Warren Buffett has said that his favorite stock was an under-followed, undervalued one that he could accumulate well below fair value.
In that theme, I am grouping a variety of stocks that could be undervalued based on either being smaller companies or having limited following on Seeking Alpha.
Over time, value will show itself; all these stocks have been strong performers over time, but have value characteristics.
Introduction - Unleashing my inner Buffett
In theory, researching and then becoming a long-term holder of shares of public companies that do not seek out publicity but have solid ongoing franchises with growth potential should allow alpha to be generated versus the S&P 500 (SPY). Or, at least, there should be a likelihood of market-level returns with less theoretical downside risk.
The relative quietude of some stable companies suits me as a potential long-term holder better than junior biotechs, with their thrills and spills.
Thus, I'd like to provide a diversified list and brief discussion of such smaller names. Perhaps some readers will find one of these to be a suitable new investment, and perhaps, in return, I will be apprised of a new, attractive name in the comments.
I've searched through the dozens of stocks in my personal portfolio to find those with the fewest number of followers on Seeking Alpha that fit the above category of being profitable, stable businesses that I am comfortable owning long term at today's stock prices. All these names either pay dividends and/or reduce their share count, and all have beaten a relevant index benchmark over a number of years. My assessment is that they remain positioned to continue generating superior returns.
The number of followers a stock has is found at the top right of a stock's summary page on Seeking Alpha. For example, as of Sunday, January 5, Microsoft (MSFT) had 755,030 followers.
I'll begin with 10 stocks I own with less than 10,000 followers and work downward. In order to keep the article's length manageable, the emphasis is on brevity, not thoroughness. I'll give the major reasons I like the company and, where relevant, its sector. Unless I am aware of something special in the downside risk category, I will skip a recitation of risks. But be aware that all stocks have risks, and you should be aware of them before owning a stock.
Then, I will provide a few closing comments.
First up, a REIT with a $29 billion market cap but only 9106 followers, which is a low ratio based on my observations of market cap-to-follower ratio on Seeking Alpha. The list is arranged so that as it moves along, the number of followers each stock has gets smaller.
Stock prices are as of Wednesday's close.
AvalonBay Communities (AVB): $205.87
This is a large apartment REIT. It has notably outperformed the large Vanguard Real Estate ETF (VNQ) on 5-, 10- and 15-year time frames. It has, however, slightly underperformed on a 12-month time frame. AVB focuses on apartments in upper-demographic localities across the U.S.
Why apartments? Two reasons:
1. December 17 news: Apartment building permits surge to four-year high.
2. Forests are part of the solution to CO2 neutrality, thus new housing should increasingly be multi-family. And in arid/treeless areas, water shortages and fire risk get even worse as new housing moves further and further from cities.
In addition to liking AVB's historical performance and focus, given the current posture of the Federal Reserve and my assessment of where the US is in the economic cycle, I prefer REITs to bonds for the income part of my portfolio.
Texas Roadhouse (TXRH): $55.80
The steakhouse chain reported a strong Q3, with revenues doing well and input cost increases moderating. The company is also making progress at its Bubba 33 internally developed concept. While the stock is not cheap, it is near the low end of its multi-year P/E range. The balance sheet is clean, with no long-term debt. TXRH also plans to expand its third concept, Jagger's, this year. Street consensus expects one record sales and EPS year after another, and I think there is room for P/E expansion as well as upside surprises on fundamental metrics.
TXRH has strongly outperformed the SPY the past 10 years, but has lagged it over the past 1 and 3 years. This has been more of a P/E move than one based on fundamentals. I'm optimistic that TXRH has several paths to come back into Wall Street favor, and I expect regular dividend increases no matter how Mr. Market treats this name in 2020.
I'm hopeful of upside surprises in Q4 and in fiscal 2020.
Old Dominion Freight Line (ODFL): $189.67
This trucker operates in the less-than-truckload, or LTL, smaller part of the business. It has been gaining market share in the LTL segment steadily. Its net profit margin is enormous (for a trucker) at 15.3% (E-Trade data). In comparison, another good stock market performer, Landstar System (LSTR), has a 5.5% margin, and Werner Enterprises (WERN) clocks in at 7.0%. ODFL pays a small dividend and shrinks its shares outstanding in most years. Even though the stock has surged this year, insiders have sold little stock, unlike their behavior before the stock took a big dive in Q4 2018.
One reason ODFL has been strong the past few months was its addition to the S&P 500.
The stock has been outperforming its cyclically weakening fundamentals; perhaps a better buying opportunity awaits. Short-term timing aside, ODFL is up 10X in the past 10 years, outperforming both Apple (AAPL) and Amazon (AMZN). Given the many opportunities to gain share just in LTL trucking, I'm looking for significant long-term gains from ODFL.
NVR, Inc. (NVR): $3785.81
This home builder has a great track record. The stock has increased about 250X since 1997 and more than 500X since its low point in 1994.
What's NVR's secret?
It begins with not growing sales fast and not going national. NVR's basic business model is to option land, not tie up capital owning it, and then build when it receives an order. This keeps the company's free cash flow high, which it reinvests in stock repurchases. Since the stock is chronically cheap compared to the cost of money, the buyback program has been accretive to shareholders.
Most of NVR's large builder peers (ITB) are finally emulating it, allocating part of their land reserves to optioned land rather than going all-in on owning their own land and developing it. I would expect that to somewhat lower NVR's amazing relative performance, but not erase it.
Author's update, 07.40 PM, 01/12/20: a prior version of this article showed a YCharts graph indicating that NVR had outperformed Amazon (AMZN) since AMZN's 1997 IPO. That graph was incorrect and has been removed. (I think it did not account for AMZN's stock splits.) AMZN has in fact outperformed NVR since AMZN's IPO. Thanks to commenter Lifedisbeautiful for noticing this and bringing it to my attention. Apologies for the error.
MDU Resources Group (MDU): $28.87
This company is generally classified as a gas/electric utility, but that is largely not the case today. The corporate name comes from its Montana-Dakota Utility heritage. However, per its latest slideshow (slide 5), 63% of MDU's earnings come from its construction businesses.
The company is doing well despite a choppy industrial/construction environment. It recently upped its full-year 2019 projected EPS from $1.55 to $1.62 (midpoint of ranges), which was a bit surprising given that the prior projection had been made recently. MDU trades around 18X this projection, a notable discount to that of the SPY, which is around 23X GAAP projected 2019 EPS.
The following exchange from the June quarter conference call (Q2) gives me an additional reason to hold the stock: a value-creating action or set of actions just might be in the offing. Some excerpts from an analyst and MDU's CEO, Dave Goodin (my emphasis added):
So, I mean you guys have done really a sensational job over the last few years operating the company... But, at the same time since 2016, one of the greatest bull markets of this time, the stock is actually down. And so, I'm just curious what's your thinking on that what's causing that and what you may do to try to improve the stock performance because clearly the company performance has been outstanding.
... I think we're demonstrating into the market our ability to execute and perform and that will then translate I believe into an appropriate share price.
But, in all due respect, that's not really, I mean you've been hitting the numbers, but if you kind of look at the mix of the businesses they don't really belong together and ultimately you look at like your analyst coverage, there's very little analyst coverage... Now, there needs to be some type of other plan, and whether it's a mix of the companies, or we're trying to get investors, it's kind of hard for - you don't really fit a utility investor.
Thus, I find MDU an interesting stock to hold, collecting a dividend that I expect to continue to trend up gradually while waiting to see if MDU itself, an acquirer, or an activist investor makes a move to realize/unlock shareholder value in the near term.
Robert Half International (RHI): $62.92
RHI is another outperformer, with less than 4000 Seeking Alpha followers despite a stellar track record. With virtually no long-term debt, RHI regularly increases the dividend and shrinks shares outstanding. The company has diversified beyond Accountemps to several other aspects of job placement. Its Protiviti consulting arm makes use of RHI's access to accounting and general business talent and is growing at a healthy pace.
Since January 1993, when the SPY ETF was formed, RHI has appreciated at a 16.6% CAGR, far ahead of the 9.7% achieved by the SPY.
With an attractive capex-lite strategy, generous shareholder returns of essentially all free cash flow, and an ultra-clean balance sheet, I would expect RHI to trade at least at a market multiple, currently around 23X GAAP projected full-year 2019 EPS for the SPY. Yet, it is trading just over 16X TTM EPS. So, I think there is a P/E expansion opportunity here along with reasonable cash-on-cash returns for patient investors.
There is also the potential for RHI to be acquired or go private; the leadership team of Messrs. Messmer and Waddell has been in place for many years. Their time to retire may be a time that RHI either is taken private or is taken under the wing of a tech or other multinational.
Moving on, the last 4 names are of less general interest.
Helen of Troy Limited (HELE): $183.07*
Since 1980, HELE has returned more than 17% annually, I believe with no dividends. The company's strategy may have served as an example for NVR: it uses much or most of its free cash flow to shrink shares outstanding. As the corporation's name suggests, its focus is health, beauty and related products for the home.
HELE reported strong Q3 results after the market closed Wednesday. The bid-ask spread shows as $194-195.50 at 8 PM.
A conference call transcript may be available by the time you read this.
I remain long HELE with a long-term perspective. But I am not able to really get my arms around the strength of the company's future growth plans given its above-market P/E. Rather, I'll just trust that the trend is my friend here.
RenaissanceRe Holdings Ltd. (RNR): $189.83
While little followed by the public, with over 95% ownership by institutions, RNR is a multinational reinsurer with almost a $9 billion market cap. Since January 1996, shortly after its IPO, its total return has exceeded that of the SPY by about 5 points annually. As a property-casualty reinsurer, the company's earnings stream is unpredictable in the extreme. For what it's worth, its forward P/E on 2020 EPS is only 13X.
RNR has been known within the reinsurance industry for high-quality underwriting tools. Currently, the company has decided that the strong hurricanes of the past several years are not just cyclical, but are due to ocean warming and other climate change features relating to rising CO2 levels in the air. The Q3 conference call featured interesting questions from some analysts as to how RNR was planning to make money off of this insight. A quick take on my part: management was close-mouthed on that topic.
RNR's long-term record of success, including a recent acquisition that it says has gone well, leaves me comfortable owning it for the long haul.
Breaking news this week was that a 4% holder of RNR shares, Tolio Marine and Nichido Fire Insurance Co., will be selling its stake in a secondary offering. This is expected to close on Thursday, January 9, and knocked the stock price down several points. Perhaps this was a very small gift to investors wanting to buy RNR, given that favorable liquidity conditions from the Fed tend to provide tailwinds to this sort of situation.
Moog Class A (MOG.A): $92.14
The company describes its products this way:
Over the last 65+ years, our engineers have developed the capability to design and manufacture the most advanced motion control products for aerospace, defense, industrial and medical applications – applications where precise control of velocity, force, acceleration and fluid flow are critical. Our motion control portfolio has expanded to include all forms of actuation technology, sophisticated control electronics and system software. We are a leading integrator of precision motion control systems and our products reflect the culture that our people embrace – a culture where the opportunity to solve a challenging control problem is always welcomed.
A detailed history of how the company went from start-up to diversified manufacturer of high-tech components and products is found on its web site and is well worth a read.
I think that the stock is cheap to the market but deserves at least a market multiple. The company has lately been positive on its business outlook, as noted in the CEO's prepared remarks in the recent Q3 conference call.
Since writing this section on MOG.A earlier in the week, the stock has moved up to the $92+ level, possibly related to Middle East tensions. I did mention it as a possible buy (and then bought it) when it was around $89 in my Friday morning, January 3 article on the Iran-US situation, titled "Mideast Turmoil: Sell Bonds, Hold Gold, Buy Tesla (And Other Names)". But it's by no means especially extended technically.
Finally, smallest and least followed is my largest holding of any of these stocks and a top-5 DoctoRx holding by dollar value.
Hingham Institution for Savings (HIFS): $208.80
This is the smallest market cap stock of this group of stocks. It also is very hard to acquire due to very low trading volume, and normally, limit orders are appropriate. My first HIFS write-up was back in September 2013, when it had surged to around $74. In April 2014, I gave it high praise in an article titled "Small Is Beautiful: My Favorite Bank Stock Has A Strong Quarter". The stock was going nowhere from September and was around $70; I was bullish. Since then, it has approximately tripled. Since the SPDR regional banking ETF (KRE) was formed, KRE has risen about 20%; HIFS, in contrast, has risen nearly 6X. New management entered in 1993, the same year that the SPY ETF was formed. This is the comparison:
This represents about a 16% CAGR for HIFS, including its modest dividends.
HIFS did not ask for nor was offered TARP money in the Great Recession, and its loan losses now are close to zero.
The company sports an efficiency ratio that has dropped from a very low 43% in 2013 to around 30% today (lower is better), indicating a highly efficient cost structure. HIFS has added the Washington, D.C. area to its metropolitan Boston base, and while the D.C. income is not large enough to merit more than one office and no physical banking branch, the Q3 10-Q suggests to me that HIFS is picking up momentum in this market. Note, about 2-3 years ago, both JPMorgan Chase (JPM) and HIFS specifically noted that D.C. was under-banked, and both have entered that market.
HIFS is heavily owned by insiders, and I strongly suspect that much of the rest of the "float" largely is closely held by friends, families, and depositors of the bank. As many HIFS shareholders appear to do, I am looking forward to owning a generous amount of this stock for many years.
As mentioned in the introduction, all stocks are risky, and the ones listed here all of individual company risks, sector risks, and general market risks. To save space and make all this readable in one article, I'm not able to go into each company's specific risks. If you are interested in owning any of these companies, I would urge you to consult the company's own recitation of risks associated with its business and its shares found in its 10-K, recent 10-Qs, and other documents.
Relative value stock investing with a growth tinge is the theme of this article.
While not really small, but by being either small in the context of the companies in the SPY or by being little-known (or both), I think these companies fit the bill for names Mr. Buffett could be comfortable owning for an indefinite time period.
The title presents them as buy-and-hold names, which is my goal. Of course, relative values change, and top-down factors may affect how many different stocks I want to hold. I may comment on any material changes in my understanding of these particular stocks in various ways as time goes by.
In general, the stocks discussed above have provided alpha over many years. I'm hopeful that most of them will continue to quietly do the same in the 2020. I look forward to any observations you may have on these particular stocks or their competitors. I'm also interested in seeing if you have any under-followed, smaller names you may wish to mention.
Thanks for reading and sharing any comments you wish to contribute.
Submitted Wednesday night.
Disclosure: I am/we are long AVB,HELE,HIFS,MDU,MOG.A,NVR,ODFL,RHI,RNR,TXRH,ITS,JPM,MSFT. 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: Not investment advice. I am not an investment adviser.