Investing Ideas: July 2019


Investing?  Who has time for investing?  Like many families, we’ve been enjoying a very busy summer in the warmer weather.  Investing has been on the back-burner compared to other activities like going to the pool, BBQ’ing, riding bikes to the library, and working on summer projects.

Even with investing on the back-burner however, I still find myself reading 10Q’s and news about all the investments I’m interested in.  Call me crazy, but investing is where my interests are.  Some people like to watch TV, but I read a quarterly earnings reports…

Actually, the hard part is finding the time to write a blog post.  I’ve been meaning to get one of these Investing Ideas posts out for a couple of weeks now…  but one thing just led to another, and I never seemed to find the time this month.

But hey — There’s still a couple days left in July!  I still have time to write!

Unfortunately for investors capital market’s have also been busy this summer.  Prices have skyrocketed in recent weeks.  This makes good values very hard to find for cautious investors like myself.  I’d love to find a great company for cheap prices, but unfortunately there are just times you can’t find greatness at a bargain price.

It’s times like this that I try to remind myself when I find the right investment, I’ll hold it for a decade or more and a dollar or two of excess valuation won’t matter much (in the very long run).  Compounding (if I manage to find and invest in a compounder) will clean-up many of the mistakes of buying stocks at bad prices.

Therefore “Quality” is July’s investing theme.  Good value is hard to find in this market, so July has been a hunt for high quality investments with average or below average prices.

(Note:  The average PE of the S&P 500 is right around 22 at the time of writing this.)

 

FAQ & Boilerplate Warnings

Before we begin, I’d like to 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 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 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!

 

Marine Products Corp

Marine Products (Symbol: MPX) is a leading manufacturer of recreational fiberglass powerboats.  Yes boats!  Fiberglass boats are not typically what I would consider a strong industry to invest in — this industry is mature (meaning slow-growing) and highly fragmented with many small companies competing for consumers discretionary dollars.  After-all, boats are very much a want not a need.  When a recession hits these kinds of companies are frequently hit hard as consumers pull back on buying those wants.  For example, 2008 and 2009 were very difficult years for Marine Products Corp.  Yet they survived and went on to grow faster than the collective industry.

mpx
Profitability took a big hit back in 2009, but business has come back strong since then.

To last in a difficult industry like fiberglass boats, a company needs to have significant financial strength, a top quality product, and efficient operations.  Marine Products appears to have all three of these things in spades.

First of all, they have no debt – absolutely zero.  MPX has very little in the way of other liabilities either.  Just accounts payable, some leases, and some pension obligations.  Other than that, it’s in absolutely great financial shape.  They should be able to weather a recession well, just like they did during the 2008/2009 Great Recession.

The boats themselves also seem to be good quality, earning many industry awards, and holding top spots in brand market-share surveys.  While I don’t personally know enough about boats to properly judge the quality of the product here, but with 9 continuous years of sales growth, somebody seems to like them.  (Product quality is definitely an area that could be researched further.)

It’s also generally hard to judge the efficiency of a manufacturers operations just by reading an annual report, but if return on assets is any indication, MPX with a ROA of 29% (in 2018), is usually the most efficient among public boat manufacturers.

All these positive factors lead up to a small, yet stable company that’s good at continuously rewarding shareholders.  Even though MPX is a small company, they still act like a large company when it comes to rewarding shareholders — they continuously buy back shares and raise dividends regularly by an inflation beating amount (21% annually over the last three years — From $0.24 to $0.48 over those three years).

In the last 4 out of 5 years they’ve also paid a special dividend to shareholders.  Last year the special dividend was $0.10 per share.

Unfortunately, investors seem to be aware of all these positive facts and are currently paying a premium for MPX, paying 17.5 times last years earning.  Ouch!  That’s not as expensive as the S&P500, but for a small company in the mature boat manufacturing industry that’s a premium price to pay.

It just goes to show that quality doesn’t come cheaply.  (Not often at any rate.)

The best time to buy a company like MPX would be during the next recession when demand for pleasure boats has dried up…. except we haven’t had a recession in over 9 years, and it’s hard to say if we’ll see another anytime soon.  You could totally ‘miss the boat’ waiting for another recession.

Another strategy would be to just invest now, and let growth and compounding handle the rest.  Given enough time, the premium paid today would matter a lot less in the future if the company continues to do well.

For me, I’m content to put Marine Products on my watch list as a “good company” to watch.  Maybe I’ll pick up some shares during the next recession.

 

Huntington Ingalls Industries

Hmm… I seem to have a thing for government contractors.  Last month it was Raytheon, and now in July I’m highlighting Huntington Ingalls Industries (Symbol: HII).  Huntington Ingalls is primarily a manufacturer of ships for the military — Aircraft carriers, nuclear submarines, amphibious assault vehicles, and so on.  88% of HII’s revenues come from the U.S. Navy.

While that might sound like a giant risk at first, you should also consider that the market for military shipbuilding is a duopoly.  There’s only two companies that build ships for the U.S. military — General Dynamics, and Huntington Ingalls.  That’s it!

air craft carrier
If the U.S. government needs a ship, they almost always call Huntington Ingalls Industries.  In some cases, they’re the *only* builder of certain classes of ship.

As you might imagine the limited competition leads to steady work and good returns for shareholders.  With ROA’s averaging around 9-10%, HII is a solid (perhaps somewhat boring) company.  The valuation for HII is also decent — shares currently trade at 12.6 times last years earnings.  That’s not terrible, considering!

Unfortunately the dividend yield on this stock isn’t that great, a mere 1.44%  That said, the dividend growth rates have been a sight to behold!  The company has grown annual dividends at rates greater than 20% for the past five years!

HII dividend growth

That’s pretty incredible when you remember the average dividend growth for the S&P 500 is around 6% annually.

One concern investors might have is how the political landscape could alter earnings for HII.  While the number of ships built does fluctuate from one administration to another, many of these ships take years to build.  For example, at the cost of $13 billion and 5-10 years for an aircraft carrier, these ships are not the kind of project started and stopped on a whim.

 

Amgen

Amgen (Symbol: AMGN) is one of those investments that’s been on my radar for a very long time… but I’ve never quite pulled the trigger.  You see big-pharma can be a tricky business — it takes years to develop new drugs and shepherd them through proper testing and approval.  When a new drug is successful, the rewards can be considerable.  Just one or two successful new drugs can generate incredible amount of free cash flow with very small capital requirements.  The drug business is a very good business… when things work out.

Sometimes new drugs don’t work out of course, and this can leave a pharmaceutical company without any big blockbusters drugs to fuel the stock price higher.  This can go on for years, as is this particular case with Amgen.

drug factory
After the R&D has been done, pharmaceuticals can be a very good business with little incremental capital required.  The trick is in discovering new drugs.

Once upon a time Amgen was a growth company, cranking out plenty of these blockbuster new drugs and growing like crazy.  They go by names like EpogenAranespSensipar/MimparaNplateVectibixProlia and XGEVA.  Unfortunately Amgen has gone through something of a dry spell in recent years.  Many of their most popular products have slowing sales, and they’ve yet to find any giant new hits.

This isn’t for lack of trying of course — Amgen spends around $3.8 billion dollars a year on research and development.  That’s an incredible amount of money invested into researching new medical solutions… right on par with some its largest competitors in the industry.

But a lack of new hits means slowing sales.  For investors this means the elevator is going down and they’re jumping out with both feet.  In a year when the S&P 500 is up 20%, Amgen is down 9.93%.  That’s some stunning under-performance.

underperformance

The investing idea here, is that sooner or later Amgen is going to find a new hit drugs.  I can’t say when exactly, but the odds are good that sales will eventually turn positive again.  That makes now a good time to buy shares when they’re in a slump.

The only problems with this idea are:

  • Timing — I couldn’t tell you when things will start to turn up for Amgen (if ever), but in the meantime there’s a nice growing 3.33% dividend to tide over investor while they wait.  That’s little consolation when shares can under-perform by 30% in a given year.
  • Debt — Amgen’s large debt load (around $30 billion dollars) makes me pause.  The debt is easily serviceable out of free cash flow, but with a debt to equity ratio over 3.0, it should serve as a warning flag.

When will things turn around for Amgen?  I haven’t a clue!  Amgen is a first-class drug company that’s currently down on its luck.  It won’t last forever, but for now the market is allowing investors to pick-up a high-quality company in the biomedical sector for a PE of 12.5.

This seems like a reasonable price, but it’s not “I can’t loose” levels of affordability.  For now, I’m keeping this one on my watch list.

Well, that’s it for this month folks!  Hopefully I’ll have more time for investing in August. Until then, enjoy your summer!

 

[Image Credit:  Flickr1, Flickr2]

One thought on “Investing Ideas: July 2019

  • August 1, 2019 at 5:25 PM
    Permalink

    Tako –

    AMGN did catch my attention earlier, as well. Haven’t pulled any triggers. Chemical industry has been very interesting as of late, i.e. Dow, Eastman, Lyondell, etc..

    -Lanny

    Reply

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