Investing Ideas: March 2018


Last month I tried a little experiment — I decided to shared a few of my favorite investing ideas, to see what the response was going to be.  It turns out — the response was pretty positive.  Positive enough that I’m willing to do it again in March!

But before we begin, let’s talk about pitches…

 

Where Are All The Pitches?

Warren Buffett is famous for describing his investing philosophy as “taking swings” at different stocks.  As far as I know, this baseball-investing analogy is unique to Mr. Buffett.

It’s a neat way to think about investing, so let’s quote the master himself…

“Ted Williams, who wrote the “Science of Hitting,” broke the strike zone into 92 ball shaped sections. He knew, if hit in his sweet spot, he’d hit 430, a little further out, and he’d hit 350. You have to know your sweet spot. The beautiful thing about investing is that it’s a “No called strike game” where unlike baseball the only strikes in investing are when you swing. I don’t have to swing.”

What Buffett is saying is that he prefers to wait until a great investment ‘pitch’ is thrown in his investing ‘sweet spot’.

You’ve probably heard this idea before if you’ve read anything about Buffett.  It’s been published a zillion times.

But what I find most interesting about this baseball analogy is what Buffett didn’t say — He didn’t say he’s got a pitcher who tirelessly and endlessly throws pitch after pitch to Buffett… all for his investing consideration!

Without plenty of pitches he’d have nothing to swing at!

Buffett’s pitcher varies from deal to deal.  Sometimes the pitcher is Buffett himself, from reading through Moody’s manuals or other reference materials.  Other times the pitcher was a business acquaintance who brought ideas.  On very rare occasions an investment banker at Goldman Sachs would even bring Buffett a few deals.

The point is — he always has plenty of pitches coming his way.

Most investors, just don’t have a pitcher like Buffett.  For starters, most people don’t have the time to sort through thousands of publicly traded stocks looking for good investments.  They rely almost entirely on the investing media to provide “pitches”.

This is a huge problem for investors seeking to realize good returns — the investing media like CNBC, the Wall Street Journal, or even the Financial Times covers the same 100 well-known and extremely well-researched stocks (or funds) over and over again.

You’ll rarely find any fat pitches in popular media.

This is one of the reasons why I believe in keeping fresh pitches coming every month —  Without finding plenty of pitches I’ll never have good stuff to swing at!

And now… onto the investing ideas!

 

March Ideas

Eaton Corp

Eaton Corp PLC (Stock symbol: ETN) is my first investing idea for March.  Eaton is a Ireland based provider of global power management systems… that also happens to make hundreds of other products in the electrical, hydraulic, vehicle and aerospace industries.  Basically, it’s a large industrial conglomerate you’ve probably never heard of.

Think of it like a smaller and better run GE.

The company has a number of good businesses with solid operating income and normal(ish) returns on invested capital.

Currently Eaton sports a PE of 12.41 and a dividend yield of 2.89%.  In other words, the company isn’t richly priced but it isn’t dirt cheap either.   Eaton is over 100 years old, and has been paying a steadily growing dividend for a couple of decades now.

etn dividends
Eaton sports a healthy growing dividend.   [Chart courtesy of Gurufocus]
The big challenge with Eaton is growth.  For a number of years sales were declining, and this brought down the premium investors were willing to pay for the stock.  However, a new CEO has been put in place and it appears growth has now resumed.  This is a very positive sign the company won’t be going bankrupt soon.

For potential investors — Eaton could be a hidden gem provided the new management can keep the company growing and allocate capital effectively across its diverse product lines.

It’s an investing idea I think is worth looking into further!

 

Interpublic Group

Interpublic Group (Stock symbol: IPG) is a global advertising agency.  With roughly half it’s business in the U.S. and the other half international, Interpublic is a very globally diversified business with low capital requirements.  You can see some of the many advertising campaigns IPG has worked on here.

Interpublic also sports very good business metrics (ROIC in the 20%-30% range) and yet isn’t ridiculously overpriced with a  PE of 16.39.

So what has management been doing with all that excess capital?  Mostly buying back shares and paying a growing dividend.

ipg shares outstanding
Interpublic Group’s shares outstanding have declined considerably over the last 10 years.

The company board recently voted to raise the dividend by 17%.  It means a current dividend yield of 3.55%.  These recent increases have brought the payout ratio to 49%, which I still consider secure given the company’s low capital requirements.

It’s worth noting that IPG is NOT a fast growing company (~5% revenue growth annually).  Hence the very affordable price.

With traditional advertising on the decline, and digital advertising being the big growth area, I doubt the market will suddenly change it’s mind about IPG.  Don’t expect a quick “pop” in these shares.

If shares fall a little further, I would be very interested in picking-up a few shares of this solid business as a long-term hold.

 

Spirit Realty Capital & Spirit MTA

Spirit Realty Capital (Stock symbol: SRC) is a “special situation” investing idea.  I cribbed the idea from the Clark Street Value Blog.  If you’re interested in this idea, I recommend reading their full writeup on the situation.

Spirit Realty Capital is a diversified real estate investment trust (REIT), owning industrial, retail, and office properties.  The REIT has a current dividend yield of 9.05%, and a price to book value of 1.14.

You’re probably wondering — why is it so cheap?

Unfortunately, SRC’s shares have been on the decline due to problems with their largest tennant:  ShopKo.   (ShopKo currently comprises 7.7% of SRC’s portfolio.)

shopko store
Shopko is Spirit Realty’s biggest tennant, and it happens to be under serious financial distress. Thankfully SRC management has a plan to spinoff the Shopko properties. [Image Credit: Flickr]
ShopKo is a very challenged retailer that’s been closing stores.  This puts significant pressure on SRC to make big changes before something bad happens.

SRC management decided to spinoff the Shopko properties into a seperate REIT called Spirit MTA.  After the spinoff, SRC plans to soldier-on without the ShopKo properties.

Clark Street Value believes there could be indiscriminate selling of Spirit MTA once the spinout is done — I tend to agree.

This is the kind of spinoff that investors dump like yesterdays trash.  It could lead to some very good values for Spirit MTA REIT investors (if your willing to hold a troubled retailer).

Picking which pieces of a spinoff to hold is always a challenge.  I can see definitely see arguments for both sides of this story.  Spirit MTA could become a great value for those looking for undervalued “cigarette butts”, and Spirit Realty might go on to bigger and better things.

Whichever side of the fence you sit on, this is one to watch!

 

CVS

CVS Health Corp (Stock symbol: CVS) is my final investing idea for March and it’s a doozy.  If you’re not familiar with CVS, the company is a major retail pharmacy and pharmacy benefit manager in the United States.

The company runs over 10,000 retail pharmacy locations and fills over 1.3 billion prescriptions annually.

CVS is an very solid business and now they’re attempting to merge with Aetna — one of the largest healthcare insurance providers in the U.S.  Should the merger go through, CVS will become a vertically integrated healthcare titan… yet the market is only valuing the company at 10.75 times last year’s earnings.

I should also mention that CVS has a dividend yield of 2.89% and has been growing that juicy dividend for 14 years now.  That’s not a history to ignore.

In my opinion the current valuation for CVS is unnecessarily cheap.  Perhaps investors are pessimistic about the prospects for retail pharmacies, or they dislike the prospects of the Aetna purchase/merger?

cvs pharmacy
Will the Aetna merger turn CVS pharmacies into healthcare centers?  Investors seem to hate the idea and are punishing the shares. [Image Credit: Flickr]
Here’s what I do know — The pharmacy benefit management business is consolidating with or without CVS.

Cigna is buying Express Scripts, and UnitedHealth Group has OptimRx.  Other mergers are also on the way.

If CVS and Aetna merge, this will make CVS/Aetna one of the few “big players” in a industry that’s going to have oligopoly-like characteristics.  Economies of scale should eventually push healthcare costs lower and lead to even further industry consolidation.

To “win” in the pharmacy benefit business it’s going to be a “go really big or go home” situation.

Will the merger with Aetna hurt CVS’s existing business?  Will the combined entity go on to bigger and better things?

The idea is intriguing enough that I believe this investing idea merits further research.  It’s very rare to see such a large dominant company like CVS sell for such a low price.

 

Final Thoughts

I hope you’ve enjoyed this second foray into my most recent investing ideas.  Normally I’m doing this research myself in the background and not publishing posts about it.

Furthermore, I still consider this series of posts experimental.  If you hate it or love it please let me know in the comments!

As far as the standard boilerplate stuff goes — Do not read 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.  I am not an investing professional, nor do I own shares (currently) in any of these companies.

Please do your own research or use your own financial advisor before you invest.  See my disclaimer page.

If you’re not into purchasing individual stocks — don’t worry.  I’ll be back to posting other things soon enough.

As always, please leave your comments below!  Feel free to share your own investing ideas too!  I’m always looking for another fat pitch!

41 thoughts on “Investing Ideas: March 2018

  • March 10, 2018 at 5:54 AM
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    These are great posts, I enjoy reading reading them. If you had to estimate, how much time each week do you spend researching and pouring over data for stocks like this? As I’ve mentioned, I’m far too lazy and time constrained to do it now which is why I just stick with index funds. But in the future, part of me can see playing with a little bit of extra money that I can afford to lose and having some fun with individual stocks. Thanks!

    Reply
    • March 10, 2018 at 3:02 PM
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      Honestly, I never keep track of the time! If I were to guess, probably 4-8 hours per week.

      Most of the time required is for reading annual and quarterly reports after I’ve found an interesting candidate.

      Reply
  • March 10, 2018 at 6:11 AM
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    Mr. Tako, I’ve always been intrigued by your stock buys and research, so these posts are fascinating to me! Thanks for sharing your ideas.

    Reply
  • March 10, 2018 at 6:11 AM
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    I like this series. You should keep it up. I am not a stock picker but love to hear the considerations that go into your choices. I feel I should understand, even if it’s not my cup of tea.

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    • March 10, 2018 at 3:05 PM
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      Smart thinking there Doc G.

      This is something I believe is missing from most investor behavior — thinking and learning. You’re already one step ahead if you bother to do both.

      Reply
  • March 10, 2018 at 6:28 AM
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    You always present super interesting analogies in your post!

    Thanks for sharing the research and all of your hard work in putting the list together. I was wondering if you think it might be unfair that you put in all the time and effort to research these companies, and other investors might just use the results for their own investment without making the effort?

    Reply
    • March 10, 2018 at 3:10 PM
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      Nah, I’m not worried about that. I’m doing the work of finding these ideas anyway… might as well share!

      If someone borrows an idea they’ll still have to do the work of determining what price to buy and sell at. Many of these ideas also have unanswered questions that might require a lot of work to answer (if they have answers at all).

      Reply
  • March 10, 2018 at 6:53 AM
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    Hey tako

    Nice list and thanks for sharing your ideas. I have cvs and think they are a great buy at the moment. The others i dont own.
    Look forward to seeing what you purchase.
    Cheers

    Reply
  • March 10, 2018 at 9:36 AM
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    I’m particularly interested in SRC. Do you also post when to sell these stocks?
    Thanks.

    Reply
    • March 10, 2018 at 3:12 PM
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      Nope, I don’t talk about when to buy or sell (or at what price). These are not recommendations, just investing ideas I’m studying.

      Some might be worth investing in, others might not.

      Reply
  • March 10, 2018 at 9:43 AM
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    “CNBC, the Wall Street Journal, or even the Financial Times covers the same 100 well-known and extremely well-researched stocks (or funds) over and over again.”

    Yesss I noticed that. It’s whatever creates the most drama because welllll they’re still journalists. That’s their real job. How many times are they going to deep dive into freaking Uber. Uhggh

    Reply
    • March 10, 2018 at 3:16 PM
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      EXACTLY! The S&P 500 might have 500 companies in the index, but how many index investors could name more than 100 of those 500 companies?

      Not many.

      For most investors, journalists drive what they know. That’s frightening when you think about it.

      Reply
  • March 10, 2018 at 10:31 AM
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    I agree with others: I am really enjoying this new series! It would also be interesting to know where the ideas come from, but that may be asking too much 😉

    You have mentioned gurufocus in other posts, and today you linked Clark Street Value. What is your opinion about using screeners (Google, Yahoo…) to filter by book value, pe ratio, etc?

    Reply
    • March 10, 2018 at 3:25 PM
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      Good question. I use a number of different sources to generate these ideas — Some come from various obscure investing blogs that I follow. Other I find in lists like the Dividend Champions. Some I discover from reading investing forums, and others come from hedge fund managers that I follow.

      Generally I don’t use screeners.

      Reply
  • March 10, 2018 at 11:24 AM
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    Fun to read your thoughts and research on individual stocks as always! Keep up the good work!

    Reply
  • March 10, 2018 at 11:48 AM
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    I like these investing idea posts and I appreciate you sharing your investing ideas. Thanks.

    Reply
  • March 10, 2018 at 2:52 PM
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    Thanks for sharing your ideas. Frankly, I prefer this more than your Monthly income/expense recap.

    Perhaps, might also be a good idea to persuade your readers to share their own ideas as well, sort of, get a forum going. Like you said the more pitches are thrown, the more swings we can take.

    Reply
    • March 10, 2018 at 3:26 PM
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      Absolutely Dick! I absolutely welcome any ideas my readers want to share!

      Reply
  • March 10, 2018 at 9:20 PM
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    Hi Mr. Tako,

    Like the recommendations. I have held CVS for a year now, buying in around $78 per share. It may be time to accumulate some more and lower my cost basis…

    Another company you should consider for your watch list is AMNF, a tiny micro-cap food company that should be on the dividend growers list. They just raised their dividend 12.5% and have been raising it for several consecutive years. They will see a huge boost in net profit from the lower corporate taxes of this year and are run very conservatively. I’ve been a happy shareholder since 2014, and also added more to my position in 2017. Not a solicitation or any indication to buy or sell, just one readers comment to try and share something back.

    Stay well!]

    -Mike

    Reply
    • March 11, 2018 at 12:52 AM
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      Cool pick Mike. I’ve never bought anything OTC before. How did you find this one?

      The shares are much more expensive than they were in 2014. Do you think it’s still a buy?

      Reply
      • March 11, 2018 at 1:32 AM
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        Hi Mr. Tako,

        I found it from a list of dividend growers. They are OTC but the financials still look good. Yes, I think there is still good value with them- when I bought their revenue and profits were much lower. They were paying nearly 35% income tax so the drop to 21% will give them a boost of 20% on top of their organic revenue and profit growth.

        Volume is thinly traded so put in on your watch list and scoop up some shares when there is a drop- that’s what I did, along with placing some long duration limit orders.

        As a microcap there is more risk of being a smaller business but there is also an acquisition opportunity.

        Looking forward to any thoughts you may have as you do your own DD. Always appreciate another perspective.

        -Mike

        Reply
  • March 11, 2018 at 7:05 AM
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    I think the Aetna deal may be a good concept and as you said the industry is consolidating regardless. BUT I think it is too big a pill for CVS to swallow (pun intended). The debt they’re proposing would be ridiculous for the resulting company’s balance sheet.

    As for the post format…keep throwing those pitches. I like reading about what stocks are on other folks’ radar.

    Reply
    • March 12, 2018 at 12:11 AM
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      I haven’t looked too deep into the funding the merger yet, but thanks for the tip on the debt level — I’ll take a look into it.

      Reply
  • March 11, 2018 at 9:31 AM
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    Thanks for sharing your investing thoughts- the CVS/Aetna merger sounds interesting.

    Reply
  • March 11, 2018 at 8:12 PM
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    Mr. Tako,

    I have an off topic question for you- did you design this site in Sitepad?

    I signed up for hosting with SquidX and used your referral code (hope you get something out of it) and when I went to build the web page I noticed that WordPress support isn’t offered but the main builder is Sitepad.

    Do I have this correct or am I missing something?

    Thanks in advance,

    -Mike

    Reply
    • March 12, 2018 at 12:10 AM
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      It’s a wordpress site. I think by default wordpress isn’t installed, but they have scripts to do it from cPanel. I believe it’s under “Softaculos Apps Installer” in cPanel (at the bottom of the page). WordPress is the first app on the list.

      There used to be a step-by-step tutorial on how to set everything up, but darn if I can find it now.

      Thanks for signing up with the referral code — that really helps!

      Reply
  • March 12, 2018 at 2:51 AM
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    Thanks for that, Mr. Tako. I think I just wasted a bunch of time on Sitepad but at least the learning curve should be steeper now!

    -Mike

    Reply
  • March 12, 2018 at 4:22 AM
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    Another question- does Squidx support https: or only http? I noticed that you aren’t using a secure site, why not?

    -Mike

    Reply
    • March 13, 2018 at 11:22 AM
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      Mostly due to laziness on my part. They support https just fine, I’ve just been too occupied with other things to make the transition. It’s on my ‘todo’ list.

      Reply
  • March 12, 2018 at 9:18 AM
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    Thanks for sharing your ideas. I like this post a lot. I’d love to read more.
    I like CVS, but haven’t looked into it as an investment. This reminds me to keep an eye on them.

    Reply
  • March 15, 2018 at 12:17 PM
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    Hello and thank you so much for all your generous sharing. I am a complete beginner. But I would like to ask a “stupid” question.. How does one buy a stock? By the way, I loved your posts on your vacation in Japan 🙂

    Reply
    • March 16, 2018 at 8:27 PM
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      Hi Luna — the easiest way is to open a brokerage account and then purchase a few shares. It’s really no harder than buying a index fund or ETF. For beginners however, I recommend a low cost index fund rather than individual shares. It’s probably the best/safest place to start 😉

      Reply
      • March 17, 2018 at 1:42 AM
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        Thank you very much Mr. Tako for taking the time to reply.
        Yes I am a complete beginner. Then I will look into low cost index funds and see how to do this in Europe.
        Thank you again 🙂

        Reply
  • May 16, 2018 at 7:53 PM
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    Hi Mr. Tako! Glad to come across this article of yours. Was looking for some stock investing ideas but I don’t know where to start really. I know i’m from a different country but the criteria you had for this companies for them to be a good place to invest in somewhat gave me a good idea and understanding. Thanks!

    Reply

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