Investing Ideas: June 2018

Yes, it’s time once again for a monthly “Investing Ideas” post!  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.  I end-up passing on a lot of frogs that probably aren’t going to be princes… but every once in awhile I find a interesting stock that I just might want to kiss.

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 generally higher returns available, but this isn’t always the case.

Not many investments end-up fitting this stringent criteria, but a few do.  Every month I try to write-up the best ideas in this regular monthly post.

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!

Iron Mountain

My first investing idea this month is a REIT… and no, I’m not going to recommend a dying mall REIT.  Instead, I decided to take a look at a real estate sector that’s doing well despite the death of retail — it’s data centers.

Data centers are the buildings where the web servers and cloud infrastructure of our modern world live.  Most people will never see the inside of one as they’re usually very secure facilities.  Without a doubt, data centers are a very important part of our modern world and they’re going to be around for a very long time.

The problem is, everyone already knows it.  Data center stocks are usually really expensive:  EQIX, COR, QTS, CONE, DLR.  They’re all very highly priced in my book, going for EV-to-EBITDA values greater than 20x.

So Iron Mountain (Symbol: IRM) is a bit of an odd-ball.  They’re actually a document storage REIT, with a quickly growing data center business.

One way to look at IRM is a slow growing document storage business that spits off a lot of cash AND a fast growing data center business that’s not quite as profitable (yet).  Iron Mountain also has a number of digital services, such as document digitization, digital archiving, digital video storage, and other digital-type services related to documents.  These services make up about 20% of revenues.  My point is, it’s not all documents stored in dusty boxes.

The good part?  It’s relatively affordable compared to other data center REITs — the EV-to-EBITDA is a more affordable 15x multiple.  The dividend yield is far more pleasant too, with a juicy 7.07% yield.

What about growth you say?  Well, based on current AFFO growth projections it should be possible for the dividend to grow by 4-6% most years, easily exceeding inflation.

While that’s nothing too exciting, it’s important to remember that the S&P 500 has an average dividend growth rate of 6.21%.  The difference here is that investors start with a 7% yield instead of a 1.82% yield.

Principal Financial Group

What can I say about Principal Financial Group (Symbol: PFG)?  This one is as boring as they get. But when it comes to investments, sometimes boring can be a very good thing.  It occasionally hides the gems.

Principal Financial Group (PFG hereafter) is a business with a focus on wealth management, retirement plans (401k’s, IRA’s and annuities), and insurance.  I know, I know… really boring stuff.

But the word “boring” doesn’t exactly cover a business that’s been growing at a regular 10% clip and growing dividends nearly as quickly.  The shares sport a nice 3.36% dividend yield that should continue to grow as long as assets under management also grow.

Try as I might, I couldn’t find anything particularly wrong with PFG.  It appears to be a fairly well run business.  Even the dividend payout ratio is completely rational at 30% of earnings.

Considering that PFG’s shares trade at 10 times this year’s projected earnings, they could be considered “a bargain” for value oriented investors.  Reasonable debt levels and a slowly declining share count are frosting on the cake here too.

The big negative is what happens when assets under management don’t rise — typically this happens during recessions when markets are declining.  During those periods, PFG tends to make a little less (but then again, so does everybody else).

The last time this happened was 2008, and earnings declined to $1.63/share from $3.09/share the prior year.  That really isn’t any worse than the broader market declines during that time period.  Risks for investors would be similar to making a broad market investment.

Year to date, shares of PFG have declined 21% which seems like it could be in cheap bargain territory.

While certain people might criticize PFG’s products like annuities, life insurance, and ETFs/Mutual funds as being ‘outdated’, I believe there’s still room for this niche to exist.  Certainly index funds are going to attract the bulk of new investing dollars, but these traditional products still have their place for some investors.

As long as the future has a need for the various investment products they produce and sell, PFG should do fine and reward investors equally well.

Western Union

Yep, it’s that old stalwart of telegrams that’s now in the business of money movement and payment services.  You’ve probably seen the advertisements.

In this day-and-age of Paypal and Bitcoin, going to a Western Union (Symbol: WU) office to send someone money sounds decidedly quaint.

“Who could possibly need such an outdated service?” you’re probably wondering.  Well A LOT of people apparently — over 150 million of them last year alone.  Over $300 billion dollars was transferred via Western Union last year.  According to WU’s annual report, many of them are immigrants that send money home.

Here’s an interesting quote from that same annual report:  “The vast majority of transfers are paid in cash at agent locations.”

Yep, cold hard cash.  Apparently there are people and places in the world that still use plenty of cash.

At one time it was thought Western Union was a business in serious decline due to online competition, but the company responded to change by investing heavily in phone apps and online money transfer services.  They seem to have largely solved this problem.

As a result, the company is growing again (albeit slowly).  Last year revenues grew at a 3% pace, and I would expect to see similar slow growth in future years.  Dividends are healthy with a 4% yield that grows anywhere from 5 – 10% per year (it varies wildly depending upon the year)

But what about the threat of digital currencies?

Well, bitcoin and other digital currencies tend to be way too expensive to be effective competition — A transfer of $600 to Mexico might cost a customer $5 (or less) with Western Union. The transaction might take a couple days to complete.

With Bitcoin this same transaction might cost around $12 (2% conversion fee), and the transfer could take a day or two if you want it converted to actual cash.

(Note: This varies considerably depending upon the digital currency and exchanges involved).

It’s not cheap to move money around in the bitcoin world.  Some digital currencies are trying to solve this problem, but in its current incarnation the technology is not a major threat to Western Union.

Initially when I was researching the company, the money transfer business see seemed like it was the kind of business where a low cost provider would be the big winner. Customers usually want the transfers to be as cheap as possible….

But, if you’re trying to send cash to your Mom who lives in a tiny village in South America, it’s the breadth of the network that matters most.  This I believe is where Western Union’s moat truly lies — with 550,000 global retail locations in 200 countries, I know of no money transfer business that comes anywhere close to this level of global coverage.

Those are very impressive numbers, and not something a competitor easily could tackle overnight.  For this reason, I think Western Union is going to be around for a very long time.

Computer Services Inc.

Computer Services (Symbol: CSVI) is probably one of the best companies you’ve never heard of.  Primarily, CSVI sells their services to small regional community banks and small banking chains that need to remain up-to-date, competitive, and compliant with federal banking regulations.

For example, if you’re a small community bank with 10 employees you can’t afford to hire an army of software developers to make a mobile app for your bank.  But your customers demand modern accoutrements like this… so what’s a small bank to do?  Well, you call CSVI and use their mobile banking app instead of building one yourself.

The same goes for the dozens of other services small banks might require — check printing, websites, digital payments, payment processing, fraud detection, regulator compliance, and all kinds of banking software.  They’re a one-stop-shop for bank software.

Contracts with these small banks tend to be long term, so CSVI is a “steady Eddy” in the earnings department.  They simply powered right through the Great Recession with nary a blip in earnings. Yes, earnings grew right through the recession.  The outperformance is impressive.

This feat really displays the power of CSVI’s moat — When it comes to small banking services there is  little competition and a small bank is simply not going to cancel a contract that’s critical to banking customers on a whim.

Meanwhile, CSVI has been growing their dividend at a market beating 10%-clip for many years now.  Currently the shares have a healthy 2.53% yield.  The payout-ratio has grown in recent years, so I expect these large dividend increases are going to eventually slow down.  They should increase at a rate similar to free cash flow growth in the future (I estimate around 5% long term)

The only problem?  The shares never really get cheap.  Not even during recessions.  The company is just that durable.  With a TTM PE multiple of about 17.68 this is not going to be deep value territory.

Instead, I consider this a high-quality moat-heavy company going for a fair price.

Final Thoughts

That wraps up this June’s investing ideas post!  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 investing ideas!

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

Until next time!

[Image Credit: Flickr1, storage.misc.org, CSVI]