The 'Retire Young' Portfolio

Apr.18.13 | About: Monster Beverage (MNST)

I've never been happy by simply performing similar to the market. It never sounded ambitious enough for me. In fact, I didn't even understand why people didn't simply buy index funds if they were interested in performing similar to the market. I've always aimed at beating the market. In fact, many times, my goal has been to beat the market by a large margin. That's why I bought Ford (NYSE:F) in 2009, Bank of American (NYSE:BAC) in 2011 and Nokia (NYSE:NOK) in 2012 when everyone else was running away from these stocks. Of course, I've made a lot of bad bets too, but the good ones usually outweighed the bad bets by a large margin.

So, if someone wants to retire in 10-15 years as opposed to 30-40, what's a strategy they should follow? There are a lot of solid stocks in the market with great fundamentals and great future potential, yet many of them will not help someone retire early. For example, we all know that companies like Exxon Mobil (NYSE:XOM) and Coca Cola (NYSE:KO) are well-managed and successful companies with strong margins and a great history of dividends, but these companies will not really help you retire early unless you buy them soon after a market crash. If my goal was to retire in 40 years, I would definitely start accumulating shares of dividend stocks but that was in the past. Now, I am looking for better returns, which means I will have to take a larger risk.

Therefore, I have to build my "Retire Young" portfolio. This portfolio will focus on companies with great growth potential as well as beaten down stocks. While the goal of the portfolio will be to hold onto each share for a period of 3-5 years, this will not always be the case. If a stock's price appreciates by 20-30% within a short time, I will not hesitate to take profits and move on to other opportunities even though the stock might have more growth left in it in the long term. The portfolio will be actively managed and there will be a lot of changes along the way. If I make any changes in this portfolio, I will make sure to write an article to let everyone know so that we are in the same page.

Since this will be a somewhat "high risk" portfolio, it will include some defense strategies such as writing covered calls. While some of the stocks in this portfolio will be dividend payers, this will not be the case for all the stocks.

A last note before I introduce the first stock of my new portfolio. There is no such thing as free lunch and there is no such thing as risk-free investment. Potential return of an investment is highly correlated with the risk associated with the type of investment.

First Stock of the Retire Young Portfolio: Monster Beverages

The first stock of our portfolio is a high growth company, Monster Beverages (NASDAQ:MNST) also known as Monster Energy Drinks. There are several reasons why I'm picking Monster Beverages for this portfolio and I will discuss them in this article.

Risks Associated with Monster Beverages

There is a lot of controversy regarding energy drinks. A lot of people question their safety. Earlier this year, the media linked Monster Beverages drinks to death of a couple teenagers, even though the latest research was inconclusive. The caffeine content in Monster Beverages drinks seem to be less than the caffeine content of regular coffee of Starbucks. Having said that, there is always a risk of consumer fear or government regulation with Monster Beverages. Also, some of the competition might be able to provide healthier alternatives to this company's products which could gain attention of the people.

Furthermore, Monster might see supply chain issues. The company is growing fast in many different markets across the world and it is not very experienced in distributing products to different countries. For example, there were issues with the launch of Monster Beverage products in Japan and South Korea when some of the cans were damaged. This was a costly mistake for the company. As time goes on, the company will gain experience in preventing and solving these issues, but the risk will always be there in the short term.

Opportunities with Monster Beverages

When it comes to companies like Monster Beverages, opportunities outweigh risks by a large margin. That's why it makes sense to invest in this company. Monster Beverages is able to grow its revenues nicely while maintaining decent margins. In the last quarter, the company reported $545 million in earnings, up from $467 million in the same quarter a year ago. This came with a gross margin of 51.7% which is in line with the last few quarters. For the full year of 2012, Monster Beverages grew its revenues from $1.95 billion to $2.37 billion, which represents a growth rate of 22%. As for net income, the company was able to grow this metric from $286 million to $340 million, representing a growth rate of 19%.

Most of the opportunities for Monster Beverages comes from outside of the US. In the last 3 years, the company was able to increase the rate of its international revenues consistently. In 2010, only 16% of the company's revenues came from outside of US, whereas this number grew to 20% in 2011 and 22% in 2012. This year, it is expected to pass 25%. On a cautionary note, the company will have to post lower margins in some countries where incomes are much lower compared to the US. The company can overcome some of this by producing its energy drinks in countries where cost of labor is relatively cheap.

Monster continues to gain market share from Red Bull. Many analysts attribute this to the fact that Monster's energy drinks have a lower price tag than Red Bull's drinks. I believe that this is only one of the reasons why we are seeing Monster gain market share from Red Bull. There is one more reason, which is rarely mentioned by analysts. Monster energy drinks come in more than 30 flavors, whereas Red Bull offers only a few different flavors. The company adds several new flavors to its portfolio every quarter, which is great for the consumers. If a consumer doesn't like the taste of a particular Red Bull drink, he or she won't have much of an option; whereas, if someone doesn't like taste of a particular Monster, they can always try one of the other 30 flavors. It's not uncommon to see people say things like "I like the Monster with orange can" or "I like the blue can" about Monster; whereas, when people talk about Red Bull they either say "I like Red Bull" or "I don't like Red Bull."

Every year, Monster enters 5-10 new international markets. There are still many untapped markets for the company. As Monster gains popularity in the US and abroad, new opportunities will arise for the company. In fact, I will be really surprised if the company doesn't receive an acquisition offer from either Coca Cola or Pepsi (NYSE:PEP) within the next few years.

Analysts expect Monster to earn $2.26 per share this year, $2.70 per share next year, $3.29 per share in the year after and $4.25 per share in 2016. Given that Monster earned $1.87 per share in 2012, analysts expect the company to grow its earnings by 127% in 4 years. For a company growing as fast as Monster, the current valuation (i.e., 30 times trailing earnings with no debt in the balance sheet) is not bad at all.

Legally, I don't see Monster getting in a lot of trouble. There is no proof that Monster's beverages are the cause of death in those two teenagers. Even if Monster's products were bad for health, the company would just end up changing some of its labels and things would be ok afterwards. There are many food items people buy and consume everyday that are known to be bad for health (e.g., sugary products including solid food and drinks, red meat, highly acidic food, alcohol, cigars) but you don't see any of those products being banned or restricted with the exception of certain age restrictions on alcohol and cigars.

Now What?

So now Monster is the first company in our newly built portfolio. We are going to add 200 shares of Monster Beverages to our portfolio at today's price of $56.49. As soon as we buy these shares, we are writing 2 covered calls with a strike price of $57.50 expiring in May and we pocket $230 per contract. Now I can hear you say: "wait a second Jacob, you are talking about being aggressive, yet you sell covered calls with a strike price just slightly above the current price; isn't that a big NO for aggressive investors?" Well, if Monster ends up above $57.50 at the end of May, we will be pocketing 5.86% in a month including the premium we are receiving from the covered call. In that case we will repurchase the shares and go from there because we are looking at long term investment opportunities rather than short term. If the stock ends up below $57.50, we will continue to sell covered calls to bring our breakeven price down. At the current rate, we are protected until Monster's share price falls below $54.19.

So therefore, here goes the first trade of our new portfolio. I will be adding 10-11 new stocks into this portfolio in the coming days. Then we will start tracking the performance of this portfolio together.

Disclosure: I am long MNST. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I'm also long F, NOK and KO as these stocks were briefly mentioned in the article. These stocks may or may not be included in the Retire Young portfolio.