Ok, so I usually write about trends and concepts (VR, space, the cloud, etc.), but after some recent conversations on specific stocks, I decided to put together a list for readers. 2017 remains a complex year to invest when you consider current market valuations, monetary policy forecasts, geopolitical sensitivities and other headline data that the Street keeps losing sleep over. Smart companies move forward, though, and I continue to believe that if we make individual investments based on macro factors and timing (such as waiting to buy a certain stock because you think the market’s too expensive), history shows it would be an uphill battle…one might have missed out on buying Amazon because he/she was terrified of internet stocks during the 2000 dot-com bust, or you could have thrown Apple out with the bathwater during the 2008 financial crisis. Neither trade would have captured the epic returns that followed. With that said, below are some of the stocks I own or plan to add to this year. The factors behind them include a time horizon of 5+ years, the total addressable market sizes, their specific products, business models and current demographic trends. I’ve skipped elaborating on the technical details around cash flow assumptions and ‘where the stock will be trading next year’, and instead, am focused more on why I like the company and its proposition. Most are in the growth space. Some are well covered on the Street, but that doesn’t make them worn-out investments, and I’ve elaborated on my personal reasoning. DigitalGlobe (DGI) and Mobileye (MBLY), two of my previous listers, aren’t mentioned as they are getting acquired. Splunk (SPLK), Nvidia (NVDA), Whole Foods (WFM), Starbucks (SBUX), Lululemon Athletica (LULU) and some microcaps are among those I also really like, but I’m still evaluating their long run prospects. I’ll publish another list in Q4 – perhaps some of them will make the cut!
The order isn’t relevant. Feel free to reach out at [email protected] if you have questions or thoughts. Here we go:
Editas Medicine (EDIT): Let’s begin with one of the most fascinating subjects in the science world – gene editing. Cambridge-based Editas Medicine (EDIT) is relatively new on the public scene, having IPO’ed in early 2016. With $6 million in revenues, it is still microscopic in nature (note the pun). Why do I like it? Because gene editing is extraordinary…the branch of genetic engineering where you literally insert, delete or replace DNA in living organisms has incredible frontiers: eradicating mosquito-borne illnesses by altering DNA structures (it’s what Bill Gates is upto these days), removing genetic disorders in humans, curing cancer by changing immune cells so they can target tumors, to name a few potential uses…the increasing spending by research institutions and drug makers makes the few firms specializing in gene editing very interesting from an investment perspective; EDIT is one of them. The company won a major patent battle in early ’17 for the rights to patents on the CRISPR/Cas9 genome-editing tool (note that this will be appealed, so some risk remains)…the stock shot up by nearly 30% on the announcement, given the obvious runway for growth. It also announced a deal with Allergan worth $90 million by providing licenses to a number of its programs, including those for a rare blindness disease. I believe numerous such relationships are likely ahead; per consensus estimates, we are looking at a $5+ billion market for gene editing by 2020, and reaching $8 billion by 2025, compared to less than $3 billion today. EDIT is a way for investors to follow the advances in this science. It’s high risk…but hey, high rewards don’t come any other way.
HDFC Bank (HDB): While international investors would consider an emerging market bank investment niche territory, HDFC Bank is a powerhouse in Indian retail finance; it trades in the US as ADRs, with a $60 billion market cap. I like the company because you’re looking at a base consumer group of 1.2 billion Indians, with nearly 40% of adults not having bank accounts yet; the average age is 27, and nominal GDP per capita is 20% of that of China’s. Note that the economy is growing at 7%, and is largely driven by services (including banking). As a result, it’s a solid structural growth story – and development can’t happen without – you guessed it – more banking access. Until the mid-90s, state banks ruled the roost; since liberalization, private players including ICICI, Yes Bank, Axis and HDFC Bank have rapidly grown – what was a 78% deposit market share in 2014 by public sector banks is down to 74% over just the past two years. HDFC Bank stands out because I think of it as a retail pureplay…with $80 billion in deposits, the bank is churning out loans at a growth rate of 27% YoY (vs the industry average of 12%). If you’re worried about their quality, note that non-performing assets are at an amazingly low 0.3% vs the public sector’s ~17% troubled assets ratio. Alongside, HDFC Bank is India’s market leader in credit card issuance, is diversified across the socioeconomic base (55% of its branches are in semi-urban and rural areas), and has been able to grow earnings at over 25% over the past five years; in fact, net margins are over 20% as well. Importantly, the Indian government decided to demonetize (pivot the economy towards cashless transactions) in late 2016, and with the public cloud-based biometric identification system (Aadhaar) now having registered over 99% of Indian adults, banks – especially those that are technologically advanced – stand to benefit from tremendous tailwinds as people enter the banking world and formal economy. HDFC is one of them. Try making the case on why not to invest with a 5+ year horizon…I can’t find any reasons!
iRobot (IRBT): Over to consumption…as The Economist stated so well, Walmart taught us the value of money, but Amazon has taught us the value of time. iRobot is perfectly positioned in the discretionary spending space to give consumers time back by removing what many (including myself) view as unproductive tasks, including vacuuming, wet mopping and lawn mowing. The company drove the robotic vacuum segment’s development; 15 years on, it remains dominant with a 60%+ market share globally, and over 90% in the United States. The $1.1 billion segment is projected to grow at a CAGR of over 15% in the next five years; alongside, lawn mowing is a $25 billion potential market, while wet mopping is $4 billion in size. iRobot has an incredibly powerful patent portfolio, a cash stash of over $250 million (aka ~40% of revenues) and has been able to double sales over the past five years – all while shutting down its Defense and Security unit to pivot towards consumers, which grew sales by 35% last year in the United States. Importantly, while growing quickly, the company’s gross margins have expanded from 41% to nearly 50%. iRobot has negligible debt obligations, is heavily spending on R&D and is ramping up its distribution network in Asia by buying its Japanese distributor this year. With less than 8% of US households penetrated, amid the oncoming IoT and connected devices wave, the company is really positioning itself as a keeper for the smarthome with tie-ups with Amazon’s Alexa, smartphone apps, vision mapping and more. What other home product can you think of that can gather data AND move around on its own at the same time – all while hosting a cat on top? I’m expecting growth rates of over 20% in the next five years, and a stock double in the next 2-3 years shouldn’t be a surprise to investors that like cleaning up.
Illumina (ILMN): We covered gene editing. Looking for something else that’s extraordinary? Gene sequencing is extraordinary. It involves figuring out the order of nucleotides that make up your DNA – among the numerous amazing applications, we can find inherited disorders and create personalized treatments based on the unique patterns of each patient. Illumina, its 20-year old San Diego-based pioneer, is the leader in providing products and services that analyze gene variations; with over $2.5 billion in sales last year, it was ranked the 3rd smartest company in the world by MIT Technology Review in 2016. Estimates show the gene sequencing market is poised to grow over 15% annually to approximately $20 billion by 2020; Illumina has transformed it by driving the costs of sequencing a human genome down from millions in the 1990s to about $300,000 ten years ago, and $1,000 as of last year; it’s aiming for $100 bucks. Think about the research possibilities being unlocked….while customers currently involve mainly research institutions, easier and affordable access would push it towards clinical uses. A $2.8 trillion healthcare industry in the US alone awaits, and each segment within it would find value in gene sequencing applications. Illumina’s own new subsidiary, Grail, is aiming to use blood tests to look for DNA fragments released by cancer cells. I’m incredibly optimistic on this. If you ever doubted the magic of markets, such public companies reinforce it…you give capital to smart ideas, and watch them run. Illumina has doubled sales over the past four years, while improving gross margins from 67% to 68.5%; net margins are over 30%. I’m all in on declaring this company as amazing for the long run – not just for the stock, but also for society.
Tesla (TSLA): Yes, it doesn’t make money. Yes, it’s burning through cash. Yes, it will raise more capital. And yes, if think about last year’s sales, Tesla has a market capitalization of $625,000 per car sold in 2016 vs $5,000 for General Motors – so you could interpret that as each Tesla car is 125x more valuable than a GM car. Insane, right?
But hey, this is Tesla we’re talking about. Combine structural tailwinds for clean energy and sustainability (government can’t change this), a demographic loyalty towards the brand and Elon Musk that’s unparalleled, the potential to reach millions of people in the way Ford revolutionized car access, and being totally off the grid if you think about solar panels charging homes, storing energy in Powerwalls and charging cars with scale efficiencies…one can imagine why this company is being treated as being revolutionary. Then, consider that the global clean energy market is around $1.4 trillion in size…massive, yes, but renewable sources power less than 15% of US energy consumption and electricity generation. That’s where I see Tesla coming in. 88 million cars were sold last year worldwide; barely 500k of those were electric cars. Tesla’s demand surpasses supply bigtime, and that’s where I see Tesla capturing share with new manufacturing possibilities. Alongside, the energy storage market in the US is barely worth $2 billion today; it grew 250% last year. Tesla could completely alter this space, and drive the market to well over $50 billion in electrochemical storage. So, Tesla’s growth potential, in my opinion, is incredibly large. And even if you focus just on cars, say, if it does reach its goal of 1 million cars produced in 2020 (or whenever), assuming an average price of $35k per Model 3, you’re still looking at revenues around $35 billion – just from car sales. Tesla’s valuation doesn’t seem as outlandish if you look at it from a 10-year horizon. The stock seems wild, but I’m calling shotgun for this ride. Just note that as an investor, you’ll definitely need a seatbelt to enjoy the returns.
Twitter (TWTR): What does Katy Perry, Barack Obama, Donald Trump, and nearly the entire journalism industry have in common? You got that right – they all love Twitter: the omnipresent, unrivaled, most as-real-time-as-possible mode of communication out there. And yet, the brilliant idea has been unable to monetize the addiction of its daily active users; revenue growth was a meager 14% in 2016, after a 91% CAGR over the previous three years. Why do I like it? Because some day, rather than going for Facebook-style world dominance, management will realize that quality matters over quantity; you could have 100 million users and those could be the most active, lucrative and loyal users in the whole world – way better than having 1 billion mediocre ones. And that’s where I think we may be finally headed: monthly active users flatlined around 319 million in Q3 and Q4 of 2016, but daily active users increased by 7% and 11% respectively in that same span. That’s a very important sign…it means more people are engaged, and I have faith that the leadership at Twitter knows it. Advertisements, subscriptions, premium content and direct messaging possibilities all await. At an $11 billion market cap today, compared to $400 billion for Facebook and $580 billion for Google, it’s worth peanuts; how can you ignore it? A pivot in the business model would help it multiply several times in value. I’m optimistic on the prospects. Worst case, it could get bought out by one of the giants, and you’d still get a solid premium as an investor.
Under Armor (UA): Under Armor’s down 50% down over the past 12 months. What?? This is a nightmare – but you could consider it a dream come true if you like bargains. The company’s growth rate in 2016 was 22%, compared to Nike’s 6% and Adidas’s 14%. Despite that, it’s trading at 1.8x sales, compared to Adidas’s 1.9x and Nike’s 2.9x, per WSJ data. Don’t get me wrong – I like and own all three companies. But UA’s the new kid on the block, and after delivering nearly two dozen quarters of 20%+ growth, one lower guidance does not spell gloom and doom. Yes, Kevin Plank’s commentary on Trump also hurt the stock, but these are temporary blips. Footwear, athleisure wear, home wear, niche sports, and an international market where people literally don’t know the brand are all markets to be tapped – per Barron’s data, a nearly $300 billion sportswear industry exists today; I’m expecting growth rates of nearly 10% as consumption increases in developing countries, and the focus on health continues to grow. International revenues accounted for barely 16% at Under Armour, versus nearly 50% at Nike and over 70% at Adidas. Alongside, Under Armour has always positioned itself as a technology company, with the purchases of MapMyFitness, Endomondo, and MyFitnessPal for nearly $1 billion; it already sells sensor-driven clothing and smart shoes. If you missed the boat since UA’s IPO, or simply want to add to your long term stash, the past year has created an amazing stock deal. Note that if you had invested in Nike during its IPO in 1980, you would be up nearly 720x your initial investment. Yeah. Even if Under Armour achieves anywhere close to such success, investors should consider it a slam dunk for the long run.
Chipotle (CMG): Yes, the jokes were deserved…along with stomachs, investors’ appetites have gotten crushed – the stock’s down 40% since its high in late 2015. That being said, just as with so many peers over the years, I believe the illness issues and corresponding empty lines are temporary in nature…the great food taste, a simple less-than-60-ingredients portfolio, an enduring focus on sustainability, and its phenomenal pre-crisis era revenue rate of $250/square foot – nearly 70% higher than the fast casual industry median number – gives me hope that the fundamental business model and proposition remains intact. Comparable sales got hammered in 2016 due to the food safety crisis, but they’ve rebounded by over 15% in December and January this year; the stock’s up 20% YTD, and at barely $4 billion in sales, I still consider this to be early days for the company. ‘Clearly we live in a post-Chipotle world’, is what Panera Bread’s CEO said recently. I couldn’t disagree more. Check out the lines at stores…it’s very visible that they’re increasing in length – albeit slowly. I get the impatience, but customer loyalty takes time to regain – numerous other foods brands have been through this, and have pulled through fine. This burrito is ready to be eaten. Bite into the fundamentals – I’m quite sure your appetite for returns will get satisfied soon.
Facebook (FB): Because this company is so, so constantly discussed by the media, I’m going to skip on why the usual metrics around 1.6 billion monthly active users, 30% net margins and 50%+ revenue growth rates matter. Are these incredible financials why I like the stock? No. Do I think advertising will remain their main source of revenues in the long run? Likely not. Do I believe the newsfeed will exist in five years? It won’t matter. The reason I’m into Facebook is because I believe in the company’s ten year roadmap, in which it aims to focus on artificial intelligence, connectivity and virtual/augmented reality. Facebook has shown an incredible ability to spot new trends before they go mainstream – by either defining them organically, or just through visionary M&A activity…WhatsApp, Instagram, Messenger, (ongoing) chatbot integration and Oculus are what I consider success stories. Therefore, I believe the total markets for this company are seemingly endless; so might be future cash flows. You can debate founder-driven company behavior and disproportionate voting rights all you want. In this case, I’m glad Mark Z’s at the helm to steer the ship towards prosperous lands without any short-term traders biting at his heels.
Shake Shack (SHAK): Want a good, fast casual, millennial-friendly burger? Over the past five years, Shake Shack has gone from 14 shacks to over 110; revenues have grown from $39 million to around $260 million. Why do I like it? Because the product tastes good, the fast casual space is going to keep expanding, and the reason investors have sold off is due to seeing single digit comp sales, rather than fundamental business model problems, given pure restaurant operating margins are well over 25%, the company is profitable, and revenue generation per store is well above industry averages, at over $2 million, putting it in the top 10 lists of quick service and fast casual restaurants…aka each shack is amazing at churning out cash. Why am I not worried about comp sales? Because this is still the first innings; literally half of their stores barely existed over the past two years. I don’t believe we can get a good measure on such a small base…not to mention spreading the word of mouth, creating brand loyalty and encouraging recurring customers, especially in international locations, will take time. This is a company where I would invest, eat a burger and chill out for a few years.
Netflix (NFLX): Netflix has changed our daily routines with the same force that Amazon has revolutionized retail spending. Human behavior will never be the same – you want what you want when you want it – and nor will the cable, television and movie industry. With over 90 million subscribers and 25%+ growth rates, just imagine the insane amount of data Netflix has on what time we watched what shows, at what points you got bored and paused, or what you watched back to back…personalized television, welcome home! With all of this information, the power of production is enormous; Netflix is spending over $6 billion in original programming this year – blowing away every media peer except ESPN. If you’re worried about revenues, note that average monthly fees went up 12% last year, but subscribers rose 25%, showing how much pricing power it has. At just $60 billion in market cap, a total television disrupter through internet streaming and media consumption will get highly rewarded over time. Just wait until it gets into live sports, incorporates some advertising or offers premium content. Binge watching Stranger Things is far more entertaining than seeing the stock rocket up or down on every earnings report – but years from now, it’s likely we will see a very happy end with this investment story.
Salesforce (CRM): Salesforce pioneered the cloud revolution – which I argue is the most important technological creation of the past 20 years (explained why in my post here). The cloud industry has a 20%+ growth rate, is driving nearly $1 trillion in IT spending over the next five years, and is well placed to be the continuing foundation for asset-light, idea-intensive, scale-on-demand business models. Salesforce leads the way here, with its expertise in delivering personalized customer relationship management services and data analytics solutions to clients. Granted, the software-as-a-service and overall cloud industry is prone to disruption and quick pivots, and Salesforce will soon face more competition from Oracle (ORCL) and specialized upstarts. However, I’m willing to fight any Wall Street apprehension on it. Why? Because I believe in Marc Benioff’s leadership. His vision falls in the same league as the Musks and Bezos of the world, and his social activist-driven nature (vocal stances on equal pay for women, low-income housing initiatives, etc.) is extremely attractive for the millenials and Gen-Z’s of the world that tend to yawn at old-school corporate conduct. On the business side, the incorporation of AI into its products, aka Salesforce Einstein, is an incredibly cool concept and the ease of access for all businesses will continue to make it the ultimate software services provider out there, ubiquitous for any customer that wants to work in the space. The company has driven revenues up by ~30% annually over the past four years, and has tripled free cash flows over the past three; with record earnings per share in the past quarter and just $8.4 billion in sales, I believe the foundations are fully in place for a future blue chip stock.
Amazon (AMZN): The title of gamechanger doesn’t do it justice. The company has totally changed how humans spend money, value time and access products and services. Just like Facebook, due to the overwhelming coverage, I’m not going to speak about its growth statistics…in essence, my reason for liking this company is simple: the moat that it has created for being the go-to place to buy anything and everything remains just outrageously out of reach for other retailers; as it continues to spread its wings into logistics, TV and film production, groceries, cloud infrastructure, and whatever else (think space, education, artificial intelligence, etc.), the data it collects through Prime will pave the way for personalized solutions, recurring customers and eventually substantial profits. At only $400 billion in market capitalization, this remains early days; I’m on board with the crowd of bulls that believe this could break through the $1+ trillion ceiling in the coming years.
Alphabet (GOOG): Here’s a growth stock at $580 billion in market capitalization. The company remains the dominant digital advertising platform, with a 40% market share; growing at ~20% on a revenue base of $90 billion is not easy, but that’s just how Google works. Let it be noted, though, that I am not in this company for its search prowess, which I think is very susceptible to Amazon and other companies (including itself) that could figure out a way to bypass a search platform using artificial intelligence to link directly to users. In other words, it sounds weird, but the entire concept of ‘searching’ for something is one I believe might get outdated soon. Rather, I am more interested in their other bets, as well as the Android operating system (which powers over 80% of smartphones worldwide), and YouTube, which could become the channel of choice for younger viewers. And last but equally importantly, $86 billion in cash is a huge stash that can be deployed in far-reaching R&D, keeping the smartest minds on deck, and for M&A activity (think London-based DeepMind, specializing in AI). Alphabet has given enough reasons for Wall Street to be happy; don’t be surprised if more come through soon.
Fanuc (FANUY): Tight labor markets due to aging global demographics (the world is losing ~1 million workers each year for the next two decades), faster go-to-market speeds to cater to instant-gratification-driven millennials, and an emphasis on costs in a slow growth environment: bring in the robots for ~30% more productivity and ~25% cheaper labor costs (BCG data). The robotics industry today is barely $40 billion in size and is projected to double in five years; combining automation and peripherals, we’re looking at nearly $150 billion in industrial spending. Robots are long term capex buys, and quality matters. IFR data reveals the disproportionate usage today: in South Korea, there were 5.3 robots per 100 workers last year; in the US, just 1.7 robots, and in China, just .5. Each industrial nation will automate with time; the runway for growth is tremendous, and that’s where Fanuc comes in: it has had a presence in the US since 1965 (per Barron’s data), predominantly in the auto industry, and has a dominant 50%+ market share; in China, it’s over 10%. Last year, it was literally unable to keep up with demand, which led to business hiccups – but I’m not concerned, as the growth story remains intact. Note that Fanuc is not an infinity-stock story…you’ll need to keep an eye on it as competition continues to creep up – especially from Silicon Valley by combining AI, big data and automation (check out the eerie videos from Boston Dynamics). However, I do believe there is room for everyone – you have Kuka (KUKAY), which I own as well, and Yaskawa Electric (YASKY) in the field too, but Fanuc’s entrenched nature gives me faith regarding double digit stock returns for the coming five years.
Orbital ATK (OA): This is a Dulles-based aerospace and defense company with roughly equal revenues generated from flight systems, defense, and space services and components. Space remains one of my favorite sectors – and Orbital ATK is one of the few contenders for launch equipment, satellite services and propulsion systems, along with SpaceX and Aerojet Rocketdyne (AJRD). Long-winded contracts with tech companies and an approximately $14 billion order backlog shows long-term stability and low volatility; alongside, Trump-era military spending boosts should provide defense revenue growth. At only 15x forward earnings, a revenue of $4.6 billion and $5.9 billion in market cap, I don’t think investors are giving it enough credit after the merger integration that brought together Orbital and Alliant Techsystems over the past two years to form OA, especially given the positioning it now has in the aerospace industry. Other industry players trade higher; Lockheed Martin (LMT) trades at 21x forward earnings, Boeing (BA) at 20x, and Aerojet Rocketdyne (AJRD) at 23x. As space spending gains altitude (personally, I’m looking at 10%+ industry CAGRs), Orbital ATK should get a proportional piece of the pie and trade closer to 20x forward earnings, implying a stock increase of around 30%.
ABB (ABB): Here’s a global conglomerate with $33 billion in sales, but only ~$50 billion in market capitalization. It’s in prime position to provide software and automation solutions to the rapidly growing robotics space, as described above with Fanuc (FANUY). ABB’s pivot is occurring – nearly half of its sales come from automation, per WSJ data, but investors seem to focus more on the slow utilities division, which comprises the other revenue stream. Consequently, I find substantial undervaluation when you think long term. Check out 2016’s annual report…ABB has gone to great lengths to show the focus on robotics and its positioning for the fourth industrial revolution; in effect, the company’s priorities are in the right place. It has a price/sales ratio of ~1.5; similar companies in the robotics and automation space (Rockwell Automation, etc.) show well above 2x. In my opinion, given their product applications, we’re looking at capital appreciation potential in the range of 20%+, along with a 3% dividend to wait as the company aims for industrial capex share gains worldwide.
ExxonMobil (XOM): My reasoning for this gigantic company is pretty straightforward…it has excellent revenue diversification (upstream, downstream and chemical exposure) to make money in pretty much all oil price conditions, it has exposure to shale as well as conventional gas sources worldwide, it shows incredibly strong leverage ratios in its sector (it might not be AAA anymore, but hey, we can live with it), and it was the only oil major to show positive cash flow in the Great Oil Collapse of 2016 (I’ve made that name up). In fact, it even raised its dividend! Walmart’s entire business model (and consequent #1 Fortune 500 rank) is facing an Amazonian threat; ExxonMobil, on the other hand, has very little competition except with itself. Consider buying it you’re thinking about portfolio cruise control.
Apple (AAPL): Hey, what’s not to like? Nearly every product it has created has been either revolutionary or way beyond peers in quality. And sure, while the iPhone has driven its success story, note that smartphone penetration worldwide is still around ~30%; countries like India have substantial potential to grow. Apple’s share within the smartphone world is nearly 20%, and the company captures an incredible 85%+ of total profits in the category. Company-wide net margins have consistently been over 20% – more in line with software firms rather than hardware firms – and services still account for just 10% of revenues, with bankable double digit growth ahead and a phenomenally sticky ecosystem. On top of that, it provides a dividend of 2%, trades at barely 15x forward earnings, has nearly $250 billion in cash on its balance sheet and carries one of the smartest workforces on the planet. Hard to argue against all this in one package deal. Bite into the story, people…you’ll enjoy the taste of sweet returns.
And there we have it. There’s no such thing as easy money on Wall Street, but hey – patience pays dividends without any costs. I believe the companies above are well positioned to deliver in the long run to investors that have faith and are willing to give them time. I’ll add more ideas in future posts, and publish another list in Q4. Until then, happy investing!
