One of our favorite traditions here on DQYDJ is our annual entry into the Financial Uproar Stock Picking Contest. This article summarizes our stock picks for 2017 and why they are in the contest portfolio. Feel free to disagree, as long as you back your opinion… we’d encourage it! Contests come with an expiration date, so you’ll be validated (or scorned) by the end of December.
Caveats: Although I pick these stocks in a similar way to companies in my main portfolio, my goals are almost certainly different than yours. Being a contrarian and taking on lots of risk is the way to win a contest because you’ll generally win big or flame out spectacularly. For most investors, we suggest many year holding periods. Better yet, buy and hold index funds. You’ve been warned. Also, we do not own any of these stocks outside index funds, and do not plan on buying them in the next few days.
Onto the picks!
Stock Picks to 2017: The Summary.
- BBBY – Bed Bath & Beyond
- URBN – Urban Outfitters
- SAVE – Spirit Airlines
- AL – Air Lease Corp Class A
We often go contrarian with our picks (contest or otherwise) and this year is no different.
Our themes: air and retail. Although Warren Buffett scooped us on the airline stocks, going where investments used to go to die is still, in our opinion, a contrarian value play. Ditto for retail: we think the reports of physical retail’s demise are a bit premature… and no one says historically physical brands can’t run websites.
Here’s a summary table of some common stock valuations at the end of December. I didn’t redo it for January 4th’s open, but it should be close enough – adjust it for your own purposes. Note our math on Return on Assets, Return on Equity, and Return on Invested Capital are annualized from the last quarterly results available.
|Ticker||Price to Sales||Price to Earnings||Price to Cash Flow||Price to Book||Return on Assets||Return on Equity||Return on Invested Capital|
The Airline Stocks
Air Lease Corp Class A
Air Lease pulls no punches with its name – it purchases aircraft and leases them to airlines all over the globe. Secondary to that, it also engages in aircraft sales and purchases from and to its own fleet. In their last 10-Q, they reported ownership of a fleet of 244 aircraft with another 372 on order.
Outside of a slightly high price to sales ratio, you can see why we picked AL. Aircraft leasing (and sales/purchasing) might not be the most visible industry, but it certainly looks like the market is undervaluing the field. Additionally, we like AL for its worldwide operations in a year where we’re not sure how foreign policy is going to shift. Europe and Asia make up a majority of the net book value of their aircraft portfolio.
Spirit Airlines is a low cost, or discount airline which operates ~400 routes daily within the US, Latin America, and the Caribbean. It owns some of its own planes, but does have some leases as well.
What’s to like? Steadily increasing annual profits and revenues, mild expectations, and (somewhat related) decent valuation. Of course, it’s also hard not to notice the success of Ryanair (which has, of course, a similar model) in Europe and the Middle East.
The Retail Stocks
Bed Bath & Beyond
Bed Bath & Beyond is a retailer which sells (surprise, surprise), bedding, and bath items… and beyond into all sorts of general home furnishing and decorating items. They also have been firmly in the spotlight as a retailer which has been hurt by the continuing move to internet shopping. Bed Bath & Beyond also isn’t their only retail banner – they also operate stores such as World Market, buybuy Baby, and Christmas Tree Shops.
BBBY was recently beaten down after their last quarterly report, which should at least put them on some of your respective radars. 9.6% of shares are now short as a percentage of float; that change put them 44th on WSJ and FactSet Research’s NASDAQ short percentage increase charts through the end of December. More interestingly, for our purposes, they’ve got some nice valuations in isolation.
Okay, yes, they do have a very strong physical store presence. They also have a burgeoning internet store – you should be able to use some of those 20% coupons you’ve got there as well. They reported 20% year over year sales increases from their web properties in their last report.
Urban Outfitters is an interesting retailer which sells general home (ahem, perhaps apartment or loft) goods, targeting a younger, hipper crowd. They carry a mix of clothing and shoes, along with home furnishings and decorations. They have a number of other brands in the portfolio, the largest of which is Anthropologie… which targets women ages 28-45 with fashion, clothing, jewelry, general home goods and gifts.
The story of Urban Outfitters is a story of flatness. The stock hasn’t returned much for the last 5 years, and neither have earnings (increases). There has been a general slight uptrend in earnings, but not the large year over year increases you might have seen in other companies since the recovery. That has left the stock with some interesting valuations – although P/B and RoA aren’t as strong as some of the others on our list, they’ve got some good numbers relative to today’s market.
Okay, yes, internet. They do have a portfolio of web sites and mobile applications, so picking this stock is at least somewhat of a bet that they can deliver more sales through those channels.
Interestingly, Urban Outfitters is also increasing their physical real estate (how’s that for contrarian?). Year over year they increased their square footage by 1.6% to 2.2 million square feet. Through October, they had opened 23 new stores across their various brands in 2016.
What Stocks Are You Watching in 2017?
Disagree? Yeah, you probably do, especially because I’m specifically picking contrarian sectors. Let us know which companies you dislike – or hate – and why.
Oh, and if you discard one make sure you substitute an alternative. The contest requires 4 picks!