So… what’s going in in the Real Money Portfolio this week, as we close up shop and get ready for a bit of time with family and friends?  I do have one buy to share with you today, I decided to pick up some shares of the stock that I wrote to you about a week ago, Five Below (FIVE).

Why?  Well, what helped to tip the balance is that Five Below (FIVE) will be a very big beneficiary of the lower tax rate, all else being equal… they pay about 36% in income taxes at the corporate level, so if we assume that they will pay roughly 21% in the future that’s a substantial boost. Right now, if the tax cut were retroactive to 2017 (it isn’t, of course, this is just an exercise), their net income would be about 23% higher.

If we use a slightly smaller number, say 20%, and apply that to future estimates (the average estimate almost certainly does not account for the new tax rate yet, since it was just passed and analysts are not typically aggressive with such things), then the 2019 earnings (they’re in FY 2018 right now) could go from $2.06 to $2.47. That means the forward PE goes from 32 to 27.

So yes, it still trades at a premium prices… but I’ll bite at that level, particularly because the stock was fairly appealing even before, and this tax cut isn’t likely to otherwise pressure the growth numbers… in fact, it could also be that the tax cut is positive for top-line sales, not just the bottom line profitability. If withholding is slightly lower for most middle class taxpayers starting in January, there could be more disposable income, which tends to leak down to the teenagers who frequent Five Below.

And really, other than Amazon my portfolio is quite lacking in retail or real consumer-driven companies, so it will probably be good to have some further exposure to that sector — even if I’m not willing to risk a lot on most of the struggling retailers right now… FIVE seems, with its fun stores and low prices, to be effectively immune from the Amazon flu that ails so many retailers, though that, of course, is no guarantee that they’re immunized forever.

It still could fall apart on an operational level too, of course, the next quarter (ending in January) is by far the most important one for FIVE, as it is for pretty much all retailers (close to 40% of revenue comes in the Nov-Jan quarter, and their profit margin tends to be about 12-13% at this time of year — versus 2-4% the rest of the year), so the late February earnings report will be watched very closely, as will any commentary from the company about holiday sales.

It could also be that some of that run from $55 to $65 was because investors were “baking in” the likely tax cuts — they had a strong “beat and raise” quarter right after Thanksgiving, at about the same time that most stocks and sectors started surging, so I think that operational performance was the primary reason for the jump… but I could be wrong. I think it will take a while for the tax cut to be fully priced-in to the expectations for a lot of stocks… and that could really add to the growth story for stocks that have fundamental growth that looks really strong and can lever that up with a really substantial increase in earnings per share from the corporate tax cut.

I don’t know what will happen with stocks that are just getting a one-time shot of earnings growth from tax cuts, or from repatriating overseas cash, sometimes one-time improvements that make a stock look like it’s growing earnings are adored by the market, sometimes they’re ignored as non-repeating windfalls… but since growth is projected to be very high for FIVE anyway, with a huge buildout in new stores that are apparently doing very well, I think it’s likely that the tax cuts will just be a bit more leverage for growth that was already coming… and I expect investors will reward that pretty handsomely as long as the economy overall is doing OK — as it should, at least in the first flush of tax cuts.

I expect we’ll see a substantial rise in inflation next year as a result of this additional spending and the projection of additional borrowing by the government, and that could bring faster interest rate rises that serve to put the brakes on a little bit, but you never really know for sure what will happen — particularly in this environment, where interest rates remain so much lower in most of the larger economies than there are here in the US.

So I’ve put on a small equity position and another levered bet that FIVE will also see some significant analyst estimate increases by next month that drive the shares higher — I did that through some January in-the-money call options, which are fairly inexpensive because the stock has run so much and there isn’t a formal “catalyst” before the expiration (the next earnings report won’t come out until late March), but I think estimate increases will come before then, largely because of taxes, and that will push the shares higher.

I’m comfortable with the equity investment, even at these high prices, and I think FIVE will likely do very well next year… but the options bet is far riskier, given that we’ve only a few weeks to expiration, and I could easily lose 100% on that position (that’s more of an “indulge my inner bettor” move than it is an actual investment).

There’s certainly risk in the stock, as well, and not just because it’s priced at a premium to the market or just because Amazon is, per investor consensus, destroying mall retailers.  Five Below is largely a seasonal and fad-driven retailer, and that has brought plenty of ups and downs… those holding since the IPO five years ago would have done well thanks to this year’s surge, but there were also plenty of opportunities to lose money along the way, and it could easily be that one of the upcoming quarters looks relatively weaker year over year because of something fad-related (if, for example, nothing takes the place of this year’s “fidget spinner” craze that really ballooned earnings for a few months in 2017). Part of what has really worked for FIVE as a business model is pulling in people for fads, and keeping them for more “regular” stuff… so they think that those fidget spinner buyers from last Summer will come back and buy Star Wars gear this winter, or candy, or cell phone cases for their new phones, or whatever. The concept is very similar to a dollar store, in that everything is super cheap ($5 or less), but unlike Dollar Tree (DLTR) or Dollar General (DG) they don’t feature so much of the “boring” stuff like food and shampoo, it’s much more of a toy store for teens.

Despite the low prices, they earn pretty high gross margins — in the 35% range, a bit better than the 30% the big dollar store chains generally earn (gross margin is just the revenue minus the cost of goods).  Add in the cost of operations, and the margin edge remains — their operating margin is about 11.4%, versus 8-9% for the dollar stores, and 7.5% for the demographically similar (sort of, at least) Urban Outfitters (URBN).  And unlike those competitors, FIVE’s margins have been generally rising over the past five years as they grow and achieve better economies of scale.

The first time I remember hearing about FIVE was when Whitney Tilson mentioned it as an overvalued fad stock to short in 2014, and I hadn’t looked at it in any detail until Cabot was pitching it last week… and it’s still a fad stock, and it could certainly still have some huge downward moves if things go badly, but recent operational performance has been strong, with margins improving and the new stores really juicing returns (they added about 70 stores in 2015, 85 in 2016, it will be roughly 100 for 2017… that brings the total up to about 625 stores, and I would be surprised if they open fewer than 120 stores next year). The growth possibilities, if they are able to remain on-trend and keep appealing to college students, teens and preteens and their parents (and other folks, but those are the core focus), are pretty remarkable if you consider that they remain fairly regional. FIVE started in Philadelphia and really began to expand in earnest only about five years ago, including opening their first few stores in California just this year. Fads can fizzle, but those who can ride fad after fad and keep opening shiny new stores and selling mermaid blankets and fidget spinners and poop emojis may be able to keep rolling along.

If that particular stock doesn’t appeal, but you’re curious about stocks that might be undervalued because of the tax cuts, by the way, I experimented with some screens to see if I could ID some stocks that hadn’t yet moved dramatically but that pay high taxes and are growing and are likely to be valued primarily on their near-term earnings.

Here’s what I did:

• Exclude real estate
• Exclude energy
• Include only stocks headquartered and domiciled in the United States
• PE ratio for the trailing 12 months (TTM) of between 15-35 (meaning there’s a good chance the company is at a fairly mainstream valuation, and is valued based on current earnings)
• PEG ratio of less than 2 (meaning the PE ratio is less than twice the expected growth rate, a simple “might not be overvalued” screen)
• Market cap of at least $500 million
• 20 day returns in the bottom 75 percentile (stocks that have not been surging over the past month)
• but… 20 day returns that are positive, so stocks that haven’t recently taken a big hit.
• Current ratio not in the lowest quartile (meaning, it’s not one of the 25% of stocks that have the most stressed balance sheets)

And that leaves us with 45 stocks… I’m not recommending these, of course, and some of them I haven’t even really looked at (a few I’ve never even heard of, some probably have terrible, scary skeletons in their closets)… but perhaps it will be a fruitful area for sniffing out ideas, or it will inspire your screening and searching. I use YCharts for screening, but it’s fairly expensive for the full version — FinViz.com offers some good free screening tools if you want to poke around, and I’m sure there are others.

Five Below is not on this list, of course, because they’ve been a top gainer over the past month thanks to that excellent late November earnings report, and their PE ratio is too high… so if relative strength is more important to you, maybe you’d want to give more room on those kinds of metrics, for example. This is the data from the screen I did, for what it’s worth… I included dividend yield just to provide another data point, it wasn’t part of the screen:

The biggest company on that list caught my eye, so I also looked for a moment at Starbucks (SBUX), since it’s been drifting lower lately and I certainly spend enough of my money on their coffee… if you assume the lower tax rate applied to the trailing twelve months for them, their trailing PE would be down to about 24 (from 29), and a similar boost would mean that their forward PE for 2019 drops to about 18.

That’s starting to look a bit better than a forward PE of 22, though Starbucks operationally is not filling most investors with profit-lust right now and they’ve been pretty much matching analyst expectations over the past year, with a flat share price since the 2016 election to match.

But hey, if they’re going to be making 15-20% higher profits under the new tax law, as the math indicates is likely, shouldn’t the stock go up?   It hasn’t.

I’ve never owned this one and I haven’t looked at the detailed reasons for the stock’s recent underperformance (analysts over the past few months have reduced earnings expectations by 2-3% for the next couple years, they’re still projecting 10-15% earnings growth), but sometimes it’s just simple:  earnings drive stocks, and higher earnings should mean higher share prices — not necessarily dramatically higher, you need fundamental growth to go beyond just the bump up from lower taxes (they won’t be lowered again the following year, after all), but still, higher, all else being equal.  I think we’ll see a lot of analyst expectations raised for a great many stocks over the next few weeks, and that should be good for the broad market and great for profitable, reasonably valued growth stocks.

Assuming, of course, that something huge and bad doesn’t happen.  Like a spike in inflation, or a political crisis.  Or, in Starbucks’ case, a wave of food-borne illnesses or something.   You should not give great gravitas to me or anyone else when it comes to what the market will do over the next couple months, since forecasters are pretty much always wrong on that kind of thing, but my expectation is that companies who earn a lot of their money in the US and pay taxes are going to have substantially higher share prices over the next few months as estimates rise and companies begin to provide tax rate guidance on their earnings calls.  A tax cut was clearly “in the market” to some degree, so some stocks have raced too high… but I don’t think that 15-20% of additional earnings growth that a lot of tax-paying corporations will see is priced in to every stock.

And moving on…

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This is the first week in a while that gold has beaten stocks, so it’s nicely timed that Northern Dynasty (NDM.TO, NAK) got its partnership deal earlier in the week and initiated the permitting process today… the partnering news is perhaps a little bit underwhelming, since it’s in the form of an “option” and it does not represent a huge amount of cash just yet, but it does potentially value the project at $3 billion (First Quantum Minerals is spending $150 million over the next four years to buy an option to buy half of the project for a total of $1.5 billion), and that puts it in range of being what people expected when they were thinking that the Pebble Project would come back to life. Right valuation range, but not quite a commitment yet — and, perhaps, a reminder for folks that this project, if it does indeed get built someday, will probably move very slowly.

I don’t see a huge likelihood that there will be a further positive catalyst over the next year or so, which means I should stick to my strategy and sell my remaining warrant position. It’s quite possible that Northern Dynasty will actually start drilling and defining the project, or will release positive news about the project and send the shares higher… but the big remaining hurdle is permitting over the next few years (this option deal with First Quantum won’t actually be finalized until the second quarter of next year, they say, though I imagine that will be a non-event), so I think we’re pretty much past the fun part now and are moving on to the less-fun waiting and permitting and drilling and, later, infrastructure building, the stuff that takes f-o-r-e-v-e-r.

I don’t particularly think this is an exciting mine to invest in, given the huge unknowns (ie, what are the reserves, what size mine will be environmentally acceptable) and the still extremely long development timeline, though it certainly does have the potential to be a huge and long-lived mine, and that’s reason enough for some folks to hold it through thick and thin.

I’ll try to be opportunistic about selling my remaining warrant position when prices bump up on higher gold prices or more attention, but we’ll see, the main reason I’m holding out a bit is that these warrants are in a taxable account and I’d rather not have to pay taxes on those gains in 2017. Letting taxes determine your trade timing is often a mistake, so I’ll cross my fingers and hope that there’s another surge of optimism coming for Northern Dynasty early next year that I can sell into.

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Speaking of taxable gains and losses, Trek Mining (was TREK.V, now EQX.V, also LWLCF OTC in the US) announced that it has officially finalized the deal to create Equinox Gold, and has completed the construction financing facility for the Aurizona Mine, with the cash fully available now. And still, even with gold prices relatively strong, the market shrugged it off a bit until there was a little 8% bump last night and this morning on the closing of the deal. This is not really news (the financing was clearly a “done deal” when the merger was announced a couple months ago, and the deal was obviously going to go through), but I’ll keep my fingers crossed that Trek (and now Equinox) stays pretty flat so I can buy back my shares in a few weeks at a better valuation. It’s not bad now, but it’s largely “story” until they start producing, and people aren’t all that lusty about gold stories at the moment… even with Ross Beatty on board. Hopefully no big newsletters will promote the shares and drive them permanently higher in the near future before I can re-purchase a position. As long as the shares are below about C$1.14 when I buy them back, the tax loss selling will have been worthwhile… we’ll see.

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And also in the gold space, Sandstorm Gold (SAND) bought a pretty big royalty this week — they spent $45 million to buy a 2% NSR royalty on the Houndé gold mine in Burkina Faso (operated by Endeavour), which started commercial production a couple months ago. The mine’s first four years are supposed to generate 235,000 ounces a year, so this is a pretty big mine — and has two million ounces of reserves and a 10-year mine life, along with a huge area for exploration around the mine (much of which is also covered by the royalty) and a drilling plan and budget to increase that reserve and extend that mine life.

At 235,000 ounces a year that’s effectively about 4700 ounces to Sandstorm (probably a little is shaved off by the processing, but not much), so at current gold prices that would be about $5.9 million/year. That means Sandstorm paid a pretty high price, they prepaid for essentially 75% of the royalty cash flow over the life of the mine — which means that any upside has to come from either better gold prices, or from the mine growing beyond the current reserves and mining plan.

So it looks like a little bit of a gamble, at least looking in from the outside, though presumably Sandstorm’s geologists saw enough to like in the potential for expanding the mine beyond the current 10-year life that they were willing to pay a high price — and unlike a lot of later-stage royalty sales (when companies sell a big royalty to help fund final construction, for example), this one is very de-risked from that perspective because it’s already operating and the initial ore has already been processed. The price must indicate that they put a high value on the 500 square kilometers of exploration land around the Houndé mine, so we’ll hope that Nolan Watson and his geologists are right about the future value… and certainly turning $45 million in cash into a $6 million revenue stream (all of which will be profit, other than debt service cost or taxes) should be positive for the shares, since royalty companies are typically valued based on free cash flow or earnings.

Sandstorm also increased its credit facility to $150 million this week, which was also cheered a bit by investors — though it could be that they were cheered as much by the wording as by the actual borrowing capacity… Sandstorm announced that it “amended its revolving credit agreement (the “Revolving Loan”), allowing the Company to borrow up to US$150 million for general corporate purposes, including paying dividends.”

Obviously it’s a bad idea to borrow money just to pay dividends, but investors love the idea of dividend payments, and sometimes they pop the share price a little just because of the potential for a future dividend — partly because it’s nice to get the cash, partly because a dividend is a sign of a “maturing” company that is optimistic enough about its future to reward shareholders with a little cash now and then. Nolan Watson has mentioned several times over the years that he’d like to start rewarding patient shareholders with a dividend, but I wouldn’t get too excited about it, if they do initiate a dividend next year I’d guess that it’s likely to be smaller than Franco-Nevada’s slowly growing 1.2% yield.

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Since we can’t go through more than a day or two without mentioning bitcoin, we should note that it appears everyone sold out of their bitcoin to go buy those last minute Christmas gifts at the Ferrari dealership, most of the cryptos were down 25% or so at one point today, bringing down the shares of most of the blockchain-related stocks as well (both the crazy and spurious ones that just changed their name to “Bob’s Blockchain” this week to take advantage of the frenzy, and the real ones like AMD and NVDA… though the real ones, of course, are down just a wee bit while the crazy ones are down as much or more than bitcoin).

At the same time, I and a bunch of other Coinbase customers got a surprise boost of some shares of bitcoin cash in our accounts this week… that was widely covered, partly because of indications that some Coinbase-related folks might have been involved with insider trading before the news.

Bitcoin cash has been around since it forked off of bitcoin in August, though it wasn’t supported by Coinbase at the time — which meant it was much lower profile in the US, where Coinbase is the dominant wallet provider for us lazy or fearful folks who don’t want to deal with overseas exchanges or complexity, so when it started trading on Coinbase that created a huge surge for Bitcoin Cash for a day or two as all those Coinbase customers could suddenly trade the coins, and apparently someone who knew when Coinbase was going to start supporting bitcoin cash traded on that info.

What does this mean? Well, for me it means that the bitcoin cash I should have had in my account over the Summer, when the fork happened, didn’t appear until this week… so even though I sold most of my cryptos back in September and forgot all about bitcoin cash, my cryptocurrency portfolio was quietly growing in the dark — it is still a small portfolio, if my cryptos taken together were a stock, they would represent about three quarters of a percent of my stock portfolio. About as big as my most aggressive options positions, and small enough that I can keep ignoring them for a bit… or even watch them go to zero without getting heart palpitations.

Which is good, because after a surge earlier this week bitcoin and bitcoin cash and all the other biggies are having a terrible day — I don’t know why, whether it’s just a bubble losing steam or whether folks are listening to Charlie Munger’s “avoid it like the plague” comments, or what… but it’s a good reminder that bitcoin has no specific intrinsic or inherent value — more than anything else, it is a trading and speculating vehicle that reflects the emotions of traders around the world. Anything that can go up 1,000% for no real fundamental reason can always go down 90% for no real reason, too, sometimes it just takes a little shift in sentiment to get the herd running in a different direction.

This bit of volatility doesn’t mean that bitcoin is done going up forever, of course, you can never tell exactly when a bubble pops or a mania ends until much later… but any sustained pressure on bitcoin would probably cause a little surge in the gold price, I expect, since bitcoin has been stealing gold’s thunder among the “we hate fiat currencies” crowd in recent months.

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Finally, speaking of Charlie Munger (and his longtime partner Warren Buffett), I should note that the little company we added to the Real Money Portfolio a few weeks ago continues to leap further out of reach — Boston Omaha (BOMN) is a stock I bought because it is set up well and has some appealing things going for it, including a bit of “secret sauce” in the way they emulate Berkshire Hathaway’s shareholder communications and set up shareholder-friendly incentive structures, but it’s also a stock that was objectively too expensive when I opened that position, at about 2X book value, and one that I’ve been hoping would drift down in price so that I can build up my holdings.

That hasn’t happened, the stock has advanced steadily higher… and today, to make matters worse, it was featured on the front page of the Wall Street Journal (well, the front page of the digital edition, at least, I haven’t seen the print paper today) because of the company’s connections to to Warren Buffett. Being mentioned in the same breath as the Sage of Omaha is enough to make any stock go bonkers in price, particularly a very small one like BOMN. And the connections are familial — in addition to emulating Warren Buffett’s communication style, one of the founders and co-CEO’s, Alex Rozek, is also Warren’s nephew.

There’s no real connection between Boston Omaha and Berkshire Hathaway, to be clear, other than that their CEOs are friendly relatives — they’re not in the same business, Buffett is not invested in Boston Omaha, and Rozek says he gets any insight or inspiration from Buffett by reading Berkshire’s annual reports like everyone else. But getting even a little sprinkle of that Berkshire fairy dust on a $300 million company means thoughts of sober valuation go out the door for a lot of people — everyone knows those stories about the small-time investors who invested with Buffett in the 1960s and are now mega-millionaire titans of philanthropy, and they’re just frantic to buy a piece of what they hope might someday be the next Berkshire.

So BOMN makes the Wall Street Journal, and now the stock is up another 12%+ — so it’s up more than 25% since I overpaid for my small position, and it would likely be more if it wasn’t the Friday before Christmas. That means I’ll have to wait still longer. This is what I wrote a few weeks ago when I bought my initial shares:

“The price you pay for an investment is the thing over which you have the most control, after all, and it would take huge conviction to be ebullient about buying a meaningful position in an investment portfolio that’s both largely in cash and trades at a huge 2X book value — value investors tell you to buy dollar bills for 50 cents, and this is closer to buying 50-cent pieces for a dollar… but they might be really nice 50-cent pieces.”

So… now it’s closer to buying a 50-cent piece for $1.35. Patience seems still to be warranted, hopefully everyone will forget about this one in a few months and it will trade down well below 2X book value again. Still like the company, and I haven’t seen anything to make me question that, but it’s not likely to grow fast enough to justify this kind of premium valuation unless they make some exceptional acquisitions. Stay tuned.

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And with that, dear friends, I’ll leave you for a week or so. Stock Gumshoe will be closed next week for a holiday break, reopening a few days into the New Year, and the next Friday File will be on January 5. I hope those of you who are celebrating Christmas have a merry one, and that those of you in the colder climes find solace in the lengthening of the days as we prepare to greet 2019.

Disclosure: I own shares of Five Below, Amazon, Boston Omaha, Berkshire Hathaway, Sandstorm Gold, warrants on Northern Dynasty Minerals, and small positions in bitcoin and bitcoin cash through Coinbase. I will not trade in any covered investment for at least three days following publication, per Stock Gumshoe’s trading rules.