SQ) for the same reason. The company has done exceedingly well this year (it’s up 171% this year alone), so my biggest hesitation with it remains valuation. The super cool thing is that an investment manager whose work I love to follow recently published an open-source SQ model. I haven’t shared any specific stock models yet, but given this is publicly available, I thought it might be an interesting exercise to actually walk through the model throughout the month – and come away at the end with a decision on whether the stock screens as at attractive buy. This week is going to be dedicated to learning more about the company itself.
The first place I always look at when trying to learn about a company is the latest investor presentation because it helps frame the company’s strategy. The key takeaways from SQ’s deck is that they’re focused on two specific areas of growth – their seller ecosystem and the Cash App – that have a really solid runway in terms of the total addressable market. The next place I look is the company’s latest earnings conference call, which has two parts – management’s prepared remarks about the quarter’s financial and operational performance followed by analyst Q&A, which typically has a lot more of the juice as it relates to the company’s biggest risks and opportunities. As I try to grapple with the company’s valuation, the biggest thing I need to understand is the company’s growth trajectory – if the company can grow its earnings at a meaningful rate, its multiple can start to seem a little more digestible at these prices. Some risks to the company’s growth –
- The need for touchless transactions during COVID-19 has definitely led to an increase in usage for SQ’s products and services. Once the pandemic is over, is the current growth level sustainable long-term? How is it influenced by changing demographics and user preferences or growth across different geographies?
- There is a major risk associated with a business model based on transaction activity when there’s so much economic uncertainty. If unemployment starts to increase again and there’s no additional federal stimulus, consumer spending should decrease aka transaction activity will also decrease.
These types of questions help put together the growth assumptions for the valuation model, which I’ll get into next week, so stay tuned!
When you’re here, you’re family (9/27/20)
I first talked about Olive Garden’s parent company, Darden Restaurants Inc (DRI) in May after we’d started to see some recovery in activity and the stock was down about 40% since the beginning of the year. The company released results this week for its fiscal quarter that ended in August and blew past Wall Street’s expectations. Earnings per share came in at $0.28 vs only $0.05 expected. In response to the COVID-19 crisis, the company reported it has streamlined its menus, adjusted its cost structure, and cut its marketing spending by over $40m. Even though sales were lower this quarter compared to last year almost across the board, certain brands like LongHorn Steakhouse saw sales lower by only 18%, which is bananas thinking of the state of the world. In fact, in Georgia and Mississippi, sales for LongHorn were actually higher than last year for the same quarter. Management remains optimistic about a “pretty resilient consumer” and their results prove it – the stock is up about 39% since May, has outperformed the broader market by 23%, and I expect continued success in the future.
For the network effect (9/20/20)
I first talked about Palo Alto Networks Inc (PANW) at the beginning of last year on the premise of cyber security becoming more and more important. In a day and age when working from home is becoming more prevalent, this is an area where businesses are allocating more and more of their budget. Given this backdrop, the stock should be a high-flier but it’s up only about 4% so far this year, underperforming its peer set even though earnings have exceeded Wall Street’s expectations. Why? Great question. It’s because they’ve been on a shopping spree acquiring companies for over two years now. Their latest acquisition was incident-response company Crypsis Group for about $265m in cash, which just closed this week. Though the flurry of acquisitions in the last two years have slightly weighed on the stock price at times, they are all strengthening the solutions offered through PANW’s platforms. With the cyber security industry expected to grow over 14% every year through 2025, this still feels like a good place to ride that wave.
Packages for days (9/13/20)
I’ve gone to a physical store (aside from getting groceries) probably less than 10 times since the COVID-19 pandemic became a real thing. I have this easy process for buying ~90% of what I need – find what I need online, and pick it up on my doorstep (at most) two days later. To be fair, this has largely been my strategy for buying things for years now, but the COVID-19 pandemic really forced a lot of people to leverage e-commerce, which has significantly increased the adoption rate across not just the product types you’d normally think (books, retail, etc.) but also other categories like food. I had talked about FedEx Corp (FDX) specifically on the thesis of harnessing this e-commerce growth and the stock has not disappointed. The stock has performed incredibly well (up 48% this year alone) – the company’s earnings release scheduled for next week better measure up to the high expectations…stay tuned.
Dropping nothing (9/6/20)
The above-mentioned pull-back in the tech sector this week had me looking for the best opportunities in the space. It’s become abundantly clear to me over the last few months that the digitization of how we work is here to stay. For years, there have been solutions to a lot of business activities that used to happen in person or on paper, but everyone has been forced to use those solutions over the last few months and (shocking more people than you would hope) they’ve found these solutions to be pretty efficient. A lot of this is facilitated by the cloud, so as I was thinking about cloud storage and digital business activities (like digital contracts), and looking for a stock with a good valuation, I landed on Dropbox Inc (DBX).
Dropbox is a cloud storage pioneer – an early mover in cloud computing back in 2007. The space itself has been a magnet for new competitors, but Dropbox has increased its paying user base by over 30% and demonstrated an increase in the conversion rate from registered to paying users since the company went public two years ago. The management team has maintained a great balance sheet with plenty of liquidity. They also recently acquired HelloSign and entered the e-signature space. You can see how a structural shift toward a digital work environment would be a massive tailwind for this company. They put up stellar financial and operational results for the second quarter and Wall Street’s earnings expectations for this company have since been on the rise, which tends to be a good leading indicator of stock performance. Despite all of this, the stock hasn’t really participated in the tech rally since March to the same extent as its peers but it still got caught up in the pull-back with the rest of the tech sector this week. This stock is on sale and I’m here for it.
Bad ideas (8/30/20)
Guys this one has been one of the worst ideas I’ve ever had. Even with the stock sitting at depressing levels, I see very limited upside at this point to LendingClub Corp (LC). I first mentioned this stock last spring on a thesis around the peer-to-peer lending platform, which is actually a super successful concept in China. Even though management claims that lending demand has shown early signs of recovery, I’m having my doubts. It feels like they’ve been dropping a shoe at every turn. At this point management has to be walking around barefoot. I’m skeptical of their ability to successfully navigate COVID-19 and the announced acquisition of Radius Bank. My biggest issue is, if I value the company like a bank, which is what they’re trying to become, by putting a multiple on its earnings that’s similar to the banking peer set, it doesn’t provide much upside to the current stock price. At these prices, I’m not a super motivated seller of this stock but I’ll be looking for some good days to exit my holdings in this name in the near future.
Outdoor leisure (8/23/20)
I first motioned Yeti Holdings Inc (YETI) last winter when I was day-dreaming of nicer summer weather. The stock has really been a sneaky success story, up almost 49% this year alone. At that point, one of the biggest selling points for me with this company was their ability to leverage a lifestyle brand that got you hooked as a user – once you use a Yeti product, there’s no going back. Strangely enough, in this upside-down quarantine world we live in, Yeti has continued to demonstrate incredible growth because of the growing outdoor leisure movement that’s been catalyzed by the COVID-19 pandemic. If my insta feed is any indication, everyone wants to be one with nature, with a Yeti cooler in hand to keep all the brands of hard seltzer chilled. Yeti reported a 7% increase in its second quarter revenues even though they saw a 20% decrease in sales in April. They generally earn most of their revenues through their wholesale channel (where they sell wholesale to retailers like Target who then sell to consumers) but Yeti was able to successfully leverage its direct-to-consumer (DTC) channel during shelter-in-place orders and sell directly through the website. This DTC channel saw sales increase a whopping 61%, and because they cut out the middleman, Yeti’s profits are higher through this channel. Selling directly to consumers will also help the company generate strong brand loyalty and incentive programs directly with consumers. If Yeti can continue to leverage this DTC platform and expand its direct brand relationships across North America and internationally, there are even more happy days ahead for shareholders.
Huawei is back (8/16/20)
It’s been a long journey with Xilinx Inc (XLNX). I first mentioned this semiconductor manufacturer on the premise of the tailwinds expected from the transition from 4G to 5G mobile networks. Semiconductor stocks are a super cyclical – they move with the economic cycle’s ups and downs. Not only are we in an economic downturn, XLNX also been caught in the crosshairs of the US-China trade war for a while now. Even though the stock is down about 11% since I first mentioned it, there are signs of recovery on the horizon. With its latest earnings report, management increased its sales outlook as the US Commerce Department signed off on abating restrictions on doing business with Huawei, especially related to the evolution of the 5G network. XLNX has a massive exposure to Huawei, so this ruling was a much-needed breath of fresh air for this stock. With the roll-out of 5G really getting some traction and demand looking strong from the communications industry and data centers, management’s (and my own) expectations have definitely improved looking forward.
I mentioned last week I wanted to postpone my stock selection to this weekend – I wanted to get through the earnings release this week from GoDaddy Inc (GDDY) to finalize my thoughts on the name. The web hosting and domain-name registration company reported a solid release with a few key things I was looking for – great traction on their websites + marketing program that’s helping them gain market share, accelerating customer additions, and strategic changes from management (like the acquisition of the Neustar registry business) that can continue to help earnings growth, which is expected to be 10% this year despite COVID-19.
Mastering transactions (8/2/20)
There are a few moving pieces making it difficult to decide on my stock pick for the month (federal stimulus package uncertainty, earnings season, etc.) so I’ll be back with the pick for August next week. In the meanwhile, I wanted to provide an earnings update for MasterCard Inc (MA). I had first mentioned this name because of the company’s ability to harness the trend we’re seeing in the digitization of money. They provide the infrastructure for cashless transactions without actually taking on any credit risk – that risk still falls on the actual banks. In a world of social distancing, cashless transactions are really taking hold. MA’s earnings fell 28% compared to last year but came in 17% higher than Wall Street’s expectations. The company saw contactless transactions increase 28% compared to last year. While transaction fees were lower (driven by the lower consumption), MA has a sizable services business that includes providing cybersecurity, data analytics, and other services, which was actually up 14% for the quarter. Final important update was the resumption of MA’s share repurchase program – the company bought back about $1b in stock over the quarter. Share repurchases are great for a few reasons – it’s a signal to the market that management believes their shares are undervalued and it reduces the number of shares outstanding, which increases both the demand and price for the remaining shares outstanding. All in all, given the state of affairs, I was happy with this earnings report and continue to be a long-term holder of this stock.
Learning in the new normal (7/26/20)
I first talked about K12 Inc. (LRN) in the spring last year because it’s 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. Since I talked about this stock it has been a pretty sleepy story, albeit with potential. However, as large school districts are making the decision to go completely online during the fall semester, it’s no surprise this stock has been on an absolute tear with shares up 136% so far this year, compared to the broader market that’s actually down 1%. Commentary from management was quite optimistic during their last update but this company releases earnings in the first week of August, and given the lofty performance we’ve seen out of the stock, it better deliver fantastic results…stay tuned.
Earnings season update (7/19/20)
Believe it or not, it’s earnings season again, SOS. As always, earnings season started with updates from the financial industry, including Ally Financial (ALLY). A recession is never friendly to banks, but because Ally has such a large exposure to consumer loans through their auto lending business, this year has been especially challenging for this company. For the second quarter, while ALLY posted earnings per share ahead of Wall Street’s expectations, it was still 37% lower than the same time last year. The bulk of this was driven by an 8.9% decrease in financing revenues for autos as stay-at-home orders really impacted auto sales during the quarter. Even then, management was optimistic as this business was showing significant improvement by the end of the quarter. On the other hand, their retail banking division is still crushing it – retail deposits were $17.2b higher compared to last year and they added 94k new retail customers, which is the third highest quarterly total in the company’s history. Even though the stock has underperformed broader equities by almost 30% so far this year, its performance is similar to peers (JP Morgan Chase, Bank of America, etc.) and remains one of my favorite stories in the sector.
Not a bloody business (7/12/20)
Given current circumstances, it’s not surprising my hunt for this month’s stock pick took me into the healthcare arena. The emergence of new pathogens poses a significant health risk, which has been exacerbated by rapid urbanization, climate change and new seasonal patterns. As a result, we are faced with an ever-increasing number of diseases from pathogens originating in environments where they were previously harmless or controlled. They can spread rapidly within a population prior to detection and testing development. Looking for disruptive innovators addressing this issue, I found a company that’s entirely dedicated to supplying technologies and pathogen-protected blood components – Cerus Corp (CERS).
In addition to continuing their innovation in the field, the company has been, obviously, working hard to combat COVID-19. Virus 101 for those who haven’t been obsessively reading up on this already: when somebody contracts a virus, their immune system creates antibodies to fight the virus, and these antibodies are found in plasma (the liquid part of blood). This antibody-rich plasma can be collected from a recovered person and transfused to a sick patient still fighting the virus. Even though there hasn’t been a large-scale study to prove the effectiveness on this method to combat COVID-19, it’s been a promising treatment option. That plasma can be treated with pathogen reduction to reduce the risk of transfusion transmitted infection to the patient by other threats such as bacteria, viruses, parasites and donor white cells. Just this week, Cerus announced a study that demonstrated their products’ ability to inactivate the COVID-19-causing agent in plasma intended for transfusion.
The new freshman 15 (6/28/20)
COVID-19 (pounds) is the new freshman 15 and I’m certainly not alone in the struggle to maintain my fitness while gyms have been closed. The healthy lifestyle has been all the rage for the last few years and Planet Fitness Inc (PLNT), which provides access to this lifestyle at an affordable price-point, has been my favorite stock in the space. The stock was trading at all-time highs in February before falling victim to the COVID-19 sell-off and is trading about 30% lower than its peak. Gyms will be among the last businesses to open and the impact of the shutdowns is detrimental– 24-Hour Fitness has even filed for bankruptcy. However, I think PLNT is set-up to succeed on the other side of this. Even though half their locations are supposed to be open by the end of the month, the company has shown the ability to adapt through the pandemic. They almost immediately started creating digital content through Facebook Live, and partnered with iFit and The Biggest Loser trainers to drive its users to its app and YouTube channel. Importantly, there are two key points to remember. First, ~25% of PLNT’s revenues come from equipment sales to its franchisees, which is nice recurring revenue built into all its franchise agreements. Second, the low-cost membership option is going to really thrive, relatively, in an environment with insane levels of unemployment when people are trying to cut costs. A fancy gym isn’t as necessary during hard times when a $10/mo membership at Planet Fitness will suffice.
Managing ESG (6/21/20)
Waste Management (WM) is a great “safety” stock – it provides a steady dividend and is a business that is, in general, immune to changes in economic cycles. The stock, however, got caught up in the broader market sell-off earlier this year and has yet to recover. The management team withdrew guidance, citing increased costs from its COVID-19 response and declining commercial revenues, especially as many business customers were closed due to government-mandated shutdowns. Additionally, the company is still waiting on regulators to approve its merger with Advanced Disposal (ADSW), which has been in the works for over a year. Aside from the company’s internal and external growth prospects, the company offers another great quality – a strong focus on its environmental impact –
- They operate nearly 150 recycling centers around the country and they are truly reinventing the recycling industry to make it more economically sustainable
- Their “CORe” facilities recycle industrial food waste through water treatment plants to generate energy
- They capture gas emitted from landfills that, when combined with other alternative fuels, power 65% of their fleet
- They turn maxed-out landfills into wildlife refuges
Aside from its focus on the environment impact, the company stepped up in a big way for its employees and communities through the COVID-19 crisis –
- Guaranteed 40 hour pay for all its full-time staff through the crisis
- Free month of service for its small business customers while working with others through payment plans
Good companies have long proven to be good investments, and I believe WM will be no exception if it continues its great work in this arena.
On Cloud Nine (6/14/20)
I first mentioned Alibaba Group (BABA) last spring because of its exposure to ecommerce growth in China – it’s basically the Amazon of China. Though it got caught in the market downturn in February and March, the stock has come roaring back. Two updates I wanted to share with you –
- While ecommerce accounts for about 80% of this company’s business, the company’s fastest growing business is actually its cloud business. Similar to Amazon Web Services that grew at 32.5% for the first quarter, Alibaba’s cloud business actually grew 58% during the same quarter. This growth is being boosted by the COVID-19 crisis, which is increasing demand for data connectivity as we all sit in quarantine and try to remember life as it used to be B.C. (Before COVID-19) in a virtual setting.
- The US Senate recently passed a bill that would require all foreign companies listed on US stock exchanges to certify they are not under the control of a foreign government. If the company can’t do this or the PCAOB isn’t able to audit the company for three consecutive years to determine the company isn’t under the control of a foreign government, the company’s shares would be banned from trading on the exchanges. This bill directly targets Chinese companies as tensions escalate between the countries. Alibaba’s management has assured its US investors that it could be compliant with any new regulatory demands, but the company’s primary shares are traded on the NYSE. If passed, this bill could lead to some near-term hiccups for US investors in this otherwise fantastic secular growth story.
There are trends that have been paused or completely reversed by the COVID-19 crisis but there are also those that have been accelerated by consumer behavior that was forced to change over the last few months. Hard to believe it’s been months since many of us went out to a restaurant for dinner or spent time with friends/family in person. Have I lost my make-up skills? Can I still make jokes that make people laugh? All serious concerns. Anyway, one of those accelerating trends is “cord-cutting” as consumers transition from traditional cable provider to streaming TV. Pre-COVID estimates called for 25% of US households to have cut the cord by 2022 (my post-COVID estimate is closer to 30%). Something that facilitates this transition is connected TV devices, which serve as a platform for streaming services and are expected to be in 77% of US households by 2021. My pick to ride this trend is Roku Inc (ROKU).
Aside from the trends in cord-cutting, Roku has a few other things going for it right now:
- As eyeballs move to streaming services and platforms that facilitate those services, so do the advertisement dollars. Roku provides some great solutions for advertisers. During their last earnings call, management mentioned brands are showing a preference for their targeted, measurable, and interactive advertising solutions.
- The Roku Channel has been growing exponentially, with streaming hours increasing over 100% for the first quarter.
- Valuation. While many stocks have retraced their way back from the depths of lows we saw in March, Roku is still down 23% for the year, and provides a good opportunity for investors.
Empty skies can’t keep this down (5/31/20)
I first brought up HEICO Corporation (HEI) a year ago – it’s a mid-cap aerospace company and one of my favorites in the industry because of its management team with a proven track record of creating value for shareholders. Given the effective standstill in air travel right now, it’s not difficult to understand why this company’s business might be struggling. However, this stock is only down about 8% this year, compared to other aerospace behemoths like Boeing, which are down over 50%. How you ask? Diversification. About half the company’s revenue is tied to defense, space, and industrial markets that haven’t been fundamentally impacted by the crisis.The company has a substantial non-aerospace business that, among other things, supplies components for medical devices (like ventilators). While the aerospace business line saw revenues fall 18% in the first quarter, the slight increase in sales from its electronic tech group helped mitigate the company’s overall revenues. The company could handle a 50-60% drop in sales from its aerospace units and still break even (hopefully it doesn’t come to that). Plus, this company continues to have one of the most important things in today’s environment – a really strong balance sheet. While being in the airline space is not ideal right now, there’s no other aerospace stock I’d rather be holding. Here for the long-term and optimistic about this company’s stock to fly high (see what I did there?) in the near future.
Printing innovation (5/24/20)
I had first mentioned Proto Labs Inc (PRLB) early last year because of the part it can play in the process of innovation – the company offers customers the ability to get parts within days for prototypes using 3D printing. While the stock traded off with the rest of the market beginning in February, the stock is actually trading higher today than at the beginning of the year. The company’s 1st quarter earnings came in significantly higher than Wall Street’s expectations. Since then, the company has boosted its 3D printing capabilities with a £10.5m investment in Europe for a new production facility in Germany. The facility should increase the company’s 3D printing capabilities by about 50% and provide in-house end-to-end solutions including providing the finishing touches after the actual printing (i.e. painting, automated finishing). Separately, they’ve been working with medical device customers to help manufacture ventilator components, face shields, lab testing equipment, and personal protection equipment during the COVID-19 crisis. I think this will be a great story as we start to reduce our manufacturing dependencies on China and bring that manufacturing closer to home. We will have to replace the cheaper labor available in China with more process efficiencies, which is something PRLB can help with.
Stripes of a winner (5/17/20)
I first mentioned Zebra Technologies Corporation (ZBRA) last summer as a way to play the ecommerce wave because the company basically provides the technology that enables ecommerce (i.e. RFID chips, barcode scanners and printers) and allows for companies to track inventory in real time. In the last few months, the company has had to combat the same issues as most others – their supply chain is deeply integrated with China and the Asia-Pacific region, obviously problematic right now. In March, ZBRA had just opened two new manufacturing facilities in Vietnam and Malaysia to reduce its dependencies on China, then COVID-19 happened. The facility in Vietnam has been limping along but the complete lock-down in Malaysia was a big headwind for ZBRA’s first quarter operating performance. However, long-term, all of this quarantining is leading to a significant step-change in the adoption of ecommerce for all sorts of goods and services, which is going to be a great tailwind for this company. Here for it.
Zoom, but make it safe (5/10/20)
I had first talked about Palo Alto Networks Inc (PANW) last year because of the company’s ability to capitalize on the need for AI-enabled cyber security. In a world where everyone is staying at home and utilizing network capabilities to work and stay connected with friends and family, it doesn’t take much to understand why this has been a great stock to own through the crisis. To further bolster the company’s cloud capabilities, they recently completed the acquisition of CloudGenix, a company specialized in helping clients manage and secure network traffic at branches or distributed locations. As we’ve tested this grand “work-from-home” experiment and found it to be largely successful, I can see a world in which we work from home much more on the other side of this. In that world, PANW continues to be a great company to have and to hold.
Unlimited breadsticks (5/3/20)
As I dig through the carnage and try to understand what the world might look like on the other side of this crisis, I’ve been trying to think through types of companies that will emerge successfully. A big part of that analysis is understanding the company’s liquidity today – how much cash (and borrowing capacity) does the company have and is it enough to satisfy the company’s required cash outflows until this is all behind us? Even when we do get to the other side of the current crisis, we’re going to be living in a world where unemployment is high and discretionary spending remains low for many people. In that world, I think casual dining continues to do well – it serves a broad range of demographics and generally delivers a lower price point service, which will hold up much better through the recovery than the more expensive price point options. Until we get to the other side, ideally, I’d want this casual dining company to have the ability to still operate curbside pick-up and take-out options. Taking all these things into consideration, I arrive at Darden Restaurants, Inc. (DRI) – which is the parent company for well-known brands like Olive Garden, LongHorn Steakhouse, and The Capital Grille (my personal favorite of their brands).
First thinking through the company’s liquidity situation to weather this storm, they’ve got about $1B available on hand and burn through about $25m in cash on a weekly basis (this includes salaries & wage, rents, etc.), meaning the company could effectively last like this for another 40 weeks. I can’t tell you when we’re getting out of quarantine life, but I know that the world is not going to remain shut down for another 40 weeks. Until we get through the economic shut-down, 99% of its restaurants are open for take-out, and take-out sales for Olive Garden have increased over 140% while takeout sales for LongHorn Steakhouse have increased over 300%. In some states where the economy is slowly opening, like Georgia, most of the restaurants have already been opened but are operating a little differently than they were before. For example, all workers are wearing masks, the dining area layouts have been changed to promote social distancing, and they will only serve parties of six or fewer people. They are also disinfecting tables between guests and workers are having their temperatures taken before the start of each shift. The stock has sold of about 40% so far this year and seems like a great entry point for a name that should experience some level of “normal” come back in the near future.
The stay-at-home economy (4/26/20)
I first talked about Wayfair Inc (W) on the basis of the actual service they deliver – it is still the best customer service I’ve ever experienced. 10/10 would recommend. That being said, the company was a richly priced Wall Street darling that fell from grace because of a slew of things – employees protests, job cuts, and a disappointing fourth quarter earnings report. However, the stock has really come back in a big way recently, rallying over 420% since its lows in March. The stock’s year-to-date return is a positive 35%, compared to the S&P 500 that’s down over 12%. This rally has been fueled by…
- An announcement that Jim Miller, Alphabet veteran and Wayfair board member, who was serving as interim CTO, would be taking on the role permanently.
- COVID-19 has caused 80% of home furnishing stores to be closed, and this pure-play e-commerce home furnishing retailer has drastically grown market share during this time. Its largest competitor is Amazon, which is currently focused elsewhere (essentials, TYVM AMZN). Wayfair management released an update in April indicating they expects to meet or exceed previous guidance for the first quarter as sales have surged. Additionally, sales growth momentum is apparently continuing into April. There are few retailers that can say this in the current environment. However, I am cautiously optimistic on the continued growth here because 26m people have lost their jobs – are they going to continue buying home furnishings, let alone much else aside from the essentials? Probably not…
- The company raised $535M in convertible notes from a group of private equity investors, adding liquidity, which is really important in the current environment.
- Wayfair has added 3D imaging of furniture it its in-room mobile app that has resulted in a higher conversion rate.
- A renewed focus on a path to profitability through managing advertising, selling, general, and administrative costs while harnessing additional efficiencies from scale.
A test for you, a test for you, a test for you (4/19/20)
I had first talked about Danaher (DHR) almost a year ago on the thesis of gaining exposure to life sciences and biopharma space with the lower level of risk associated with a large global conglomerate with many different business lines. One of DHR’s business lines includes diagnostics. One of subsidiaries in this business line, Cepheid, recently received approval from the FDA for the first coronavirus test that can be conducted entirely at the point of care for a patient and delivers results in 45 minutes. Unsurprisingly, the stock has performed quiet well and is currently trading only 3% lower than its price on February 21st when the COVID sell-off began and is slightly positive year-to-date (compared to the S&P 500, which is down almost 12%). Cheers to better (and more) testing to help us get this situation under control.
Pandemic survival needs (4/12/20)
I first talked about Berry Global Group, Inc. (BERY) in October last year. The company operates in three main segments – consumer packaging, engineering materials, and health, hygiene and specialties. Bringing this one back because it’s been a market outperformer since the beginning of the COVID-19 sell-off and, given its business lines, it’s easy to understand why. Importantly, we recently saw two updates from the company worth sharing:
- Results for the quarter ending March 31 are in-line with expectations including modestly positive organic volume growth. Granted this quarter only contained a little exposure to the COVID-19 situation in the US at the end of March, but I’ll take anything that’s in line with previous expectations and demonstrates positive growth. Secondly, the management team highlighted the strength of the company’s balance sheet – at the end of the quarter, BERY had $900m of cash on hand, an undrawn $850m line of credit, no financial maintenance covenants, and no near-term debt maturities. This means their revenues would have to fall by 77% for them to be unable to cover their necessary expenses. That’s a very plausible situation for hotels or restaurants this year, but not a company that makes consumer packaging and health/hygiene products.
- The company is ahead of schedule for its Impact 2025 sustainability strategy, which is so important for a company that’s so heavily leveraged to plastic products.
Sifting through the carnage (4/5/20)
I’ve spent some time sifting through the carnage and found some really interesting opportunities. The game is really figuring out what the world looks like on the other side of all this and finding companies that will win in that new world. The best-case scenario is finding companies that will thrive in the post-corona world but are also thriving through the corona madness but have still sold off with the rest of the market. Financial exchanges will continue to be relevant on the other side of this mess. In the meanwhile, the mess in the financial markets has created record breaking volatility, and financial exchanges actually benefit from this volatility because it means higher trading volumes. CME Group Inc (CME) is my horse and the recent sell-off creates an attractive entry point for this stock with significant upside.
CME is an exchange that lists futures (and options on futures contracts) on interest rates, equity indices, currencies, energy, and other commodities. Volumes are up almost 50% so far this year. The company benefits from an attractive business model with a +60% operating margin, a globally relevant product offering with high barriers to entry, and a great dividend. While the last downturn tested this company, there are many differences in the state of affairs today compared to 2009 when volumes actually fell 20%. The most important distinction is the overall health of the financial system. The entire financial system crumbled in the last recession, but has learned from its mistakes and is in a much healthier position today, with the ability to actually help in a recovery. Another difference today lies in CME’s overall product offerings – they’re much broader today and provide solutions for a larger client base.
The struggle (3/29/20)
When interest rates are low (as they are now basically in every major economy), financial institutions that lend money are able to make very little interest income. When many businesses (small and large) are seeing a complete shutdown in their revenue streams as a result of government mandated shutdowns, these businesses turn to lenders and draw down credit lines (basically like maxing out their credit cards). Both are happening at the same time right now, which is putting tremendous pressure on financial stocks. Ally Financial Inc. (ALLY) is no exception. While the company has had a strong share repurchase program, ALLY suspended share repurchases through the end of the June as a way to preserve cash and maintain its dividend. While this is prudent, it still caused significant pressure through this market sell-off. The stock, which was trading in the $26 range when I first mentioned it months ago, rose higher than $33 in February before getting caught up in the viral sell-off. The stock is trading now in the $15 range as financials, in general, haven’t participated in the market rally nearly in the same way as other sectors this past week.
Anything but waste (3/22/20)
In a time when most everything seems to be in the crapper, something that makes me feel all nice and cozy is Waste Management Inc (WM). This was the very first stock I talked about on the basis of having a solid balance sheet and a steady business that would continue to see demand through all types of times, especially the uncertain ones. Today definitely counts as that. The company can continue generating significant cash flows, has a solid balance sheet that can support share repurchases and opportunistic acquisitions, and pays good dividend. These are the kinds of times when you hold on tight to companies like this.
Peer-to-peer pain (3/15/20)
While the stock market has been getting completely whacked, bond yields have been also falling to never-before-seen levels. As yields decrease, interest rates decrease. For example, if the US 10-year treasury bill is yielding 0.4% (which really happened at one point this week), it means if you lend the US government $100 today, you’re only going to earn 40 cents on that investment over TEN YEARS. Sing it with me, “this shi*t is bananas (B-A-N-A-N-A-S).” Anyway, this means that banks, when they lend, are earning pretty much no interest, which really impacts their earnings so bank stocks have been getting annihilated. I bring this up because unfortunately, this means LendingClub Corp (LC), an online peer-to-peer lending platform, is getting absolutely crushed. The low rate environment comes after LC announced its acquisition of Radius Bank. The deal, when announced on February 18th (coronavirus downturn in stocks began literally days after this), was anticipated to help LC save $40m every year in bank fees and funding costs and was scheduled to close in 12-15 months. Acquisitions tend to put pressure on the stocks of the acquiring companies. TLDR, this stock has felt some serious pain in the last month.
Global supply chained down (3/8/20)
Stocks with exposure to a global supply chain have really gotten the wind taken out of their sails the last two weeks. Unfortunately, FedEx Corp (FDX) has gotten caught up pretty heavily in this sell-off as investors are trying to quantify how the coronavirus is going to really impact the company’s earnings this year. The stock had been under pressure last year because of the China trade war and the loss of Amazon as a customer, which had created a buying opportunity because of the inevitable benefits it will see long-term from an e-commerce driven supply chain. The company is set to release earnings later this month so I’ll be paying close attention to management’s assessment of what’s in store over the foreseeable future. All that being said, I’m still a long-term believer in this story but I’m buckling in for a bumpy ride in the near-term as I see coronavirus uncertainties creating an overhang for this stock for a few more weeks (months?) until we have a better grasp on the virus’ economic impacts.
Buying it all (3/1/20)
While a massive correction in the stock market means current investments take a hit, it also means that everything is on sale. The S&P 500 closed at 3338 last week and ended this week at 2954. And I love a good bargain. I think the market needs to see some light at the end of the tunnel – which will have to come from China given that’s where this all started – before we see stocks turn around. At this point, I’m foregoing a single stock to just buy the whole market at these discounted prices through index funds because I can see stocks rebounding sharply from the panic sell-off that happened this past week. I am also going to be carefully watching Super Tuesday results – if Sanders takes a meaningful lead in the Democratic primary, I could see markets price in additional risk of a socialist agenda making its way to the Oval Office.
Despite pressures on all travel related stocks due to COVID-19, Expedia (EXPE) shares saw a big boost recently after a great earnings release. The company’s conference call to discuss earnings was the first since the shakeup in top executives (former CEO and CFO both resigned on Dec 4). On the call, the market heard from a familiar voice – company Chairman Barry Diller. Diller reassured the market about the company’s re-focus on core operations and efficiency that should generate double-digit earnings growth for EXPE in 2020. The company seems to be in no rush to find a replacement CEO as Diller and vice chairman Peter Kern are currently running the day-to-day operations of the company. With these two at the helm, investors are feeling optimistic about the future of this company.
(It’s Electric!) (2/16/20)
ICYMI, Tesla shares have been on a tear in the last few weeks as the company actually delivered on some of its promises. The stock had been largely owned by retail investors (main street) from the beginning who believed in the electric vehicle (EV) story while many institutional investors (Wall Street) questioned Elon Musk’s leadership capabilities and seemingly unrealistic promises. But the company actually delivered in 2019 and made some seemingly realistic promises for 2020, causing the stock to rally in a big way because a lot of institutional investors decided to drink the Kool Aid. Separately, the growth in EVs in China has been bolstered by the Chinese government confirming it will not be cutting subsidies for EVs. All this put together means that Tesla shares have run up over 85% since the beginning of this year. I had first mentioned Albemarle Corp (ALB) in January last year because of my thesis around the transition from the combustion engine to EVs as over half of ALB’s EBITDA comes from lithium, which is a key ingredient for EV batteries. All this was to tell you that the run up in Tesla and the excitement around the EV thesis has brought ALB shares along with it as expected – this stock has run over 23% since the beginning of the year.
Shaky Confidence (2/9/20)
I first mentioned semiconductor manufacturer Xilinx Inc (XLNX) in May because of its potential to harness the growth in 5G. I also mentioned it in December because while the stock had run about 11% since I first mentioned it, it had been under pressure after its earnings release in July confirmed some near-term headwinds. This quarter was rough, as expected, and management confirmed things would rebound from here, again as expected. The company’s data center and automotive businesses are still strong (they accounted for about 28% of sales this past quarter) and should provide ample growth in the future. However, to my (and the market’s) unpleasant surprise, two things came up that created some level of uncertainty about the near-term future of this company, and the market absolutely doesn’t like uncertainty.
- Management announced a 7% reduction in its workforce through layoffs and slowdown in hiring as well a cost reduction plan to drive efficiencies. The latter should always be something any company is doing. But combined with the workforce reductions, this doesn’t make me feel too warm and fuzzy.
- Management declined to provide any guidance for fiscal 2021 (their fiscal year starts in the summer) because of uncertainty around their wireless and mobile business. The wireless and mobile segment has been hurt by the China trade war because its massively exposed to Huawei. Even if/when the White House lifts its ban on doing business with this company, management at XLNX doesn’t believe revenues would return to the pre-ban levels. On top of that, wireless providers in the US have been stuck in a seemingly never-ending regulatory battle waiting for the Sprint and T-Mobile merger, which has put a pause on their 5G roll-out plans.
I’m closely watching for the next quarter’s earnings release – the management team better instill some level of confidence in the growth of this company or else my thesis on this name might change all together.
Leak Detection (2/2/20)
My neighbors have this leaky faucet that if you don’t just perfectly shut it, it’ll leak for hours before they notice. Trying to find a solution led me down the path of researching companies that produce water flow monitoring and conservation solutions. This wild goose chase led me to Rexnord Corp (RXN). Rexnord has two business lines – process & motion control and water management – and a lot of potential.
The company recently reported its results for the last quarter and while there are some operating headwinds to the company’s process & motion control business line because of the halt in production of the 737 Max airline, the company overall is proving to be quite resilient and less cyclical than it has been historically. I’ll take that in a potentially uncertain environment for most stocks in 2020. Additionally, management outlined a strong capital allocation plan with reduced leverage and an annual $75-$150m stock buyback plan. The company also trades at a ~2x multiple discount to its peers, and that gap should continue to narrow as the company continues to prove its ability to create value.
You’ve Got a Friend in Me (1/26/20)
Ally Financial Inc (ALLY) has been one of my favorite underdogs in the financial sector for years now and the company reported another quarter of great results this week, delivering 11% earnings growth. Management is forecasting another year of 10-15% growth in 2020. This level of growth accompanies a 2.4% dividend yield but this stock is somehow trading at a ~60% multiple discount to the broader market, providing a great value play for my portfolio. Management’s expectation for earnings growth seems fairly reasonable with upside potential driven by a few things –
- The risk associated with the auto loan business remains moderated
- The company’s online banking platform is materially adding to the company’s interest margin despite interest rates significantly falling throughout the year
- A stellar management team with the ability to allocate capital in the most effective and efficient way
Hiding From the Cold (1/19/20)
The need to keep my warm drinks insulated in the wake of this weekend’s winter storm, I’m reaching back to one of my favorite stock picks of 2019 – Yeti (YETI). The stock ran from about $17 at the beginning of 2019 to $35 by the end of the year, handily outperforming the broader market on strong operating performance and brand management. The best part is that there’s more to come as we move into 2020. The company is expected to open 4-6 stores in 2020 and 2021, which should add an incremental 1-2% sales growth at a minimum. Additionally, the elimination of tariffs on list 4B (those that were supposed to be enacted on 12/15/2019) should provide for additional margin expansion. I could see this stock climb past $41 in the near future, hopefully providing another strong year of performance.
An Avo a Day… (1/12/20)
I think I eat at least an avocado a day – its health benefits seem to be indisputable and it also seems like the appropriate millennial thing to do. This had led me to discover Calavo Growers, Inc (CVGW). The name has seen some pressure due to many things including the trade wars, but the company reported year-end results in December and expectations for 2020 are looking up. In fact, Wall Street is expecting over 20% earnings growth for this company in 2020 and earnings estimates have increased over 11% over the last three months. The direction of earnings revisions tends to be a great indicator of how the stock should react, so I’m ready to see some strong upward momentum for this name in the near future.
The stocks I’ve been most keen about recently have a few specific characteristics that should enable them to ride through defensive times. Some of the best qualities I can ask for in today’s economy are steady cash flows and a solid balance sheet. I see both in a house-hold name, Coca-Cola Co (KO).
The company should see improving operating margins through 2020 and beyond driven by product innovation, synergies from recent acquisitions, growth in Japan, and on-going productivity measures. Early in 2020, this company should see some catalysts in the form of its product innovation through the launch of Coke Energy and AHA sparkling water, which will be the company’s largest brand launch in over ten years.
Catalysts Upcoming (12/22/19)
I first mentioned semiconductor manufacturer Xilinx Inc (XLNX) in May after this company, with potential to harness the growth in 5G, saw serious pressure following a less-than-ideal earnings release warning of near-term headwinds. The company had also been caught in the negative sentiment around China trade war given its exposure to Huawei. While the stock did run about 11% after that call, the name has seen some additional pressure since its first quarter earnings for fiscal year 2020 (in July 2019, confusing, I know), which confirmed the near-term headwinds management had alluded to for the first half of fiscal 2020. However, earnings are expected to bottom with this next quarter and then rebound nicely, which should provide a catalyst for this stock that has been reacting positively since US Commerce Secretary Wilbur Ross said licenses to sell to Huawei would be coming “very shortly” as part of the first phase of the China trade deal. Despite some short-term headwinds, resolution with China trade should provide some short-term relief and the company’s 5G investments should position XLNX for strong long-term value creation.
Brand Management (12/15/19)
I first talked about Yeti Holdings Inc (YETI) in March and the stock has run 31% since, outperforming the broader market by 18% in the same period. The stock recently got a nice boost this week because of an upgrade from Goldman Sachs with a price target of $37 (an additional 11% return from where the stock is trading today). The upgrade is being driven by YETI’s best-in-class brand management (truth, it’s a cult following) and new distribution relationship with Lowe’s, which should provide additional growth opportunities across its various categories and geographies. I still continue to be constructive on this company and will be a long-term holder of the stock.
Making big moves (12/8/19)
I first talked about Bristol-Myers Squibb Co (BMY) in May because of the attractive relative valuation of this high quality, large cap, and high yield healthcare name. The stock has since put up a 28% return, outperforming the broader market by 18%. This week, the company announced the FDA granted Breakthrough Therapy Designation for its ORENCIA drug that prevents moderate to severe acute graft-versus-host disease (GvHD) in hematopoietic stem cell transplants from unrelated donors. You can read through the entirety of their press release, but the punchline is that stem cell transplants are usually the last option to treat hematologic cancers but GvHD occurs if the donor’s white blood cells recognizes the patient’s healthy cells as foreign and starts attacking healthy tissues and organs – this impacts up to 40% of patients that receive stem cell transplants from unrelated donors with a mismatch in genes. Snaps for BMY on this one.
Channeling my inner Joanna Gaines (12/1/19)
Speaking of an increase in homeownership rates and home sales, it’s worth thinking of names upstream from this demand that could benefit. When I think about my home shopping experiences, I swoon over nice kitchens and a crucial part of any Joanna Gaines kitchen is the white cabinetry. Here I’m looking at American Woodmark Corp (AMWD).
AMWD is the second-largest cabinet maker in the United States with sales channels through major builders, a network of independent dealers, and home centers like Home Depot and Lowe’s. The company has a few things going for it right now –
- Increasing market share through all its major sales channels, especially with the new construction channel as their growth is exceeding the growth in new home construction. Home Depot and Lowe’s account for almost 50% of sales, which is a high concentration and poses some risk, so the growth in other channels is especially important.
- AMWD acquired RSI at the beginning of 2018, expanding their footprint into lower price-point cabinetry – this is especially important because there’s a large amount of pent-up demand in the lower price-point homes as an aging millennial population looks for starter homes.
- Strong balance sheet – the company has been working on reducing leverage and has positioned itself well given we’re currently so late in the economic cycle.
- Of course, the biggest risk here would be a struggling consumer – if anything causes consumers to significantly pull back on discretionary spending, look out below.
Has Wayfair lost its way? (11/26/19)
I’m so torn on this stock because as a consumer, I’ve had nothing but the best experience, but when looking at it as a company, this one is a little bit of a head-scratcher. Wayfair Inc (W) was the darling of Wall Street for a while and had gotten extremely richly priced but was becoming more interesting as its price had started to correct this summer. However, after several IPOs failed spectacularly this year because of a lack of “path to profitability,” Wayfair got caught in the riptide. The company has been growing sales at a solid pace (consistently ahead of expectations) while failing to translate that into earnings growth (almost consistently below expectations) driven by continued investments in its platform and increased marketing expenses. Additionally, the company has been feeling pressures from the China trade war. The company’s latest earnings release didn’t do much to assuage concerns. Unless the company can turn around this earnings story and help the market understand its path to profitability in the foreseeable future, it’s going to be difficult to turn the negative sentiment on this name anytime soon.
Keeping things secure (11/17/19)
I first talked about Palo Alto Networks Inc (PANW) early in the year and my thesis centered around the company’s ability to capitalize on the need for AI-enabled cyber security. The company was demonstrating impressive growth in revenues, customer counts, and customer spending as they were converting to a subscription-based model. Since then, the company has completed a couple acquisitions – Zingbox (IoT security start-up for $75m), Twistlock (a leader in container security for $410m), and PureSec (a leader in serverless security for $47m). While this growth strengthens PANW’s expertise and breadth in the cybersecurity space, acquisitions tend to put downward pressure on stocks. With all this churn, the stock was underperforming through the summer but has rallied in a big way and outperformed the market as of this week by 5% on a 21% return since we first talked about the company. Wall Street analysts have also turned more positive on the story – Goldman Sachs recently issued “buy” rating on the company due to its “favorable exposure to next-generation security, an ability to take share in key markets, a demonstrated ability to execute, and strong fundamentals with cash flow.”
Falling inexpediently (11/10/19)
I first talked about Expedia (EXPE) in the summer on the premise of healthy revenue and earnings growth, synergies across its various platforms, and VRBO growth coming next year. The stock then had run close to 23% until it plummeted 27.39% in a day on Thursday after this quarter’s earnings revealed a struggle to manage around the ever-changing search-engine dynamics and trouble with some of its platforms. It hurt almost as much as Penn State’s heart-breaking loss on Saturday. Expedia’s results were released alongside disappointing results from fellow online travel company TripAdvisor, which fell 22.41% on Thursday. Expedia’s management disclosed the company was dealing with weakness in volumes driven by search engine optimization (SEO) forcing the company to shift to higher-cost marketing channels and TripAdvisor pointed to similar headwinds. These companies depend on SEO to drive traffic through search engines (i.e. Google) but Google has been pushing these SEO driven search results lower down the page as paid search results and Google’s own “Hotel Finder” platform occupy more and more of the real estate at the top of the page.It’s important to note that TripAdvisor is significantly more exposed to SEO volumes at 95% of EBITDA while Expedia’s exposure is significantly lower at 50% of EBITDA. While this quarter’s results could be indicative of headwinds in the short- to medium-term, I think the reaction to their quarter’s results is quite outsized and this isn’t the time to sell the name.
Vulnerability Management (11/3/19)
Consumer technology companies have recently come under the scrutiny from lawmakers on data privacy issues. As we continue to use more and more data to allow for superior consumer experiences, securing data appropriately is going to be an ever-increasing concern. Technology companies that can provide solutions for such concerns, on the other hand, are obviously set up to benefit. One such company I’ve been looking into is Rapid7 Inc (RPD).
Rapid7 provides analytics solutions for security and IT operations through vulnerability management, incident detection and response, and consulting services. Rapid7 has been a fantastic executor of its strategy, growing revenues 30%+ while transitioning to a cloud-based delivery system over the last few years. The stock’s performance has recently been hurt after its second quarter release driven by a few things (mainly slowing growth and competition) but this means the company is currently trading at quite attractive valuations. The company’s core growth should continue to grow in the mid-teens and its cloud-based solutions have been growing at more than 100% for several quarters now. While there is competition in the marketplace, RPD’s competitive price structure is allowing the company to capture the demand in the small-medium businesses. The company is set to report results this week and depending on management’s growth outlook, it could be time to buy this one.
Powered by Lithium (10/27/19)
Albemarle Corp (ALB) has been a real drag of a stock this year, down 17% since I first mentioned it. If you remember, I first got into this name as a way to play the growing demand for electric vehicles. ALB is a producer of lithium, which powers the batteries used in electric vehicles. Lithium producers have been under pressure driven by the supply surpluses forecasted for the next few years (this was already beating down ALB’s price by the time I started getting interested in the name). Despite negative sentiment around lithium producers, ALB’s financial results remain solid per their earnings this quarter. A few resilient points about this company I’ve liked from the beginning – half its EBITDA comes from outside its lithium business and over 80% of its lithium contracts are already signed through 2021 at prices equal to or greater than the 2018 average, providing downside protection on eroding pricing power. Additionally, ALB predicts that EV battery sizes are set to increase by 50% by 2025 driven by the longer ranges for EVs. Incremental demand can also come from renewables like wind and solar as these sources of energy begin to reach volumes that require more sophisticated electricity storage infrastructure.
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.