Cabot’s “The Next Amazon” stock

by Travis Johnson, Stock Gumshoe | January 11, 2016 4:11 pm

The Cabot[1] Stock of the Month[2] newsletter from Timothy Lutts[3] is one of those “best of” newsletters — its goal is to identify the best pick each month from among all of the newsletters published by Cabot.

Which sounds lovely, right? Why would you want anything but the best stock, why even consider subscribing to all the other newsletters from that publisher if you’re only getting ideas #2-10 for that given month?

Such is the world of investment promotions — investing is a world of uncertainty, probabilities, multivariate problems and surprise catalysts of both negative and positive sorts, but we all seem to desire certainty and binary outcomes. Winners and losers.

That obviously doesn’t work, there are probably not even that many folks among us who could accurately pick out the one stock in our portfolios that will perform best over the next month, let alone the next year — and those are the stocks you know best and follow frequently. We probably can’t even pick two or three of the top five performers in our portfolios in advance… at least not with any kind of consistency. If we could, we wouldn’t need to diversify.

So yes, every time you introduce a “pick this one stock out of the ten available for RIGHT NOW” selection, you’re increasing risk because there’s a new layer of opinion laid on top of the analysis of those ten stocks, which is kind of like a second layer of “manager risk.” I would bet that buying all ten Cabot picks, each month, probably does better than buying just the “top” Cabot Stock of the Month[4] pick each month over the long term, though that’s just a guess.

But, naturally, I still want to know what Timothy Lutts’ “Next Amazon” pick is as his Stock of the Month for January… so what is it?

Here’s how he gets us interested in his free article today (you can see a version of it from last week on their website here[5]):

“The Next Amazon

“I used to own Amazon once. Bought it in January 1998 (long before the company was profitable) and sold it in January 2000, for a profit of 1,290%. Those were the days!

“But I’d rather be hunting the next Amazon now.

“It’s much more fun, and my criteria are pretty simple:

“Fast growth of revenues.

“A great growth story that can persist for years.

“A stock that’s outperforming the market, ideally by regularly hitting new highs….”

And then he throws down a few hints that we can toss into the Thinkolator…

“This company grew its revenues roughly 80% last year (final numbers aren’t in yet), to roughly $130 million, and it could continue that growth for years to come.

“Most investors don’t know the stock; it only came public last April.

“But it was hitting new highs last week, even while the broad market was falling to pieces, as investors in the know were accumulating it!”

A little bit thin, right? There were only 15 IPOs in April, but that’s still a fairly squishy bit of clueishness — thankfully, Lutts cut down on our work level a bit by including a chart (he loves him some charts), so we can confirm that, yes, the stock they’re picking this month (presumably he means this month, maybe it’s the pick from December — they didn’t specify) is…

National Storage Affiliates Trust (NSA)

Which is a great ticker symbol for what is, at its heart, a very simple company: They own self-storage properties and rent them out, so that none of us ever have to sell Aunt Petunia’s old breakfront that will never fit in any home we ever inhabit, or recycle our college notebooks from 1989, or sell that motorcycle that you know you’ll never ride again. We’ve been becoming a nation of hoarders, of downsizers, of renters to some degree, and all of those trends help to support the self-storage industry.

Which has also been one of the hotter little micro-segments in the market for several years — there are five publicly traded self-storage REITs[6], and all have been fantastic investments over the past five years, the weakest among them has provided almost three times the return of the average REIT. They are CubeSmart (CUBE), Sovran Self Storage (SSS)[7], Public Storage (PSA)[8] and Extra Space (EXR)[9]. National Storage is far, far smaller than all of the established public storage companies — PSA is the granddaddy of the business and is massive with a market cap of $44 billion, but the others are also all multibillion-dollar companies — NSA has a market cap of about $400 million and is clearly the upstart trying to grow into a competitive position. This is how they’ve done so far this year (so yes, you can see that they mostly trade together and react to the same economic or market catalysts, though over longer periods PSA emerges as a dramatically better performer to date):
[10]

I don’t know what the broad marketplace is like for self storage — PSA has been around for much longer than the others and inspired all the competitors as they were trying to roll up what was a business dominated by small mom and pop properties, but I don’t know how much consolidation there still is to come in the business. There are few barriers to entry, of course, since it’s fairly easy to slap together a couple dozen garages (or in cities, closets) and call it a storage area, but there are presumably some advantages to having a network of properties either regionally or nationally, connections to moving companies, and the cost reductions that might come with a large portfolio of storage facilities.

NSA is by far the smallest of these guys, and the youngest by a decade or more (as a public company, at least), and it is also likely to be the fastest growing as it tries to grow by acquiring more storage facilities. It’s also got the highest dividend yield at this point, at 4.75% it’s about twice the annual income paid out by the other storage REITs… and it looks to me like the company carries a lot more debt, relative to the market capitalization (PSA has very little debt, the other three have debt that’s 25-35% of equity, NSA has debt that’s 85% of equity), which might be one of the reasons it can pay out a higher dividend at this point. I would be shocked if they didn’t offer up more equity for sale, since that’s how REITs grow (they’re pass-through entities and can’t retain earnings, since doing so would incur a tax bill), but as long as they can maintain a 4.7% yield they should be able to raise money without any real trouble.

It’s been a hot sector, and I’ve never owned any of the stocks in it. It’s hard for me to see another opportunity for the fantastic long-term gains Public Storage (PSA) has had, but it’s generally a fantastic business to be in (storage areas have great vacancy rates and retention and low costs most of the time, tenants rarely complain and don’t care about noise or smells, rents are not generally substantial enough that tenants complain about marginal increases, etc.). I don’t know anything else about NSA or the others, other than that the sector has beaten most of the market and been among the hottest sub-sectors in the REIT world in recent years, but this is the first public storage stock I’ve seen that has a competitive yield with other REITs… so that is, at least, something. Next Amazon? No… but I never did like Amazon stock, either so what do I know?

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