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!
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.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 (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.
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 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 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?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.
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!