Friday File: Dark Stock, Dark Roast, Emojis and Uranium

Thoughts on earnings from FIVE and OKTA from the Real Money Portfolio, plus updates on IIPR, IQ, GOOG, SBUX, uranium and more...

This counts as a “holy crap!” week when it comes to earnings, not because of any huge reporting that moved the market but because of the surge by just one stock, our fad retailer Five Below (FIVE) after earnings on Wednesday night.

FIVE is generally lumped into the “dollar store” category, it’s the teen-focused retailer that sells most everything for under $5 and is heavily fad and fashion driven, with a jump in earnings last year from the fidget spinner craze and, more importantly to my investment thesis, a very small footprint that they’re aggressively expanding across the country. I bought shares starting back in December because of the two levers that I thought would be operating on their earnings growth: Taxes and Store growth. They are a major beneficiary of the corporate tax cut, since they’re entirely a US company and they paid a pretty high tax rate before January, and they are small enough, with only about 700 stores now, to grow dramatically in size before they run out of appealing new markets to enter.

To give you some idea of the impact of rapid store growth on the top line, they had “comparable store sales” growth last quarter of about 3.2% (which was in the guidance range, though the number of transactions was down a bit because of the cold spring weather), but because they can open stores quite efficiently and get them up to speed fast, and because the store count is so small that they’re actually increasing the total store count by close to 5% each quarter, the actual total sales increased by 27%. On top of that, the lower tax rate helped them double earnings in the quarter, year over year.

Of course, none of that was a huge surprise to analysts — they were expecting big growth, and the company had already guided to strong growth… it’s just that they did about 5-10% better than expected, depending on which metrics you use, and, as importantly, they raised their full-year forecasts. No matter what market you’re in, a “beat and raise” quarter is going to get investors excited, and in this market of growth enthusiasm it’s perhaps stronger than usual… so the stock opened almost 20% higher on Thursday morning.

So even with using ‘weather’ as an reason for their traffic and transaction volume being down a bit, which can be a red flag, they beat the expectations handily. In case you’re wondering about which products are driving the bus right now, there’s not one specific one (like last year’s fidget spinners), but, according to management on the conference call, “slime, smiley, squishy, spa and mermaid trends continued to be popular.”

The financials point to the risk of a letdown in their second quarter, which ends July, mostly because the comparable year-ago quarter was the major beneficiary of the fidget spinner craze so the comps are challenging, so it might be that we’ll see the shares come back off of these highs a bit — but the company is doing everything right and I remain very impressed with their growth strategy and their ability to bring new stores into the fold so quickly and remain so nimble with fads and fashions.

Next quarter’s results will probably depend on whether or not their summer-themed sales take off, with giant beach umbrellas and emoji towels and whatever else, so it’s possible that we’ll see some dips, but I think this one is worth holding even at these much-higher prices — a regional store going national can be a phenomenal investment if they can open new stores with relatively small capital investments and make them profitable quickly, and FIVE is getting it right.

You can see the conference call transcript here to get an idea of what management is focused on. This is certainly not a cheap stock — with expected earnings of about $2.45 (that’s the middle of the company’s forecasted range), it trades at almost 40X current-year earnings — so it’s not one that I’d want to be the largest position in my portfolio, but the growth potential is very strong and they’re building at a speed that would have them almost doubling the store count in the next five years, and that would still have them well below their potential market of 2,500 stores. So in some ways this stock price surge is just a validation that Wall Street believes them now.

That won’t necessarily stick, you never know — but if they can get through another good year of merchandising, it could be a fantastic year for the company… they are guiding to just 1-2% comparable store sales growth and almost 20% sales growth overall, with impressive discipline in keeping costs under control as they expand, but they’re still fashion-driven and hit-driven. That means if they have another “fidget spinner” quarter this year they’ll blow out those numbers and the stock could soar, if they have a flop in the fourth quarter and don’t have good holiday sales, the stock could get cut almost in half (about half of their earnings come in the fourth quarter, like most retailers).

So… fingers crossed. I expect to see the 2020 earnings estimates (that’s their next fiscal year, ending in January of 2020) rise into the fall, probably by about 10%, and that will mean the stock at $99 would be trading at roughly 30X forward earnings. That’s reasonable for this kind of growth, but the stock is also volatile around earnings and general sentiment about retail stocks (which has become strong again recently) so it’s quite likely that we’ll see the shares dip to more appealing prices along the way, too. If I didn’t own, I’d think about a first nibble in the low $90s if it dribbles back down to that point.


And Okta (OKTA), the “identity cloud” service provider that I’ve been adding to recently, also had a solid quarter — though not nearly so dramatic, and the company is not profitable just yet. They reported revenue and earnings “beats” and increased their guidance to above what analysts had been expecting for the year.

That didn’t have much impact on the stock price, in the end — there was a little “pop” because people like to feel like they have to do something when there’s a quarterly report, but it flattened out a bit not long after and by late yesterday the stock was back in the low $50s where I most recently added a few weeks ago, with analyst targets raised but not to dramatic heights, most analysts are looking for $60-65 for these shares.

For me, what stood out was the fact that they went positive on their operating cash flow this quarter and talked about that a bit on the call, so they’re starting to think about and report about their company in a way that owners would appreciate: Is it going to make money?

And if this trend continues, it certainly will — they now have 747 customers who each provide annual recurring revenue of greater than $100,000, so they’re getting solid deals with large customers and beginning to expand those customer relationships, which could snowball… that number was 691 last quarter, so it’s at least moving in the right direction. What’s most appealing to me with Okta is their focus on identity and convenient security, which is clearly important to companies (my perspective is that most companies don’t spend nearly enough on cybersecurity or have secure-enough systems, and part of that is because security that’s so stringent that their employees can’t operate freely is inconvenient, and inconvenient stuff gets bypassed… I think of Okta as offering customer service-friendly login/access security).

The problem, of course, is that I’m not an enterprise IT buyer… I don’t really know whether their product is better than the many competitors offered up by software vendors, I just know that it’s convenient and cloud-based and that they seem responsive to offering up newer and more convenient security/identity solutions. The way to know whether it’s working, since I’m not going to become an embedded expert, is just to watch customer acquisition and retention… sometimes we overthink this stuff and try to extrapolate the future or compare technical products that most of us really aren’t qualified to analyze, but in reality if it’s an appealing product and they market it well, their customer count and their retention and their revenues will rise. If not, they won’t. We get to hear an update each quarter, and so far so good — I like the story, and the numbers keep backing it up, and as long as that happens I’m likely to stay in the stock to see how it plays out, speculative though it clearly is. I added slightly to the position again following the post-earnings dip (at about $52).


And in other portfolio musings… I noted yesterday that I decided to buy an initial slug of Hershey (HSY) shares after looking into it again for the latest “tease” from Porter Stansberry, but that also got me thinking about other “brand” stocks that might be relatively inexpensive and sturdy companies if and when we hit the next downturn.

So I did some browsing and screening, and yes, that turned up quite a few packaged food companies that are in obvious downturns due to changing consumer preferences (General Mills, Kellogg, Kraft Heinz, Campbell Soup), and perhaps those will end up being bargains if those companies can figure out how to appeal more to consumer interest in fresh foods and rejuvenate their core franchises… though in a recession, perhaps “fresh and organic” will go out the window and folks will start buying condensed soup and Kraft Macaroni and Cheese again, I don’t know.

I have a much higher comfort level with the candy names at this point, so Hershey’s at a relatively low valuation is more appealing than those guys at an obviously cheaper valuation — if you want more detail, you can see that HSY went into the Real Money Portfolio at just under a 1% position, I’ll be watching and may well add to that as time passes, particularly if the share price continues to drift lower, though that’s very much intended to be a “slow and steady” presence in my portfolio and I’d be surprised if it beats the market during exciting yearst.

But a few others stood out that I’m wondering about as “next generation” brands, too — including Starbucks (SBUX), which has been in the news this week thanks to Howard Schultz’s retirement but which is an extraordinary company and brand that now, after a couple years with a pretty flat share price, seems much more reasonably valued (and has a very low “beta” of 0.6, meaning it doesn’t move in lockstep with the market), and Michael Kors (KORS), which is a brand that I don’t understand in fashion but has gone, through a bit of upheaval since the IPO a few years back, from a completely beloved momentum growth stock to one that’s pretty reasonably valued.

The “brands that screen well” list could also include the small and secretive Tootsie Roll (TROLB), by the way, which is occasionally covered by the business press just because it’s iconoclastic (including this recent piece from the Boston Globe, or this older piece from the Wall Street Journal). That’s a fascinating story, but not so much a compelling investment for me.

I can’t get myself to wade into the world of fashion, but I do have my eye on Starbucks. I think the pessimism about Schultz’s departure and the flat same-store-sales in the US will eventually be a distant memory thanks to the stores they’re building in China (two stores open there a day) and the Nestle distribution deal (Nestle will take over distribution of packaged coffee products from Starbucks, including bringing Starbucks-brand Nepresso pods to the world, in exchange for $7.15 billion plus ongoing sales of coffee, which Starbucks will still supply, and royalties on the future sales). That particularly should be a brand amplifier in China, where Nestle is pushing hard to build market share and Starbucks is already placing a big bet, and my sense is that it is likely to work out very well in a market where coffee in general has huge growth potential.

Starbucks definitely won’t go up as dramatically as it did in its early years, it’s a $75 billion company now and is unlikely to go up 1,000%… but it is a very un-levered company, with plenty of cash and little debt and a tremendous amount of possible global growth still, and it pays a decent dividend of $1.20/year (over 2%), with a strong history of ramping that dividend up. Their dividend growth has been 20-25% for several years, a strong signal of financial strength and flexibility and of their interest in rewarding shareholders (that’s a higher yield and a faster dividend growth rate than Apple, for example, though Starbucks isn’t doing Apple’s massive buybacks).

I’ve never owned Starbucks shares, but I’m getting more interested in sticking my toe in the water coffee… and it helps that they just yesterday announced price increases for their regular coffee in the US, a solid reminder of the fact that Starbucks has been able to raise prices for years without impacting sales or turning off customers. That’s a sign of a strong brand, in addition to being a reminder that yes, these are inflationary times in many parts of the economy even if the CPI doesn’t say so yet. I’ve put Starbucks officially on the watchlist.

And on a similar note, I also got a few questions about Stansberry’s latest pitch for their pricey Stansberry Venture Value service… so I thought we’d sneak in a quick teaser solution for you today:

The headline was, “A $3 stock that went ‘dark’ 9 years ago could triple your money when it reappears today” … and it’s effectively about stocks that are unlisted, for a variety of reasons, that surge when they relist or otherwise come to the attention of Wall Street again.

More details:

“… a major decision is about to take place regarding this company in the next few weeks.

“It’s a company in the financial services industry.

“It’s been ‘dark’ for 9 years now….

“… beginning this July, a decision involving this company’s assets could cause this small stock to suddenly soar.

“When it first went ‘dark’ back on December 17, 2008 shares traded for just $0.17.

“But when this July decision occurs, I believe Wall Street will catch on to this ‘blind spot,’ and the price could easily soar and make you as much as a 185% gain in as little as a year.”

So what’s the company? That all sounds pretty tantalizing, right?

Our best answer here is that they’re referring to Syncora (SYNCF), a financial insurance company (think: bond insurer) that just about went under in the 2008 crisis and did get delisted on December 17, 2008.

And yes, it has been coming back, and does trade at about $3 a share now, a little less than half of their adjusted book value. Most of their portfolio is essentially coverage of municipal and infrastructure-related debt and mortgage bonds, so a fair amount of it is backed by real assets and cash flow or by governments…. though some of that is Puerto Rico debt, so it gets complicated very fast.

I am not going to be able to get a handle on this complicated portfolio and risk for you in a few minutes, and this is not the kind of stock I’m likely to spend a lot of time on, but it is an interesting story, at least. You can see their slideshow from the latest earnings call here, which indicates that there is pending litigation in July against Macquarie, which might be delayed, as well as some other asset sales and other transactions since the quarter closed that could help the numbers improve a bit, including a big reinsurance deal and the sale of their American Roads asset, which could well be the asset change hinted at in the teaser ad… but I can’t claim to really understand them after my quick look. The transcript of that conference call is here.

Syncora has been punted around by value investors and special situations investors for several years now as an “undervalued, might get re-listed” stock, and that chatter continues to emerge every now and again. I expect the downside is pretty limited from here, particularly after the deals they’ve announced in the past few weeks, and assuming that they have any good fortune in their litigation, but it’s still obviously in the fairly perilous business of insuring municipal bonds, so if that market collapses or fear rises dramatically it could get ugly — I’d guess that’s a low-probability risk, but a risk nonetheless.

You can get a little sense of recent investor chatter from some quick postings on the Corner of Berkshire and Fairfax discussion forum here (that’s a great value-investing hangout if you’re interested in that sort of thing, by the way, particularly if you’re interested in Fairfax Financial or Berkshire Hathaway… lots of thoughtful posters). Not something I’m going to delve into more deeply, but some folks wanted the teaser solution there… so, enjoy!


What else is going on?

iQiyi (IQ) is getting wacky now, perhaps just because that Baidu (BIDU) spinoff is getting widely talked up as the “Netflix of China” (not a perfect comparison, but a similar business). I took a position in it as a “busted IPO” a little while back (“busted” just means it drops below the IPO offering price, $18 a share in this case), mostly because I thought it was a high-potential stock that was likely to get a lot of institutional support but was temporarily distressed because of China concerns and a lack of understanding of what the company was at the time of the IPO.

So I thought it would bounce back to the $18-20 range at some point over the Summer, and bought some shares and a small options position. The options I sold fairly quickly because the stock did indeed bounce back as expected… but then it kept on soaring.

This is what happened right away, and was something like what I expected after buying in early April (though I wasn’t confident the stock would bounce so quickly):

And this burst of enthusiasm is what I did not expect:

So yes, in retrospect I regret taking those quick profits on the options position… but I’m happy to hold the shares into this manic move. The company is in an extremely competitive field (paid and streaming video in China, up against offerings from both Tencent and Alibaba as well as a bunch of smaller players), but they are well situated and have the benefit of being a separate company now, which provides more visibility for investors and, perhaps, a more focused management.

The valuation doesn’t make sense on current financials for either $16 a share or $30 a share, clearly, and they are going to spend a lot of money developing content and brands, but the market is growing very fast as the Chinese skip traditional Pay TV and go straight to streaming services (much as they skipped the PC generation and went straight to mobile phones for internet access). Their content deals and content development strategy are strong, I think, with the CEO stating that he sees Disney as his model in developing content and brands, not Netflix, so with a small equity position I’m willing to let this keep riding since the possible upside is tremendous. As with other momentum stocks, I’ll keep an eye on the stop loss to help manage my risk (right now, the VQ% stop is around $22).


Apple (AAPL) and Facebook (FB) both also hit all time highs this week, despite the fact that Apple’s developer conference (WWDC) was relatively quiet and uneventful… aside from the fact that they emphasized security and privacy and threw some shade at Facebook. Nothing new to see here, move along.


Innovative Industrial Properties (IIPR) made another deal, buying land in Massachusetts for another facility to be leased by Pharmacann… sounds like the terms were likely the same as for prior deals, with that juicy ~15% cap rate, so all’s well, though the concentration of operators continues to be a risk. This is, again, a medical marijuana facility, so they’re still staying out of what’s likely to be the center of the federal legal crosshairs and not getting into the slightly-more-controversial recreational market, though, of course, a facility is a facility and the customers could change in the future. Still holding as a possible rapid-dividend-growth REIT, still wouldn’t push to buy above $35. I went into more detail on this one a couple weeks ago here if you want more info.


Remember uranium? Even curmudgeonly Grant’s Interest Rate Observer, which is the only financial newsletter I happily subscribe to (at a premium price), is getting excited about uranium again.

Well, perhaps “excited” is the wrong word, but they had a bullish piece on uranium recently and reiterated their fondness for Cameco (CCJ) — a position they also held in January of 2017, to their short-term detriment. And as with all the teasers about “uranium must rise” that we’ve seen over the past six or seven years, it rings true — the logic is inescapable that uranium prices should go up.

That said, don’t hold your breath — uranium demand should exceed supply, and supply won’t likely expand at current prices (the major producers are cutting back, in fact), so although it takes a long time for those long-term contracts to work their way out of the system, eventually people will have to pay markedly more for uranium if they want to keep using more of it.

This is exactly the same logic that has made sense for most of the past five or six years, though, so that’s where the “don’t hold your breath” part comes in. You can lose 90% of your money on your way to being eventually proven right. I am willing to throw some money at uranium speculation every now and then, as I did with long-term Cameco options a few years ago (they’re still in the portfolio, though still quite “red”), but I’m waiting for a signal to indicate that the market, and particularly the buyers of uranium, are beginning to price in higher prices.

For me that signal is the long-term price — that’s where most uranium is traded, in long-term deals with utilities that operate nuclear power plants and should want to have assurances about their supply many years into the future.

And right now that long-term price, as reported by Cameco, is still holding flat below $30, which means they’re below the price at which a lot of uranium companies can make money. Half the global supply still comes from Cameco and from Kazakhstan’s state-controlled Kazatomprom, which is still planning to become partially public this year with an IPO (probably in either Hong Kong or London), and some pundits will no doubt again start chirping about how Kazatomprom will manipulate prices higher in order to get their IPO some additional “juice”, so perhaps we’ll see some sign of that — but so far, the long-term market remains depressed at long-term lows around $29/lb, well below the unsustainable $40+ prices that seemed destined to rise four or five years ago.

Spot prices and long-term prices continue to converge, which means that the occasional pops up in the spot price are not being reflected in equal pops in the long-term price, which perhaps means we’re headed toward having a meaningful spot market eventually — but given the limited number of suppliers and the patience and strategic imperatives of buyers, who don’t have to care very much about price (uranium prices have no impact on demand from utilities, for whom fuel is a very small part of the input cost of nuclear reactors), it’s an extraordinarily difficult market to forecast. As so many pundits have proven to their readers over the years.

So if the long-term price rises, even a little bit, for a couple months in a row, I might get interested. The spot market price has risen a bunch of times over the years, albeit temporarily, but the long-term contract price has not had sequential increases since at least 2014, meaning that a rise in price has never been followed by another rise in price — the trend has been down, of course, but each rise in price has either been followed by flat pricing, sometimes for months, or by drops in price.

So a bump up in long-term prices would be a bullish sign, I think, but we’ll see — the last time we saw a burst of bullishness for the long-term uranium price was in late 2014, and even that didn’t do anything for the stocks, the only positive jumps we’ve seen from the uranium miners and explorers have really been story-driven, first the expectation that President Trump would be “huuuuge” for the nuclear industry starting after the 2016 election, then the supply cutbacks from Cameco and Kazatomprom that were intended to support the market. After so many years of this, I’m done getting excited about stories when it comes to uranium. I’ll wait for prices. That means I’ll probably miss the first part of any potential bull market surge, and I can live with that.


I’ll close with an illustration for you, maybe you can decide what it means.

This is what the stock chart of Google parent Alphabet (GOOG) looked like when reports started swirling midday on Wednesday that there might be an up-to-$11 billion fine coming down from the European Union due to their market dominance (or abuse of that dominance, I guess they’d say) with the Android mobile operating system (forcing Android customers to have Google apps on the home page, etc.).

We’re accustomed to big tech companies getting large fines for their anticompetitive behavior, particularly from the EU in recent years — Intel was levied a $1.2 billion fine a few years ago, Microsoft had a few penalties totaling about $2 billion, and Google got a different $2.8 billion fine last summer for its shopping comparison tool… so it starts to become something that seems like background noise, like just the cost of doing business for these companies.

But $11 billion is still a lot of money, even to Alphabet. That’s about 10% of their global revenue (or 2/3 of their profits) for the past year (that’s not a coincidence, 10% of revenue is the maximum fine allowed).

So even though that’s the maximum allowable fine, and often they’re lower, that should be a worry for shareholders… right?

And that’s not even counting the probably more spurious complaints brought under the early days of the GDPR policies going “live” in Europe, like the Austrian group that is asking for Google to be fined (another) $4.88 billion.

The problem is, we don’t have a caption for that chart that shows almost no impact from news of a potentially MASSIVE fine — so what is it, should we call that chart “Complacency” as investors seem no longer to worry about regulatory pressure in these days of tweet-storm panics?

Or should we call it “The Big Guys Win Even Under Regulation?”

I’d guess at the latter, but “complacency” is the biggest concern I have about the markets right now, and shattered complacency, by hook or by crook, is the thing that might most quickly fuel a dramatic decline.

But still, this is clearly not the major driver of the stock, at least this year — here’s the year-to-date context of that CNBC headline that came out midday on Wednesday, “Alphabet dips on report that EU is prepping huge fine”:

So yes, headlines exaggerate, and they don’t always drive stocks. No surprise there.

I’ve owned this stock for about 13 years now, and a lucky 13 it’s been… and today, Alphabet is the first US “big tech” stock I’d buy today if you forced me to buy something at current prices. Down near $1,000 a share it gets pretty compelling even if they get some high-end punishment from the EU for their near-monopoly position in so many markets when that decision comes out, which could be as soon as next month.

Sure, there’s the risk that antitrust pressure could damage them more significantly in the short term, particularly if it’s really in the $10+ billion range, but Google isn’t going away, and Android and YouTube continue to grow more dominant each year. If you ask the regulators what they do when they want to answer a question, I bet they’d still say they “Google it”… and parent Alphabet is sitting on $100 billion in cash that they’re not doing anything with or getting any credit for, anyway, so even an $11 billion fine isn’t going to destroy anything. Assuming, of course, that like the regulators did with Microsoft over the years, they fine them without really materially harming their ability to go about their business in the future.

Huh, maybe it’s me that’s being complacent.

Enjoy your weekend, dearest friends — more to come next week as we prepare for the real summer doldrums.

Disclosure: As is hopefully clear, I own call options on and/or shares of many of the stocks mentioned above in the Real Money Portfolio… including Okta, Five Below, Hershey, iQiyi, Innovative Industrial Properties, Alphabet, Apple, Intel, Facebook and Cameco. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.

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