Investing Ideas: August 2018


You guessed it — time for another one of my “Investing Ideas” posts!  In my continuing quest to find good places to invest excess cash, I’m always searching for interesting stocks, funds, REITs, ETFs, bonds and preferred shares to potentially buy.

Week after week, I’m hunting for good investment ideas.  Usually I don’t find any “ten baggers”, but I try to write-up a few gems (my best candidates) here every month.

In general, I try to find good returns by investing in businesses with a significant margin of safety, a growing stream of dividends, and good returns on capital.  My preference is usually for equities (stocks) due to the higher returns available, but this isn’t always the case.

Not many investments fit my stringent criteria, but a few always do.

 

FAQ & Boilerplate Warnings

Readers seem to really enjoy these ‘ideas’ posts, but they also generate a ton of questions.  In response, I’ve put together a Investing FAQ that should answer the bulk of common questions.  If you’ve got questions, check that page first.

Please be warned — DO NOT consider any of these investing ideas as a solicitation to buy shares.  I’m not endorsing or advising anyone purchase these investments for themselves.  These are merely investing ideas that I’m considering this month.  I am not your financial advisor.  Please do your own research or hire a professional advisor.

I do not currently own shares in any of these companies, nor am I paid to endorse them in any way.  I may or may not put money into these investing ideas.  Some investing ideas may require additional research, or need to have certain questions answered before anyone should invest in them.

With that out of the way, let’s proceed with the investing ideas!

 

Tyson Foods

For some reason, large food companies are unloved by Wall Street right now — probably because big unhealthy package food brands are out of favor with consumers right now.  In a previous investing idea post I offered up Kraft Heinz (Symbol: KHC) as large food company that would eventually get their act together and find food products that consumers like.

But what if there was a big food category that consumers already liked?  Like protein!

Tyson Foods (Symbol: TSN) is a protein company that’s doing quite well with consumers.  The vast majority of their revenues are derived from selling Beef, Pork, and Chicken, along with a prepared food division.

tyson sales
Tyson is a protein company. Prepared foods are only a small piece of the ‘meat’ pie.

In some segments, the company is vertically integrated — starting with owning chicken farms, raising the protein, processing, packaging, and then shipping to grocery stores.  Other segments, like beef and pork they purchase from independent producers and then process the meat from there.

OK, now let’s talk about prepared foods — Instead of falling sales of prepared foods (like other large food companies), Tyson’s prepared food brands (Adell’s, Jimmy Dean, Tyson, Ball Park, Gallo Salame, etc) are actually enjoying growth.  Albeit slow growth, but growth nonetheless.

Yep, culturally Americans love their protein and show no signs of spending less on meat (sales growth of roughly 2-3% seems to be the norm here).  Yet Tyson Foods stock is down 23% this year and trading at a forward PE of roughly 10-11.  This could be a good time to buy shares.

The stock sports a dividend yield of 2% which it has been growing at a incredible rate — an average of 41% over the last five years.  With a payout ratio under 15% I see no signs of this dividend growth truck stopping.

But where can Tyson grow?  Internationally of course!  They already have significant number of operations in countries like China, India, and Mexico but these are just a tiny piece of the pie.  There’s plenty of room to grow internationally.

Domestically, Tyson has been growing by buying up organic and premium protein producers (think free-range and organic beef, chicken, and pork) and also by purchasing prepared food companies that focus on protein — such as Advanced Pierre Foods.

If you’ve ever tried those Angus burgers or Philly cheesesteaks from Costco, then you’ll be familiar with Advanced Pierre Foods.

After researching this stock, I can’t help but come away impressed.  The company is well managed and they’re going to do well.  The company understands current consumer trends and they’re investing appropriately.  They also know how to build value for shareholders, and they’re doing it.  If there’s a negative at all, it would the fact that protein is a commodity — net margins can vary significantly from 0 – 8% depending upon the economic environment.  Meaning, profitability can fluctuate wildly.

tyson net margins
Margins fluctuate significantly from year to year.

Will the recent international trade war derail Tyson Foods?  Probably not.  There might be a flood of cheap protein in the short-term as protein exports slow down (hurting margins), but longer-term Tyson will do just fine.

They have a recipe for success, and this protein truck is just going to keep on truckin.

 

AMC Networks

My second idea this month is AMC Networks (Symbol: AMCX).  AMC is a media company that primarily owns cable television networks — AMC, WE tv, BBC America, IFC, and SundanceTV.

While I’m not a big TV watcher, I’m at least familiar with the type of media they produce.  I’ve watched a few episodes of Breaking Bad and The Walking Dead.  The BBC documentaries are more of my kind of media content.

AMC produces plenty of quality content and cord cutting does NOT seem to be slowing down the business.  Revenues are growing in the 5 – 10% range, as consumers seem to like the media they produce.

Net margins are 10-15% at AMC, indicating the company is in a very healthy state and produces plenty of free cash flow.

So what do they do with all that cash?  In the last few years they’ve used most of the free cash flow to buy back shares.  Yet the stock really hasn’t done anything — trading in a range of $50 to $80 range.

amcx shares
Recent buybacks are having a significant effect on share count.

So why haven’t the shares followed suit and gone up?  Well, the company is controlled by the Dolan family and shareholders come-in second in this situation.  Shareholder friendly activities like share buybacks are a relatively recent event in the company’s history.  It’s going to take investors awhile to trust those moves will continue.

It’s also worth noting that AMC does not pay a dividend and I would not expect such moves in the near future.

So why am I putting this company up as one of my monthly investing ideas?  Based upon projected earnings, AMC is cheap.  Shares are trading hands at only 8.78 times free cash flow.  It’s the cheapest media company I’m aware of right now.

On top of that, all the big media companies are trying to consolidate to deal with the transition to streaming media.  Disney is buying Fox, and Comcast is buying Sky right now.  The future is streaming, and it’s exclusive content that will drive consumers from one streaming service to another.

Big media companies are pairing-up!  It makes me wonder who’s going to pick-up AMC.

So far AMC isn’t terribly affected by cord-cutting, but I think they could become an acquisition candidate when cable subscribers really begin to decline.  Frankly, they’re small enough to be acquired by one of the big media names and yet they produce quality content that consumers want to watch.

In the meantime, I expect share buybacks will continue.  Eventually the stock will move upward, but the biggest gains are going to happen when (and if) an acquisition occurs.

In the meantime, I think this is one to watch from the sidelines despite being really cheap.

 

Eastman Chemical

The next company on my investment ideas list this month is Eastman Chemical Co. (Symbol: EMN).  Eastman produces many many chemical products — plastics, resins, fibers, benzene, rubber additives, solvents, and many many more chemical products commonly used in our modern lives (without really knowing it).

As an investment, Eastman Chemical looks like a ‘Steady Eddy’ kind of stock, with a record of regular share buybacks and dividends that stretches back decades.

eastman
Eastman is a company with a long history. In recent years, the shares have outperformed the S&P.

Currently, the shares sport a 2.21% dividend yield, and dividends have been growing at 10% annually (or slightly higher) for the past few years.  The payout ratio is an easy-breezy 22%, leaving plenty of room for dividend growth.

Speaking of growth — in its most recent quarterly report, Eastman reported sales growth of 8%.  Projections of future sales growth are at least 10%.  For such a long established (and large) chemical company this is a pretty impressive growth number.  If that growth trend continues, good things will likely happen for shareholders.

Meanwhile the shares are reasonably affordable, trading at a EV to EBITDA ratio of 9.28.  Not bad!

Would I buy shares in EMN … even though I have a similar investment in the chemical space with LYB?

This is a hard one.  Eastman is a well run company, and it would make a good investment.  They’re growing faster than LYB, but I was bummed by the low returns on capital management is targeting — 10% to 15% for future investment.  That’s nothing to get excited about and the company retains plenty of capital to fund growth.

Those capital investments will compound over time.  Which is going to compound faster?

The future (after all) isn’t about what’s happened in the past.  It’s the investments management makes for the future that count.

Will growth or value win out?  It’s hard to say.  I need to study and think about the differences between them more.  For now, I’m sticking with my LYB shares — they have a higher dividend yield and it’s not 100% clear how recent acquisitions at LYB are going to work-out.

 

Gilead Sciences

My final investing idea this month is Gilead Sciences (Symbol: GILD).  Gilead is a biopharma company that produces treatments for a number of human ailments/diseases.  While I won’t admit to knowing anything about the pharma industry, I can spot a pretty good investment when I see one.

Gilead’s customers often need these drugs/treatments to stay alive or function normally, so they have something of a moat here.  The only problem is that patents in the pharma space don’t last very long — Pharma companies have to be constantly researching new drugs and new treatments to “stay ahead” of the generic drug market and competing drugs.

With a ROE generally over 30% and a PE of about 11, Gilead falls into my “cheap AND good” category.  The only problem is, they’ve been having a bit of a slump recently.  Shares are basically flat for the year with a mere 2% decline.  Investors aren’t impressed with declining sales.

This happens frequently in the pharma space.  It can often take years of research before a new hit drug is found and then approved for sale to consumers.  During that time, profits and margins can begin to erode (temporarily), only to come back when a new hit drug is released.

(When I think about it, biopharma’s business cycle sounds a lot like a movie production company.)

This will eventually happen to Gilead, but for now, the shares are in the pits because sales of the current generation of drugs are slowing.  While investors wait, the company pays dividends and buys back shares regularly.

As a potential investor, I have to ask myself if the 2.93% dividend yield is sufficient until some new drugs from Gilead’s pipeline get released.  In recent years, dividends have grown about 10% annually.

It’s a difficult question.  My lack of knowledge in the pharma space has me staying on the sidelines.  I really can’t tell if new drugs in the pipeline are going to be mega-hits or not.  A 3% payout while I wait isn’t setting the world on fire either.

While I’m definitely interested in biopharma companies like Gilead, I’m going to wait until I see a sales turn-around begin before I even consider investing.  I know practically nothing about the drugs in the pipeline and that seems pretty critical to stock performance.

While Gilead is clearly a good company, staying on the sidelines seems much safer than jumping into an investing situation where my knowledge is limited.

For astute readers, you might recognize this strategy as “avoiding stupidity”… my stupidity level is quite high in this space, so I’d rather not make a bad mistake even though the company is a good one.

 

Final Thoughts

Thanks for reading my August investing ideas everyone!  I hope you enjoyed these ideas and perhaps found them useful.  I’m curious to hear your feedback on these ideas, and please feel free to share your own ideas in the comments!

If you enjoyed this post, or others in my Investing Ideas series, please let me know! This series is still an experiment, so I’m very curious to hear your feedback!

Until next time!

 

[Image Credit: Flickr]

9 thoughts on “Investing Ideas: August 2018

  • August 18, 2018 at 6:59 AM
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    Interesting investing ideas, Mr.Tako. I’m a fan of AMC (Breaking Bad is one of my fav shows) but not a fan of the fact that they don’t pay dividends. Also, they have to compete with Netflix, HBO, and a multitude of other media channels. And who knows, maybe someone else will come and completely knock out Netflix in the future. Fun to think about, but since I can’t predict the future, no idea what’s going to happen to AMC.

    Reply
    • August 18, 2018 at 10:16 AM
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      I’m with you on this one. Without a steady dividend and a more shareholder friendly management, this one seems more like predicting the future (despite its cheapness)

      Reply
    • August 18, 2018 at 10:20 AM
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      Care to be more specific? There’s a lot of angles I could look at here. Is there a rash of post apocalyptic zombie shows on the market? Relative content pricing issues? Poor streaming margins?

      A hint at what you mean would be great.

      I wouldn’t be too concerned with declining ratings on specific shows. They have a track record of producing quality content. Is there any reason you believe that wouldn’t continue?

      Reply
  • August 18, 2018 at 9:54 AM
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    I like GILD too but our position of 115 shares is pretty “full” at this point. It is tempting to add when they’re in this earnings trough though.

    For a protein play I much prefer HRL to TSN thanks primarily to a much healthier balance sheet.

    I don’t think the payout ratio is a particularly useful way to gauge dividend growth prospects. If you’ll begrudge a follower a little self-promotion I wrote a little thing about this a while back.

    I really like these posts. Please keep posting them!

    Reply
    • August 18, 2018 at 10:27 AM
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      Yeah yeah… payout ratios use net income not free cash flow. I’m aware. If you were a regular reader you’d know I’m very well aware of the difference between gaap net income and cash flow.

      The payout ratio is just a handy tool that’s published everywhere. Depending upon the company, the payout ratio and free cash flow may not differ materially and can be used as a quick proxy.

      Since this is your first comment I’ll try to be gentle — Please read some back posts before pretending to be a know-it-all.

      Reply
  • August 21, 2018 at 1:50 PM
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    Hello Mr. Tako,
    Tyson sure looks very cheap, and they are fairly global. This is a very interesting pick at these levels.
    any news on WKEC ? are you doing well on that investment?

    EricP

    Reply
    • August 21, 2018 at 7:54 PM
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      Yes, doing quite well. I’m up about 49% on my cost basis.

      Reply
      • August 22, 2018 at 5:46 AM
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        Wow! and that’s over just a couple of years right? still not willing to share the name of WKEC I see?

        Reply

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