I've made several recent transactions for the Project $1M portfolio. In this update I'll share the companies that I considered and ultimately added for Project $1M.
The most notable addition to the Project $1M portfolio was the purchase of a $5000 position in Starbucks (NASDAQ:SBUX). Now while I've always been an admirer of the Starbucks business, the thing that I had to come to terms with was the valuation of the business, and also whether Starbucks was a business that could grow 3-4x over the next decade.
Starbucks has increased revenues from $7.8B in 2006 to over $19.7 B in 2015, representing an annualized growth of over 17%. During this same period, operating income has increased from $897M to $3.6B, an annualized growth rate of 13.5%. The fact that Starbucks has been a high growth business is in little dispute.
What I realized was that Starbucks still continues to post strong results even in recent quarters, which auger well for sustained long term growth in the decade ahead. In the last quarter of 2015, Starbucks had strong revenue and profit performance, with quarterly revenue up to $4.93B and operating income of $981M, which was up 14% year on year.
While the revenue and profit performance are impressive in and of themselves, what struck me the most was the increase in comp store sales. These were up 8% globally and 9% in the US, with increased foot traffic only accounting for 4% of the comp sales growth.
This is suggestive of either existing patrons having bigger order sizes or Starbucks successfully passing on pricing increases to patrons. The increasing combination that food sales are making to overall Starbucks revenue suggest both large basket sizes and pricing increases are playing a favorable role in improving comp sales.
In addition to pricing increases and bigger ticket sizes, I feel optimistic that emerging markets will power Starbucks expansion over the next decade. Penetration in China is only a modest 1,800 stores, with Brazil and India very much underpenetrated at present. Add to this a more aggressive expansion into food, and Starbucks should still be a promising growth story over the next decade.
While Starbucks isn't cheap, I don't find its forward P/E of 27x earnings, or PEG ratio of 1.5 to be terribly demanding for a company that is currently recording revenue and operating income growth of 14%. I think the current valuation represents a fair price to pay for Starbucks stock.
While I wasn't really looking to add any additional businesses to the portfolio at this juncture, its occurred to me recently that to give myself the best shot of attaining low to mid double digit growth, I should consider a couple of plays that are a earlier stage.
Though I feel relatively confident that the businesses that I've selected have a good window of long term growth ahead, they are in most cases larger, more established businesses that are unlikely to go up 10x over the next 10 years. I felt that identifying 1 or 2 such earlier stage businesses which could generate blockbuster returns would be a good use of capital, provided they were given a relatively modest allocation.
To that end, I began digging into an emerging biotech play called MiMedx (NASDAQ:MDXG). MiMedx specializes in using human amniotic fluid in such diverse areas as sports medicine, orthopedics and wound healing.
What struck me about this business is the long term potential to unearth a growth story relatively early on and piggy back this for the long term. MDXG has a valuation of only $800M today and is pursuing markets that have potential of almost $18B in the US alone. This is no doubt a high risk story, but I am happy to allocate a small amount of capital toward this. The company has revenues of over $170M in 2015, and has given guidance of 30% revenue growth for 2016.
I made a relatively small initial investment in the business, which I expect to steadily increase upon the business demonstrating continued traction.
Akorn (NASDAQ:AKRX) was another interesting speculative play that I had stumbled across. The company had developed a niche in specialty generics manufacturing in such areas as ophthalmology and dermatology, which have higher barriers to entry and are more complex than traditional generics.
Temporary accounting issues had pummeled the company's share price, with a potential threat of delisting sending the shares down to a level that were less than 50% of Morningstar's fair value. The core business was growing fairly strongly, with revenue growth exceeding 20% in each of the last 4 years.
Before I could complete my diligence and act to place an order, AKRX issued a market update that sent the stock up 40% in a day. This business is now off my watch list, however I remain interested in uncovering any other potential hidden gems with strong growth potential over the next decade.
Disclosure: I am/we are long SBUX, AKRX, MDXG.
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.