Today I’m taking a “mea culpa” moment to remind you about a a stock I’ve been a wee bit skeptical of as “too expensive” for quite a while … I’ve been quite wrong about the stock so far and it has risen persistently and consistently over the last 2+ years.
Not that it’s rare for me to be wrong about a stock, of course — we’re almost always spot-on accurate in identifying teaser picks, where Stock Gumshoe has consistently been more than 99% accurate for over five years, but my opinions about stocks often turn out to be wrong.
And since this is a stock I’ve written about a couple times, and there isn’t really much new to say, I’ll also throw in a couple “bonus” teaser solutions.
All of this comes in courtesy of the Motley Fool’s marketing machine, by the way — they’re trying to get subscribers to their Rule Breakers newsletter, which is the growth stock letter helmed by David Gardner.
And since early 2010, whenever there’s some kind of chatter about Apple or the iPhone (as there almost always is, whether it’s new carriers or new competition or a new version), we get another taste of this ad. Last time we wrote about this, it was the “secret that Siri isn’t sharing” and there was plenty of promo chatter on this as well back when the Steve Jobs biography was being parsed regarding his “war” on Android. This time around, the “hook” is that the Motley Fool has the “biggest iPhone 5 news yet” and they’ve got a “backdoor” opportunity for you to profit.
Here’s the basic pitch, in case you missed it:
“According to a recent Wells Fargo report the coming iPhone 5 will be…
“BIGGER than any TV… Walkman… Camera… or PC launch in history
“In fact, these industry insiders are predicting that it will be the single biggest consumer electronics launch of all time…
“Piper Jaffray’s senior Apple analyst, Gene Munster, seconds this opinion — saying that Apple will easily sell 80 million units right off the bat.”
Which would be fine with me, as an Apple shareholder — but it’s not Apple that the Rule Breakers folks are talking about … it’s cell towers.
The spiel is that the most profitable investment in early cell phones was made by those who bought frequencies and thus controlled local areas — and the closest analogue to that now, the way to profit from cell traffic in an area without having to pick the best phone or carrier or app, is by owning the cell towers. Cell towers are what host the radio antennas that connect cell phones to the networks, and the argument (and it’s a good one) is that they can often add lots more antennas without increasing marginal costs much, and they can rent out space to all of the telco providers and don’t have to pick winners, and the more data that gets transmitted online, the more antennas need to be added to existing towers, generating additional revenue for the tower owners who charge rent.
So that’s the basic idea, and the stock that’s being teased by the Motley Fool is still American Tower (AMT), the largest of the “pure play” tower companies — though Crown Castle International (CCI) isn’t that much smaller, and even comparatively small “third place” player SBA Communications (SBAC) is a pretty big company with a $7 billion market cap. American Tower converted to REIT status early this year and has continued to go up and up and up, and it seems likely that CCI will also convert to a REIT within the next couple years (they’re using up some tax losses first, it sounds like).
These are stocks that depend on a tech trend (more wireless bandwidth demand) but are really rapidly growing, high-debt, real estate companies — they have a lot more power to increase earnings from their current asset base than do traditional real estate companies like office or retail space owners, because they don’t have to build or buy more buildings to increase the revenue that they receive from each tower, they just have to raise prices or add antennas. And they also generate a lot less income for stockholders than do typical real estate companies or REITs. AMT pays a dividend, and will continue to pay a rising dividend as a REIT, but the actual yield is quite low at less than 1.5%. AMT, CCI and SBAC are all very, very expensive based on conventional metrics like price/sales or price/earnings, but they’re also growing earnings very fast.
In AMT’s case, they’re growing both through “same tower” sales growth that comes close to 10% as well as through aggressive international expansion, which has included some pretty big tower purchases or buildouts in places like Mexico, Brazil and Uganda. And though they carry a lot of debt and a high valuation, they still look better than their two smaller competitors on both of those fronts … and they’re also growing faster.
So I still have some trouble with the high valuation, and I still have never owned the stock, but it’s also hard to justify buying CCI or SBAC instead of AMT if it’s towers that you like. They’re doing well, and I’ve been missing out. The stock is up a good 75% from when I first covered them and noted that they were expensive in May, 2010, and up 10-15% since the last similar campaign that the Fools ran back in January. And as several folks have noted, the next big transition in mobile, to the faster and even-more-data-carrying LTE standard, is still just barely underway and might create some more substantial growth as new antennas need to be added to towers to spread the new networks — this is nicely summed up by Bloomberg here.
So yes, it’s a bit silly that they keep using the same promo with different iPhone-related pitches … but damn it if the stock hasn’t done just fine despite the fact that it’s an odd and expensive bird — a high-growth, low yield Real Estate Investment Trust that sometimes worries folks with their debt levels and their expensive international expansion, but keeps on growing and has very little competition.
What are they teasing these days aside from American Tower? I promised to share a couple other quick teaser solutions, so here we go:
In the same ad for the Motley Fool Rule Breakers, they pitch their “Stocks 2012″ report — which is getting a bit long in the tooth now (they release one of these every year, basically a mini e-book giving the analysis of favorite picks from a dozen or so of their analysts). So, since they give a few hints we’ll try to figure out what they are …
“A popular restaurant concept where insiders have been lining their own pockets for years. But there’s a new sheriff in town seeking change. It’s an activist investor famous for digging up hidden value from tired business concepts — and making shareholders a lot of money in the process.”
That’s obviously not a lot of clues, but I reckon the odds are very good that here they’re teasing Cracker Barrel (CBRL). Cracker Barrel is facing increasing pressure from activist shareholder Sardar Biglari, who wants to be the next Warren Buffett — he is best known for turning Steak n Shake around, and during that turnaround he took control of the company and renamed it after himself as an investment holding company, Biglari Holdings (BH), which has arguably had a hard time finding its “next hit” and rejuvenating investor enthusiasm after the Steak n Shake success (BH stock is right around the middle of its 2-year range of $300-450 per share, and the stock still has plenty of value investing fans).
Biglari has upped his stake in CBRL to about 17.5% now and is trying to pressure what he says has been a too-chummy and overpaid management team that has been ineffective. There has been some reaction in a bit of turnover at the board of directors, and there are some analysts out there who’ve raised their price target on CBRL and who say that the shareholder fight is causing a discount in the shares — CBRL does pay a decent dividend, they are growing their sales (somewhat tepidly) and their earnings (pretty well), so there is a real company there, and they do have a brand that people like and continuing plans to keep opening new locations. I don’t know if Biglari will succeed in shaking things up any more than he already has, but at this point it might be getting interesting — it’s a little bit more expensive than other family casual restaurant chains like Darden (DRI — Red Lobster, Olive Garden, etc.) on a PE or dividend-yield basis, but not dramatically so (and it is a much smaller company).
How about one more? Don’t worry, I’ll make this one even shorter:
“A cutting-edge biotech company churning out barrels of oil from algae. Might seem speculative, but this business is already proving itself — boasting clients like the U.S. Navy, Dow Chemical, and even oil giant Chevron. Analysts predict business will grow nearly 5 times by 2015, indicating this could be a solid buy for your portfolio now.”
This one must be Solazyme (SZYM), which is indeed helping to create biofuels for the Navy and other customers using algae. It’s pretty cool, but it’s also, of course, a long way away from making money. Like many alternative energy sources, they depend on someone to create a market for them by forcing usage — there’s no way to get biofuel produced by algae down to the same price as kerosene produced from fossil fuels in the near future. Which isn’t to say it’s not a worthwhile endeavor — the Navy certainly is willing to pay a substantial premium to research fuels that don’t have to come from people we might be at war with in the future, though I’m sure that, like other alternative energy research programs, it will continue to be a big debate (some politicians have already tried to shut down the Navy program as a waste of money). Solazyme is an $800 million company with about $200 million in cash, so they can keep losing money at this same pace for a couple more years without too much worry, but for the foreseeable future it looks like they will depend on subsidies to sell their fuel. You can see the company’s promotional video here if you want the basic gist of how they’re positioning themselves, and there’s a quick piece here about the Navy’s continuing push for biofuels here.
There have been predictions that algae-based biofuels will grow fivefold from 2010-2015 — I don’t know if they’re going to be correct, but one quick summary is here. The forecasts from analysts for Solazyme specifically tell us that they think revenue will more than double next year, but that the company will still lose almost as much money as this year (losing about a dollar a share). This is a story stock, and the story needs some outside impetus — that outside impetus to push them through to profitability over the next few years may or may not come, depending both on US politics and on global fuel security/oil panic politics, but the stock’s not going to move based on actual profits in the foreseeable future because it won’t have any. They do have some big customers and plenty of cash to keep them going, so they’re not going to disappear overnight like some alternative energy stocks have, but I don’t know of any obvious positive catalyst to drive a lot more revenue.
So there you go — David Gardner apparently still loves American Tower, and if you’re sniffing around for other hinted-at ideas it looks like someone at the Fool also likes Cracker Barrel and Solazyme … anything in that list appeal to you? Let us know with a comment below.
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