The Motley Fool is launching yet another “upgrade” portfolio service to start this year, they call it Showdown 2022 and it’s essentially an evolution of what Stock Advisor used to be — Motley Fool Stock Advisor started as essentially a monthly competition between brothers David and Tom Gardner, with each picking a stock each month (David leaning toward growth, Tom toward value in the old days), and this one adds a “portfolio” strategy to the stock picking, with allocations and buys and sells along the way, but also bumps us up to four stock picking leaders instead of just two.

This new service is a competition between other Fool analysts and groups of analysts, with four different groups each running a quarter of the portfolio, and, like the other higher-end Motley Fool offerings, it’s expensive and non-refundable ($1,999/yr, though it’s “on sale” for $1,499 for this launch). The four lead advisors will be Tom Gardner, adding picks from his Everlasting Portfolio strategy (mostly “strong brands, competitive advantages, great management”), John Rotonti, who seems to be looking for “resilient growth” companies, quant Ayal Cusner, who’s picking stocks using mathematical models, Emily Flippen, who seems to have taken on more of the David Gardner role these days as he has stepped back from stock picking. Rotonti and Cusner are new to me, so we’ll see if their picks get highlighted or teased in the future, but Flippen and Tom Gardner are two of the higher-profile stock pickers at the Fool and we’ve looked at plenty of their picks in the past.

Here’s the big picture spiel from the ad:

“… you won’t just know Emily Flippen’s team’s favorite stock, or John Rotonti’s portfolio’s top pick, or the Ayal Cusner’s quant-driven highest conviction stocks, or Tom Gardner’s top picks…

“But our top stocks from all of them combined.

“Making it simple for a member to take the very ‘best of the best’ stocks from all four of our independent analyst teams.

“The benefits of competition, pure and simple. Plus:

“We believe every single stock that made the cut to be included in Showdown 2022 has the potential to at least triple investors’ money over the next 5 years.”

So… do they drop enough clues to let us know what stocks they’re going to be picking for this Showdown 2022 group of portfolios?

Well, from my first read-through of the ads it looks like they give away one of the ideas for free, so we can at least start there, and then there’s at least one other idea where the hints are good enough for a solid Thinkolator answer.

Wise PLC (WISE.L, WPLCF) is the one that Emily Flippen gives away for free in the video, the one she refers to as the $10 stock that could be “like buying PayPal in 2002” — it’s a cross-border payments company, essentially trying to undercut traditional banks and other services like Western Union in moving money around the world, and attempting to build on that by offering additional financial services to their customers (business accounts for those who deal with cross-border trade, debit cards for customers, etc.). The company went public through a direct listing on the London Stock Exchange in July (WISE is the ticker on the London Stock Exchange, WIZEY or WPLCF for the US OTC trading).

Flippen’s quick description sounds fairly compelling, particularly the quick aside that it has $5 billion in cash to make the valuation seem more reasonable… but when I looked more closely I discounted that cash position — it looks like the cash balance is really just customer deposits (they have $7.2 billion in cash and short-term investments, but also $6.9 billion in “payables”, so those offset and they don’t really have any “book value” to speak of — the company’s actual cash balance of their own money, the capital they’ve raised and income they’ve kept, is more like $450 million).

The good news? The revenue is growing pretty nicely, from $248 million a year ago to $353 million in September (both for the trailing six-month period), and has been growing at roughly 50% a year. That’s fast. And they’re profitable and have been profitable for several years, earning about $40 million a year in net income right now. That means they’re currently valued, at about $10, at 15X trailing revenue and about 250X net income.

The mission of the company sounds impressive, and they have a charismatic leader who is really pushing that vision of making cross-border money transfer free and fast (it’s worth a quick listen to CEO Kristo Käärmann’s video message on their “owner relations page” from last Summer to get an idea of the mission and vision) — it’s worth reading their first letter to investors (a blog post, really) from late November to get an idea of how they’re positioned and what their strategy is… right now, they’re expecting revenue growth in the mid-20% range for 2022.

It’s an impressive company, with what looks like a very strong board and funding partners (they had major funding from Andreessen Horowitz, and execs from Adyen, Grab and Netflix are on the board), and it’s got a focused mission on cutting costs for businesses and people — that’s impressive, but it is a tiny, tiny player in the global cross-border payments world, so the biggest test over time, assuming that they can continue their discipline of attracting customers with low fees and reinvesting most of those fees into further improving the business and cutting future costs, will be whether they can continue to evangelize their customers to spread the word without having to do massive marketing spending. It’s hard to stay on a simple mission as you grow, so that will be a challenge, but it’s an interesting company I hadn’t heard of before — maybe worth a look.

By contrast, PayPal (PYPL), which of course has a much larger customer base and a more complex business, is growing revenue at 10-20% and earnings by about 10%, and trades at 9X sales and about 45X trailing earnings. Block, formerly known as Square (SQ) before it decided to become three dimensional, has been growing revenues by more than 25%, and is currently valued at 5X sales and 140X earnings. I don’t own any of these… but If I had to choose, of the three, my first buy today would probably be Block. They don’t have much of a presence in cross-border payments as either PayPal or Wise, and you can certainly make the case for any of those companies continuing to grow nicely over time as they build better payment and cash-movement systems that are far more appealing than the still slow and expensive traditional banks, and retain those money-transfer customers and upsell them to other financial services. Wise is interesting, not very well-known in the US yet, expensive, well-led, and pretty small.

And any secret stocks to dig out? We do also get this clue from Emily Flippen about one of her other picks:

“… focused on cash-generating, highly scalable business models.

“That means these companies all have large and growing addressable markets.

“For example, a very profitable SaaS business with 73% recurring revenue…

“…and remarkable above-market growth rates that’s providing the public sector with mission-critical software solutions enabling the future of ‘Digital Government’ — and you won’t find it in any other Motley Fool service!”

Who might that be? Those clues aren’t quite enough for a 100% certain match, but the Thinkolator points us straight at Tyler Technologies (TYL), a legacy tech provider for governments that has become a “cloud first” SaaS business in recent years.

Tyler is an interesting company, and has quietly grown into a strong leader in its space — partly through acquisitions as they spent the past five years or so shifting to subscription businesses, including the acquisition of NIC’s payments platform last year that helped put Tyler into the lead when it comes to public sector payments (taxes, etc.). And those businesses are probably bigger than most of us imagine — for example, Tyler sees the opportunity for payments revenue from just the state of Florida being in the range of $40-50 million when you include their enterprise contracts with the state as well as all the various local and agency projects where their technology is integrated.

And yes, they match the clues — 73% of their revenue is classified as “recurring revenue,” generally from ongoing subscriptions from government entities. And they are exclusively government-focused, with packages for schools and courts and all kinds of municipal entities around the country — and have apparently done pretty well at upgrading to cloud and SaaS services instead of letting themselves be disrupted by the next hot software startup. That’s probably easier when your customers are government agencies, which are resistant to change and risk averse, but their 98% customer retention number is still impressive. They sum up what they think you should be impressed by as their investment proposition here.

This market is more fragmented than I had assumed, so they say they do have real competitors like Oracle, SAP, Workday, CentralSquare and others who push into government systems (there are 88,000 local governments in the US, so it’s a big target), but they say that 2/3 of local governments are still using “antiquated deployments” that are more than 20 years old or are cobbled together at the local level. That’s a big market to sell into, and they do think they can continue to grow nicely, with R&D spending on things like cybersecurity that helps to separate them from smaller niche players.

The bad news? It’s not exactly dirt cheap at the moment. No surprise there. The company is valued at about $20 billion and is expected to finish up 2021 with $1.6 billion in revenue, so that’s a price/sales ratio of about 12 — not high in the context of this past year’s wild enthusiasm for software stocks, but still pretty high. The good thing is that they’re growing their earning substantially faster than their revenues, largely because the shift to SaaS deployments from enterprise purchases leads to meaningfully higher earnings but spreads the revenue out over more years. On an earnings basis, the stock is at $490 and they’re expecting $7 in earnings per share for 2021 and $8.12 for 2022 — so that means you’re paying about 60X earnings for a company that will probably grow earnings by about 15-20% a year. That’s a little rich — I’d be pretty excited about Tyler at $300 or so, but at close to $500 it’s pricing in a lot of future success. That success might come, and it’s possible I could be talked into it given the strong growth in their recurring revenue and their market leadership in this sector… but it’s not so compelling that I’m ready to click the “buy” button here.

And one more where the Thinkolator can chime in with an answer, if not a 100% certain one… Here’s a clue dropped about one of John Rotonti’s “Showdown” picks:

“Lead advisor John Rotonti and his team have pinpointed what they believe are some of the most resilient growth businesses in the world.

“Their “vital check” for a stock to make the cut:

• A strong balance sheet
• High or increasing returns on invested capital (ROIC)
• Growth on the top line (revenue)
• Growth on the bottom line (earnings)

“To give you a sneak peek…

“One company that checks ALL the boxes is a leading private equity firm that just reported a record quarter after making big moves into the booming rental property and self storage markets, which should continue to prosper given high inflation…”

That’s not exactly a definitive clue, most of the private equity folks and many hedge funds have been going gaga for single-family rentals and for self-storage properties for a couple years now… but the one who has pushed most aggressively into those most recently and is also a clear leader in private equity is KKR (KKR). You can also make Blackstone (BX) fit those clues, but KKR is more likely given their high-profile pushes into building up portfolios in both single family rental homes and self-storage in just the past six months or so.

It’s hard to argue with KKR right now, they’ve certainly been through some peaks and valleys over the years so they could be out of step with the market again at some point — but right now they’re moving quite nimbly to generate big profits from their portfolios and management fees.
The stock trades at 2.5X book value, which is close to the 3X that they’ve maxed out at in the past, so the risk is that during times when people are fretting about investing these kinds of companies can trade down to book value (as KKR did in 2016, for example), but they’re highly profitable and analysts are pretty confident that they’ll keep earnings up at this level ($4 a share or so), and probably grow that number a little bit in the next couple years. That means they’re valued at about 17X adjusted earnings, with earnings growth likely to be under 10% unless the analysts are just being too cautious — arguably reasonable, but they have often traded down to 5-10X earnings during darker times so there is downside risk. Blackstone is about twice the size of KKR and trades at a meaningfully higher valuation (and pays a larger dividend), in case you’re curious.

So that’s a little sampler, as far as the Thinkolator can go from the first wave of Showdown 2022 ads… perhaps we’ll learn more about this project in the next few months as they begin to sell it a bit harder, if so we’ll keep an eye out for clues and try to name some more stocks for you.

Disclosure: Of the companies mentioned above, I own shares of Kennedy Wilson and Brookfield Asset Management. I will not trade in any covered stock for at least three days, per Stock Gumshoe’s trading rules.