Today we’re starting with a little update on the portfolio, and that’s going to give me a chance to follow up on some reader questions about gold and cryptocurrencies. Then we’ll move on to Toast (TOST), a company I like but a stock that I can’t justify yet, a bunch of other minor updates on our Real Money Portfolio companies, and if you’ve signed up for the extra credit assignments, a little homework.
As we close out the third quarter and look toward the end of the year, I’ve got a little shuffling to do to take advantage of tax laws. I am taking tax losses in two smaller gold royalty companies, Triple Flag (TFPM.TO) and Nomad Royalty (NSR and NSR.WT.TO warrants), both of which have dropped considerably this year as gold has fallen.
This is not an assessment of the prospects for those particular stocks in the next few months, but realized losses in my taxable accounts are valuable to me and I typically go through and book some of those losses each year — and, at the same time, look for possible bargains late in the year, as other investors begin to harvest taxable losses in November and December. Sometimes, stocks that I really like for the long term but which are having a bad year can dive into a bit of a downward spiral with tax loss selling, and it’s good to be ready for that. Not much has done terribly this year, of course, unless you did all your buying at the February peak for some of the more speculative names, but there could well be some SPAC survivors that fall too far, and at this point both the gold mining and crypto mining plays are candidates for tax loss selling (or possibly buying, if that selling is overdone in November and December).
The prices of those two stocks I just sold will very likely be driven more by gold prices than by anything those companies do. And this is not a bet against gold, specifically, I actually don’t want to dramatically reduce my gold exposure, so I’m moving most of that capital from these sales into Royal Gold (RGLD) shares. After my wash sale period has expired in early November, I’ll look at Nomad and Triple Flag again, assess their prospects, and see if I want to re-enter those positions or just leave that portion of my gold exposure in the larger and relatively safer Royal Gold.
But wait, you say! Anglo Pacific (APF.L, APY.TO, AGPIF) is in just as bad a condition right now, shouldn’t you take the loss on that, too, maybe move it to Altius Minerals (ALS.TO, ATUSF) or some other base metals company, for similar exposure while the wash sale rule plays out?
And maybe the same for Deterra (DRR.AX), similarly down 20% or so?
Indeed, that’s a reasonable idea… but it so happens that I don’t hold those Anglo Pacific shares in a taxable account, so there’s no real benefit to that…
… and in the case of Deterra, I’ve made the judgement call that it’s a unique enough asset that I’d rather leave that capital in place. Deterra is primarily a single-property royalty company, so they’re driven almost entirely by BPH Billiton’s mining progress at the massive Mining Area C in Australia, and on pricing of iron ore in China, but as we close in on their first year of existence I expect they’re likely to feel some pressure to add more royalties to the portfolio and diversify more meaningfully. It’s quite possible that it would be worthwhile to sell Deterra here to harvest that tax loss, and move that capital into something else that’s largely driven by iron ore, like Labrador Iron Ore Royalty (LIF.TO, LIFZF), which is the most directly comparable company to Deterra, or to BHP itself, but I didn’t elect to do so at this time. For what it’s worth, both Deterra and Anglo Pacific also pay meaningful dividends, roughly 5% and 8%, though that wasn’t the primary driver of my decision to hold them.
So that’s a little reminder that some of the moves I make are simply personal portfolio management, without a strong company-specific assessment behind them. Tax losses are valuable, since each dollar of tax loss I can book this year will offset taxable gains and therefore provide an effective return that’s equivalent to whatever my top marginal tax rate is. That’s likely to be in the 30-40% range for me, my top marginal rate is pretty high if you include state and federal taxes, so it’s a very tempting gain to take — your situation may differ, but it’s not worth anything in the near term if you don’t “harvest” the loss by selling, so having some discipline to take those losses and get back in after the wash sale period, or move to a different investment with similar exposure, is often worthwhile.
What’s the downside? Well, it can be a little challenging to make this kind of “tax loss capture” trade — and the challenge is twofold.
First is the possibility of missing out during the wash sale period, so if the story changes during the next month there’s a potential for regret. Humans hate the feeling of regret, and sometimes make questionable decisions just avoid it. (What’s the wash sale rule? If you buy the same stock you’re selling within a 61-day period, 30 days before to 30 days after selling, that’s effectively considered to be gaming the system to claim an artificial loss, so you can’t book the tax loss, any losses just reset your cost basis for some eventual sale in the future. You can buy something similar within that window, but you can’t buy something that’s “substantially identical”).
And second, there’s also a psychological block that most of us face — if we sell today to book the tax loss, and plan to buy back in but find that the shares are 20% higher in a month, we will find it hard to buy them again, even if the net outcome is still favorable (depending on your tax rate and the size of the loss, you might still come out ahead if you buy the shares 20% higher), mostly because doing so makes you feel like a dummy — and a shocking amount of our decision making is driven by the desperate desire to not feel like a dummy. For me it’s probably even worse, because I don’t get to forget it and move on, I have to write to all of my closest friends about being a dummy.
We’ll see how it goes — these stocks are not particularly high-conviction ideas for me, they were just interesting groups trying to build the next wave of new gold royalty companies, and they had some size and reasonable valuations. I’m reasonably confident that if these two smaller startup royalty companies fly higher in the next month, it will be because gold prices go up fairly dramatically… and I’ve certainly got plenty of exposure to that possibility in the portfolio, and am keeping most of that cash in gold-exposed names today, so the odds of missing out on anything big are quite slim. That’s worth the risk for me, given the tasty taxable loss I can harvest to help make up for some of the more dramatic gains I’ve taken in the portfolio this year.
I would not as easily make this move for a company that I am really committed to holding for years, and that I think is uniquely well positioned, because there likely wouldn’t be an equivalent place to put the money during the wash sale period… but for a gold royalty company, where I can be fairly sure that most of those companies will move in unison if there’s a big move, it’s a pretty easy call.
And why Royal Gold as the parking space for that gold exposure? Mostly just because it’s well-valued here and is a relatively small position for me, so it makes more sense to build that into a bigger position than to become further overweight in a more volatile name in that space, like Sandstorm Gold (SAND), even though I have a stronger “buy” opinion about Sandstorm in the long term. Both companies are similarly valued in my assessment, at roughly 15X operating cash flow, and over the long run I think both are reasonable buys up to 20X cash flow if you want exposure to gold — Sandstorm continues to have more dramatic upside potential over the next decade, thanks to their delayed Hod Maden project in Turkey, but also more risk, and most of the time those stocks will move together, following the gold price.
Where’s gold going? I don’t know. I like having some exposure to gold in my portfolio, primarily as a hedge against disaster or currency collapse, but if that ever becomes the most productive part of my portfolio, well, I’m sure it will soften the blow, but I’m also sure that I’ll be having a bad year overall.
Will the amazing rise of Bitcoin as a digital asset eat into gold’s potential on that front as an investment for those who want to flee their local currency, or get out of the dollar? Maybe, and I expect it already has. I’m willing to have similar exposure to cryptocurrencies and to physical gold in my portfolio, I think they both have a place — Bitcoin may be the digital gold the world seeks someday, but it would have to settle down a lot to become something that provides confidence as a “store of value”. Gold can be volatile too, of course, but even the volatility of gold over the past seven years, up and down by 20-40% a couple times, looks like a straight line compared to Bitcoin.
Sometimes you want to shoot for that wild move, the 7,000% that Bitcoin has returned since 2014… but that’s not a hedge against anything, it’s a bet on the future and something new. Sometimes, when thinking about the construction of your portfolio, you want a little bit of the flat line in their, too, to moderate the impact of those giant spikes, particularly because a major reset in sentiment that sent those assets back to their 10-year lows, in dollar terms, would mean a 30% loss for gold and a 99.99% loss for bitcoin. Even if that’s not at all likely, in my judgement, given the extent to which Bitcoin has reached a level of mass acceptance as an asset, that’s a judgement call — we need to be aware of the fact that it’s within the realm of reasonable possibility.
Bitcoin has had a remarkable rate of acceptance as an asset over the past decade, and that makes it seem more “real” every day. Any kind of asset value is just based on how willing people are to ascribe value to it, so I’m certainly much more comfortable with it than I was when I first dabbled in Bitcoin late in 2013. But gold is still much more embedded in most cultures as a store of value, and after a couple thousand years that value is almost hard-wired into our psyche. Gold doesn’t necessarily make as much sense as Bitcoin does, as a portable store of value or an alternative currency with a natural limit on supply, but history counts for something, and there are a lot of people whose first thought when they worry about the falling value of their local currency (or the collapse of civilization, depending on which newsletter pitchmen you read), is “gold.” Gold is less convenient than Bitcoin, and harder and more expensive to store or move… though it also doesn’t disappear if you lose your password, or don’t have electricity or internet access available, and Bitcoin isn’t pretty or shiny so you can’t really show it off to signal your wealth (I guess you can do that with NFTs, to display your virtual wealth in the metaverse, but that will be a change that takes a generation or two to take hold).
For what it’s worth, roughly 6% of my portfolio is in physical precious metals and cryptocurrencies, at this point the split is roughly 50/50. Additionally, about 4-5% of my equity portfolio is typically in gold-related names, and some small portion is likely driven in part by cryptocurrencies (though that’s generally far less direct or obvious, and many cryptocurrencies are not really “assets” like Bitcoin is, they’re investments that give you some sort of participation in a blockchain network or platform that might become valuable, and therefore act more like venture capital-stage equity investments).
That feels reasonable to me. I’m not a wild enthusiast for either cryptocurrencies or commodities, and much prefer companies who generate real cash flow and profits and improving margins thanks to their own innovation or production or investments. Being entirely beholden to commodity prices makes me a little nervous, and I expect that real estate will probably do as well in protecting against inflation as commodities or cryptos do over the long run… but I don’t really know what will happen in the future, and there’s room for lots of different perspectives in any well-rounded portfolio.
*****
I’ve been keeping an eye on Toast (TOST) since before it went public last week… partly because it’s one of the major competitors for other companies that interest me, including PAR Technology (PAR) (which I own) and Square (SQ) (which I sold WAY too earl), partly because it’s a local tech story here in Massachusetts so it gets a lot of media coverage in my part of the world, and partly because a few of my favorite local restaurants have adopted the platform, so I’ve had quite a bit of personal experience using it.
And it’s a fascinating company, not least because of their near-death experience last year, when the sudden collapse in restaurant dining led them to lay off a huge portion of their staff and go into panic mode, and it has the kind of amazing scaled growth potential that we love to see… so I was hoping to find the financials compelling enough that I’d want to buy.
We’re not there yet, to cut to the chase, but I’ll run you through my thought process.
Toast has effectively the same goal as PAR, they’re trying to build out a modern operating system for restaurants, including hardware and payment processing and software for managing customer interactions, the back-room business, and the kitchen. The two companies have very different customers (PAR mostly goes after large chains that want semi-customized enterprise control and flexibility to integrate lots of other software platforms and drive-ins and delivery services and other stuff, TOST is more of a plug and play unit that an individual restaurant or small chain might put into place over a weekend, kind of like Square or Lightspeed (LSPD)), but there’s probably enough potential overlap for pricing pressure to emerge as they all compete.
The big advantage for PAR is their relationship with large chains of quick service restaurants (fast food, including the modern evolution of fast food with healthier menus like sweetgreen), forged decades ago when they were building those new cash register terminals for companies like McDonald’s… the big advantage for Toast is scale and an embedded focus on payment processing as a core part of the product (PAR offers payment processing, too, but that’s essentially a brand new add-on, they depend on software subscriptions… Toast depends almost entirely on payment processing fees, and software and hardware are both effectively “loss leader” businesses that get them locked in with that payment processing business).
What do the numbers indicate? As cloud software providers the key number folks look at is is usually annual recurring revenue — TOST had growth in ARR of 118% in the second quarter, hitting $494 million, and they are in about 48,000 restaurant locations. They think they’re in about 6% of restaurants in the US. That’s a really big business already.
And they’ve been growing fast, their ARR grew 77% year-over-year from $184 million as of December 31, 2019 to $326 million as of December 31, 2020, and more recently 118% year-over-year from $227 million as of June 30, 2020 to $494 million as of June 30, 2021. That growth rate will probably slow, but it could slow from here and still be extraordinary.
PAR has about $77 million in ARR as of the second quarter, almost all of which is from software subscriptions to Brink POS, Data Central (back office and staffing) and Punchh (loyalty and marketing), and that will likely grow close to 50% in 2021 (it was $65 million at the end of 2020, but “contracted” ARR that had not yet been installed was approaching $100 million, and has been growing at a 45-50% pace over the past several years). They have far fewer core customers for their core POS system than Toast does, there are only about 12,000 active locations for Brink… but their loyalty and marketing platform acquired this year, Punchh, has 41,000 active locations, so they touch almost as many restaurant locations as Toast does, just in a different way and with much less revenue (because they’re collecting just a monthly subscription from each location and not a slice of every purchase — their payment processing business, which is what scales to sales, is very small).
So PAR is really a hardware/software company that makes money primarily on software subscriptions, so to grow they need to add new restaurants and cross-sell to get users to integrate more than one of their software tools. Toast is a hardware/software company that makes money primarily on payment processing, so to grow they need to get more restaurants, too, and they also sell add-on software tools, but they also have the underlying rising tide that they can grow naturally, with their sliver of payment fees, as sales grow at those locations.
That’s what makes the comparison somewhat tough — TOST does have huge ARR, but only about $150 million of that will probably be software/subscription revenue this year, more than a billion dollars worth of their revenue in 2021 will be from payment processing fees. If you just look at the subscriptions, PAR is close to being, well, on par with Toast… but they don’t control the payment processing for all of their customers like Toast does, so they do not have that huge (and variable, and probably lower-margin) business.
The good news? The Toast business is clearly scalable, largely because of that huge payment processing number. They struggled a little bit in early 2020 because so many restaurants shut down, but stormed back quickly and managed to grow that year anyway, since every restaurant that wanted to reopen needed digital tools, often for the first time, and Toast was ready with one of the easier options to take live.
Toast’s gross profit, which is the cash that’s left over after you cover the direct cost of the products you’re selling (so, the cost of running the subscription software, the cash they pass through to payment processing partners, the cost of building the hardware that they sell at a loss, etc.), came in at $62 million in 2019, and rose to $140 million in 2020 — so it roughly doubled, and the overhead grew by only about 30%. That’s pretty good. Year over year, for the first half of 2021, it got better, gross profit tripled over the very low early 2020 numbers, to $155 million for the first half of the year (so, already more than the full year for 2020), and yet their operating expenses rose by only about 25%. That’s a really good sign, that’s more efficient growth than Square and much faster growth than PAR.
The net losses at Toast looked ugly for the first half of this year, but a lot of that was one-time adjustments before the IPO and dealing with derivatives and debt, some of which was a result of the strange washout of the past year, when they offered a lot of forbearance to their customers who were in trouble.
But the business itself got a lot better this year. And that’s mostly just because it got a lot bigger, with gross payment volume (the total dollars that got processed by their client restaurants) growing 125% for the first half of 2021, versus 17% in all of 2020. Restaurants suddenly having to go cashless and adopt online ordering was a really big deal for Toast, partly because their take rate (the processing fee that they earn as the payment processor) on online orders is a little higher than it is for “card present” orders inside the restaurant, and with huge volume “a little higher” translates into a lot of money.
How does that payment processing business work? Most of that 3-4% fee that most companies pay for payment processing goes to Visa, Mastercard and the bank that issued the card, with a few others dipping their beak in, but the payment platform keeps a sliver, too — Toast probably gets between 0.5-1% as their net take rate, higher in takeout or online orders and lower on in-person card swipes, though they say the rate is negotiated with individual restaurants, so probably sometimes its larger as a way to subsidize the hardware and software. The examples they give in their investor materials imply an average take rate of about 0.75%. That doesn’t sound huge, but it’s a perpetual top-line royalty as long as customers stay with Toast, and I don’t have to point to the stock charts of Mastercard or Visa to tell you how valuable a top-line “royalty” can be.
Reliance on payment processing fees has the potential to make margins look pretty soft when you’re comparing to other software companies, and investors always believe that those fees will eventually come down because of competition (we thought that when Mastercard and Visa first came public, too, and it never happened), but we have plenty of examples of this working out really well for investors. Shopify’s margins started to look a lot worse once their payment platform began to really grow and drive more of the revenue than their software subscriptions… but their revenues grew so fast that it was a fair tradeoff. That’s why PAR is also trying to build a payments business, though they’re starting late and it’s very tough and competitive to get in the door with customers who are already satisfied with their payment platform.
The most bullish interpretation I have for Toast, is that we might look back and determine that the singular brilliance of the Toast platform is that it’s sold as primarily a payment platform, with fees that appear similar to other platforms, and they offer a lot of integrated software and hardware to sweeten the deal and upsell software, but they always tie those customers in to their platform and therefore get that share of revenues, call it 0.7%, effectively in perpetuity and without additional cost. PAR offers payment processing as an add-on to their cloud POS system and restaurant management software platform… Toast offers restaurant management software as an add-on to the payments processing/POS system that is their core offering. Owning the payments is potentially huge, and the way they try to do that is by giving restaurants better tools and better hardware than other payment processing companies.
That means Toast is not so different from Lightspeed (LSPD) or Square (SQ) in concept, and all of those have wildly higher valuations and higher growth rates than PAR because PAR is still all about the software and hardware and has yet to grow the payments platform very much. PAR doesn’t get that top-line royalty.
And while that means it’s a different company, that doesn’t take away from my admiration for PAR. Mostly because they’re building what their customers want — enterprise restaurant chains don’t really want to be tied to a payment processor, they want the lowest possible rate and they want to be able to shift and negotiate. Part of PAR’s attraction for customers is that they integrate with hundreds of other software platforms that enterprise and chain restaurants might want or need, and Toast, with its much more streamlined and user-friendly system for small restaurants, can’t offer that (yet, at least).
And investors are paying up for that, of course. In most ways, the valuation at TOST is pretty similar to Square, though Toast has been growing a little faster lately and has been improving its margins more rapidly (that’s splitting hairs, they’re both losing quite a bit of money as they try to take market share), and Square’s valuation is thrown off by the fact that their Cash App and foray into more banking services is arguably more important to the company than their signature POS platform and payment processing network.
TOST has a market cap now of about $26 billion, which means it’s valued at about 50X ARR. That’s a whole heckuva lot. Subscription services, mostly add-on software offerings, will probably bring in about $150 million this year, so the stock is at about 170X SaaS revenue if you exclude the payments portion (which is not fair, to be clear). PAR will probably hit $100 million in ARR this year or early next year, almost all of which is software subscriptions, but their customer rollout is slower, mostly because they don’t have a plug and play device that you just mail to the restaurant and turn on, they have to first convince the chain operator to choose them for their 100 or 200 or 2,000 locations, then they usually have to physically go to individual chain restaurants and install their cloud POS system, and sometimes convince franchisees to get on board as well, whether they’re providing new hardware or not.
So PAR, at a $1.6 billion market cap, is much cheaper and slower-growing than Toast. PAR has 40-50% ARR growth, and is valued, ignoring the other businesses (government contracting and restaurant hardware, both of which are close to break-even), at about 20X current ARR, versus Toast’s 50X ARR valuation for 100% ARR growth. PAR has more hidden value, since ARR is still a small slice of their revenue, but Toast has much better growth.
So… does PAR go up as they grow their footprint and get more restaurant chains on board and as software becomes the dominant part of their revenue stream, including some customers who will use their payment processing platform and therefore add a little more value over time? That’s my guess.
Does TOST go down because their share of payment revenue drops as restaurants go back to in person sales? Or because of competition from players like Square in the single restaurant/small chain sector? Not necessarily, they are getting huge market share in restaurants by selling what is probably the easiest-to-implement platform for small restaurant operators, and the established offerings for restaurant software are still pretty terrible, and customers are much more accustomed to digital interactions even in person now, so they will probably grow, too.
There doesn’t have to be a winner here, both can thrive, but Toast is clearly more likely to build massive scale rapidly. The real difference is that with TOST you’re paying a lot for that growth, and the growth rate is stupendous right now, with some of that growth not likely to be sustainable… with PAR the growth is coming a bit slower, but there’s a defensible niche among large chains and a large installation backlog, so some of the growth is predictable, and you don’t have to pay as much for it. Both have ambitions of creating the operating system for the restaurant of the future, and Toast has the edge on that because of its massive scale… but PAR has the edge on that when it comes to the particular needs of their target customers, since Toast isn’t focusing on popping in with a customized enterprise solution for a 200-unit chain of restaurants.
I’ll be really curious to see how it goes, I really like Toast and its mass-market potential, being the leader in that niche but having still only 6% market share presents some real opportunity, particularly because their business is led by payments and therefore get some natural scale without additional work. And I would love to see some insider sales wash through and bring a dip in the share price as we head into the end of the lockup period next year, as often happens for big IPOs… but I’m not inclined to chase it just yet at a $25 billion valuation. It might work out even at this price, particularly because they are building scale in independent restaurants faster than anyone else, and network effects are real and powerful and those customers will probably be quite sticky, but at this point I think we’d be paying too high a price to bet that it will work. Especially since that letdown for IPOs in the first six months is so common, historically.
The standard lockup period for the IPO would expire in mid-March, and another risk is that TOST is overwhelmingly insider-owned and controlled even after the IPO, with super-voting B shares (which don’t trade) making up about 95% of the market capitalization (and 99.5% of the voting rights), so there’s not a lot of trading float until those class B shares start getting converted and sold by insiders and other large pre-IPO owners — the three founders control a lot of that, but even more is in the hands of venture backers, including three funds who each own about 12% and a few 5%+ holders, and they’ll be naturally inclined to begin taking profits next year when that window opens. I’ll keep watching, hopeful that a tough quarter or some insider sales will bring the valuation down, but for now I’m watching from the sidelines.
*****
Other news from our world?
Boston Omaha (BOMN) filed for a stock offering, though in this case it’s really just an option to sell shares if they see that as a good way to fund investments at some future point, they usually have an agreement like this in place but don’t necessarily have to activate it and sell those new shares. They filed an at the money sales agreement with Wells Fargo to raise up to $100 million, so that provides them with more potential capital for whatever they want to do next, most likely continue to build out their fiber-to-the-home business or buy big collections of billboards.
They don’t have an obvious need for the cash at this point, they have a couple hundred million in cash and short-term investments on the books, and they carry only a tiny amount of debt (all tied to the billboard business, which can easily service that debt), but they do have meaningful outlays coming in the PIPE for their Yellowstone SPAC merger, and presumably they have other possible acquisitions on their watchlist… for an investment company that wants to be nimble in making deals it’s always good to have optionality. BOMN is above my buy price, even after it dipped on this news, but I don’t think this new offering is a meaningful negative.
*****
I’ve been keeping half an eye on the tower REITs in this latest dip, hoping they’ll come down to my buy levels. Crown Castle (CCI) should declare its next dividend increase in the next two or three weeks, that announcement typically comes in mid-October. If they stick with their forecast of 7-8% growth, that would mean the dividend for next year should be about $5.75. THat’s what I base my “buy below” price on, a 3.5% yield at that dividend — if they go crazy and boost the dividend by 11%, like they did last time, the impact won’t be dramatic, that would get us up to $169 at a 3.5% yield… but it might shift some opinions, because that would shift the growth expectations for the future. All of this is somewhat arbitrary, 3.5% is really just about the average dividend yield CCI has offered over the past five years, and was kind of the floor for the yield from 2016-2019, but having a little price discipline when buying is a good idea, even if you have to make it up.
American Tower (AMT) is a better company, I think, with much more optionality from their global platform and a lower payout ratio (meaning, they pay out a smaller portion of their funds from operations as a dividend than CCI does), and it has typically earned a stronger valuation based on those factors and on the fact that they raise the dividend every quarter, not every year, and at a more aggressive pace (roughly 15% annually).
As a general rule, when the dividend yield for CCI is more than 200 basis points above AMT’s dividend (like, 4% versus 2%), I like to shift my buying to CCI… when the yield contracts to only a 100 basis point or smaller difference (ie, CCI yielding 3% and AMT 2%), then AMT is the more appealing prospect because of its better growth and more levers for future growth optionality.
Right now I expect that AMT, if they are able to grow the dividend at 14% (slightly below recent growth levels), should pay us $5.73 over the next year in dividends. At $267, that’s a 2.1% dividend, which is about as high as AMT’s dividend yield has ever gotten (on a trailing basis).
CCI’s per share dividend, if they raise it by 8% next quarter, will be an almost identical $5.75 over the next year, so at $174 that’s a 3.3% dividend. That’s still below the five-year average yield for CCI, which has often traded at a dividend yield approaching 4%. On a relative basis, we’re in a grey area when it comes to picking one over the other, and I’d still shade slightly to AMT — higher quality, closer to average historical valuation, more international exposure — but both are getting closer to buy range thanks to a 10%+ drop in the past few weeks. Fingers crossed that they fall further, I’d love to see AMT at $230 or CCI at $150 to let me justify making bigger purchases, but given that they’re both just above that preferred buy range (they need to fall another 10-15% to get me excited), I’d still peg AMT as a slightly better value at the moment. Interest rate and inflation fears have brought them down a little in recent weeks, but I’m greedy for more of a drop.
What’s the argument for Crown Castle? In addition to the higher current yield, CCI does have that small cell network they’re building out in the US, fiber-connected 5G base stations in urban areas that aren’t traditional towers, and that could be very valuable over time as well. The concern there is that the value of shared small cell 5G base station locations isn’t as proven out as the shared tower model, and small cells so far have lower returns for CCI (which was part of the bearish argument Elliot Management when they waged an activist campaign against CCI), so that’s a risk on the CCI side. You can match that with AMT’s risk from things like foreign currencies (AMT is global, CCI is almost US-only) and their own smaller investments (like their distributed mini data centers), but at the core these are extremely similar companies in the US, and should both do very well as data infrastructure demand continues to grow and 5G coverage proliferates.
Add in a fourth wireless carrier in the future, as Dish tries to build up its 5G network, and there might even be some surprise growth potential in the out years.
That growth from Dish has been halting so far, and they’ve arguably moved backward as they’ve been losing a lot of the acquired Boost and other customers they’ve bought to try to build the fourth option, and in the initial period they’ll rely on T-Mobile and AT&T for a lot of their network capacity until they build out… but if they end up spending big to build out the antenna network, that would benefit all the tower companies. I’ll keep watching, in the past few years these have been great companies to buy during dark days.
*****
I noticed that a big quarter from recreational vehicle manufacturer Thor Industries (THO), particularly their outlook and commentary about strong ongoing demand and order backlogs, gave a little boost to all the RV stocks, including Camping World (CWH), our retailer in that space.
It didn’t end up helping the stock that much in a down market, but it did keep CWH shares fairly flat while the world was falling apart for a couple days, which is something. Some of the credit goes to the dividend and bottom-of-the-barrel valuation, of course — when investors think they see a migration to “value” stocks, that makes these cheap, cyclical companies much more attractive to people — and there’s not much in the market that’s cheaper than CWH with its PE ratio below 8 and dividend yield of 5%. The cycle of booming RV sales will turn, probably, but I’d say that’s baked in — the price we’re paying now already anticipates, at best, a really tepid few years. When building a portfolio, cheap and cyclical stocks like Camping World can provide some real ballast against the mega-growth stories that are generally far more volatile. And ballast lets you stay invested on the crazy days when the sexiest growth stocks are falling apart, and the people who own only high-growth stocks are most prone to panic.
*****
I have been a cyclist for most of my life, I know a lot of you supported my in my fundraising ride with the PMC again this year as we raised money for cancer research and treatment at Dana Farber (and hit a new record this year, so thank you!), and I love being out on the road — but it does mean I have to chisel out some daylight time to exercise, and that’s sometimes a challenge… and if it’s 100 degrees outside, or 30 degrees, or pouring rain, I’m not so thrilled about going for a ride… so I do have an older indoor bike from ProForm that works pretty well, but it’s almost ten years old and does not have the ability to connect to classes or routes or any king of gamification or competition to make things more interesting, so it’s awfully boring. And the growing body of evidence (and the use of new holes in my belt) suggests that “boring” means I’m not going to use it enough.
So I’m planning on trying out a Peloton (PTON) bike, now that they’ve reduced the price of the basic bike a bit (it’s still pretty pricey, $1,495 plus $39/month for classes, but that’s a big price cut from last year’s levels)… and I’m also noticing that the stock price is falling pretty sharply of late for this “pandemic darling” stock, so this will also count as some “clips in the pedals” research.
That “try it out and see if there’s something special in this product” certainly worked well for Stitch Fix (SFIX) and Roku (ROKU) last year, there’s no substitute for personal experience in evaluating a product… and I was particularly blown away by how much better the Roku platform was than other streaming TV platforms I’ve used, so that helped me to have confidence in building that position. It’s only fair to say that was, at least in part, lucky timing, but we’ll see if lightning strikes again — or if I hate the Peloton and send it back in a few weeks. I’ll let you know how the experience goes… and if you’ve tried the Peloton (or any other product whose maker we might consider investing in), and have any feedback as a user, please share.
*****
Finally, I got a question earlier this week that I think will let me go off on an interesting tangent for a moment, so here it is:
“Travis, obviously these stocks are public. Can /will you give me a good strategy, on stocks, to learn, source docs you feed info the Thinkolater.
Before signing with Gumshoe, I bought small positions in 10 or so companies. About half are at or a little above the purchase and the other half are well below my purchase. Just trying to get better at this game.”
There are so many great sources for research — but they all take time, which is why so many people find the prepackaged ideas from investment newsletters appealing. You can cultivate a good source list of fundamental investors on Twitter, read the investing magazines and even a few lower-end newsletters, read the Wall Street Journal and Barron’s and similar sources, or even just watch the world around you and buy the stocks of companies that touch your life in a good way and catch your attention, as Peter Lynch wisely suggested a generation ago. There are far more ideas than most of us can research. The problem is not really in finding ideas that sound interesting, it’s in that step-back to really evaluate which ones are worth your money.
When it comes to making your investment decisions, a long-term investor who intends to hold for years has to have enough confidence to hold through bad news… and in my experience, you have to build that confidence brick by brick. For me, it starts with the company’s actual SEC filings, presentations and conference calls. You want to get really familiar with what the business has been like over an extended period of time, watching that growth rate and the shift in margins as they have grown (all else being equal, you want gross margins to stay steady and operating margins to improve over time as they become more efficient, with expenses rising more slowly than gross revenue to give a clear path to earnings growth), and you want to have a good qualitative understanding, too, a sense of how management is directing the organization and what the strategy is and whether the company excites its customers and its employees, a lot of which you can get from listening to the quarterly conference calls or, when they post them, reading the letters from management.
That qualitative assessment is what can make it possible for you to have enough confidence in a company to hold through the periods of time when the stock isn’t popular, or even hold through a bear market. Reading a bunch of online articles about the company will give you some context and help you think about what they do and what their prospects are, but really, there’s no substitute for reading the 10-K (annual report) and listening to a couple of the most recent conference calls, including the Q&A with analysts… anything else is someone else’s assessment of the people you are trusting with your money, and you generally want to use your assessment instead. It takes time to understand the business well enough to make your own assessment with some confidence, but it’s time worth spending.
You said “game,” and I use that term sometimes, too, talking about the importance of managing our emotions so we can “stay in the game.” But really, trading is a game. Investing is a hobby. You don’t win or lose in a given year, you get out of it what you put in… and over a lifetime, you might find extraordinary returns. But if you don’t like doing the work, it’s a lousy hobby.
If you don’t like fishing or golf, why dedicate your weekends to getting better at it? It’s the same with investing — if you don’t like it, there’s a great alternative in low-cost broad-based index funds and dollar cost averaging, you can guarantee yourself average returns without doing any extra research or work, and over the past 100 years average returns have compounded into excellent performance for investors, so that will probably continue.
And the kicker is, even if you get pretty good at the hobby, most years you won’t do a lot better than the much easier alternative, and a lot of the time you’ll do worse. The advantages of being a patient investor in individual stocks accrue over very long periods of time, and are hard to see in the moment, so even if you turn out to be pretty good at it (which is mostly a matter of discipline and managing emotions, and only secondarily a matter of prescience and good research skills and the luck of landing on a good idea a the right time), you have to enjoy the process enough that in the years when all your work and research caused you to earn a return a little lower than your brother-in-low, who just bought the S&P 500 and ignored it, you can still sit at the Thanksgiving table without gnashing your teeth.
If you want to think more about this, I really recommend Chris Mayer’s 100 Baggers: Stocks that Return 100-to-1 and How to Find Them, which was first published about five years ago. I’ve skimmed it in the past, but I’m just reading it through now. That book, by a former newsletter guy who always seemed out of place, more egghead than pitchman, is nominally about finding the patterns that lead to a stock providing 10,000% returns, but really it’s about finding the ways in which companies are special and have staying power and make massive long-term returns feasible. During the wild days when the market panics, this is the kind of reading that serves as a restorative tonic for weary investors.
You may or may not love the idea of searching for huge long-term returns, but I think that’s the most appealing part of investing — trying to identify the themes and investments that can compound massive returns over long periods of time. Whether or not you get a “100 bagger” is almost beside the point, the point is really that setting your mindset on those kinds of possible returns helps you to think in a long-term way, and to think about the qualitative ways in which the company you’re considering really might have that potential. Even if all the book does is help you reset your default thinking to “patience” instead of “do something!” it will probably be valuable to a lot of people, and it’s an easy and pleasant read.
If the lingo is new to you, a 100-bagger is an investment that rises 100X in value over time — it’s an evolution of the term “tenbagger” that Peter Lynch popularized in his One up on Wall Street (originally published in 1989, though it has been updated and is still a good read), a term for 1,000% gains that was borrowed somewhat strangely from baseball (I’d think of a four-bagger, a home run, as the 100% gain, but I’m not really a baseball fan). A 100-bagger is a daunting 10,000% return, but if you spread it out it’s easier to visualize — that’s equivalent to 25% compounded returns for 20 years… or 58% a year for 10 years… or only 12% a year for 40 years. There are a surprisingly large number of companies who have generated that much for investors, given enough time.
I have yet to book a 100-bagger, sadly enough, though if Alphabet keeps growing at 20%+ for another five years perhaps I’ll get there, and I love the idea of looking for that potential — it really sets the mind on the right path, and this is the one area where individual investors, looking at relatively small companies and digging in to the real operations of the company and trying to understand the long-term potential, have a big advantage over massive institutional investors who are rewarded for their ability to beat the benchmark each year, not for having patience, or some imagination about the future, or some insight into a business plan.
I love all kinds of compounding investments, because the best feeling in the world is when your money is making you money and you don’t have to do any work. Steady compounders like REITs or utilities or dividend-paying blue chip stocks are a great foundation for a portfolio, but they won’t often lead to even 10X returns unless you let it ride for 30 or 40 years, to get that kind of growth you also need some businesses that compound internally… they invest their free cash flow in growth, which generates more free cash flow and lets them invest further to build on that growth even more (or, in some cases like strong brands and royalty companies, they can growth without investing much of their free cash flow), and they don’t have to sell more shares to get there so all of that growth compounds the value of your piece of the company.
It’s simple, but even for the high growth companies that are often looking so sexy for investors it can take a long time to really kick in, and as sentiment waxes and wanes during those time periods any stock can fall by 30%, 50%, even 80% if there’s an ugly resetting of that investor sentiment — a panic about a sector, or a high profile piece of bad news about a company, or even just a crash in the broad market that brings everyone down. There are some times when it makes sense to cut your losses in those situations, like Cisco in 2001, but also some times when it makes sense to just be patient, like Amazon in 2001.
The trick? We don’t get to know beforehand whether we’re holding an Amazon or a Cisco at the moment when the market is crashing. The trick is to know your companies very well, have a high degree of comfort with management, and let that knowledge give you a sense of comfort and patience that the continuing progress of the company will eventually make up for whatever stock drop is happening — and you’ll be wrong sometimes. Being wrong sometimes is the price of being right sometimes, and if you’re patient enough, and choose companies with strong fundamental growth in their real business, not just their stock price, it’s a price worth paying.
And that’s enough blather to send you on your way for the weekend, dear friends — your optional extra-credit homework is to read 100 Baggers, and I wish you a Happy October. Thank you for reading, and please share your feedback or questions in the happy little comment box below.
Disclosure: Of the companies mentioned above, I own shares of and/or options or warrants on Stitch Fix, Roku, Camping World, Alphabet, Sandstorm Gold, Royal Gold, Altius Minerals, PAR Technology, Deterra Royalties, Crown Castle, American Tower, Anglo Pacific Group, and Boston Omaha. I also own both physical gold and Bitcoin.
I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.
- 000
- 100
- 100x
- 2019
- 2020
- 2021
- 5G
- 5g network
- 7
- 84
- 9
- access
- Account
- acquisitions
- active
- Activist
- Add-on
- Additional
- ADvantage
- Agreement
- All
- Alphabet
- Amazon
- American
- among
- Announcement
- Annually
- antenna
- app
- AREA
- around
- articles
- asset
- Assets
- AT&T
- Australia
- Bank
- Banking
- Baseball
- Bear Market
- bearish
- Benchmark
- BEST
- Billion
- Bit
- Bitcoin
- blockchain
- board
- body
- Books
- boston
- Box
- brands
- build
- Building
- Bullish
- Bunch
- business
- business plan
- businesses
- buy
- Buying
- call
- Campaign
- camping
- Cancer
- cancer research
- Capacity
- capital
- capitalization
- cases
- Cash
- Cash App
- cash flow
- Cashless
- Catch
- caused
- challenge
- change
- Charts
- chase
- China
- chip
- Cisco
- closer
- Cloud
- Collecting
- coming
- Commentary
- Commodities
- commodity
- Common
- Companies
- company
- competition
- competitors
- Compound
- Conference
- confidence
- construction
- continue
- continues
- contracts
- Couple
- Crash
- Creating
- credit
- crypto
- crypto mining
- cryptocurrencies
- currencies
- Currency
- Current
- Customers
- data
- data centers
- day
- daylight
- deal
- dealing
- Deals
- Debt
- Decision Making
- delivery
- Delivery Services
- Demand
- Derivatives
- DID
- digital
- Digital Asset
- digital gold
- disaster
- dividend
- dividends
- Dollar
- dollars
- driven
- driver
- Drop
- dropped
- Early
- Earnings
- eat
- Edge
- Effective
- electricity
- emotions
- employees
- Enterprise
- equity
- estate
- etc
- evolution
- Exercise
- expenses
- experience
- eye
- Face
- fair
- FAST
- fears
- Federal
- Fees
- financials
- First
- first time
- Fix
- Flexibility
- flow
- Focus
- follow
- food
- For Investors
- Foundation
- founders
- Free
- Friday
- full
- fund
- Fundraising
- funds
- future
- game
- gaming
- General
- Giving
- Global
- Gold
- gold price
- good
- Government
- great
- Group
- Grow
- Growing
- Growth
- Hardware
- harvest
- head
- here
- High
- history
- hold
- Home
- homework
- hoping
- How
- How To
- HTTPS
- huge
- Humans
- Hundreds
- idea
- identify
- Impact
- Including
- Increase
- index
- industries
- inflation
- info
- Infrastructure
- Innovation
- Insider
- Institutional
- institutional investors
- interest
- International
- Internet
- investing
- investment
- Investments
- investor
- Investors
- IPO
- IPOs
- IT
- keeping
- Key
- King
- knowledge
- large
- latest
- Laws
- lead
- LEARN
- Led
- Level
- lightning
- lightspeed
- Line
- List
- Listening
- local
- location
- Long
- looked
- love
- Loyalty
- major
- maker
- Making
- management
- Manufacturer
- Market
- Market Cap
- Market Capitalization
- Marketing
- massachusetts
- mastercard
- Match
- materials
- Media
- Members
- Metaverse
- million
- minerals
- Mining
- model
- money
- months
- move
- moves
- names
- Near
- net
- network
- news
- Newsletter
- Newsletters
- NFTs
- nimble
- numbers
- offer
- offering
- Offerings
- Offers
- offset
- online
- online ordering
- opens
- operating
- operating system
- Operations
- Opinion
- Opinions
- Opportunity
- Option
- Options
- order
- orders
- organization
- Other
- Others
- Outlook
- owners
- P&E
- Pacific
- Panic
- parking
- partners
- Password
- Pay
- payment
- payment processing
- payment processor
- payments
- peloton
- People
- performance
- perspectives
- physical
- pipe
- planning
- platform
- Platforms
- Plenty
- plug and play
- Popular
- portfolio
- PoS
- power
- Precious Metals
- Presentations
- pressure
- price
- pricing
- Product
- Production
- Products
- Profile
- Profit
- project
- public
- purchase
- purchases
- Q&A
- quality
- raise
- range
- Rates
- Reader
- Reading
- real estate
- reduce
- reopen
- report
- research
- restaurant
- Restaurants
- retailer
- returns
- revenue
- Risk
- rules
- Run
- running
- S&P 500
- SaaS
- sale
- sales
- Scale
- SEC
- sell
- sense
- sentiment
- Services
- setting
- Share
- shared
- Shares
- shift
- Simple
- SIX
- Size
- skills
- small
- So
- Software
- sold
- Space
- Spending
- split
- spread
- square
- start
- started
- startup
- State
- stay
- stock
- Stocks
- store
- Stories
- Strategy
- streaming
- street
- Strikes
- subscription
- supply
- Supported
- surprise
- system
- T-Mobile
- talking
- Target
- tax
- Taxes
- tech
- Technology
- The Future
- The Metaverse
- the world
- Thinking
- Tide
- TIE
- time
- toast
- top
- touch
- trade
- Trading
- treatment
- Turkey
- tv
- Update
- Updates
- urban
- Urban Areas
- us
- users
- utilities
- Valuation
- Valuations
- value
- valued
- vehicle
- venture
- Versus
- Virtual
- visa
- Volatility
- volume
- Voting
- wait
- Watch
- Wave
- Wealth
- week
- weekend
- Wells Fargo
- What is
- WHO
- win
- wireless
- within
- Work
- work out
- working out
- works
- world
- worth
- year
- years
- Yield