by Travis Johnson, Stock Gumshoe | January 20, 2022 4:00 pm
As growth stocks give up their premium multiples, investors have been betting that the recent trend toward “value” stocks will really kick in and reward investors who bet on stability and low valuations over growth and growth potential. Maybe that tendency to move to “value” will continue, who knows — it’s hard to have any real confidence about whether a jolt to the markets over the past few months is a real “sea change” that will lead to entirely new trends, or just a little reset — but the newsletters are ready. The Motley Fool[1] is out promoting its “12 Top Value Stocks for 2022,” which is a report you get for signing up for their “upgrade” Market Pass service ($799/yr, runs what sounds like a “greatest hits” portfolio that mines several of the popular Fool letters for ideas), and in promoting that service they’ve been sending out teaser emails in recent days.
Which is where we come in, naturally — what ideas are they hinting at in those ads? Might we find something interesting for our portfolio for a price that’s a little bit more, shall we say, free-ish?
There are actually two different ads that I’ve been asked about in the past day or so, teasing different stocks for this idea of a 2022 “Market Pivot” to value, so let’s see if we’ve got enough clues to ID a couple stocks from that “top 12 value stocks for 2022” list for you.
The first one is that “Unknown 50X potential” stock, here’s how Eric Bleeker’s teaser letter hints at that one…
“I want to talk to you for a moment about a travel stock with a time-sensitive window before it can really start tapping that growth potential.
“And really at its core, this is what ‘Market Pivot 2022’ is all about – finding new opportunities before the rest of the market wakes up to them….
“I had never heard of this company before… it is well under a $1 billion market cap (to put that in context, it’s less than 1/100th the size of Booking Holdings)….
“Nearly tripled gross profit in less than a year. Which is quite a feat, and a signal of a management team firing on all cylinders….
“… this company brought in $252 million in sales over the past year… its total addressable market was measured at $21.7 billion in 2020.”
OK, so they’re calling it a “value” stock, it’s got something to do with a rebound in travel, and we get a few hints about specifics — including revenue and market cap. What does the Thinkolator say? This one’s pretty easy, the Fool is hinting at Despegar.com (DESP), which is the leading online travel agency (OTA) in much of Latin America — essentially, the equivalent of Booking.com or CTrip, but focused on customers in Brazil[2], Argentina[3], Mexico[4], Colombia[5] and elsewhere in Latin America. And yes, if you round up they did indeed have $252 million in revenue over the past four quarters, as of September, and it’s a tiny stock, with a market cap around $650 million.
And yes, they “almost tripled gross profit in less than a year,” though that probably says more about the collapse during the worst of the pandemic, and the quick bounce-back, than it does about the typical growth for this company. Gross profit came in at $120 million for the year ending September 30, and that’s “almost triple” the gross profit they reported for all of 2020 ($46 million). It’s still way below the pre-COVID performance, as you might guess for a company that essentially sells airline tickets and hotel bookings, annual gross profit was running in the $350-400 million range from 2016-2019.
Despegar.com got some attention in early 2021 as a bounceback, post-COVID play, but the ongoing challenges of outbreaks and travel disruption seem to have kept a bit of a lid on things so far. The company was profitable for their first year as a public company (the IPO[6] was in late 2017), but for some reason that didn’t stick, and they were losing money pre-COVID… there are a few analysts who cover the stock, they’re predicting that DESP will roughly break even this year, and that 2023 will be the year they re-emerge into profitability. If so, and if they can generate the 20%+ revenue growth that those analysts are expecting, then the current price in the $9 range might well turn out to be a great value — they have a lot less scale than Booking Holdings (BKNG), of course, but they’re also a lot cheaper, at about 1X forecasted 2023 revenue (BKNG trades at about 6X that number, Expedia (EXPE)[7] is much cheaper at about 2X). I don’t know anything else about the company, and in particular I don’t know how they’re positioned in their key markets like Mexico and Brazil, how the fourth quarter might have gone as Delta and then Omicron swept across that region, and what competition they face. The big players are in Latin America too, including Booking.com and Expedia and Airbnb, but at least pre-COVID those firms had less market share than Despegar, which had the lead with about 10% of the market.
As with Booking.com and the larger global players, I assume that a huge part of the business is building a “start here” brand and using search engine advertising to capture potential travelers, while trying to avoid paying too much for those ad placements, or losing market share to customers who use search engines but then book direct with hotels and airlines… but in Latin America, more than in the US, there’s still a relatively heavy presence of traditional travel agents, so there may be a lot of relatively easier competition to win over as more customers go digital. The challenge there might be that if the multinationals focus more on Latin America, and Despegar has to go toe-to-toe with Booking or Expedia in marketing, they may have to find a way to win without having the same buying ad-buying power as those much larger companies.
I’ll need some more context before risking money here, and none of us, of course, knows exactly how or when travel will return to the levels of 2019, or what economic conditions will look like in the next few years in Despegar’s key markets, but I did find their third quarter earnings recovery (investor presentation here[8]) pretty impressive, and from what I’ve seen so far I like their cross-selling and brand-building strategy. Interesting little company.
And what’s the other one? Our clues are much more limited, let’s see what we can find… this second one is pitched as a “$40 Value Stock Too Cheap to Ignore.” These are the other clues:
“Growing profits faster than Amazon. That’s right, earnings per share are up more than 7.5x in less than four years….
“… not a recommendation in any Motley Fool service, and at a market cap just over $1 billion….
“This $40 stock is trading for 16 times earnings. That’s far cheaper than the S&P 500 (27 times earnings)….”
And that’s all we get. Not enough to be definitive about our answer like we can be with Despegar.com, I’m afraid, but the Thinkolator does have at least a solid match for us: This may be Donnelley Financial Solutions (DFIN)[9].
How do we match, you ask? Well, the price is right around $40 ($38 as I’m typing), the market cap is a hair over $1 billion, and if you take the four year period from September 2017 to September 21 the quarterly earnings did come in with almost exactly 7.5X growth. That’s really cherry-picking, though, it’s not at all the longer-term trend — earnings growth has perked up coming out of the pandemic, but EPS had been drifting lower for several years before that… and earnings per share today are only about 14% higher than they were five years ago. And there’s very little analyst coverage of Donnelley, but those analysts expect both revenue and earnings to drift lower in 2022 and 2023 — which might still make it a value stock, the shares trade at only about 8X forward earnings, and perhaps the pessimism is overdone, but if you just go by those numbers, it is certainly not exciting in any obvious way.
What’s the business? This is how they describe themselves, and I can’t say I’m any wiser after reading this paragraph:
“DFIN is a leading global risk and compliance solutions company. We provide domain expertise, software and data analytics for every stage of our clients’ business and investment lifecycles. Markets fluctuate, regulations evolve, technology advances, and through it all, DFIN delivers confidence with the right solutions in moments that matter.”
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This gets a little better, from their latest investor presentation[10]:
“DFIN’s portfolio of software solutions and staff of regulatory experts assist corporations and money managers with the creation, formatting, filing, and distribution of required SEC compliance documents.
“DFIN’s clients utilize its solutions for ongoing compliance needs and for capital markets transactional activities such as IPOs, debt issuances, and M&A.”
That’s a little better, they offer software and services to investment managers and publicly traded companies, to help them file SEC submissions and stay in compliance. So, I guess the reason analysts are expecting earnings to drift down a bit might stem from the fact that we’ve been through a historic boom in IPOs and mergers & acquisitions, and maybe that business will cool off. By far their biggest business, and their highest-margin business, comes from transactional and compliance filings with the SEC, including proxy mailings and communications to the SEC and to individual investors. I guess their competition is coming from two fronts, the large shareholder communications and compliance business at longtime industry leader Broadridge Financial (BR), which I own in a small way and is a fairy steady company and trades at close to a market multiple (about 25X earnings), and the flashier cloud-based Workiva (WK), which has a similar amount of revenue right now but is dramatically larger, with a market cap of about $6 billion, mostly because it has much better growth and trades at a lofty cloud SaaS multiple of 15X sales.
Donnelley looks really cheap compared to both of those, but it has also failed to have the kind of growth that has interested shareholders in those much larger companies. If you can look into their reports and their history and see reasons for the recent strength to continue, or for a turnaround to really be taking shape, perhaps it will work out great from here — and if investors go looking for companies that are objectively cheap on a PE or price/sales basis, Donnelley certainly stands out as appearing pretty cheap in its little corner of the market. Sometimes companies are cheap for good reasons, with a business that’s in persistent decline and can’t be rejuvenated, and sometimes they’re cheap just because nobody’s paying attention, and they’re not as sexy as their competitors.
And with that, dear friends, I’ll leave you to do your cogitationizing… do these smallish “value” plays have a place in your portfolio? See any big red flags, or reasons for optimism? Have a better match than the Thinkolator could come up with for that second one? Let us know with a comment below. And, as always, thanks for reading!
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Well for what it’s worth I had signed up for the motley fool premium service and cancelled before the trial period was over for a refund. My contention being if you throw enough cooked spaghetti at the wall some is bound to stick…lol. My contention has always been that the stock advisory services rely primarily on hype. Think about it logically if any of these services had found the holy grail to investment success they’d just shut up and rake in the millions using their formulas and not selling newsletters or services. The vast majority of stock pickers, professional money manager, etc can’t match the indexes that track performances. I rest my case.
I beg to differ. I joined MF Stock Advisor in 2016, knowing next to nothing about stocks, and bought some of their Best Buys Now (GOOGL, SHOP, FB, ILMN, etc.), and all of them have done very well over the years. SHOP is up about 30x since I bought it, and GOOGL is up about 3x. So I’m a big fan of MF Stock Advisor.
I’ve subscribed to well over a dozen stock and crypto investment newsletters in the last five years, and have canceled most of them. The ones that have generated the most money for me are MF Stock Advisor, Palm Beach Confidential (for cryptos), and Jeff Brown’s Near Future Report, so I bristle when I hear them being disparaged, especially MF SA and PBC. They’re extremely helpful for financial ignoramuses like myself.
I beg to differ. I joined their special advisory service years ago and paid a nice premium for the “5 best stock picks!” None of them performed. What a joke.
Hugh, I’m glad it worked out for you. My point was if someone were to sift through all their stock recommendations over a year’s period and tally up winners and loosers. Thery’d be way more loosers than winners. I’d like to see the breakdown of the Motley fool’s owners revenue/net worth from stocks they bought versus their newsletter, etc…revenues.
Sometimes, timing is everything. In your case, starting investing in 2016 turned out to be a very fortunate decision.
exactly when you look at some of the charts presented and they are dated from 2021 to 2022 you see something isn’t right
It didn’t take an investment guru to pick those, a lot of their picks are dated like bad fruit
I never have signed up to the Fool but I do pay for a monthly newsletter called “Sure Retirement” from suredividend.com. This newsletter features “dividend aristocrats” which are mostly large caps that have a history of steadly paying dividends and make products or services that people/businesses buy good times or bad. It also features an excel spreadsheet that will do searches of all such companies as to earnings, dividends, co. info, etc. I rarely use that but I do buy or sell the stocks in the newsletter now and then. I’m a buy and hold guy so the aristocrats match my investment interests.
Just think, if they made recommendations based upon their holdings there would be no need for a subscription fee, people would be flocking to buy, therefore making their investments explode, yet they tell you to expect the possibility of losing your money because any change in circumstances is out of their control.
I’ve been thinking about that point lately – why don’t they just retire on their brilliant investment ideas? It occurred to me that many people are not driven solely by money. Jeff Bezos obviously doesn’t want to just sit on a beach all day. If he wanted, he could have done that ages ago. Same with Tom Gardner, etc. There are many other possible motivations (not all noble): they are fascinated by business / markets and love their work, they want to be successful, they want to be famous, they want a positive legacy, etc. Google says Gardner’s net worth is 22 million. So, unless he wants to have yachts, helicopters, mansions, etc., he’s probably motivated by something else.
About the hype: to some extent it’s self-perpetuating. If you buy a small cap stock they hype in a newsletter, they might publicly hype the crap out of it a couple years down the road, and you directly benefit from that.
I own 27 different stocks. All were recommended by Motley Fool Stock Advisor and Rule Breakers. I’ve earned 652%% over about ten years, which includes taking out profits for stuff like cruises and trips and major purchases over the years. I’m in my 80’s and this is the retirement gift that keeps giving. I now have a cash reserve in case things goes really bad. I’m not sure when to take profits when things seem to be going skyward. Any suggestions? I trust what MF taught me: (1) Buy more than 20+ good stocks recommended by them, (2) hold them for at least 3 – 5 years, (3) expect some to lose money and some to make lots of money with the outcome being a sizeable increase, and (4) don’t panic when prices fall.
This may help others. JFK’s father, old Joe Kennedy, although he was a tough and not always nice man, said, “I never bought at the bottom or sold at the top.”
I have to disagree with you about the MF. I joined in 2005 for the free service, and then paid for two of their services starting in 2014. I have also paid for several other companies subscriptions. The MF is the best by far. All of my best winners are from the MF. MY cost basis in SHOP is $107.40, MELI is $145.21, MDB is $141, AMZN is $ 806, OKTA is $47, etc. Seventy five percent of my portfolio is their picks and not one is in the red. I think you might want to go back and check them out a little closer.
I wonder how the election of left-wing governments in Chile and Peru is going to impact on business in the region. My Scotiabank shares have held up but a pure South American play raises some questions in my mind for which I don’t have the answers.
left or right the crooks that take over are always in for money so worry not
Those aren’t the most critical markets, but the impact investors seem to be worrying most about there is in mining — particularly copper and lithium.
Who knew that investors might start to be happier with Argentina than with Chile?
Hi Travis –
can you give any more detail on ROKU AND DOCU . I really loss lot of money. all my portfolio is really bad . how long you think market will be like this ?
Thanks you !
vintee786, growth stocks might go lower (but might not) because of the Taylor rule. The simple version of the rule is that to get inflation down, the interest rate on government bonds needs to be 1.5 times the rate of inflation. For an inflation rate of 7%, that implies an interest rate around 10.5%. That’s way higher than most economists and financial pundits are talking about, and likely to be bad for growth stocks. I’m not an economist and I don’t know if inflation will be tamed without applying the rule, or if inflation will rise until eventually the rule is applied. Maybe I’m causing unnecessary worry with a minority view that’s too pessimistic.
You might want to find these articles:
“Dollar cost averaging through the Great Depression” by Clark Howard
“Here’s The Best Way To Buy Stocks If You Fear A Market Crash” on businessinsider
I can’t promise the authors used accurate spreadsheets, but the principle seems plausible. I’m just an investor, and quite often, I’m wrong.
I actually owned DFIN for awhile after the Covid crash, but sold at around $30 when it appeared to stop going up. It’s indeed a rare event to find a “value” pick from the MF group, so I might buy it again when the dip is over with. Hang on…Cramer sez we are almost at the bottom!
never listen to crammer
Travis – thanks for your analysis of the pitches that we all get from the stock picking companies. Your articles are always well written and I enjoy reading them.
DFIN was up 7% premarket last night. Currently only up .20%. Interesting.
Thanks for the great read and detective work Travis.
https://www.marketwatch.com/story/good-luck-well-all-need-it-u-s-market-approaches-end-of-superbubble-says-jeremy-grantham-11642723516?siteid=yhoof2 NFLX another domino to fall with more to come should Jeremy Grantham recent article above prove correct which is very likely. I would compare this market to the movie A perfect Storm. The analogy being the Captain and crew betting on a boatload of fish despite a storm brewing and instead of dumping the boat load of fish back into the ocean and waiting the storm out they plug ahead into the eye of the storm and lose all. They would of had enough to buy a house a car and a boat but ended up without a place to live drive and float
BOMN, BUR, CSGP, DESP, DFIN, KKR, LBRDA/LBRDP, LMB, PFMT, RADI, RMNI, WCC
many of those are at there 52 week lows? who is pushing these stocks?
Almost everything is at 52 week lows…. It’s worth noting this “report” was not actual recommendations, although I think half actually are MF recs in other services.
Thank you!
MF has not done well by me, they gave me a few winners but a boatload of real losers to offset that.
(Lemonade? Down 79% Teladoc ? Down 75 % I could go on..) They pay zero attention to market timing and never suggest to sell anything, that’s something I had to learn for myself. As GeneH said, timing is everything. If I had started in 2016 with the stocks named, I might be singing a different tune.
I am a big fool, and I have done very well by following their advice. They are explicit in saying: “some stocks will go down, others will go up, a few will go up massively, and that makes up for the losses, plus provides massive profits.” The last 3 months have been brutal, and I have lost a small fortune on paper. However, I have not sold. I am still up from 2 years ago. However, these stocks have I will, for the most part, come back. These companies are quality growing companies. They are making investments that will bring up the stock price in the years to come. I am in for the long game.
In the meantime, I use my cash to buy while recommendations are in the toilet.
As for DFIN, as late as 1/21/22, their disclosure has not shown they recommend it or own it. There are Fool analysts that do. The disclosure policy is a great tool.
TMF sent me an offer for ” Double down playbook. Our top stocks on sale for cheap.”
Hey what about all the stocks you recommended over the last 12 months?
I can get those for free.