“What you don’t know about Steve Jobs’ final vendetta …” (Motley Fool)

Dave Gardner's teaser pick, now also teased as "The only thing Siri isn't telling you"

By Travis Johnson, Stock Gumshoe, January 11, 2012

The folks at the Motley Fool have run lots of ads for stock picks that “piggyback” on the iPhone’s gargantuan success — as have lots of other newsletter publishers, of course — and it looks like that trend will continue.

The ad I’ve seen today takes a somewhat different tack on this same basic idea — telling us that “Steve Jobs’ final vendetta” is the key to the future for one particular secret stock pick. So what is it?

Well, the vendetta part is probably something you’ve heard of — it was widely covered when Jobs’ biography came out around the time of his passing, and it’s basically that Steve was pissed that some key parts of Android had been “stolen” from iPhone.

But the take on it for the Motley Fool folks is that not only is their secret company profiting from the huge growth of iPhone … but that the iPhone, far from being the global leader, is desperately growing in an attempt to catch up with Android.

Which is basically a way of setting the stage for a huge competition — and the competition will drive down prices for smart phones, which means more and more people around the world will buy them, which means cell phone traffic will skyrocket, which means the networks will get clogged, which means they’ll need more cell towers and more antennas to handle the additional bandwidth required from all of these data-heavy devices.

Which means, yes, David Gardner and the Rule Breakers folks are apparently again re-picking American Tower (AMT), the dominant US cell phone tower owner and developer.

And though AMT looks awfully expensive by most conventional metrics — trailing PE of 90, priced at 10X sales, 7X book value — it’s hard to blame them for their enthusiasm. After all, AMT was pretty expensive when they started teasing it almost two years ago, too, and it’s up about 50% since then.

American Tower is still churning along on more or less the same path as when I wrote about them in May of 2010 — expensive, but roughly similar valuation … the forward estimate for earnings now gives them an estimated PE of about 42 on the next year’s earnings, compared to a forward PE of about 38 when I last wrote about them (the stock has moved from the low-$40s to the low-$60s in that time).

And the big change in the interim? AMT finally decided to do what many folks thought they should have done all along: They converted to a REIT (Real Estate Investment Trust) on December 31, so from here on out they’ll be a tax-advantaged pass-through company.

According to this article from the Motley Fool, they’re going to be a lousy yielder as a REIT — with an expected dividend of 80-90 cents per year that would give them a yield of less than 1.5%. Kind of hard for me to get real excited about, but it is high compared to their tower-owning peers. There are some limitations on how REITs can fund growth by reinvesting earnings, but I don’t know whether those limitations would really cut into AMT’s flexibility as they try to continue to grow their network.

The folks at Investors Business Daily speculated that there might be some love for AMT from REIT investors that helps the share price continue to climb, in part because AMT has growth numbers that are substantially better than most traditional REITs, and that should mean that they can grow the dividend pretty quickly compared to traditional REITs … but that’s a pretty low base to grow from.

Personally, I’m more of a fan of the also-nicely-growing data center REITs who benefit from the same basic tailwinds (more data, more traffic, more need for servers and server space), but which I think are priced more attractively — that group includes Digital Realty Trust (DLR) and CoreSite (COR), the latter of which I profiled for the Irregulars quite a long time ago and still prefer (I don’t own either — nor, for disclosure’s sake, do I own AMT. I do own Apple and Google shares, just FYI).

That’s not to say there’s anything wrong with American Tower, it has a unique market position and strong growth, along probably with very good dividend growth going forward… and probably a [small] part of the reason for their relatively high PE is the cost of REIT conversion. It’s just that I like a little more current yield with my REITs, and from my perspective it’s hard to build excitement in a REIT that starts out being this expensive.

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