Mark Skousen is an old hand in newsletterdom now, and we’ve looked at pitches for his newsletters that are published by Eagle Financial many times over the years, including the “entry level” Forecasts & Strategies letter as well as his more expensive options-focused services.
And he’s launching a new service to take advantage of the changing dynamics in Washington — he has always been a somewhat politically-connected economist, and this new service of his is priced at $995 a year and is called the 1600 Alert… with the veiled promise that he is connected with many of Trump’s economic advisers, and will be able to give you unique insight into how to profit from President Trump’s decisions and priorities.
I have no idea whether or not Mark Skousen is going to have better insight than others into the mind of our new president, or into what might happen when his priorities hit the actual economy, but he is pitching his first “Trump Trade” to try to hook subscribers… so we’re going to look at that pitch, find the name of the stock for you, and let you draw your own conclusions. Thinking for yourself is a good idea for any political climate.
I would note, just to be a little bit snarky, that Dr. Skousen was also forecasting a Mitt Romney upset two weeks before the 2012 elections, and selling his top six ideas for the Romney presidency — those six stocks, on average, have done worse than the market for most time periods over the last four years (a couple of the picks have done well — INTC and BBT have beaten the market if bought in October 2012, and there are others that have done well for shorter periods of time, but on average they’ve had a total return of about 35% versus the S&P 500’s total return of 75% for that time period).
And to make it clear that they’re not selling a political viewpoint, the publisher, Roger Michalski, claims that Skousen has such good contacts and insight that they would have been launching this 1600 Alert service regardless of who won the election, since both rely on cadres of economic advisers who travel in the same circles as Mark Skousen.
But anyway, what’s this first “Trump Trade?” It is, as you will be unsurprised to hear, an infrastructure stock — tied not just to the notion of a “trillion dollar” surge in infrastructure spending that is continuously talked about as a political priority of the President, but also specifically to the border wall that was his biggest applause bait on the campaign trail (and, of course, in the actual news as his administration looks for a way to build the wall in the early days of his presidency).
Here’s what the ad says:
“Trump’s consistently strong stance on infrastructure spending is why a lot of the big, obvious players in that sector have done well since Election Day…
“John Deere is up 18.9%. Caterpillar is up as much as 14.9%. And diesel engine leader Cummins is up as much as 11.9%.
“But none of these — or any other lumbering Blue Chip, for that matter…
“Can hold a candle to the profit potential of the infrastructure stock Mark picked on December 12th to kick-off his new Oval Office investment service.
“In the seven days following Trump’s election, this nimble, specialized equipment company jumped over 38%!”
What else do we learn about this specific stock? More clues:
“… this stock is the farthest thing from a high-profile household name.
“In fact, I’ll guarantee you’ve never even heard of it. Neither has your broker.
“One big reason for that is because it’s a bona-fide small-cap with less than $850 million in outstanding shares.”
OK, market cap under $850 million. What else?
“You see, this company specializes in the sales, servicing, and rental of cranes, industrial lift trucks, and high-lift aerial work platforms.
“Now of course, these things are vital for all kinds of infrastructure construction, renovation, and repair work…
“But they’re especially useful for building walls!
“Like, for instance, a border wall between the U.S. and Mexico.”
Skousen gets “on the record” here as saying that he’s still an open-borders, free trade libertarian, so he’s personally anti-wall, but that’s not terribly relevant. Do we learn anything else about this company that can help the Thinkolator get us some answers?
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“… no less than nine small-cap, micro-cap, growth, and income funds took new positions in this stock during the fourth quarter of 2016.
“The company’s own officers are scooping up shares like wildfire, too…
“According to SEC records, the CEO, COO, and Director hastily scooped up 50,527 shares in their own firm in early November — just before the election.
“Now, whether they actually ‘know something’ or are just seeing the same incredible profit potential in this stock that Mark does is irrelevant.”
So there’s our pack o’ clues… where do they lead us? I shoveled them up, tossed ’em into the Thinkolator for you, and got an answer nice and quick: This is H&E Equipment Services (HEES).
The market cap is up a bit more, to about $930 million at $26 a share, which is the new 52-week high (though well short of the highs in mid-2014, before the oil collapse stopped what had been a nice trend of rapid revenue growth)… and there were 50,527 shares acquired by the CEO, COO and a Director that were reported on Form 4 on November 1, though none of those acquisitions were dramatic — CEO John Engquist, for example, added 34,000 shares to his total… but he already owned almost 2.8 million shares. Still, they were real insider purchases, not stock grants — and that’s pretty much always a positive sign even if it’s not dramatic.
The stock has soared since those insider purchases and since the election, and the lift has been a little more aggressive because it’s a small stock, but there’s nothing really company-specific about this surge. The stock is up 97% since the election, but other companies with similar drivers are up as well. Manitowoc (MTW), which makes cranes and lift equipment, including some of what is probably sold, rented and serviced by H&E, is up 75%… and the much-larger construction rental company United Rentals (URI) is up 68%.
HEES is definitely in a “rentals rally” as people speculate on a big surge in construction spending, but it has also been in a pretty significant earnings decline for a couple years since their 2014 peak, and it’s not cheap — the stock trades at a PE ratio of about 25 (you can use either forward or trailing numbers for that, analysts are not currently predicting any increase in earnings for 2017… though, to be fair, there aren’t all that many analysts covering this small-cap stock), and they have grown earnings, on average, by only about 8% a year over the past five years.
So this is really a “story” stock about future growth, and that means there will be a high degree of volatility if the story doesn’t play out as current investors are expecting. I have no idea how much infrastructure spending will come out of Congress in the next couple years, or how long it will take to get the faucet opened up, but I do well-remember the 2009 stimulus attempts, which included some infrastructure spending that was expected to be “shovel-ready”… and that was probably $150 billion in actual infrastructure spending out of the $787 billion stimulus bill (if you use a pretty wide definition of infrastructure), but only ~10% of it was underway within a year. This stuff takes a long time, and the decisions made rapidly may not have been the best ones, though if infrastructure turns out to be the administration’s top priority it’s possible that it will move more rapidly this time.
Looking back at HEES in those years, their revenue bottomed out in the first quarter of 2010 and doubled over the next four years… though it’s hard to know whether infrastructure spending had any direct impact on that, or if it was just their reaction to the economic recovery and the return of construction spending in general. Their best two quarters, revenue-wise, were in December of 2007 when housing was in an all-out mania, before any big infrastructure stimulus was foreseen, and in December of 2014, when the 2009 stimulus was five years old but money was flowing freely on the Gulf Coast thanks to $100 oil and the shale boom.
“Infrastructure” dollars don’t necessarily flow from politicians mouths into the pockets of construction companies all that quickly. The most recent highway bill, signed in late 2015, included $305 billion in spending over five years, and HEES’s revenues and earnings have been flat to down since then.
Here’s what the CEO said in the last quarterly press release, which included a fairly steady report from their leasing business but some real softness in sales of new and used equipment:
“As we expected, our distribution business remained soft during the quarter as new equipment sales continued to be pressured by very low crane demand. When the energy markets rebound on a sustained basis, we believe there will be substantial pent up demand for cranes. We continue to believe that the non-residential construction markets remain healthy based on current bidding activity levels, solid backlogs, positive customer sentiment and the robust activity associated with ongoing large projects.”
That softness was blamed on weakness in the oil business, and on the floods in Louisiana. There didn’t appear to be any major changes in terms of the efficiency of the business or their rental rates. Half of their revenue comes from their “Gulf Coast” region, which is mostly Texas and Louisiana, so the focus on the energy business is reasonable even though they say that oil and gas directly account for only about 5% of revenue. And they say they don’t have any equipment that’s specialized for the energy business — they are very much specialized in “lift” stuff, aerial work platforms, cranes and lift trucks make up almost 3/4 of their fleet (The rest is mostly earthmoving equipment), but they aren’t actually leasing drilling rigs or oil-specific stuff like that… which is good, but the cranes and AWP equipment have seemingly had pretty low utilization of late, too.
That big move in the stock has not been driven by increased earnings expectations among the folks who follow the stock most closely — in this case, it’s the story driving the stock, and we’ll see if the earnings forecasts (or actual earnings) catch up with the story. It’s certainly possible, but right now you’re paying 25X earnings for a stock that has no earnings growth, so keep it firmly in mind that you’re buying rising expectations, not proven performance.
The company looks to be in reasonable shape, the balance sheet shows a lot of debt but not an unexpected level for a heavy equipment company, and the heavy depreciation charges mean they can cover the fairly high dividend (4% yield right now) even though their actual earnings are slightly below the divided. That last one would worry me a bit, since depreciation is very much a “real” thing for heavy equipment that has to be refurbished and replaced on a regular basis, but earnings are pretty close to covering the dividend.
What’s the worry? I’m not really sure how much of that depreciation money they need to hold on to — A crane and a building, for example, both depreciate, and that’s a non-cash charge for both that gives them some decent cash-flow flexibility… but a crane depreciates much more quickly and loses value every year, while buildings typically increase in value, which is why REITs paying out some of that depreciation allowance in dividends is more comfortable than a heavy equipment company doing the same thing. Pipelines, similarly, pay out lots of depreciation as distribution to MLP unitholders, and that works because pipes might last for decades even after they’ve been fully depreciated… but I’m not sure how it works with shorter-lived assets like trucks and cranes. That’s a real “I’m not sure,” by the way, it might work fine, particularly when financing is easy to come by.
Right now, of course, much depends on whether news from Washington brings a real spurt to non-residential construction, and thus to demand for construction equipment… and whether that makes the company say encouraging things about demand or rising forecasts in their next earnings release. Personally, I’d think that the recent move in the stock presupposes a lot of success already, which makes me not very interested in speculating on their near-term prospects… but maybe you’ll see something to love that I’m missing.
So there you have it — it’s a stock that has already moved a lot based on expectations of a surge in construction spending, and they are certainly focused on an area of the country that should be impacted both by oil and gas spending and by any large border wall construction projects, but so far most of the company’s own commentary indicates that they are really driven by the overall rate of non-residential commercial construction and by broader road-building infrastructure projects. That’s all I’ve got from my few minutes browsing through their financials… if you’ve got an opinion on HEES or on whether a new wave of non-residential construction will lift all boats in the heavy equipment business, please let us know with a comment below.