Tag: Invest

Stock #2 (HII)

I logged on this morning and bought my second stock for the portfolio. Huntington Ingalls Industries (HII) is a military shipbuilder and the leading supplier of the United States military. I got in today at $249.00 and purchased 3 shares for a total of $747.00. I still have $8,579.88 of cash left in my 10K Portfolio.

Why HII?

From a broad perspective, I often like to have an impetus behind an investment. You need to be able to tell a story and then focus in on the minutia. Looking at the Trump administration, I don’t think it is a stretch to say he favors a growing military budget. This set me on a quest to look at all the public military contractors. One thing I noticed is that they are almost all great companies. It is no wonder the US military spending is so large and growing. From there I determined HII was my favorite and have been following it ever since.

Huntigton Ingalls is a classic high moat company. They are the leading supplier of the US Navy, supplying over 70% of all ships. They are the only company capable of building and refueling nuclear-powered aircraft carriers and one of only two that can build a nuclear powered submarine. They were spun off from Northrop Grumman in 2011. Spin offs are often a good candidate for research, as they are not always properly valued. Seven years later, HII continues to gain market share and grow their earnings.

HII generates ample free cash flow each and every year. You might start to sense a theme, I prefer companies with lots of leftover cash ever year. This gives a company flexibility, they aren’t constrained to any one strategy. Should they see a good acquisition opportunity then great, otherwise they can pay out dividends or buy back shares of the company. The board recently increased the buyback allowance from 1.2 billion to 2.2 billion. If my math suits me correctly 2.2 billion is just over 20% of the entire company. They won’t buy it all back overnight, but the share count should fall dramatically over time.

While 2017 wasn’t quite a banner year, they more than made up for it in the first half of 2018. Due to lower taxes, a reduced share count and higher sales and margins earnings increased YoY from 3.21 to 5.40. That’s an increase of 68% in a single calendar year. While we can’t expect such growth going forward, that would be impossible. The company will continue to perform with precision.

Conclusion

Huntington Ingalls is a simple but extremely well run company. They will never be the fastest growing company, but they are almost guaranteed to grow at a decent clip over time. They have a growing backlog that will keep them busy for years to come. As of the end of 2017 their backlog stood at $21.4 billion. The company will continue to buy back shares and grow their earnings. They are trading at a reasonable multiple and over the course of 5-10 years the company will be considerably larger.

Building a Watch List

Before you can buy a stock, creating a watch list is vitally important. A proper watch list focuses your attention and lets you weed through most of the junk. I am attempting to put together a list of companies that could be interesting should they hit a reasonable price. That’s not to say you should automatically buy them, but they deserve a closer look. For that matter, they may already be at a perfectly reasonable price, but there is no rush to buy in. I am looking to buy stocks for the long run. If you intend to hold a stock for 10+ years, waiting weeks or even months before you pull the trigger isn’t all that important. It is far more important to make sure you pick the right companies rather than picking the right price.

5 Stocks to Look at:

Here are 5 stocks I’m currently looking at. Each of these companies displays classic GARP tendencies. They grow revenue and earnings each and every year, employ limited amounts of debt and can be found at reasonable P/E ratios. My own personal list is over 40 companies long, but I don’t have the time for a write up on each of them.

ODFL

Old Dominion Freight Line is a less than truckload freight company. An essential part of the economy, trucks are always in need. While rail is still the cheapest way to ship coast to coast, you need a way of getting items to and from the warehouse. ODFL is best in class for smaller orders, where a full truckload isn’t quite necessary. A classic capital compounder. Since they went public in 1991, this stock has gone up over 70x. Last quarter YoY revenue growth of 23% and EPS YoY growth of  65.8%. Can’t ask for much more than that.

LEA

Lear Corp. manufactures a product you all have probably sat on and never even thought about. They are a vertically integrated world leader in automated seats for automobiles. They really only do one thing, but they do it incredibly well. They generate a tremendous amount of free cash flow, which enables them to buy back shares of the company in droves. At the start of 2014 they had 81 million shares outstanding. That number now stands at 66 million. Every shareholder should be happy to now own significantly more of the company.

IPGP

The leader in laser technology, IPG Photonics creates laser powered technology that is sold to manufacturers around the globe. These lasers enable manufacturers to produce items at a lower cost, which encourages more spending on CapEx. These lasers are used in all kinds of fields ranging from car manufacturing all the way to medical devices. The total addressable market is massive. They have hit a bit of a hiccup lately due to the Trump administration trade war, given that their main customers are foreign manufacturers. For that reason I think it is best to wait and see how this trade war plays out.

APH

Amphenol develops small components and connectors used in complex electronic machinery. They are a company no one would ever think of, but sells more every single year. They sell to virtually every industry imaginable. Like others on this list, they generate ample free cash flow. They use this free cash every year to make acquisitions, buy back stock and pay a growing dividend. A classic compounder, since going public in 1992 they have been a 200 bagger.

FB

Given that we’ve gone over a bunch of really well known names, let’s look at one nobody has heard of. Just kidding of course. Facebook is one of the biggest, strongest companies on earth. They have fallen a bit lately due to fears of slowing growth rates and falling margins. I feel these fears are short sighted. Looking years into the future, we simply don’t know how strong a network Facebook could be. They already have daily average users of nearly 1.5 billion, a number that is still growing rapidly. Given how many people are on the platform, monetization is only just beginning. They make their money primarily through advertising, but could start making money through any number of different avenues. How about the fact that they also own Instagram? 10-20 years from now I think we could legitimately be looking at Facebook as a multi trillion dollar company.

Thanks for reading. Comment any companies you have on your own watch list. As always follow along and subscribe!