So what’s been happening since I last wrote to you, dear Irregulars? I’ve got a couple teaser picks to reveal for you in a moment, but first there are a few thoughts to get off the ol’ Gumshoe chest.
We’ve seen a nice recovery from the healthcare REITs, which are still quite reasonably priced (DOC, OHI, VTR and MPW are the ones I’ve bought into personally) — the one that remains relatively more depressed is Medical Properties Trust (MPW), but even that has come back a bit as management continues to follow through on what investors expected. They said they’d clear up their balance sheet worries by getting more permanent capital, and probably by selling some assets — so far they’ve done the easier and faster part of that, with their oversubscribed $500 million bond offering, and I expect they’ll follow through with the rest and that the high dividend (nearly 8% now) will remain fine and well-covered even if it’s not likely to be raised in the next few quarters.
And in the REIT space, you might remember that though I was buying DOC, OHI and VTR personally at the time, my “Idea of the Month” two weeks ago was Crown Castle (CCI)… and I hadn’t bought it, partly because I was hoping for a more depressed price. Haven’t gotten it yet, the stock is up 5% or so since I wrote that piece as the tide has lifted all REITs. It’s been a good few weeks for REITs in general, as interest rate expectations stay low and investors flock to some semblance of dividend-paying stability.
As has been pretty clear over the last few months, I’m a little nervous. I continue to have a large cash position, and the investments that appeal to me are the relatively conservative and less-cyclical companies who have strong and consistent earnings power and, in many cases, have high and sustainable dividend yields. I’m expecting a lot of my return over the next year or two to come from dividends, since it seems a bit aggressive to assume that we’ll see more valuation expansion in the broad market and earnings growth is probably not going to be super high.
What does that mean? Just that the rise in the S&P 500 over the past five years or so has come as much from an increasing PE ratio (investors are willing to pay more for each dollar of earnings) as it has from actual increasing earnings at the underlying companies in the index. It’s not just that major US companies are doing well and growing earnings per share, though they have been to some degree (partly by borrowing money at super-low rates to buy back shares), it’s also that investors have been willing to pay more for those earnings.
My guess, and it is solely a guess, is that we’re not going to see the broad market PE ratio go back to well above 25-30 like it did in the pre-crash bubbles of 2001 and 2007. It could, since interest rates remain so oppressively low that there isn’t anywhere else to put your money if you need it to grow, but I think there’s more risk in expecting that kind of continued inflation of valuation ratios, and I suspect that in a vitriolic election year the risk appetite of investors will generally be low… which means that valuations won’t go to new highs.
Things have normalized a bit with the recent dip in the market, and the broad market may well see earnings stay stagnant due to low oil prices, but that’s all guessing — I just think we’re in a slightly riskier world right now, stocks aren’t particularly cheap, and I find solace in decent valuations, understanding the stability of specific companies and their earnings power as best I can, and trying to find companies where cash earnings and dividends should provide some bulwark against market volatility.
Whether that works or not, I dunno. I’ve been wrong about broad market expectations before, to be sure, sometimes extremely wrong. That’s just how I’m thinking, and that’s why these kinds of “boring” investments are more likely to catch my eye these days. I’m not alone in that, though it seems I’m less afraid of some REITs than a lot of investors are — you can clearly see the investor worry in the fact that utility stocks, bastions of solidity in the minds of investors, are within a whisper of their all-time highs (as measured by the Utilities Select SPDR ETF (XLU)).
This is a big weekend coming up for individual investors too, by the way, so clear some space on your calendar — Warren Buffett’s annual letter to Berkshire Hathaway (BRK-B) shareholders will come out tomorrow here, and that’s always an excellent read. If you’re new to investing, read the past 20 years of Berkshire letters (they’re easy to read, have no fear) and you’ll get a really good basic education in Buffett’s value-inspired and patient philosophy.
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Berkshire has done worse than the market over the past year, and made one huge acquisition (Precision Castparts) and they’ve also seen some of their biggest capital investments coincide with severe weakness in those divisions (like the BNSF railroad, which sucked up a lot of money last year but also may be seeing lower demand with commodity prices weaker), so it should be an interesting letter. I’ll be in Omaha again this year at the Annual meeting in a couple months, too, and that’s fun and interesting, but I learn a lot more from Warren’s letters than I have from being at the Berkshire meeting.
I’d find it easy to buy more Berkshire if it drops down to near 1.25X book value again (and did nibble a bit last Fall near that level, though the book value may well be lower when they report tomorrow), but I don’t expect Buffett to beat the market until the market goes through a long weak patch again — the best opportunities for big, value-generating investments at Berkshire only really come when they’re one of the few opportunistic buyers in the market, which usually means things are ugly. BRK-B shares have performed roughly as well as the market over the past 5 years, the most recent period of big outperformance for Berkshire came in the 2006-2009 period when Buffett didn’t panic and set the stage for some great investments… but Berkshire does certainly fall sharply sometimes, and in my experience those times have created buying opportunities. I’m skeptical that we’ll see Berkshire take a huge fall, since Buffett has been more interested in buying back shares of late and has drawn a line in the sand at 1.2X book value, underneath which the assets are pretty clearly undervalued, to trigger those possible buybacks… but we’ll see, maybe he’ll talk more about possible buybacks tomorrow as well.
But how about the wacky little investments that continue to clog our inboxes? I’ve got a couple “bonus” teaser picks for you that readers have been asking about… let’s jump right on that:
Andy Obermueller over at Game Changing Stocks is touting a bunch of energy storage stocks that he thinks will benefit from the huge push toward better batteries and other storage technology, spurred by the well-publicized Gigafactory that Elon Musk’s Tesla is building to create enough lithium battery supply for their future cars and for other applications… like the Tesla Powerwall home battery that they’re selling (just as sleek and shiny as the cars, naturally).
This appears to be right in the teaser wheelhouse of “hot stuff” now — so many newsletters are touting the resurgence of solar, and storage has a huge role to play in the future of solar energy, so I expect we’ll keep seeing these solar/storage ideas pitched in the months to come (yes, even with low oil prices).
I’ll spare you all the “power storage will be huuuuge” stuff, which we will stipulate (storage and efficiency are the two keys to reducing reliance on coal and gas for electricity), and move on to the specific ideas:
“Stock #1: 1,000% Gain from “The Google of Energy Storage”
“My first pick is perfect for conservative investors.
“It’s ‘The Google of Energy Storage’ and offers an incredible opportunity: the chance to make 1,000% gains by investing in a well-established industry leader.
“It’s the global leader for industrial applications. It already has facilities in 20 countries, and customers in 120.
“Given its breadth, it would be essentially impossible for the energy storage market to take off without this company soaring with it. After all, with a 23% market share, it already dominates the market.
“As I said, the U.S. energy storage market alone is set to soar 1,100% over the next four years. This company is the perfect way to capture that growth. If it does nothing more than rise with the tide, it could deliver quadruple-digit returns.
“And that’s not even counting any growth it gets from its operations in other countries….
“What’s also great is that almost no one knows about this company. Despite growing its net income by 483% over the past decade and watching its share price quadruple, it’s still completely under the radar.
“Only about 317,000 shares trade hands per day — which is how many shares Apple trades every eight minutes.
“I’ve tagged this company as an immediate ‘buy.’ As the energy storage revolution unfolds, I think it’s only a matter of time before its share price takes off… and the company becomes a household name.”
It always catches my eye when you’re dealing with an investment that someone touts as “conservative” and that has relatively low trading volume and probably not much of a following, but with some growth and potential for more growth… so that gave me enough curiosity to put some time into firing up the ol’ Thinkolator to ID this one. Obermueller’s hinting at: EnerSys (ENS), which is indeed an industrial battery company.
EnerSys does claim facilities in 20 countries and customers in 120, and they do claim to have 22% market share in their core business (industrial lead acid batteries, mostly for forklifts and backup power systems). As of this year they say it’s 22% of a $9.8 billion business, a few years ago it was 23% of a $8.8 billion business, so it’s been pretty consistent and growing (albeit slowly). Their business is about half “motive power” and half “reserve power” — the motive power stuff is almost entirely from battery-powered forklifts and similar industrial vehicles, the “reserve power” is primarily (about 2/3) for telecom and “uninterruptible power systems” customers (ie, hospitals, data centers, folks who have to have backup power no matter what).
Their most direct “pure play” competitor, Exide Technologies, filed for bankruptcy a few years ago, so there’s no great comparison we can make with other firms — but considered on its own, ENS looks pretty good. They have not been showing much growth over the past couple years, but they have been growing a bit and they have consistently been nicely profitable. And from what I can tell by browsing their charts going back a ways, their cash performance (free cash flow) has been stronger than their earnings performance, which is good, and ENS right now trades at only about 10X free cash flow.
So on those metrics, it’s an appealing company… but it has come down a bit, mostly, it appears, because of lowered expectations for growth. This is, particularly with their motive power division (forklifts), presumably a pretty cyclical business (you don’t buy a lot of forklifts if you’re not building new warehouses), so maybe that has something to do with it. They are not “just” an industrial lead acid company, they also have divisions that make little lithium batteries for medical devices, and very weight-sensitive batteries for spacecraft, but it’s the industrial stuff and the banks of telecom batteries and things like that which really move the needle… and that needle moves fairly slowly.
Analysts are now expecting EnerSys to earn $3.89 in their current fiscal year (which ends with the March quarter), which is down from last year’s $4.32… and even in 2017 they’re expected to earn only $4.13, and all those estimates have been drifting down over the last few months. They do see growth resuming after this year, though, with expectations of 16% growth over the next five years — that’s obviously a guess on their part (five year growth estimates are never reliable, but they give, at least, some picture of consensus growth expectations), but if it’s close to reality then the stock’s valuation (PE of 12) is at least reasonable and maybe cheap (that’s a PEG ratio of about 0.75). Even if you discount the growth expectations, that’s pretty good.
Will it work out? I certainly have no idea, but they are, at least, a large player in industrial energy storage, and they have a strong brand (a bunch of them, actually) and a good record of increasing cash flow and earnings over the pat 15 years or so. They also have a strong balance sheet, with a reasonable amount of debt that they should be able to keep servicing and rolling over without a problem (given their consistent cash flow generation).
Unlike Andy Obermueller, I would be shocked if EnerSys went up by 1,000% anytime in the next 5-10 years, but I can see some logic in assuming that it will rise in value as energy storage continues to be a growing priority — they do not have a particular presence directly in things like solar energy storage, or any big projects for utility-scale energy storage, but that’s probably a good thing for conservative folks, that’s where a lot of folks are chasing big dreams with uncertain returns. Selling forklift batteries and uninterruptible power systems for data centers seems much more “vanilla” and less volatile. I’m no expert on the company’s potential, to be sure, and I don’t own shares, but given my current tendency to be a worry wart and find conservative ideas appealing, I’m going to keep an eye on EnerSys.
For a bit of perspective on the industrial battery business in general, I found this presentation from an industry group interesting as well — not quite up to date, but it gets into some forecasting and some perspective about “new technologies” and their impact on business for companies like Enersys and Johnson Controls (JCI) who have large market share in the lead acid battery market.
How about one more from Obermueller? This one’s a bit wilder:
“Stock #2: A Speculative Pick That Could Deliver 10,000% Gains
“This investment isn’t for everyone. It’s speculative and could be a rollercoaster ride. But if you’re looking for a thrilling, huge-potential stock that gets you in on the ground floor of the energy storage revolution, you’ll want to buy shares immediately.
“Nobody needs energy storage more than our soldiers — especially when they’re out in the field.
“When you’re in the middle of the jungle, you can’t just plug in your radio or GPS.
“Traditionally, what they’ve done is charge the batteries in their electronics by drawing from a larger ‘source battery.’
“Unfortunately, most source batteries the Army uses aren’t rechargeable. One charge is all you get.
“That’s where this tiny $1 company enters the scene…
“It has a groundbreaking rechargeable battery system. It fits right into a soldier’s vest. All throughout the day, a radio or GPS can draw power from it.
“According to Major Mark Owens, in early tests soldiers have loved it. They are saying that these battery devices are ‘some of the best pieces of equipment they’ve ever seen.’
“This company makes several other products as well, including ultra-light submarine batteries, a battery system with eight times the charging cycle over a typical battery, and more.
“The military has taken notice, and is already placing orders… which are having a huge impact on this company’s share price.
“Last year, for example, the company announced a $2 million order from the Army. The shares soared 50% in a day.
“That’s right — a tiny $2 million order triggered a 50% jump.
“As battery storage gains traction… and as this company’s system are deployed… there’s no telling what could happen to its share price.
“Like I said, it’s a speculative play. But just a few hundred dollars has the potential to change your life.”
Laying it on a bit thick, no? There are a bunch of companies working on “Soldier Power” projects designed to help bring down the weight and variety of batteries that a soldier has to carry, but the best match here is a company called Arotech (ARTX), which was a $1 company for a while (and a $5 company) but is now priced at around $2.60 a share, for a market capitalization of around $65 million.
They are primarily a military and aerospace contractor, they do sell the SWIPES (Soldier Worn Integrated Power Equipment Systems — everything must have a cool acronym), which is basically a vest with integrated rechargeable batteries and connections for all the radios, GPS units, scopes and gizmos a soldier needs to carry. That is the one that was lauded by Major Mark Owens, who worked on the program a few years ago when it was launched — maybe he still does, I don’t know, but it hasn’t generated a lot of press since 2012 or 2013. And yes, they also sell batteries for submarines and other aerospace and military applications.
They’ve got an investor presentation up on their website from last year that you can see here, so that’s worth a scan if you’re interested in their prospects — the SWIPES vest is one of their growth projects, but not much in this military procurement landscape seems all that predictable to me. They are profitable but not growing, and they seem to have a fairly steady backlog and have announced orders several times this year for both their training and simulation business and their power management business (each is roughly half of revenue, it appears). The stock has had a few big swings in the last five years or so, I don’t see any reason why they should suddenly see the kind of revenue growth that gives you 10,000% returns (right now they’re talking about cutting costs and operational efficiencies, which is not what you hear from companies that are expecting sales to skyrocket), but neither is there anything that looks disastrous in their books. I don’t know if they stand out as being particularly unique in the “military battery” business, there are a lot lot lot of small defense contractors and subcontractors, and Arotech is not the only one focused on power systems… but it is one of the few publicly traded ones that’s nearly a “pure play” on batteries and power management (well, half of a pure play anyway).
Can’t get excited about that one, I’m afraid. But perhaps you can.
So that’s what we’ve got for your Friday File edutainment — have a great weekend!
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