What are the “Duke Street Trusts” From Motley Fool?

Checking out the teased high conviction ideas from David and Tom Gardner

By xiexgp@gmail.com, April 9, 2014

“You Won’t Read About ‘Duke St. Trusts’ in Bloomberg…

“But for Over a Decade They’ve Minted Returns Like 197.7%, 3,265.6%, and even 5,389.9%! (Seriously)

“The financial media is at it again: After a great rally they’re all blabbing that stocks can’t go higher, but they’re missing the biggest story yet…

“Because the 2 newest Duke St. Trusts have just been revealed!”

That’s how the Motley Fool has been pitching their Stock Advisor service recently — the 3,000% and 5,000% returns catch your eye, no?

Well, the returns are real — over decades, and for specific stocks out of a huge portfolio, but real. David Gardner in particular has been able to pick a few stocks that have been remarkable long-term growers over the years and, perhaps more importantly, has shown the ability to hold onto those stocks both through huge drops and through huge, several-hundred-percent gains that would have short-timers cutting losses or taking profits.

Some of the picks they’ve been tremendously successful with, like Netflix and Priceline.com and Amazon, have been stocks that I thought were too expensive before they went up by 500%… so just a warning that if we’re looking at that kind of stock again, you might want to take my opinion with a grain of salt.

And, of course, most of the stocks the Gardner brothers recommend do not go up several hundred percent or more. Their Stock Advisor service has often beaten the S&P 500 over the last 10 or 15 years, but not every year… and not every pick.

But the latest thing they’ve been pitching in recent weeks has been something they call “Duke St. Trusts” … so what are they?

Well, they aren’t trusts. And despite the name, they aren’t even necessarily income oriented (often when folks tease trusts, like the “Eisenhower Trusts” pitched by Investing Daily, they’re referring to Real Estate Income Trusts or Oil Trusts… not this time). They’re just stocks.

The ad is signed by one of the editors at Fool.com, continuing their tradition of getting the Gardner brothers away from the business of spinning sales pitches, and he talks up these “Duke St. Trusts” nicely:

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“While I’m fully expecting returns that will make the best investments of 2013 look like a molehill, I should warn you…

“If you’re just in this for the bragging rights or the thrill of incredible wealth or only want a fashionable stock tip to spill at the watercooler, this isn’t for you.

“Frankly, to really get the best returns, I shouldn’t even be telling you this…

“But those two maverick investors I mentioned earlier? They only agreed to release their new report, ‘2014’s Duke St. Trusts — Minting Tomorrow’s Royalty Today,’ if I shared it with genuine investors.

“But you’ve read this far, so I can tell you are one.

“See, like us, they invest for something bigger. They invest to help people like you and me realize our dreams of financial security.

“They’ve been doing it for over 20 years. And they’re damn good.

“To tell the truth: For over a decade the combined returns of the Duke St. Trusts they’ve picked have tripled the return of the S&P 500, up an astonishing 157.7%.”

Golly, doesn’t it feel special to know that you’re a “genuine investor?”

So what is he talking about? Well, the “Duke St. Trusts” are just “stocked picked by Motley Fool Stock Advisor” … but he goes a bit further and makes similar claims to past Motley Fool, ads, that if the stocks picked by the Gardner brothers are great, the ones they re-pick and re-recommend are even better:

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“Not only have both of those Super Investors from earlier recommended getting in on these investments…

“They’ve done it twice!

“That’d be enough to convince me right there, but then I saw something else shocking…. A ‘Super Signal’ that’s been lying dormant for nearly 8 years!

“The last time investors got a hint of this signal Pluto was still a planet and Barry Bonds was busy breaking The Babe’s record!

“Not only have both Duke St. Trusts been recommended, but one of them has received a sterling “buy” rating twice in a row!!!

“The importance of this can’t be overstated, so I’ll just lay the facts bare:

  • This has happened only five other times since 2002.
  • The last time this happened was 2006.
  • The average return every time it’s happened is 168.4%!!”

OK, so yes — it’s encouraging that the Gardner brothers are re-recommending these stocks and effectively pounding the table on them, and it might even mean that they’re better investments… but don’t get ahead of yourself, that 168% return is only slightly better than the average return of these “Duke St. Trusts” according to the claims they made earlier in this ad letter. And it’s a very small sample, so these stocks might be qualitatively better but it’s a bit of a stretch to say that their returns are necessarily going to be quantitatively better.

But still, now that we’ve heard the pitch I want to know what the stocks are. I know off the top of my head some that have been aggressively re-recommended by the Fool brothers over the years, like Marvel (before their Disney takeover) and Whole Foods (WFM) and 3D Systems (DDD), because those re-recommendations were pretty actively teased at the time too … but let’s check out the clues on this one:

These aren’t ordinary stocks. They’re attached to the world’s greatest money-printing companies.

Companies that could make you rich.

In just the last few days, here’s what I’ve heard:

“Duke St. Trust #1 — ‘is a best-in-breed manufacturer… it sells to the military… a gutsy management team… already has more than twice the market share as Honda in 1 vital market. Stock could easily double (and zoom further from there.)’

“Duke St. Trust #2 -– ‘One of the best IPOs I’ve ever seen… with only 62 locations, you’re getting in on the ground floor of a business revolution… Has been on ‘Fortune ’s 100 best’ list for 14 years straight…. Could easily expand their domestic footprint fivefold, that’s before they even think about international…. When I see I see an opportunity like buying Wal-Mart’s IPO.'”

And that’s about it … not a lot of clues. So will the Thinkolator be left at the curb, slumped in defeat?

Don’t be silly. We’ve got one certain answer for you… and one not-quite-certain.

Duke St. Trust #2 is the Container Store (TCS), which put itself up for sale as a private company in 2007, just before the market collapse, was bought out by private equity firm Leonard Green & Partners, and grew the store count by about 80% in six years, with a solid slug of debt, before being taken public again in an IPO last Fall (they priced the IPO cheap at $18, it doubled before trading started and hit the mid-$40s in end-of-year euphoria, and it’s now back to about $32). Leonard Green & Partners still controls the company with more than a 50% shareholding, and management and employees also own quite a bit of stock, including preferred shares.

The Container Store is a bit of a cult retailer — they sell organizational stuff, and have led that niche for 30+ years now as they have grown very slowly and carefully in relatively wealthy urban areas where people have money, lack time, and are obsessed with clutter. They keep an edge over competition by having expert staff, who cost a lot more than employees at Target or Bed Bath and Beyond, and by selling quite a lot of “exclusive” stuff, including closet solutions from their own elfa brand. They’ve outlasted a few direct competitors, most notably the Williams Sonoma brand Hold Everything that was shut down a number of years ago.

But they’re still not profitable. So this is a growth story. Think they’ll get to the 300 stores they anticipate, and do so in less than 20 years? Then the stock will likely do very well. Think they’re going to continue to grow very, very slowly at just a few new stores a year? Then it’s going to be tough for them to hit profitable scale … and revenues might not grow fast enough to keep investors paying a high multiple.

There’s a good free analysis of The Container Store at the Motley Fool here, which probably provides some insight into what the Foolies are thinking on this one, though it’s not actually from the Gardner brothers. Me, I think I’d rather wait until either the private equity firm sells down some more of its stake or until they get some debt repaid, I’d like the potential a lot more if I understood their growth strategy better or if it was trading down in the neighborhood of companies like Bed, Bath and Beyond (BBBY) at closer to 1X sales (its’ at 2X sales right now — even more than faster-growing Restoration Hardware (RH), which has similar demographics). This is a company somewhat along the lines of Costco (COST), Starbucks (SBUX) or Whole Foods in the way it compensates and rewards employees, and that’s good because it means they have expert employees who can sell the products well… but it also means building stores and growing their customer base takes time and high touch, and I think it might be a stretch to anticipate the same kind of growth from The Container Store given their niche.

That’s just my initial reaction — TCS is down quite a bit from their highs but the initial price they offered on the IPO ($18) looks a lot more appropriate than the current $32 to me. Do remember, though, that I have had the same reaction to a lot of Dave Gardner picks that have clobbered my own ideas, so perhaps I’m a contrarian indicator when it comes to his stocks — there is a huge potential growth runway even if you’re just talking relatively affluent urban and semi-urban areas, they do only have 63 stores now so they won’t be stretching to find new locations for a long time… but they had 39 stores seven years ago so haven’t even doubled the count off of a much lower base, and the new stores will be expensive and take a few years to start generating returns even if things go quite well. I also may be in their desired demographic, but I’m not a member of the de-clutter cult — If you could see my desk right now, you would say that I need a Container Store intervention.

And for “Duke St. Trust” #1? We have to settle for a best guess given the lack of clues, but the Thinkolator sez our best match here is: Embraer (ERJ), the Brazilian airplane manufacturer.

[See comments below the article — a reader brought up a better match, which is probably the correct one, in Polaris Industries (PII), though I’ll leave my jabbering about Embraer here for your edutainment]

Yes, they sell to both military and civilian customers — they are probably best known for their large regional jets that are chipping away at the low end of the airline market (they have a market share similar to Airbus or Embraer when it comes to sales to US airlines, in the 10-15% neighborhood … all of those together have less of the market than Boeing), but they also sell military jets and smaller airplanes.

The Honda bit? Well, that’s up for debate. Honda has been trying for almost 20 years to develop the HondaJet, which was formally presented to the world in 2006 but I think is still technically not available for sale yet — it’s a small six-seat jet that the folks at Honda like to call the “Acura of the sky”, with a pretty radical design and low cost and high efficiency. They’re aiming at the air tax business and at small businesses and wealthy individuals, a market that is continually predicted as a future growth area but that has also led to lots of failed companies. The big player there is Cessna, owned by Textron (TXT).

So yes, if they really are able to sell 80 plans per year then there are ways that you can draw that as a picture where Embraer has twice Honda’s market share. But that gives us some uncertainty in sniffing out the pick, so we can’t be 100% positive on this one.

We can say, however, that yes, Embraer has been recommended at least twice over the years by the Motley Fool Stock Advisor — the backfiles at Hulbert Interactive confirm that. And Hulbert’s methodology doesn’t necessarily match the Motley Fool’s for tracking picks (he tracks a couple hundred newsletters and has to turn them into buys and sells to compare them), but he does indicate that Stock Advisor upgraded Embraer three times in the past year (and downgraded them too, which could mean taking it off of a “best buy now” list or recommending a sale or something along those lines — I’d guess the former, the Fool doesn’t often cycle in and out with buys and sells). Stock Advisor is also the only newsletter Hulbert tracks that covers ERJ at the moment, for whatever that’s worth.

What’s to like about Embraer? Well, they have gotten a good slice of the US market with their E-jet large regional jets, which were in development the last time I owned this stock a very long time ago, and they do have a large military business both to their home country and to the US military and others around the world. They are a good manufacturer.

And when it comes to airlines, you can make the case that they’re pretty cheap — they don’t have any net debt on their balance sheet, which is part of the reason that their EV/EBITDA ratio is far lower than most airlines (they’re down at 6 or so, Boeing and Airbus and Bombardier are in the 9-11 range by that metric).

Analysts are predicting better than 25% earnings growth this year based on their backlog of orders, and that the earnings growth will settle in at more like 10% or so as we move out into the future, with their next wave of new E-jet redesigns slated to come in four or five years. So at about 13X next year’s earnings, and with a trailing PE of 16, that’s pretty reasonable. I don’t know much about the business these days and haven’t owned it for a long time, I think I sold quite a while before their last revenue/earnings peak in 2007 and I probably last wrote about Embraer five years ago, but they appear to have built a pretty good business on the crumbs that Boeing leaves behind and they’re cheaper than most of the stocks in the aviation sector.

Again, not sure that ERJ is really a Gardner brothers fave pick here, but I know they have liked it in the past and I’m quite sure they’re enthusiastic about The Container Store (which is probably Dave Gardner’s pick).

I’m not jumping up and down to throw money at either of these stocks at the moment, but I can see the potential for a rosy future and don’t know about any serious problems with either — if you’ve got an opinion to share on business jets, elfa shelves, or anything else about these “Duke St. Trusts”, well, feel free to let it loose on the world with a comment below.

P.S. I forgot to mention the source of the “Duke St. Trusts” name that they used to refer to the stocks picked by the Motley Fool Stock Advisor — Duke Street in Alexandria, VA is where you’ll find Motley Fool’s headquarters. Nothing too secret or shocking there, but I figured someone might ask.

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April 9, 2014 2:44 pm

I calculate their fair value at 39.75 per share by discounted free cash flow and technically I think there is a strong resistance level at 36.75. If it gets to 37 might be an interesting play. Untill I think I wouls wait.

April 9, 2014 3:19 pm

Read all the stock splitting on Edgar within The Container Store before their IPO. Did not pull the trigger when TMF recommended it. I am not all that sophisticated regarding finance but I got the impression that they lined their own pockets quite well.

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👍 1313
April 9, 2014 3:25 pm

And in case anyone is wondering, “Duke St. Trust” is a nod to Motley Fool HQ, which is on Duke Street in Alexandria, VA.

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April 9, 2014 3:26 pm

I think #1 is Polaris Industries. I know they’ve recommended that in the past.

Travis Johnson, Stock Gumshoe
April 9, 2014 3:58 pm
Reply to  efugleberg

Ah, could certainly be a better match — hadn’t thought of the motorcycle end of things, thanks. FYI, the Fool disclosures say they recommend Polaris (PII), and I know Tom Gardner in particular has recommended them in the past, but Hulbert doesn’t currently include them in his tracking of Stock Advisor for some reason. Lots riding on their growing investment in rejuvenating the Indian brand as a competitor to Harley, interesting story.

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