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.

Advertisements

My First Purchase

Guess what? I bought my first stock this week for my 10K Portfolio! I am now the proud owner of 4 shares of the Lear corporation(LEA). I purchased 4 shares for 168.28 a piece for a grand total of $673.12. This still leaves me with a cash position of $9,326.88. Of course as soon as I bought it, the stock continued to fall. O well. If an immediate fall in price causes you trauma, I fear investing in stocks just might not be for you. Keeping an even temperament is probably even more important than a high IQ.

Why Today?

When I logged on to Robin Hood on Wednesday, I checked my watch list and saw that Lear was down almost 3.5%. Seeing that a stock I follow is down, I made a quick google check to see if there was any news. Turns out that there is increased worry about trade within the auto sector in NAFTA. The trade war is real and it may materially impact the earning power of the business. That being said, I think the company exhibits a strong moat and this is just providing an opportunity to buy a stock on the cheap. Would I have rather made my initial position even lower? Of course, but you never know when you will find the bottom. Buy in and if it falls lower, buy more.

Digging Deeper

Lear now sits at a P/E of 9.06. According to the Wall Street Journal, the S&P 500 average P/E is 23.79. This means that on just a P/E basis, Lear is almost 1/3 the price of the S&P 500. Looked at another way, Lear’s earnings could be cut in half and their P/E ratio would still be noticeably cheaper than the S&P 500.

As mentioned in my Watch List post, Lear is a vertically integrated manufacturer of automated seats for automobiles. It is simply the best in the business, displaying a wide moat. In the last 5 years it has increased sales from 16.2 billion in 2013 to 20.5 billion in 2017. EPS grew even faster going from 5.61 to 17.66 in the same time period. In 2017, Lear generated just under 1.2 billion dollars in free cash flow. Based on the current market cap of 10.9 billion, it has a free cash flow yield of 10.9%.

I also like what management had to say in their most recent annual report.

We also have an outstanding record of returning cash to our shareholders. Since we initiated dividend and share repurchase programs in 2011, we have returned more than $4 billion to our shareholders, which includes buying back 42% of  our shares outstanding and steadily increasing our quarterly cash dividend.

I believe that this is a great time to invest in Lear. We have the strongest team in the industry, a focused strategy that is delivering superior results, a growing market share in both business segments, a footprint that is second to none, a well-established and growing position in china and a record three-year sales backlog of $3.2 billion.

Conclusion 

Lear is a classic GARP stock, growing at a fast rate and selling for a bargain price. Even if it is impacted by this trade war, they have the financial strength to withstand a couple of tough years. 5-10 years from now they will be a significantly bigger business which earns appreciably more free cash. The company should actually be rooting for the stock price to fall. Given that they spend so much on share buybacks, Lear could buy back considerably more shares should the stock fall or remain flat.

 

 

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!

 

 

The 10K Portfolio

For my first project on this blog I’m starting a real life portfolio and showing you step by step how I go about constructing it. I am contributing $10,000.00 out of my own pocket into a Robin Hood account. I plan on never adding a dime, so all gains(I hope) will be due to prudent investments.

Why 10k and Robin Hood?

I chose $10,000.00 as the starting amount for a reason. 10K is a large enough amount that it proves you are committed to saving over merely consuming. I feel that it is an amount attainable by most anyone. If you cut back on luxuries and dedicate yourself to saving, I really believe anyone can reach that amount. Whether it takes a couple of months or a few years, just keep saving. It is also large enough that it could one day turn into a huge amount if you let compounding work its magic.

I’m sure many of you are familiar with Robin Hood, but for those who aren’t the app allows you to make commission free trades. For a portfolio this small, this feature is vitally important. If I were to use another broker, commissions could quickly eat into my returns. Imagine using a broker with $10 fees for every trade. If you only bought stocks 10 times, commissions would total $100. $100 is already 1% of the total portfolio and that is only trading 10 times in an entire year. Hard to beat the S&P if you are being handicapped by commissions.

I will be benchmarking this portfolio against the S&P 500 index SPY which currently stands at 285.06. It is not enough to just make money, you can put your money into risk free government bonds and make a positive return. Rather, you have to outperform what you can get by buying an index fund, if you want to prove your merit. You will see in real time whether I’m successful or not. Copy me, berate me over my irrational picks or cheer me on. I’m in no way guaranteeing success, but I do have faith in my abilities to compound.

This portfolio’s performance will be judged over the course of years, not months. Don’t be surprised to see early underperforamance.  It takes time for a company’s market value to reflect their real intrinsic value. I’ll update results every quarter as well as an update any time I buy or sell a stock. I encourage you all to follow along, or even better create your own 10K portfolio and we can compare!

Keys To Success

  1. Long term performance over short term mentality
  2. No more than 10% into any one stock, diversification is important.
  3. Buy a great company at a fair price, rather than a fair company at a great price.

Thanks for reading!