Investing Ideas: September 2018

Where does the time go?  It’s been another month already, and it’s time once again for another Investing Ideas post.

Why do I keep doing these Investing Ideas posts?  It’s all part of my investing philosophy — keep the pitches coming!  I don’t necessarily need to invest (swing) at every pitch, but I do need to keep them coming in!

So, every month I’m out hunting for good investing ideas.  Most stocks I can pass on pretty quickly, but a few merit more reading.  Those few gems (my best candidates) I try to write-up in this post every month.

In general, I look for good returns by investing in businesses with a significant margin of safety, a growing stream of dividends, and good returns on capital.  Not many investments fit this criteria, but a few always do.

Are they worth buying?  I have my own theories, but tell me what you think in the comments below!

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 am not paid to endorse these companies in any way.  I may or may not put money into these investing ideas, but if I own shares I will disclose it.

Some investing ideas may also 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 this month’s investing ideas!

LyondellBasell

The first investing idea this month is actually one of my old ideas that I’m revistiting — chemical manufacturer LyondellBasell (Symbol: LYB).  I first started buying shares of LYB back in 2015 at prices in the low $80’s.  I still own those shares today.

What changed to get met interested again? Well, LYB’s stock price fell 10% in the last month because of two analyst downgrades. Now, the stock trades at a crazy-low trailing twelve month PE of 7.

Why did the stock get downgraded?

In the last couple of weeks ethane spot prices have risen by nearly 50%, which gives analysts reason to believe margins will decline in the short-term.  (Emphasis on short-term is mine)

Ethane of course is a natural gas liquid, and a major energy feedstock component used by LYB to make a number of chemical products.

As an investor, my interest in the company is not short term.  Energy prices are very volatile and sudden spikes are not unusual.  I have no doubt that energy prices can (and will) rise and fall rapidly again when new chemical plants are started, new pipelines are started, or when plants are shutdown for maintenance.

Here’s why I’m not concerned:

• Eventually more pipelines will be built to feed the chemical industry on the gulf coast.  Several are already in the process of being built.
• LYB’s chemical plants are flexible and can run on a variety of chemical feedstocks — naphtha, propane, ethane, and butane.  In fact, all of LYB’s plants in Europe run on naphtha right now.  If prices rise too quickly in one feedstock, they can switch to another that’s less in demand.
• Chemical demand is growing and surprisingly consistent.  If energy feedstock prices remain high, all players in the gulf coast will be affected.  Chemical prices will eventually rise to meet demand.  This is already happening.

In the short term, I fully expect it’s possible earnings could decline into the $7-$8 per share range, making the forward PE closer to 13.  That’s not a bad deal considering LYB would still be able to pay dividends and fund growth investments.

If share prices decline to under $100 per share I’ll probably want to pick up more.

Magna International

Magna (Symbol: MGA) is a global auto parts supplier, supplying auto parts globally for Jeep, Chevrolet, GMC,  Ford, Audi, Jaguar and other car brands.  Roughly half of MGA’s revenue comes from North America and another 40% from Europe.  It’s one of the world’s largest auto parts suppliers, operating in over 28 countries.  It’s globally diversified and conservatively managed.

The stock sports an unexciting 2.34% dividend yield.  Yet surprisingly, MGA sells at a EV/EBITDA ratio of 5.37.  That’s surprisingly cheap, but I checked and historically the company has traded around that level for a very long time.  That’s the bad news.

But here’s the good news – The company has grown dividends slightly over 10% for the past 7 years, and EPS has grown at an even faster pace (slightly over 13%).  That’s pretty amazing when you consider how cheap the stock is.  Debt levels also look very manageable.

So what’s not to like here?  Other than a existing in a slow-ish growing and volatile industry, the only red flag I see is a hit because of recent U.S. tariffs.

This one is definitely worth a deeper look.

FedEx

Here’s a good value sitting in plane sight — FedEx (Symbol: FDX).  We all know what FedEx does of course — They ship packages around the world.  The company, it’s brand, and it’s trucks are well known to many.

Yet at a time when the S&P 500 is trading at a PE of 25, FedEx shares trade at a mere PE of 14.  That’s considerably lower than it’s bigger rival UPS (PE of 20).

Profit margins at FedEx are usually a few percentage points lower than rival UPS, but by no means does this make FedEx a bad company.  Both are great companies that have an incredible tailwind of growth from consumer shopping shifting to online purchases.

In recent quarters, revenues have grown in the 9-10% range annually, and dividends for shareholder have grown even faster (35% annually over the past 3 years).  The only problem is that the dividend was so small to begin with.  Right now, FDX sports a dividend yield of 0.93%.

That’s small potatoes for serious dividend growth investors, but the company has started buying back a lot of stock in recent years.  Enough to noticeably reduce the share count.

Is FDX just an also-ran next to the mighty UPS?  It’s hard to say.  Globally there is considerable shipping competition from many other companies, but FDX’s economies of scale should keep the business profitable and rewarding shareholders far into the future.

In fact, I have a hard time believing that Fedex won’t do really well over the next ten years.  It’s almost inevitable that shipping company revenues are going to grow and brick and mortar retailers will shrink.

For a long term shareholder, I think this pick is bound to do OK given a long enough investing timeframe…

Campbell Soup Co

Here’s one of those “packaged food company” ideas again.  Campbell Soup (Symbol: CPB) owns a number of iconic package food brands in the U.S. — Pepperidge Farms, Prego Spaghetti sauce, V8, Pace salsa, Goldfish crackers, and many more.

Really, it’s the same story we saw back when I thought about investing in KHC — consumer preferences are shifting to healthier foods, away from pre-packaged food.  Sales at the iconic food brands like Campbells are falling and profitability is on the decline.

Shares are down 15% YTD, primarily because earnings were down 70% last year.  That sounds like a huge drop, but organic sales only declined 2%.  Somebody really tipped over that applecart.

It’s also worth noting that CPB sports a 3.5% dividend yield, and they’ve been buying back a few million shares every year for a couple of decades now.

If profits weren’t falling so quickly, this could make a decent investment.  Management seems like they’ve been doing a really poor job adapting to changing tastes.

So how does CPB plan to fix these problems?  By selling off pieces of the business, a plan they recently published to reduce indebtedness and cut costs.  Unlike Kraft however, Campbell Soup has a big catalyst for change — Hedge fund manager and activist investor Dan Loeb (of Third Point Management) is on the attack, starting his battle with a nasty letter to the board and a proxy fight.

If you’re not familiar with Dan Loeb, I suggest doing a little reading.  He’s made a fortune buying into poor performing companies, replacing the board of directors and bad managers, and then bringing the company back to profitability again.  He’s pretty successful at it too.

Unfortunately Loeb currently controls about 8.3% of the stock, while founding family members own about 30%.  That’s a tough road to haul, and he might not be successful.

Investors would be primarily “along for the ride” on this one, voting alongside Third Point and hoping for a positive result.  In the meantime they can collect that dividend until the necessary changes get made.

Unfortunately I don’t think the shares are cheap enough to make this one really compelling.  There’s a decent chance *something* is going to happen in the next year that will benefit shareholders, I’m just not certain it’s going to be enough to make this investment worth the trouble.

Final Thoughts

Thanks for reading my September investing ideas everyone!  I hope you enjoyed these ideas and perhaps found them useful.  I’m always curious to hear your feedback, and please feel free to share your own ideas in the comments!

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

Until next time!

[Image Credit: Flickr]