Investing Ideas: January 2020 (Slow Growth Monsters)


Yep, it’s another investing ideas post!  It’s been several months since I last posted one of these ideas posts, but I have forgotten you guys!  I know how popular they are!

I’ve just been really busy.  Honestly!  With the holidays  behind us, and my old car finally sold (yes it sold!), I’m feeling like I finally have time to sit down and start digging into some juicy annual reports!

While the market continues to go nuts over fast growing tech companies, I’ve been busy hunting a different kind of beast — A tortoise of the growth world.  Call them dogs if you like, but I like to refer to them as Slow Growth Monsters.

What’s a Slow Growth Monster?

  • A business that’s growing revenues faster than inflation (3% annually) and yet isn’t growing so fast that it attracts an extremely high valuation (less than 20% growth annually).
  • A company that can continue to grow at a slow and steady rate for many years to come.
  • A company that retains at least 40% of earnings for reinvesting in the business, and then earns good returns on retained capital.
  • Maintains a return on equity of at least 17% through the economic cycle.
  • A business that can grow dividends at a rate that equals or exceeds the S&P 500 without raising the payout ratio to dangerous levels.

Basically these are money generating machines that are extremely consistent, compound money year after year, and have a very good chance of existing far into the future.  Yet, they don’t command the insane prices of today’s FANG-type tech stocks…. because well, they’re sort of slow and boring…

 

FAQ & Boilerplate Warnings

Before we go any further in this post, let’s get a few things out of the way…

Readers 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 a question, please check there first.

Be Warned: DO NOT consider these investing ideas as a solicitation to buy shares.  I’m not endorsing or advising anyone purchase these investments.  These are merely investing ideas that I’m considering this month.  I am not a financial advisor.  Please do your own research.

I’m also not paid to endorse these investments.  I may or may not put money into these investing ideas, but if I decide to buy shares I will disclose it.

With that out of the way, let’s look at this month’s investing ideas!

 

Lakeland Financial Corp

Lakeland Financial Corp is a bank holding company (Symbol: LKFN) that operates as Lake City Bank in Indiana with 50 branches.  It’s a community bank that’s been growing and operating for 144 years.  Try to stay awake, OK?  In other words, it’s a sleepy mid-western bank that’s been around forever.  Sounds pretty boring, right?

Not in the least!  From Dec 31st 2000 to Dec 31st 2018 the stock realized a return of 1435% (inclusive of dividends).  Holy cow!  That is quite the slow growth monster!

lkcity bank
Just another boring community bank, or Slow Growth Monster?

Let’s look at a few key statistics for Lakeland Financial:

  • Revenues growing at a rate of 4-5% annually.  Earnings per share growing at about 10% annually.
  • Div yield of 2.51% is higher than the S&P 500 and growing at (roughly) the same rate.
  • Payout ratio is a very reasonable 35%.  No worries about dividends getting cut with such a low payout ratio.
  • Very reasonable debt to equity of 0.05.  Yes, really!  This is a bank with basically no debt and funded almost entirely by deposits!
  • The bank makes very high quality loans — net charge offs in the Sept 2019 quarter were 0.09%.  For comparison, charge-offs at large banks generally tend to be around 1%-3% and sub-prime lenders at 4%-5%.

While a community banking businesses like Lakeland Financial is not exciting, the results certainly speak for themselves.  Over longer holding periods they’ve definitely outperformed the S&P 500:

lkfn

Who says you need to grow fast to beat the S&P 500?  Not me!

Slow and steady wins the race over the very long-term and that seems to be Lakeland’s secret — Continuous slow growth and very high quality loans combined make for compounding formula that will make shareholders happy far into the future.

 

General Dynamics Corp

General Dynamics (Symbol: GD) is a aerospace and defense company, most famous for manufacturing Gulfstream jets.  In addition to really cool jets, they also make tanks, nuclear submarines, Navy destroyers, as well as a variety of other big machines.  It wouldn’t be wrong to say they are primarily a government contractor which makes equipment for the U.S. military.

Regardless of how you might feel about the military or military spending, this is an extremely stable business with a steady customer and a giant backlog of orders (over $50 billion!) that will fuel growing revenues for many years to come.

The stock may have under performed in recent years, but the company has not — Returns on equity have been in the 20% to 30% range (which is excellent), and in the most recent quarter its grown revenues at a rate of 7% annually.  Not bad!  The company has been growing revenues faster than inflation for over two decades!

gd stock
The stock hasn’t done much in the last couple of years (compared to the S&P 500), but the business has actually done OK.

Did I mention that General Dynamics is a dividend aristocrat?  That means it’s been growing dividends for at least 25 years.  In recent years that means an annual dividend raise of 8% to 11% annually.  That’s quite good!

Not to mention GD has been steadily buying back shares every year for over a decade!  This is a very shareholder friendly company.

Currently General Dynamics sports a dividend yield of 2.21%, and a PE of 16.  While that’s not necessarily a “dirt-cheap” stock, it does seem to be a fair price if we consider this to be a very stable and high quality company.

If shares fall any further this year, it just might become a bargain!

 

Points International Ltd

Points International Ltd. (Symbol: PCOM) is a Canadian firm that provides e-commerce and technology services to companies which offer loyalty programs (mainly airlines and hotels) to customers.  The company trades on exchanges in both Canada in the U.S.A., but revenues are primarily earned in the U.S.A by giving customers the ability to spend ‘points’ in one loyalty program and then buy services from another company.

Pretend you want to spend some of your hard-earned airline miles in order to book a hotel room for your upcoming trip to Italy.  Points International is the company that make that transaction possible.

Think of it as a foreign exchange service, only for loyalty points.  They convert loyalty points (the currency) into something else for a small cut of the proceeds.  Additionally, PCOM gives plan members the ability to buy more miles using cash, or the ability exchange/move loyalty points between different loyalty programs. (Say for example I want to trade my Delta mile points for Southwest mileage points.)

Points International has been a public company since 2007.  While they don’t pay a dividend, they’ve been rewarding shareholders with rapid revenue growth — growing at a pace of 10%-20% annually almost every single year.  I see no reason why this growth will stop anytime soon.  PCOM adds plenty of value for its customers.  Airlines and hotels are unlikely to drop the service once consumers have become accustomed to using it.  This provides PCOM with something of a margin of safety.

pcom
Slow and steady growth wins the race for Slow Growth Monsters like PCOM.

Being a relatively young company, profitability and cash-flow were illusive in the early years for PCOM, but things seems to have taken a positive turn in recent years — The company now generates enough free cash that they can now expand at a 10%-20% annual clip AND buy back shares.  It’s a win-win for shareholders!

What I find even more impressive was the fact they were able to continue growing through the last recession.  That’s a sign of a Slow Growth Monster!

Returns on equity typically hover around 18%-25% for PCOM (which is very respectable), but that’s nowhere close to the gigantic returns of the most popular FANG-tech stocks.

Unfortunately PCOM share prices have shot-up in recent weeks (while I was researching it), making them considerably more expensive.  They no longer represent the bargain they once did.  Should the shares come back down to Earth, it might represent a good opportunity to pick-up a unique company with a long and profitable runway ahead of it.

 

Delta Air Lines

In the past, no-one would mistake an airline for a growth company.  Airlines always struggled with operations, profitability, and managing heavy debt loads.  Frankly, airlines were a terrible investment.

Today I’d like to make the case that this has changed in recent years.  Delta Air Lines (Symbol: DAL) in particular has been growing revenues per share at a steady 6%-10% clip since 2010.  Last year alone (2019), Delta managed to grow revenues by 7.5%!  Not bad for a notoriously competitive business!

So what happened in 2010 than changed things for the airline industry?

Well, two things happened — The airline industry consolidated down to fewer players, and the U.S. shale oil revolution happened.  Less competition and cheap shale oil turbocharged airline profit margins and generated a TON of free cash flow.

Free cash flow means money to invest and money to return to shareholders.  Delta has primarily funneled its free cash flow into the following:

  • Growing dividend payments (14.9% growth last year alone!)
  • Share buybacks.  Shares outstanding were reduced by 7% in 2019.
  • Growth (both organic and inorganic) by investing in more fuel efficient planes, new routes, as well as recently buying 20% of LATAM airlines.

Couple all of that with a growing interest in air travel by the public (spending on experiences not things!) and you have a recipe for steady growth at airlines like Delta.  In 2020 Delta intends to grow revenues 4%-6%, which seems entirely possible.

Delta is also lucky enough to NOT fly any of the flawed Boeing 737 MAX’es that have plagued airlines like Southwest (Symbol: LUV) in recent months.  Delta has taken market share from competitors because they have planes and seats available, while competitors are forced to fly older planes with less free capacity.

Until the MAX situation gets resolved (maybe by the end of 2020?) Delta will continue to see open skies and room for growth.  I suspect investors will also continue to be well rewarded by this stock.

Full Disclosure:  I’ve written a few Delta ‘put’ options in recent months, but shares haven’t yet gotten to my preferred price yet.

 

When Slow Growth Finally Wins

Not everyone is going to appreciate a Slow Growth Monsters when the S&P 500 has been putting up returns of nearly 30%.  I completely understand it.  Returns like that are tough to beat.  The rabbit has really been on a good run!

But, when the global economy is finally ready to decline, it’s the slow-growth businesses like these that will continue to plod forwards when others retreat.  That’s really their secret sauce to out-performance:  One foot in front of the other, marching forwards when others take steps back.  Compounding money year after year.  Steady as she goes!

These are truly the tortoises of the investing world, and I completely understand why most investors will shrug them off.  They’re looking for a flashy tech stock to jump in-and-out of for quick gains.

Meanwhile, the slow growth monsters will keep doing what they do best… Ever so slowly.

 

[Image Credit: Flickr]

8 thoughts on “Investing Ideas: January 2020 (Slow Growth Monsters)

  • January 26, 2020 at 6:01 AM
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    I like seeing slow and steady growth in my portfolio, I’m not looking for the home runs. I rather let compounding do it’s thing and I enjoy the ride of my automated investing approach with minimal efforts.

    -DGX Capital

    Reply
  • January 26, 2020 at 7:54 AM
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    Some interesting ideas! I’ve been looking at GD for a while, especially as it may have a low correlation with the rest of the market this year. DAL scares me, though – feels like 2019 was pure luck, and the incredible ability of airlines to lose money hasn’t been on display recently, but I’m sure is still there 🙂 Thanks for the ideas.

    Reply
    • January 28, 2020 at 6:25 AM
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      Absolutely with you on DAL. Unfortunately no company can convince me to even have a closer look at it.

      LKFN: I don’t want banks in my portfolio atm. I’m happily covering the financial sector with Visa.

      GD: I’m not interested in companies that sell weapons. What a pity because the Gulfstream is a pretty cool product.

      PCOM: No thanks. A very unreliable business idea. If enough bonus programs stop selling miles/points or lock PCOM out they will have to go out of business. Also changes in the bonus programs can occur overnight. I’m not believing that this is a sustainable investment. Therefore also not for me.

      DAL: Oh well. You already said it. Airlines tend to burn money rather than bringing it in. If we were at a different stage of the economic cycle maybe. Just not now.

      Reply
    • January 28, 2020 at 11:57 PM
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      Perhaps I’ll buy DAL in your stock picking contest, just for a little fun! 😉

      Reply
  • January 26, 2020 at 8:38 AM
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    I’ve purchased $GD twice in the past two weeks. Stellar biz at a fair price and plan to hold forever (unless they cut divs).

    Reply
    • January 28, 2020 at 11:59 PM
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      Given the long term contracts in place, dividend cuts seem entirely unlikely…but you know, never say never.

      Reply
  • January 26, 2020 at 8:09 PM
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    I see you remain liking Delta. I like the airline too but just can’t get myself to invest in another airline stock. Maybe time will change my mind, we’ll see.

    Reply
    • January 29, 2020 at 12:00 AM
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      I don’t believe I’ve mentioned Delta in the past. I do own some Southwest shares though.

      Reply

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