Investing Ideas: September 2019


Wow, what a summer!  Every month I try to write-up a post detailing my current investing ideas, but I failed horribly in August.  Summer happened.  I was so busy traveling and vacationing around in August, that I didn’t manage to write that post!  Ooops!  Sorry about that folks!  Summer was busy!

Now that the kids are back in school, I suddenly find myself having more spare time for things like investing, and researching good investments.  It’s a good thing too, because all the recent talk about a passive investing bubble has me thinking that certain large-cap stocks might be over-valued.  Especially technology stocks like the FANG stocks… which tend to attract a larger portion of the indexing dollars.

Its got me thinking small.

For this September edition of my “Investing Ideas” post, instead of looking at the entire universe of stocks (both large and small), I’m going to be focusing on small stocks that aren’t a part of the big-money index funds.  In other words, companies nobody’s ever heard of.  Large enough to be public, but not large enough to be widely indexed.

Small doesn’t have to mean poor quality however — They might not get a lot of love from the stock market, but there’s plenty of high-quality small companies to invest in.  Let me show you a few I dug up!

 

FAQ & Boilerplate Warnings

Before we begin, let’s 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!

 

CorePoint Lodging Inc.

CorePoint Lodging Inc. (Symbol: CPLG) is a hotel REIT.  REITs are real estate investment trusts that are required by law to pay-out 90% of their taxable income to shareholders.  They tend to have high yields, but lower growth rates.

This particular real estate investment trust owns 313 hotels, primarily under the La Quinta brand.  The hotels are mostly located in southern U.S. states, with the majority being in Texas and Florida.  The company sports a $615 million dollar market cap which keeps it pretty far off the radar of most investors.

The vast majority of CPLG’s hotels are in southern U.S. states.

What’s so interesting about CorePoint Lodging you ask?  The company was formed as a spinoff from La Quinta Holdings (The hotel chain) back in 2018.  The Texas-based hotel chain decided it would be a good idea to spin-off their hotel properties into a separate REIT structure, but the REIT’s stock has continuously dropped ever since the spin-off happened.

Originally the REIT shares started trading at around $25.90, but today you can pick up a share for a mere $10.66.  That’s a huge drop!  CPLG is now trading at around 10x estimated 2019 FFO per share.  That’s pretty good!  CPLG is starting to look like it could be a good value investment!

So, you’re probably wondering “what’s wrong with it?”  The REIT sports a 7.46% dividend yield (which is great), but the company’s revenues have recently declined 6% yoy.  That’s not really a good sign.

Presumably the parent holding company La Quinta decided to spin off the company at a very ideal time, and the properties are now returning to “normal” profitability… hence the revenue declines.  Given enough time the hotel business might start to improve again…

The company has a stated strategy that they intend to “grow and diversify the portfolio over time”, but I’m skeptical.  So far, I’ve only seen CPLG sell hotels.  That’s not unusual for a hotel REIT, but it does make me doubt management’s ability to execute on their stated strategy.

For now, I’m putting this small REIT into my “watch close” category.  If the shares continue to drop even further, it could represent a very good value.  I’ll also be watching for some kind of signal to see if the REIT’s management has an actual growth strategy, or if they just plan to continue selling off hotels.

 

NACCO Industries

Here’s a little company that I can almost guarantee you’ve never heard of.  With a mere $381 million dollar market-cap, this coal miner is pretty small by stock market standards.  NAACO (Symbol: NC) is in the coal mining business for electric utilities.

While coal mining for power generation is not typically considered a growth industry in the U.S., it’s still used to produce around 27% of all electrical power in the U.S.

coal electricity production

Coal usage for power generation has been declining since 2007, and it’s a industry with a dirty reputation.  This is probably why NAACO’s stock is so cheap, trading at a mere PE of 8.

Fortunately for NACCO, everyone still likes to have power even if they don’t like the dirty source.  To ensure a steady supply of coal, the power utilities have signed long-term with NACCO.  Some of those contracts are even written to last for over 20 years!  Since the contracts aren’t tied to the price of coal, this creates a very stable source of revenue for the company.

Here’s the interesting bit — NACCO has managed to maintain stable earnings per share in recent years.  This is a fairly impressive feat if you take into consideration the declining state of the coal industry.

To put it simply — Coal will continue to consume a smaller and smaller percentage of U.S. energy generation in the future, but NACCO isn’t going away anytime soon.  There’s still plenty of money to earn from existing assets.

nc profitability
Revenues have declined in recent years, but profitability per share at NACCO has remained stable!

Investors have recently caught onto the fact that NACCO is a rock solid business, and shares have risen 61% this year alone.  Yes, you read that correctly — a 61% gain from a coal stock!

While coal mining is still a stinker of an industry, the real gem in this small-cap stock seems to be the management.  This is a very well run company that doesn’t seem to waste shareholder capital.  They seem to be carefully buying back stock only when it makes sense and carefully looking at growth opportunities outside the coal industry.

NAACO sports a dividend yield of 1.44% which isn’t huge, but they’ve been paying down debt in recent years.  Now, the company is nearly debt free and given their lack of reinvestment opportunities I expect dividends might grow dramatically.

While NAACO is probably not going to turn into the next Berkshire Hathaway, anyway you slice it this stock seems to have a large margin of safety.

 

PetMed Express, Inc.

PetMed Express (Symbol: PETS) is a stock I’ve followed for awhile.  Why?  Pets are a huge growth industry.  First world countries now seem to have a trend toward having “fur babies” instead of real babies, and this means consumers are spending more and more of their hard-earned dollars on pets every year.  Pet medication of course is one piece of that spending. PetMed Express is in the business of selling pet medications online and over the phone (through 1-800-Petmeds), and has been growing as part of this overall pet trend.

So what happened that caused PETS stock to recently tank from a high of around $45/share to a mere $17.44 today?  Competition that’s what!

There seems to be a price war going on in the pet medication industry, with Chewy.com and PetMed Express trying to maintain sales by cutting prices.  In the last couple of quarters this has caused large drops in profitability and PETS’s stock has fallen by 53%.

Historically PetMed Express has been a very good business with no debt, growing at a decent clip, and requiring very little in the way of capital expenditures.  This meant there was plenty of free cash flow from which PETS could reward shareholders.  Typically the company has done so with a healthy growing dividend.

Today, PETS pays a nice dividend yield of 6%. 

pets dividend growth
Until very recently, PetMed Express has been a dividend growth company, with a healthy dividend.

My biggest question for this stock revolves around when and if this pet medication price war is going to end.  If the price war continues for the foreseeable future, PETS’s tradition of raising the dividend annually could be in jeopardy.

There’s plenty of places that sell pet medication offline, but the speed and convenience (and of course price) of buying online has been fueling the growth of online retailers like Chewy and PetMed.

PetMed Express is a small company with a $351 million dollar market cap, but I think there’s still plenty of room for it to grow simply by growing with the pet market AND the potential of taking market share from traditional (i.e. offline) competitors.  I suspect the pet medication price war is just masking the growth right now.

pets market share
There’s plenty of room for an online retailer to grow in the pet medication market.

Does PetMed Express or Chewy have some kind of competitive advantage that might allow them to take market share from offline competitors?   I don’t know.  I haven’t found an answer to that question yet, and it has me sitting on the sidelines despite the lower stock price.

That said, I’ll be watching the company closely.  If customers continue to fill more and more of their pet medications online, there still could be some life left in this stock.  Right now might just be the perfect buying opportunity for a very good business.

 

GreenSky, Inc.

GreenSky (Symbol: GSKY) is in the business of creating “point of sale” loans for customers of home improvement companies and elective medical procedures.  Imagine for a moment that you need to borrow money to pay for your kid’s braces but you don’t want to put it on your credit card.  Instead, the Orthodontist offers you a no interest loan for 30 days with a lower interest rate than your credit card.

Seems like a pretty decent deal, right?  That’s exactly the kind of business GreenSky is in.  The company earns money from two different places — transaction fees (creating the loans and providing the platform) and loan servicing fees.  Mostly they don’t ‘own’ the loans, but instead partner with banks who provide the funds for most of these high-margin loans.

It’s a profitable business growing at a good clip — profit margins are a healthy 7.28% and last quarter GreenSky’s transaction volume was up 20% year over year.

gsky revenues
Despite growing revenues at a rapid clip, GreenSky’s share price has fallen 23% YTD.  Such is life as an unloved stock.

Despite all the growth, this stock gets no love from the stock market.  The company has a market cap of $1.34 billion, but the stock has done nothing but sink since going public last year.  Shares are down 68% since it went public.

Why is there such a lack of love for GreenSky’s stock?  Perhaps it’s because the business model is unproven.  The company is growing rapidly, but investors might be worried the business is going to dry up when the next recession hits.

Or, investors might be scared because the company recently announced they’re pursuing “strategic alternatives” to address their low stock price.  Even though the company has recently bought back $146 million of their own shares over the past eight months, management thinks they can do better.  Using this sort of terminology it means management is typically looking to sell the business to the highest bidder.

While a sale of the business may or may not happen, the company is likely to keep growing at a 17%-25% clip this year unless the economy goes completely off the rails.  If a buyer is announced, it might mean a decent ‘pop’ in the stock price  (buyers of public companies will typically pay a premium above the current stock price in order to secure the sale).

Either way, I think under most scenarios investors at this level are bound to do pretty well.  If a buyer emerges, investors will likely make money, and if the company continues to grow and buy-back shares those dollars spent will be very effective.

The only problem is, GreenSky doesn’t pay a dividend.  Investors in this stock will need to be very patient and collect no income (potentially for years) until a buyer is found.  Or, following the other scenario it might take a decade until GreenSky “proves itself” to the market by surviving a recession and compounding retained earnings.

This is definitely an investment for a patient investor, but if you’re patient and don’t need income, this stock definitely has the potential to provide good returns in the future.

 

The Small Ending

That’s it for September folks!  Thanks for reading my latest investing ideas post!  Let me know if you agree or disagree with my analysis in the comments!  I certainly don’t know everything, so it’s always good to learn from readers like yourself!

Feel free to drop any additional “small stock” investing ideas you have in the comments too!  I’m always curious to take a look at small unloved companies.

 

[Image Credit: Flickr]

8 thoughts on “Investing Ideas: September 2019

  • September 18, 2019 at 6:26 PM
    Permalink

    I like it – especially when I see a bunch of names I’ve never heard of.

    GreenSky scares me though – since they’re just squeezing into a crack in the market, there’s a natural cap on growth, and I could see them in real trouble if there is a recession. But it looks like a good company to watch, and if they do survive long-term maybe they (and their investors) will do well.

    Reply
    • September 18, 2019 at 6:37 PM
      Permalink

      Thanks Paul! You might be surprise at the growth opportunities in those cracks. Home improvement and elective medical are just the *current* niches they’re in. If you check out some of their investor presentations, you’ll see they have grand plans to expand to many other sub-markets.

      Reply
  • September 19, 2019 at 7:45 AM
    Permalink

    Good foresight on the pet industry. We don’t have pets, but our friends who do spend more on their animals than we do on our human baby. Almost irrationally.

    Reply
    • September 19, 2019 at 8:59 PM
      Permalink

      I know exactly what you mean, I see people spending crazy amounts of money on their pets these days. Heck, there’s a mobile dog spa in my neighborhood almost every weekend!

      Reply
  • September 19, 2019 at 12:08 PM
    Permalink

    i had pets on a watch list for a long time. i just took them off because i think the dividend might be cut soon. i’ve been keeping an eye on NTAP, who has taken a big hit this year. they have debt but cash to cover it and should make well over double what they’re paying out in dividends next year. thanks for the thoughtful idea.

    Reply
    • September 19, 2019 at 8:58 PM
      Permalink

      Yeah, I’m not so certain PETS can continue their dividend growth policy too. It looks dicey.

      On NTAP, I’ve been watching them too, but I have a hard time predicting what the future looks like for them. That’s usually enough to keep me away. 😉

      Reply
  • September 19, 2019 at 6:18 PM
    Permalink

    Thank you for providing the research and analysis on these stocks.
    The one which interested me the most is CorePoint Lodging Inc since it’s in the hotel industry. I have been investing in the hotel industry for over 12 years and most of my current portfolio is tied up in this industry through syndication (they concentrate on Marriotts and Hiltons products). When I looked at CPLG’s 2018 annual report (FYI – I’m not an expert at reading these reports); I noticed that all their hotels are Laquinta Inn/ and suites which were mainly built in the ’70s 80’s and 90’s, so an investor would need to make sure that they don’t need too much renovation.
    Out of the 315 properties, they have 93 exterior corridor properties and 222 interior corridors properties. The preference today is having interior corridor properties; sometimes the Franchisors are phasing the exterior properties out; if this happens CPLG, would most likely need to sell these assets at a lower price because the new owner would need to convert to a lower flag hotel, which in most cases will reduce occupancy and their average daily rates.
    On a positive note on the Laquinta brands, I have heard that they tend to make profits because their running cost is less than some of their competitors; my cousin is building a new Laquinat in Kansas City and he pointed this out to me.
    I will definitely start following CPLG and get more familiar with this company and maybe buy some stock if I feel comfortable.
    Thank you for all your hard work Mr. Tako and keep up the good work on this “Investing Ideas Series” which I thoroughly enjoy.

    Reply

Leave a Reply

Your email address will not be published. Required fields are marked *

Do NOT follow this link or you will be banned from the site!