You should follow Eddy Elfenbein on Twitter, he’s a funny and interesting guy. But you shouldn’t sign up for his newsletter just to learn a “secret” stock pick.
I’m not picking specifically on Elfenbein there, of course, just my regular public service announcement that sending money to someone to learn about a stock pick that you’re convinced will change your life is a recipe for disaster. It might work, of course, and odds are pretty good that any growth stock picked in the past five years worked out pretty well… but it really short-circuits your ability to analyze or even think clearly about a stock.
If you’re like most people, then you are strongly influenced, at least in your subconscious, by the first thing you learn about a company, that sets the basic foundation of your knowledge… and you are also likely to be biased in favor of anything you just paid for, because we like to justify our decisions and remind ourselves that we’re smart. That sets you up with a double-edged behavioral bias if you pay for a secret stock pick — you’re both more likely to believe the hype in the original ad, because it’s the basis of your understanding for this company (assuming it’s new to you), and you’re likely to follow the advice in the newsletter without doing much thinking on your own, because you paid for it and your brain will push you to reinforce that decision (I paid for it, so it must be good, and I’ll prove that by buying the stock!).
So that’s a big part of why we do what we do here at Stock Gumshoe — push back on that temptation to “buy” a stock pick by subscribing to some newsletter that you don’t know anything about otherwise. I’m hoping for two things: That you won’t commit to something you don’t need or want just to get a “stock tip,” and that if you learn the names of these stocks for free, courtesy of the Thinkolator, that this will give you a better chance of thinking clearly about both the upside and downside potential and buying something that fits with your needs and priorities and risk tolerance.
People often ask me if I hate newsletters, and, of course, I don’t. I don’t subscribe to them, because that wouldn’t be fair if I’m sniffing out their secrets based on their ads… but I have subscribed to some in the past (before my work here at Stock Gumshoe), and I’ve seen many sample issues and heard from many happy subscribers from a variety of newsletters. I know that some newsletters are educational, informative, entertaining, and sometimes even profitable for those who follow the advice, and that the editors are often more reasoned and careful than they sound in the hyped up ads their publishers use to hook new subscribers… but I also know that none of them can match up to the image you probably have from their hype-filled teaser ads about infallible 200% or 10,000% gains, so let’s get that part out of the way and let you think about both the stock and the newsletter with, one hopes, a clearer mind.
Sorry about that, sometimes I just get inspired to explain what we do here — I know we have lots of new readers every month, and sometimes it’s not clear.
But now I’ll move on to the task of the day — let’s check out Eddy Elfenbein’s latest ad for his Growth Stock Advisor, which is an entry-level growth stock picking letter ($49 for the first year, renews at $99, and unlike most expensive newsletters they do offer refunds if you don’t like it in the first year).
We’ve certainly heard plenty of pitches about 5G over the past year or two, so a lot of this one will sound familiar when he talks about the massive potential of the 5G transition… here’s a taste of the ad:
“Market Legend on a 14-Year Undefeated Streak Finally Reveals…
“The ONLY 5G Stock You Need to Buy
‘[this stock] is in raging bull market mode’ – CNBCAre you getting our free Daily Update
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“You must get in now to earn up to 200% gains by the end of the year”
When it comes to teaser pitches, 200% gains “by the end of the year” is actually relatively muted… so this is probably an established or better-known stock, not one of the tiny fellas that gets teased from time to time.
And I expect variations of this ad have been around for a while, because he says both that “February 26th… is the critical date to enter in a position before for maximum gains” and that “you could miss out on the best chance to make a fortune by 2020.” Which is hard to wrap your head around, given that it’s already 2020.
So yes, they’d like you to think there’s an urgency here… but that’s true of every newsletter ad. Urgency, often almost entirely false urgency, is what gives you that last little bit of temptation to pull out your credit card.
But anyway, back to the ad — what else does Elfenbein say about the stock…
“Wall Street and the media are pointing you in the wrong direction.
“I’ll reveal evidence that confirms this in my briefing here.
“And let me say this… You will NOT hear about this secret 5G company from mainstream sources.
“But on this page, you’ll discover why this company will soon skyrocket…
“No matter which telecom provider gets the most 5G coverage!”
And apparently there was some hinting that there would be big partnership news by December 31, perhaps that was just lightly updated with the February 26 date so that they can continue to push some urgency…
“… this company could skyrocket before December 31st. I predict they will release some groundbreaking partnership announcement on that date.
“Now, I consider this company ‘secret’ for one reason:
“5G will never work without the service they provide…
“Yet not 1 in 1 million Americans knows this company even exists!”
There’s also plenty of teasing about what a major change 5G will make, speeding up wireless transmission by 100X and enabling things like autonomous cars, augmented reality, next generation manufacturing and healthcare and retail and all the other promises we’ve heard. And that it’s estimated half of Americans will have access to 5G by 2025, which is similar to projections we’ve heard elsewhere (though, of course, essentially no one is paying extra for 5G right now and we don’t really know what the economics or demand will be on the consumer side, which means the pace of capital investment could certainly change).
Though they also undersell it in parts, for some reason…
“Right now it takes 6 minutes for a movie to download on 4G…
“But it takes just 3.6 SECONDS to download the SAME movie on 5G!
“That’s a 196% increase in speed!”
Most of the 5G pitches we see tout the “1,000X faster than 4G” potential, though perhaps the 200% increase is a more reasonable near-term goal.
But you’ve seen all the hypetastic touts of 5G potential, I’m sure, so we won’t linger on that… what, specifically, is Elfenbein teasing?
Well, he uses a very popular Wall Street analogy to the mining business:
“To Get Rich, You MUST Follow This 150-Year-Old Stock Market Secret
“You get rich selling the picks and shovels…
“NOT by mining the gold.”
It’s not true that you can’t get rich mining gold, of course, but it’s true that selling the picks and shovels is a lot lower risk.
What other hints do we get about the actual stock Elfenbein likes? Here you go:
“You see, without the product this business provides…
“5G networks are impossible to establish.
“I’ll explain why in just a moment, but I’ll put it this way…
“This company could very well be a legal monopoly.”
Investors loooooove monopolies, of course. Lack of competition is great for margins.
“… every telecom company needs what this company provides…
“In fact, many already do. As leading resource FierceWireless reports…
‘…[Secret 5G Company] to have exclusive right to lease and operate Verizon’s [network] for 28 years.’
‘[Secret 5G Company] inks new MLA deal with AT&T’
‘[Secret 5G Company] expects long-term positive impact from T-Mobile/Sprint deal’
“It’s no wonder The Motley Fool has this company listed as one of their 3 stocks to hold for the next 50 years!”
OK, so it might be “secret” for the purposes of this ad, but it’s certainly not going to be a tiny or unknown company. Not with quotes like that.
And then we get confirmation that this ad has been around for a bit, and has been poorly updated:
“But You’re Almost Out of Time
“I first recommended this stock back in November…
“And since then, it’s already reached 48% gains.
“And I’m predicting it could shoot up as high as 200% by the end of 2019.”
From the chart he uses in the ad, it seems like this teaser ad started running in September.
Which means that we can confirm the Thinkolator’s answer pretty easily right now… this is good ol’ cell tower owner American Tower (AMT), the largest real estate investment trust (REIT) in the world and, yes, a clear beneficiary of all the past cellular transitions (2G, 3G, 4G, etc.) as new tower space is needed for more and more antennae and transmitters.
Here’s my version of Elfenbein’s chart, by the way, since he said he first picked the stock in December of 2018…
And, in case you’re afraid you might have missed out because you didn’t buy by December 31 or whatever the imagined deadline was, here’s the return since the ad was apparently written in September…
So the stock has recently beaten the S&P 500, though not to a degree that you’d probably say was life-changing.
American Tower, SBA Communications (SBAC) and Crown Castle (CCI) are the three gigantic telecom REITs who own primarily cell towers and other mobile network infrastructure, and AMT has been the “blue chip” of that select group for a very long time. Here’s what the total return of the three looks like over the past ten years (SBAC just started paying a token dividend and was the most recent REIT conversion, in 2017, the others have been REITs for seven or eight years).
I prefer and am invested in Crown Castle personally, mostly just because it is US-centric and has focused a lot on building up small cell (and fiber) capacity, but also because it pays a higher current yield of about 3.2% right now, roughly twice the size of AMT’s dividend. CCI’s dividend is not growing as quickly as AMT’s, however — CCI grows the dividend by about 8% a year, AMT is still growing theirs by more like 20% a year (and they raise it each quarter, so the compounding is speeded up a little).
Crown Castle has lagged AMT and SBAC since I bought shares because of lower growth rates, partly due to the fact that SBAC and AMT are both expanding rapidly overseas while CCI has invested in small cell networks that aren’t going to pay off in the near term (though, of course, they hope this bet will be important longer-term), so I’ve been wrong on that, but we’ll see how it goes. SBAC was the last to convert to REIT status and just initiated a dividend in August, they currently pay at about a 0.6% rate but we’ll see how that evolves and if they begin to grow the dividend meaningfully from here. All three have been pretty heavily teased from time to time as good plays on 5G by various newsletters, particularly over the past year or two.
They do clearly tend to trade together, though AMT has pretty consistently outpaced the growth of CCI and SBAC over most time periods. They’ve all always been very expensive compared to the average real estate or yield-oriented investment, which is what deterred me from getting involved for a long time — so there’s some risk that if growth expectations die down, these three could all have pretty far to fall, and I think CCI should have more downside support than the others due to its higher dividend… but so far most such worries have been overstated in recent years.
What does the current valuation look like? REIT investors usually go by funds from operations (FFO, a cash flow measure) instead of earnings per share, and AMT currently trades at a price/trailing FFO ratio of about 25 (CCI is also at 25, SBAC at 34). On a more traditional PE ratio, AMT has a trailing PE of 66, CCI 76 and SBAC 210 (SBAC went through an awful patch and still has some big losses they can write off for tax purposes, which depresses their reported earnings).
Right now, analysts project that cash flow (or EBITDA, at least) will grow at a 4% rate for AMT, versus 6% for CCI and 8% for SBAC (using 2018 numbers and estimates for 2021)… in terms of revenue, the equivalent forecasted growth rates are 4.7% for AMT, 5.4% for CCI, and 6% for SBAC.
Which all makes me reconsider — even now, perhaps, I should be looking at AMT and its much higher historical growth rate and larger (and international) portfolio over CCI and its more comforting current yield, somewhat better valuation, and focus on 5G and small cells in the US… and maybe even considering SBAC, which could emerge to generate a real dividend eventually.
But that’s been challenging because I’ve been dealing with the hang-up of judging REITs based on the dividend yield, underestimating AMT’s ability to grow the dividend, and struggling to justify a 1.6% yield for a mega-cap REIT even if that dividend is growing nicely. I don’t really want to chase those valuations with big bets after a huge run in the past year or two, but in retrospect I should have probably spread my investment across all three… and I expect all three will work out well over time, and will likely benefit from both a multi-year wave of 5G infrastructure investment around the world, and from continually depressed interest rates (which make their borrowing cheaper, and make their yields look more compelling for investors).
And incidentally, if you just like the yield and want a little growth “juice” for your portfolio, then if you buy just the broad Vanguard Real Estate ETF (VNQ) you’ll be getting a fair dose of tower REITs — AMT, CCI and SBAC are some of the largest REITs in the world, and combined make up about 15% of that index ETF (and sticking with the “high tech” theme, data center REITs are another 6% or so), and it should have a forward dividend yield of about 3.5%. Of course, you get shopping malls and office buildings and timber and apartment complexes and nursing homes along with all that, and maybe you don’t want that stuff… but we often overthink these things, and not everyone wants to spend their days obsessing over individual stock tickers (I do, of course, but I’m told I’m a little bit deranged).
REITs in general have been on a heckuva run as the sentiment shifted from “interest rates will rise and cause problems for REITs” to “interest rates will never rise, and may go to zero,” so do be mindful that all of these leveraged “asset” investments will be significantly influenced by changes in interest rate expectations. Cutting interest rates further, even to zero, might not spur economic growth at this point… but it would probably continue to boost asset values and make investors hungry for dividends that would have seemed almost inconceivably low a decade or two ago.
If you want just “high tech” REITs, by the way, there is also the Benchmark Data & Infrastructure Real Estate ETF (SRVR), which I also have some money in. That is mostly tower REITs and data center REITs, with a few oddballs thrown in (mostly billboards)… it’s relatively expensive for a ETF, with a 0.6% expense ratio that effectively cuts into the dividend yield, but you do get some diversification in the space.
The other risks to the cell tower REITs in general come from the fact that they have really pressured the mobile telecom companies by keeping lease rates high, so a big part of the cost structure for Verizon and AT&T is tower rent… and that might backfire, since companies like Verizon and AT&T now pay out a pretty huge percentage of their revenue as lease payments to the REITs, which means they probably sometimes regret the fact that they spun out their tower networks to these REITs in the first place — which means they might continue to hedge their bets by building their own towers and small cells to reduce their reliance on the colocation tower owners. They do have near-monopoly status in many of their tower areas… but they also are faced with an effective oligopsony (big word time! That just mean there are only a few meaningful customers — a monopsony would be “only one customer”), so the pricing relationship is not always one-sided.
That has accelerated over the past year or so with AT&T and Verizon both bankrolling Tillman Infrastructure, a startup that’s building new towers for them, mostly as a way to pressure the existing tower owners (this won’t be a quick or dramatic change, AMT and CCI each own 40,000 tower locations in the US and many of those are not easily replaced, but it is a sign of the potential competitive threat… which is meaningful in a market where there are only a few customers).
Add in the potential loss of Sprint or T-mobile when (if) that merger goes through, and if we end up without a strong and viable third mobile company in the end it might be that Verizon and AT&T have enough heft between them to put the pressure back on the tower owners and keep a lid on lease prices. And, of course, the situation in every other country is different, sometimes better and sometimes worse for the tower owners (AMT and SBAC rely a lot on growth from overseas, which sometimes hits snags — like AMT’s troubles last year in India as wireless companies consolidated there and they lost tenants — but is largely why they’ve grown faster, while CCI is really US-only).
So there you have it, dear friends — yes, American Tower is a pretty solid play on continuing demand for wireless data infrastructure, which should ramp up as 5G networks are built but 4G networks remain critical… and it has been a fantastic investment for a decade or more. It’s tough to swallow at a $100 billion market cap and with a rich valuation and low current yield… but I found it too tough to swallow in 2010 as well, and that was a mistake.
Which is why, thankfully, you have to decide for yourself what you should do with your money — interested in American Tower and its relentless dividend growth as they build cell towers around the world? Prefer their near-peers like upstart turnaround SBAC, or higher-yielding CCI? Let us know with a comment below.
P.S. In case you’re wondering, yes, February 26 does mean something — that’s the day before AMT reports its next quarterly results, before the market open on the 27th. Earnings reports are not typically super-volatile moments for AMT, there generally isn’t a lot of surprise either way, but the stock could certainly move on any news or updates about their expected pace of growth in 2020.
Disclosure: Among the stocks mentioned above, I own shares of Crown Castle and the Benchmark Data & Infrastructure REIT. I will not trade in any company covered for at least three days after publication, per Stock Gumshoe’s trading rules.