Stocks for the Long Term

[BlueWolf]

Crazy week, especially Friday. First, I want to add a few stocks to my list:

AMZN (I add this as a sort of “of course”), DOCU, LYV, TWLO

I thought about adding some Chinese stocks to the list, but they were abysmal performers last year (I had to cut a bad investment in HUYA loose) and I don’t think the time is right just yet. The additions make my overall list as follows:

AAPL, AAXN, AMZN, ANET, AYX, DATA, DOCU, EDIT, ISRG, LYV, MTCH, MDB, OKTA, SQ, TDOC, TEAM, TTD, TWLO

Stocks for which I have provided a (brief) write up are in bold italics. I will provide write ups for the others as time permits.

On Friday, I bought/added 2.5% positions (this is my standard allocation for a long term investment, i.e. 1/40 of my portfolio) in the following stocks:
AAPL, AAXN, AYX, EDIT, LYV, MDB, MTCH, TDOC, TTD.

I already owned shares of the following from the list:
AAPL, AMZN, ANET, DATA, MDB, OKTA

I broke discipline a little doing this, and I hope I don’t regret it, but the market action last week coupled with the jobs numbers on Friday, overall indications that the economy is still going strong, and the resumption of trade talks with China emboldened me. I am nervous about this because I have said on several occasions that I prefer buying when the market is on the way up or in a sideways consolidation, but this time I let my intuition get the better of me a little. Intuition, however, is often worthless, so we’ll just have to see. ** Grinding teeth **

[BlueWolf]

I should add MA and V to the candidate list. One or the other is a good idea for a diversified portfolio. Disclosure: I currently have a position in MA. That makes the current list:

AAPL, AAXN, AMZN, ANET, AYX, DATA, DOCU, EDIT, ISRG, LYV, MTCH, MA, MDB, OKTA, SQ, TDOC, TEAM, TTD, TWLO, V

[BlueWolf]

Here’s my rationale for ISRG:

Why do I like ISRG for a long term investment? Three words: Minimally Invasive Surgery (MIS). It’s the wave of the future in surgery. It opens up otherwise complicated procedures to more surgeons and produces more predictable outcomes, It also results in reduced blood loss and shortened hospital stays which translates into cost savings for both the patient and the care giver. I myself benefited from MIS when I had discectomy to repair a ruptured disk. I walked out after only a single overnight stay and my injury, which was so bad when I came in that I could barely walk, was 100% corrected.

ISRG was one of the earliest players in this field with the the da Vinci family of surgical robots. Their growth has been phenomenal and they now have an installed base of approximately 5,000 systems. Why do I believe there is still a growth story here? Because last quarter, their growth was a phenomenal 20%, year over year with a mature product. Listen to this breathy claim from Morningstar: “Healthy system and instrument pricing reflects the firm's monopoly status in its niche, allowing Intuitive Surgical to achieve profitability rarely enjoyed by medical equipment makers, with adjusted operating margins in the mid-30s. In fact, gross margins on Intuitive's systems are comparable to its instruments (consumable component) profitability.”

The long term picture is even brighter. The da Vinci system targets certain types of surgical procedures including prostate surgery and hernia repair. There are numerous other surgical areas that remain largely unpenetrated, and ISRG, with their existing IP, is in a great position to introduce products into these areas. Listen to these numbers: The global minimally invasive surgical systems market will grow to somewhere between $20B to $40B by 2025 with a CAGR of 10.9% from 2018 to 2025. If ISRG’s penetration of these new opportunities matches their penetration of existing MIS areas, this is going to translate into substantial growth. ISRG is on target to generate over $3B in revenue for FY 2018. Imagine grabbing 10% of that emerging market. I can easily see ISRG’s revenue and profitability doubling over the next five years. That’s why I like this stock.

My current candidate list:
AAPL, AAXN, AMZN, ANET, AYX, DATA, DOCU, EDIT, ISRG, LYV, MTCH, MA, MDB, OKTA, SQ, TDOC, TEAM, TTD, TWLO, V

Note: Stocks in Bold are stocks for which I have provided a rationale. Underlined stocks are stocks that I currently own including those that I recently purchased.

[BlueWolf]

Today I added positions in ISRG, DOCU, SQ. I am waiting for a pullback in TEAM and TWLO before buying. I am not sure I will buy V because I already have a position in MA and I would like to stay diversified. My updated long term candidate list is as follows:

AAPL, AAXN, AMZN, ANET, AYX, DATA, DOCU, EDIT, ISRG, LYV, MTCH, MA, MDB, OKTA, SQ, TDOC, TEAM, TTD, TWLO, V

[BlueWolf]

AAXN

Axon Enterprise Inc is in the development, manufacture, and sale of Conducted Electric Weapons designed for use by law enforcement, corrections, military forces, private security personnel and by private individuals for personal defense. It is also engaged in developing, manufacturing and selling of connected wearable on-officer cameras as well as developing and selling cloud-based digital evidence management software. The electric weapons, e.g. Tasers, part of AAXN’s business is mature but still growing enough on its own to sustain the business. The x-factor, however, is in the body-mounted camera market. This market, which was estimated a $260M in 2017 is predicted to grow to $3.4B with a CAGR of 38% by 2025. Whoa! That’s some pretty phenomenal growth. How will AAXN be able to take advantage of this? Well, a significant portion of this growth will be in the security segment, a segment that AAXN already dominates with other products. The key here is the presence AAXN has already developed in law enforcement. They have relationships with just about every major law enforcement organization in the US and a great many in Europe and Asia as well. Axon should be able to leverage this unique position to gain a significant degree of penetration in the emerging body camera market. Eventually, body cameras will become as ubiquitous in the law enforcement community as the Taser, and hopefully AAXN will be the dominant supplier. That’s my recipe for a winner: A big and growing market and a company with the experience, savvy, and IP to take advantage.

My current List:
AAPL, AAXN, AMZN, ANET, AYX, DATA, DOCU, EDIT, ISRG, LYV, MTCH, MA, MDB, OKTA, SQ, TDOC, TEAM, TTD, TWLO, V

Bold=Write Up Available
Underline=I own it

[BlueWolf]

AMZN

Here’s my write up for Amazon. They’re big. They’re good. They’re getting into new markets every year and they’re still growing by leaps and bounds. ‘Nuff said. I’m buying and holding. 😬

AAPL, AAXN, AMZN, ANET, AYX, DATA, DOCU, EDIT, ISRG, LYV, MTCH, MA, MDB, OKTA, SQ, TDOC, TEAM, TTD, TWLO, V

Bold=Rationale Available
Underline=I own it

[BlueWolf]

ANET

People are always looking for the next something: The next Microsoft, the next Apple, the next Amazon. Well I think Arista Networks is the next Cisco. They went public in 2015, and then in late 2016 they began a breakout that saw them double their revenue, triple their EPS, and quadruple their market capitalization. So what makes them so special? Well, they provide networking solutions (software, switching, and router products) that are targeted to high-performance applications such as data centers, enterprises, service providers, and campuses. They excel in this area and more and more companies are trusting ANET with their networking infrastructure. Basically it’s about volume, and nobody handles network volume better than ANET. In fact, the company was founded by a former Cisco executive to address this very specific opportunity, i.e., high volume, high throughput data centers. There is a real opportunity here. Transformation of data centers to handle high volume network traffic was $6.45B market in 2018. By 2023, it is expected to grow to $12B with a CAGR of 13.2%. The good news is that ANET is positioned to snag a healthy portion of that growth, adding to their already healthy annual revenue of $2B+ ( est. FY 2018 ).

AAPL, AAXN, AMZN, ANET, AYX, DATA, DOCU, EDIT, ISRG, LYV, MTCH, MA, MDB, OKTA, SQ, TDOC, TEAM, TTD, TWLO, V

Bold=Rationale Available
Underline=I own it

[antioch6]

I want to bring up another Brazilian company. The name is Telefonica Brasil and they provide telecommunication services in Brazil. From FinViz:

Telefonica Brasil S.A. provides mobile and fixed line telecommunications services to residential and corporate customers in Brazil. Its fixed line services portfolio includes local, domestic long-distance, and international long-distance calls; and mobile portfolio comprises voice and broadband Internet access through 3G and 4G, as well as mobile value-added services and wireless roaming services. The company also offers data services, including broadband and mobile data services. In addition, it provides pay TV services through direct to home satellite technology, IPTV, and cable, as well as pay-per-view and video on demand services; network services, such as rental of facilities; other services comprising Internet access, private network connectivity, computer equipment leasing, extended service, detects, voice mail and cellular blocker, and others; wholesale services, including interconnection services to users of other network providers; and digital services in the field of financial services, machine-to-machine operations, e-health solutions, security, education, insurance, entertainment, and mobile advertising. Further, the company offers multimedia communication services, which include audio, data, voice and other sounds, images, texts, and other information, as well as sells devices, such as handsets, smartphones, broadband USB modems, and devices. Additionally, it provides telecommunications solutions and IT support to various industries, such as retail, manufacturing, services, financial institutions, government, etc. Telefonica Brasil S.A. offers its solutions through its stores, dealers, retail and distribution channels, and door-to-door sales. The company was formerly known as Telecomunicacoes de Sao Paulo S.A. TELESP and changed its name to Telefonica Brasil S.A. in October 2011. The company was incorporated in 1998 and is headquartered in Sao Paulo, Brazil. Telefonica Brasil S.A. is a subsidiary of SP Telecomunicacoes Participacoes Ltda.

This company has steady earnings, a reasonable P/E valuation, and a high dividend. Brazilian stocks are now in favor and outperforming U.S. markets. The Real has gone steady between 0.25 USD and 0.27 USD since October. Previously, it fell from the high 0.30s to lows of 0.2376 USD in 2018.

Earnings have been steady the past five years with one flat year last year in 2018. We should expect at least fifty billion Brazilian real in sales for the 2019 year, compared with 54.45 Billion, 57.89 Billion, and 59.26 Billion in 2015, 2016, and 2017. 2018 hasn't finished reporting. For the last four quarters combined, sales were 54.33 Billion.

Net incomes were 3.42 Billion real, 4.02 Billion, and 4.60 Billion for 2015, 2016, and 2017. The last four quarters show combined net income of 8.93 Billion Real. I'm not sure how net incomes can be higher without more sales revenue. From their third quarter conference call, the CEO states the company added "almost 1 million new additions in postpaid in the quarter," assuming it is postpaid telephone lines, "already representing 53% of our mobile customer base." The company is a little leveraged. I see 5.52 Billion Brazilian real of short term and long term debt (mostly long term) on their balance sheet, compared to 3.71 Billion real in cash and cash equivalents.

On further investigation, I found the company won a federal court ruling on taxes being received in the form of tax credits going forward amounting to 3.8 Billion real in the second quarter, and 2.4 Billion in the third quarter.

"Moving to Slide 14. Let me give you more details regarding the final judgment in the Supreme Court of Justice, which impacted positively our results in the second and third quarters of 2018. In March 2017, the Federal Supreme Court decided that ICMS, which is a state tax, must be deducted from the basis of calculation of PIS and COFINS contribution. Since last year, the company adopted the new methodology according to this decision. Higher -- we had processes requiring the amount paid in the last few years by some of our incorporated companies.
In the second quarter of 2018, the process related to Telesp operations for the amount paid between 2003 and 2014 had its final decision positively impacting EBITDA by BRL2 billion and financial results by BRL1.8 billion, amounting to a total of BRL3.8 billion in the quarter. In addition, in the third quarter of 2018, we had the final decision this time for Vivo related to the amount paid between 2004 and 2013, positively impacting the EBITDA by BRL1.4 billion and financial results by BRL1 billion, totaling BRL2.4 billion in the quarter.
Summing up, the positive impact on EBITDA in the first nine months of the year amounted to BRL3.4 billion while the financial results reached BRL2.8 billion, representing a total impact of BRL6.2 billion. And unlike the other examples of companies that have a reversal of provisions similar legal matters, our case generated tax credits that will turn into cash as time goes by, boosting our cash generation and creating a potential for unprecedented shareholder remuneration in the future. Finally, there are other processes still waiting for a final judgment which could generate extra gains in the future, which are -- total -- that would have a total impact of 10% of the market capital."

So there is some chance for future tax credits boosting earnings. On a normal adjusted basis, they earned 1.24 Billion real in cashflow in the second quarter and 862 million in the third quarter (the quarter impacted by 53% net increase of postpaid lines.) This is compared to their cashflows of 765 million real and 1.51 billion real the preceding two quarters, or 1.55 billion real and 1.50 real in the same quarters of 2017. Overall this shows a decreased cashflow in the third quarter because of competition in prepaid lines and IPTV (or else cashflows would be higher). They had to offer lower prices on contracts starting in 2017 and going forward. We can expect cashflows of 750 million real per quarter being conservative going forward. This sums 3 Billion real a year, or 810 million USD( U.S. Dollars.) So 810 million dollars steadily a year out of a current asking price of 21.7841 Billion USD (according to Morningstar) gives us a cash yield of 3.718% before the dividend.

The dividend was exceptionally high last year at 8%. In normal times and at current prices, Telefonica has a dividend yield of approximately and conservatively 3.63%. This gives us a total yield of 7% per year, compared to roughly 2.5% from U.S. treasury bills.

Considering the company has relatively low debt, steady earnings, and a current P/E ratio of 12-15 leaning towards the lower side, it looks like an OKAY buy at the current share price of 12.90 or lower (lower the better; higher yield). Also, the stock is outperforming major market indices for the past month, three months, and six months. The Brazilian market, represented by the etf EWZ here in the states, found a bottom in September. It trended higher in October while U.S. markets fell, and is now gaining momentum again during the past two weeks. The symbol is VIV and I am looking for a 5%-10% pullback to buy. Next I will compare it to another Brazilian stock.

[BlueWolf]

Which symbol is that, Antioch? Is it VIV?

[antioch6]

The last major Brazilian company (Besides Banks and Oils) is Ambev S.A. They sell beverages in Latin America. It is summed up in the first sentence following. From FinViz:

Ambev S.A., through its subsidiaries, produces, distributes, and sells beer, draft beer, carbonated soft drinks (CSD), other non-alcoholic beverages, malt, and food in the Americas. It operates through Latin America North, Latin America South, and Canada segments. The company offers beer primarily under the Skol, Brahma, Antarctic, Brahva, Brahva Gold, Extra, Budweiser, Bud Light, Stella Artois, Corona, Modelo Especial, Beck, Leffe, Hoegaarden, Presidente, Brahma Light, President Light, Bohemia, The One, Quilmes Clasica, Pacena, Taquina, Huari, Becker, Baltica, Ouro Fino, Pilsen, Patricia, Labatt Blue, Alexander Keith's, Kokanee, Banks, and Deputy brands. It also provides CSD, bottled water, isotonic beverages, energy drinks, coconut water, powdered and natural juices, and ready-to-drink teas under the Guarana Antarctica, Gatorade, H2OH!, Lipton Iced Tea, Fusion, Do Bem, Pepsi, Canada Dry, Squirt, Red Rock, Pepsi-Cola, Seven Up, and Frutee brands, as well as cereal bars. Ambev S.A. offers its products through a network of third-party distributors and a direct distribution system. The company was founded in 1885 and is headquartered in Sao Paulo, Brazil. Ambev S.A. is a subsidiary of Interbrew International B.V.

I think of this company as the latin american coca-cola. This would be a good description if there wasn't already a latin/asian coca-cola, KOF (also coming out of a Long Base on the Monthly 5+ year chart.) The difference here in Ambev being less debt. Ambev has a strong Balance Sheet with Cash and Cash Equivalents of 12.22 Billion Real versus debt of 4.9 Billion

Aside from one down year in 2016, Ambev's sales revenue is trending higher on the annual basis. Net incomes look like they broke uptrend starting in 2012. They fell from 10.5 Billion real to 9.5 in 2013. Net incomes were solid in 2014, 2015, and 2016 at 12.0+ Billion real. they fell again in 2017 to 7.3 Billion (including a one time tax of 2.98 Billion, bringing normalized income to 10.10 Billion) before trending back up the past four quarters at 10.7 Billion. We should conservatively and pessimistically expect Net Incomes for 2019 of at least 8 Billion real. This translates into a steady 2.16 Billion USD and a reasonable yet high P/E of 34 versus 20-30 for the S&p. Look at Google. Google has a current P/E of 31 because of the steady 15% growth. Ambev only has flat/stable net incomes so maybe Google is a better stock pick. Anyways, as I am comparing Net Incomes from Telefonica with Ambev, I notice a discrepancy in Telefonica's stated Net Incomes on Morningstar's database. On their Income Statement for second quarter 2018-06 it is reported as 3.16 Billion real, whereas on the Cashflow Statement it is reported as 4.66 Billion. So I will be calling Morningstar when they open at 7:00am!

Back to Ambev, they have consistent net incomes of at least 2.0 Billion real going back three years. Cashflows for 2015, 2016, and 2017 were +2.87 Billion USD, +3.35 Billion USD, and +2.03 Billion USD. For the last four quarters summed they are 3.15 Billion USD. 2.85 Billion is the average over the last 3.75 years. So, we can optimistically and reasonably expect 2.5 Billion over the next year. Out of a current market cap of 72.7888 Billion USD, this gives us a cash yield of 3.4%. The dividend is stable going back to 2013. At current price of 4.63 the dividend is around 3.455%. This gives us a total yield of 6.855%. Looks OKAY again versus Telefonica yield of 7%. Again, looking to buy ABEV same as VIV on a 5-10% discount.

[BlueWolf]

AYX

Alteryx Inc (AYX) provides self-service data analytics software on a subscription basis. Data analytics is a technology buzz word, for sure, and there are a lot of players in this space so what makes AYX so special? Their target audience. It’s the widest in the industry. Why? Because AYX has built a platform that can be used by just about anyone. Sure, you can code your own apps on top of their platform’s APIs, i.e. it’s code-friendly. This is not required to use the platform, however. It has a spiffy graphic interface that allows you to configure and use the platform without having to write a single line of code, i.e. it’s code-free. This opens up their customer base to include anyone who needs data analytics, not just an IT organization. Executives, managers, planners, researchers, educators, lawyers, medical professionals, law enforcement professionals and even hobbyists can avail themselves of the platform and its many capabilities. And boy is their platform complete. There are modules for data access, data prep and blending, data sharing, predictive and prescriptive analytics, visualytics, and data reporting. It even has modules for dealing with special kinds of data like spatial data, scheduling data, and demographics. OK, it can be used by anyone and it is absolutely comprehensive. What about growth? The data analytics market was estimated at $8.5B in 2017 and predicted to grow into a $40B+ market by 2023 with a CAGR 29.7%. It’s fair to say that AYX won’t get the lions share of this. Nobody currently dominates this crowded market segment. Having said that, this growth will definitely float AYX with all the other boats and it is likely, given their terrific IP, that they will get a fair share. Let’s look at their growth. They IPO’d in 2017. In the two years leading up to this IPO they increased revenue 144% and increased their market capitalization 300%. The bad news is that they are still a relatively new company and they are burning cash. This makes them a little more of a risk. The good news, however, is that they have steadily improved their cash flow and controlled costs to the point that last quarter they broke even, i.e. did not burn any cash. The future looks very bright for AYX given their unique IP and phenomenal growth within an exploding market segment.

AAPL, AAXN, AMZN, ANET, AYX, DATA, DOCU, EDIT, ISRG, LYV, MTCH, MA, MDB, OKTA, SQ, TDOC, TEAM, TTD, TWLO, V

Bold=Rationale Available
Underline=I own it

[BlueWolf]

DATA

Tableau Software is another data analytics play, and I admit that I have liked and owned this stock for a while now. I am an ex-software engineer, so you will have to forgive me for my love of geek stocks. DATA’s software is targeted primarily towards data visualization and currently their platform is primarily delivered as an on-premises solution. Like AYX, their software is renowned for it ease of use. Once again, this opens up the product to all kinds of market segments. DATA went public in 2013 and rocketed up. By mid 2015 DATA had more than doubled its market capitalization. Then the market does what the market does: It lost interest in DATA and the market cap sunk back to 2013 IPO levels. Starting in 2016, however, DATA made a bold and fortuitous decision: They decided to begin adopting a subscription-based model. Just look at what that has done for revenue at companies like ADBE and MSFT. Well, it did the same for DATA as subscription revenue grew rapidly from ~$60M in 2016 to $190M+ in 2017. The fickle market took notice and fell in love again, returning the market cap to 2015 levels. Even as the market was falling out of love with DATA late in 2015, DATA was growing their overall revenue like crazy. They went from $654 in 2015 to $827M in 2016 and $877M in 2017. In FY 2018, they are on track to hit $1B+. With the phenomenal growth in the data analytics market segment predicted to continue through 2023 with a CAGR of 29.7%, it’s not hard to get excited about the prospects of DATA over the next five years. Morningstar forecast a 10-year revenue CAGR of roughly 14% for DATA. Wow! Not bad. DATA is not without it’s risks. Like AYX, they are a newer company and they are still burning cash. They are a couple of years away from profitability. With assets over $1B and 75K customers, however, I believe DATA will achieve that profitability sooner rather than later. This is why DATA is one of my picks.

AAPL, AAXN, AMZN, ANET, AYX, DATA, DOCU, EDIT, ISRG, LYV, MTCH, MA, MDB, OKTA, SQ, TDOC, TEAM, TTD, TWLO, V

Bold=Rationale Available
Underline=I own it

[BlueWolf]

Bought TEAM this morning on the minor pullback. I don’t think I will buy V since I own MA, and I want to I stay diversified. I therefore think I will just drop V from my list. The only stock on the list I therefore haven’t bought recently is TWLO. It is in a little bit of a sloppy consolidation pattern right now and I should have also bought that this morning, but I dropped the ball. Since I now own most of the stocks on the list, instead of making the ones I owned underlined, I am just going to list TWLO separately.

Now, because I do want to diversify, I have to seriously look at some foreign stocks. I am hesitant to buy Chinese stocks because of the pounding they took last year and because of the uncertainty of the trade talks, but I think I need to consider some positions at current prices. The only Chinese stock I currently own is TCEHY, which I picked up back in August and held on to because I think it’s undervalued. The others I had I dumped back in Oct. More on foreign stocks later.

AAPL, AAXN, AMZN, ANET, AYX, DATA, DOCU, EDIT, ISRG, LYV, MTCH, MA, MDB, OKTA, SQ, TDOC, TEAM, TTD

Still no position: TWLO

Bold=Rationale Available

[BlueWolf]

Here’s a foreign long term stock idea: BIDU. It looks attractive both technically and fundamentally right now.

[BlueWolf]

Bought TWLO this morning. It looks ready to break out of the little cup it is forming, so I took a shot. Since it’s a long term hold, I gave it a wide stop right at the top of the gap of 1/7. That’s about $10, which is OK with a long term because I trade smaller share sizes then when I day trade. I now own all the stocks in the list.

AAPL, AAXN, AMZN, ANET, AYX, DATA, DOCU, EDIT, ISRG, LYV, MTCH, MA, MDB, OKTA, SQ, TDOC, TEAM, TTD, TWLO

Bold=Rationale Available