Today we’re looking again at a teaser from our old friends at the Motley Fool — this time, the Rule Breakers folks, led by founding bro Dave Gardner … and they’ve got what they think is a hot growth stock that you have to buy now, before the next iPhone comes out in a few weeks.
Here’s how they pitch it at the top of the ad …
“One Stock You Must Buy Before iPhone Fever Strikes Again
“It’s not Apple or AT&T, Verizon or Google. In fact, you’ve probably never even heard its name.
“Yet this behind-the-scenes company is so vital to the wireless industry that its shares have doubled time and time again since smartphones first hit the shelves.
“And soon millions of people everywhere, from Miami to Mumbai, will be racing to buy the new iPhone — meaning it’s only a matter of time before this stock takes off again.”
As you can imagine, they’re reserving the name and ticker of this particular stock for subscribers to Rule Breakers, which will run you $149/year. You’re always welcome to subscribe, of course, but if you’d rather hold on to your money (or invest it) we can dig in and see if this top pick can be gleaned from the pages and pages and pages of Fooleriffic clues.
The ad starts with an example, of a truck driver who got in early on the cell phone craze by buying up spectrum in a couple cities, becoming a millionaire in short order … and the ad says their idea is a similar one.
As they often do, the Foolies trot out some opinions from name brand folks to buttress their choice of stock … here’s that bit:
“Famed money manager Gary Kaminsky calls this company ‘a pure play on wireless growth’ and notes that it’s ‘generating tremendous amounts of cash with a very shareholder-friendly focus.’
“CNBC’s Lee Brodie says he likes this company because it’s ‘closely tied to an industry that’s poised to explode.’
“Oppenheimer analyst Timothy Horan says that of the select few companies that operate in this extremely important wireless niche, this one is ‘not only the biggest but also the best managed.’
“And apparently he’s not the only one who thinks so…
“Harvard Business Review recently named this company’s longtime leader one of the ‘Top 100 Best-Performing CEOs in the World.’
“Nevertheless, you might be wondering if you wouldn’t just be better off investing in a well-known giant like Apple or AT&T.”
Of course, they don’t think Apple or AT&T is the way to go for investors now … this company they’re teasing is apparently broader based …
“… this company doesn’t own, license, or lease spectrum — but it does provide behind-the-scenes infrastructure that is absolutely crucial to the functioning of virtually all cell phone networks…
“Meaning its value isn’t dependent on the success of any one cell phone brand or carrier.”
And then we hear all about how wireless bandwidth demand is climbing dramatically thanks to smartphones, and the providers need to expand their networks to keep up, which I think we’ve all been hearing ever since the original iPhone almost crashed AT&T’s networks in some cities.
So how about some more specific clues? They oblige, thankfully:
“… the company I’m writing you about today stands head and shoulders above all the rest!
“Currently, it owns and operates roughly 27,000 ‘cellular transmission sites’ around the world, which it leases out to all major cellular carriers at ever-increasing rates.
“And not only is it the largest company of its kind, it’s also the most profitable.
“Over just the past 12 months, it has cranked out a whopping $630 million in free cash flow — nearly double that of its closest competitor.
“Speaking of which, competition isn’t all that much of a concern here.
“For one thing, favorable zoning laws in many of the places this company operates give it sole control of large amounts of territory.
“For another thing, it sports much higher profit margins and a lower debt-to-capital ratio than does any of its competitors.
“And its abundant cash flow allows the company to reinvest in the business as well as expand to new countries and new markets.
“Lately there’s even been talk about restructuring the company as a Real Estate Investment Trust (REIT) so that it can start returning some of this cash to shareholders.
“In fact, in a recent interview on CNBC’s Fast Money, the company’s CEO confessed that he believes that ‘dividends will be paid in the next two to three years.’
“As investment legend Gary Kaminsky pointed out after that interview, there are ‘very few companies that can grow and return capital to shareholders.'”
So who are we talking about here? Well, we put all that info into the mighty, mighty Thinkolator, let it cogitate for a bit, and we learn that this is …
American Tower (AMT — click here for the free instant analysis of AMT from Marketclub, one of my advertising partners … just FYI, they say the trend pretty well stinks right now)
Ugh … no, not the company, the ticker, I keep getting stuck with the AMT when I file my taxes and it’s profoundly irritating.
The company is, as you might guess, a great one — but it is dang expensive. American Tower owns a huge portion of the gazillions of cell phone towers and other transmission sites in the US, and is also expanding quickly in India, Brazil and Mexico. They usually lease the site for their tower for a long term, build the tower and pad and set up space for ground equipment for their tenants, then fill the tower with antennas and other equipment for as many tenants as they can squeeze on. The tenants lease that space for long terms, usually five years with high retention rates as they keep renewing their leases with inflation boosts, and they can add more and more tenants until the space on the tower is maxed out — but the tower never gets more expensive and it has very limited maintenance costs, so the margins get higher and higher for that tower as they add antennas or clients. The company’s overall operating margin is a delightful near-40%, which is pretty nice for such an asset-heavy company that owns real stuff… but as I said, it’s expensive, and usually has been expensive throughout much of its history as a public company.
The current trailing PE is 57, the estimated forward PE is 38 based on guesses that they’ll earn $1.04 in 2011 (on the 2010 earnings guess the PE is 46) — as to whether the analysts know what they’re doing with AMT, the company blew out earnings estimates in the first quarter this year but failed to meet estimates twice last year, so it’s probably tough to estimate their quarter-to-quarter performance.
If you’d like to get a quick overview of the details of American Tower’s business, and why it’s generally so stable and profitable and why the stock trades at a lofty multiple, they made a thorough presentation at an investment conference back in March and you can see the slides here [pdf file] (that was before the last earnings release).
And as to the “expensive” notion … well, that’s what David Gardner likes. He has set up the Rule Breakers newsletter to follow his philosophy, which he says relies on these six keys:
The company needs to be a Top Dog and First Mover … from the ad:
“A ‘top dog’ is a company that dominates its industry… and a ‘first mover’ is a company with a technology or product so revolutionary that it disrupts an existing industry and creates an entirely new one.”
And it needs to have the following qualities, as explained here in the ad:
“… a sustainable competitive advantage that can be exploited for years to come (like exclusive rights to highly in-demand cellular transmission sites all around the world)
“strong past price appreciation (like 5,000%+ gains in under a decade)
“excellent management (like a long-standing CEO who top-notch equity analysts and the Harvard Business Review alike have called out as being one of the best in the world)
“strong consumer appeal (like being the top behind-the-scenes provider to one of the world’s most in-demand industries)
“And here’s the big one…
“documented proof that the financial media thinks it’s ‘overvalued’
“Recently, I’ve heard this company’s valuation called everything from “frothy” to downright “expensive” (even though shares have pulled back a bit, thanks to the recent market volatility)”
That “proof that the media thinks it’s overvalued” bit always seems like the funnest part of Dave Gardner’s shtick — he seems to love to pick growth stocks that he thinks will explode, but that most pundits are afraid of because of lofty valuations. It obviously doesn’t work all the time, and the example picks they provide in the letter of past Rule Breakers winners that have had huge runs were largely small cap stocks, not behemoths like American Tower ($16 billion market cap, plus a few billion in debt), so although AMT is very profitable, expanding internationally (particularly with some appealing acquisitions in India to boost their total to 7,000+ towers there), and likely to return cash to shareholders with buybacks and, possibly, a dividend someday … it’s hard to see it being a near-1,000% winner like Intuitive Surgical or Baidu over the next few years. That’s not to say it’s a bad pick, of course, just that it’s different from some of their recommended breakout small caps that became mid caps over the years.
As for the Rule Breakers newsletter in general, as you might expect from a growth stock letter it had a great year following the crash of the market and a terrible year as the market was crashing — they’ve been around for at least six or seven years, and most of the Fool letters hate to sell stocks, so they probably have at least 50-60 stocks in their portfolio right now, all of which will be growth-focused and most of which are probably quite a bit smaller than American Tower. Hulbert pegs them at about a 12% annualized return for the last five years, which is better than any other Motley Fool newsletter (and in Hulbert’s top 20 for that time period), though it’s worth noting that your mileage may vary — some of their picks, like BIDU and ISRG, did a lot of that heavy lifting — this style of investing often seems like home run hitting, looking for a few massive hits and getting lots of strikeouts in any given time period, though I’d wager that American Tower will probably be less of a “big swing” given its already large size (and, of course, probably also less of a risk, despite it’s high valuation).
Stock Gumshoe Reviews surprisingly boasts only a single review of Rule Breakers right now (if you’ve subscribed, please click here to review it for us), though we have dozens of reviews of other Motley Fool letters for your perusal, should you be so inclined.
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