Billy 5i Research Coverage at 5i Research
Member since: Aug '20 · 1689 Opinions
PLUG stock has been quite weak, but it is still in fundamental growth mode. Sales are expected to go from ~$700M in 2022 to more than $1.9B in 2024, based on estimates. It is, however, still losing money, with negative cash flow, and in a weaker market tape investors get more concerned about this. The balance sheet is decent, with about $400M net cash, but we note cash flow was negative $1B in the last 12 months. It will likely need more capital, and it may be more interesting when it decides to issue equity (we are assuming a discounted price if this happens). Its loss last quarter was higher than expected, and it had previously expected to be profitable this year, but this now looks to be pushed into 2025. So, we like the growth trend, but are a little concerned about its capital needs. We think buyers can wait here.
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ZBRA's share price has been falling alongside the market so far in September, but this has been somewhat exacerbated by a rating downgrade by Morgan Stanley. We do not feel that anything has fundamentally changed, and its weakness is similar to many names in today's market. It trades at a somewhat premium valuation, with a forward P/E of ~30X, and has decent margins, but sales growth has been somewhat muted recently and investors are likely trying to connect its premium valuation to sales growth. Earnings growth is expected to be strong in the coming years, and we like it for the industrial robotic side of things. We are comfortable with the name, especially for a long-term hold, but we might expect some further downside pressure as it retests its lows of ~$230.
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Take a long-term view.
In the short term, the market is a voting machine. In the long term, it is a weighing machine. Short-term stock prices are influenced by a multitude of factors: interest rates, inflation, sentiment, politics, analyst upgrades and so on. But in the longer term, it is how a company specifically performs that will determine its true value. Nothing else really matters if one is looking at an investment period of 10 years or more (and you should).
Academic studies have proven that over one day or week, the odds of having a positive investment return are worse than 50/50. Over a one-year period, this rises to 73 per cent. Over three years, 84 per cent. Over five years, 88 per cent. Over 10 years, 94 per cent. Over 20 years, it’s pretty close to 100 per cent.
As they say, it’s not timing the market, it’s time in the market. But most investors do themselves a disservice by not sticking it out long enough. We get customers saying, “I’ve owned this stock for three months and it is not performing. What should I do?” Sometimes, stocks take a while to perform. Patience is certainly required at times in the market.
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We are still positive on the company. GSY has adapted well to new regulations, and as one of the largest in the sector its smaller competitors are having a harder adjustment to interest rate caps. Growth may slow in a higher interest rate, recessionary environment, but we think the very low valuation already reflects a lot of this risk. We think it will be higher in a couple of years, perhaps significantly if rates fall and/or there is no recession.
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FC is a relatively small mortgage lender. The stock is cheap at 10X earnings, and it mostly trades for its 9.4% yield. The dividend has not been raised for at least 10 years, but it does pay fairly regular small special dividends annually. There has been esssentially no growth in per share earnings in 15 years, and its business is very closely tied to housing, rates, and the economy. With this, and with its small size, it should be consider higher-risk income, certainly. We do not really see any red flags other than these risks, but we would prefer to see growth. Competitive pressures have increased, and a recession or 'higher for longer' rates would not help the stock much. The stock has declined about 30% over the past decade. This has been offset by the dividend, but the stock could still drift lower, lowering net gains on the dividend.
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Total obligations have gone from $13.1B at year end 2022 to $14.5B at June 30 2023. While $1.4B is a 'lot' we also note that cash grew $500M in the same period, and total cash is $15.7B, more than total debt. Thus, we would not consider debt high at all here in the big picture. Also, the balance sheet movements largely reflect a massive amount ($9B) of share buybacks in the past year. With near $7B in free cash flow annually, we would consider the balance sheet exceptionally strong.
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Diversification:
A concentrated portfolio is one way to build high wealth, but it is also a way to surely go broke if things don’t work out as expected.
Many dividend investors learned a hard lesson last year when nearly every dividend stock declined at the same time as interest rates soared. Technology investors are used to getting crushed every so often as tech stocks tend to be highly correlated. Investors who loaded up on real estate when interest rates were near zero are now getting a very painful lesson in how lack of diversification can hurt.
It is commonly known that diversification reduces risks, but investors still forget. We’ve seen investors with six bank stocks who think that’s diversification (hint, it’s not.)
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We would be a bit more interested in SVI in the $4.25 range. The company has done an admirable job building out its business and consolidating its acquisitions. There are still plenty of small operators it can acquire. The stock had an initial big run and now has paused a bit (down 19% YTD) as investors reconsider economic prospects and the company's quite-high debt load. We do not think SVI has done anything wrong, but we would consider it a higher risk position now with higher interest rates and somewhat of an economic slowdown. It may see some tax loss selling. Generally though we like it, but would like it more a bit cheaper to reflect some of the risks here.
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We still like SHOP and suggest it as a long term growth pick. There is no specific news today, but last week Tik Tok came out with an app that may allow merchants to be less reliant on existing e-commerce players. Last week Ark Funds also announced it had sold some of its SHOP positions. Profit taking could also be at play, the stock is still up 72% YTD. Tech in general has also been weak of late.
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NANO has $33M net cash, but is still struggling to get to any meaningful revenue. Cash burn was $12M in the last 12 months. It had a corporate update in August, outlining its progress with CBMM, commercializing of its One-Pot technology, six new patents and new potential partners. But there was not a lot of 'meat' in the release. The stock is up 15%, and market cap is now $300M, so expectations remain very high for a company expected to have less than $5M in sales next year. Losses are expected to continue for some time. The technology is interesting, no doubt. But it is hard to just 'assume' everything is going to work as planned, in scale, and profitably. Thus, we have to stay on the cautionary side here.
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Understand your investments:
Warren Buffett said it best: “I never invest in something I do not understand.” Seriously, how many current cryptocurrency investors do you think actually know what they are doing? We always get customer questions on market-linked guaranteed investment certificates or principal-at-risk notes. Even with 40 years’ investment experience, we can barely get through all the documentation and risk disclosures that come with these products.
There are now leveraged single-stock exchange-traded funds (ETFs). There are leveraged ETFs where you are promised two or three times the return of some specified investment or index. You can buy ETFs that go up when the market goes down, or ones that go up if volatility increases.
We like to keep things simple. If you can’t explain an investment to your 10-year-old, you are probably taking on too much risk.
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MASI is a $5.4B company, which has declined ~32% year-to-date and 31% on a one-year basis. It missed on both sales and estimates in its recent quarter, and management noted it was displeased with results. Reduced guidance was led by assumptions of impatient volumes not returning to levels that management expected and it is not receiving some of the new large orders it anticipated. It trades at a 2.5X forward sales and 27.8X forward earnings multiple, which are both below its 10-year average. Relative to some of its peers, it trades at a cheaper P/E and price-to-sales valuation, but its forward sales and growth estimates are also weak relative to peers. We are not big fans of its negative momentum and poor guidance from management - we would prefer to see a shift in momentum with sales orders before getting more comfortable with the name.
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PZA is a $457.9M company that pays a 6.4% yield. Its performance has been quite resilient over the last few years, and it now trades at a 14.6X forward earnings multiple. PZA operates as a royalty company that collects stable royalty earnings from the franchisee and pays out almost all of its cash flow as distributions. Its balance sheet is decent, with net debt of $39.8M, strong profit margins, and recent sales growth of ~13%. Going forward its sales and earnings are expected to grow in the high-single digits this year, and then ~3% to 5% thereafter, along with inflation. Although growth is not that fast, it is stable, and predictable in earnings and distribution payments. Overall, we like this name for income purposes.
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We would view SYZ as a possible take out, if the stock cannot regain some of its former valuation mutliples. Its transition from 'income' to 'growth' was not easy, but investors are supporting it now. It is trading very close to recent highs and is up 26% YTD so short term momentum is good. But it may still take awhile to get to the old highs. Even not considering its high dividend from before, earnings per share, even with high growth, is expected at 26c next year. That is still well below its range of 45c to 50c in the 2018 to 2020 period. But if SYZ can string together a few years of strong growth it will have a chance to get north of $10 or $11 down the road.
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NVST is a $4.5B market cap company serving the dental industry. It is reasonably-priced at 14X earnings. Net debt of $800M is fairly high compared with $235M cash flow in the last year. Cash flow is decent, and steady, but we do note that sales are essentially the same level as nearly eight years ago. It has been consistently profitable, but EPS next year is expected to be slightly lower than it was in 2016. Even with no growth, the company pays no dividend. Insiders own less than 0.5%. On the positive side, sharecount has not changed in many years. It typically beats estimates, but there is very little excitement here. We would be more interested in it as a value stock if debt was lower. As it stands, we would pass.
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