Motley Fool co-founder David Gardner regularly recommends sets of stocks on the Rule Breaker Investing podcast — essentially giving us all a free taste of the choices he and his team make in Motley Fool Supernova’s portfolio universe. And he holds himself accountable, annually going back over those five-stock micro portfolios to let everyone see how he scored against the benchmark of the broader market.
Right now, it’s time for that yearly review of the ones he picked to honor the month, and also the briefly famous pregnant giraffe.
Top 10 Biotech Stocks For 2018: Southside Bancshares, Inc.(SBSI)
While the run-up in banks has left yields in the financial space awfully dry, Southside Bancshares, Inc. (NASDAQ:SBSI) offers a respectable yield of above 3%. That’s in some part thanks to an aggressive dividend policy that has seen the company raise payouts multiple times a year over the past few years.
Southside, by the way, is the bank holding company behind Texas community bank Southside Bank, which controls about $6.5 billion in assets across 60 branches within the state. There’s nothing out of the ordinary about this bank – it provides typical services such as mortgages, personal loans, and checking and savings accounts.
What is unusual about SBSI is its dividend program, which has featured varying numbers of increases across the past few years. But one thing that’s pretty consistent is the company announcing a dividend hike sometime in mid-May.
Top 10 Biotech Stocks For 2018: American Campus Communities Inc(ACC)
Consumer tastes change over time, and over the past two decades, college students have noticeably shifted their preferences toward off-campus housing options.
American Campus Communities is a real-estate investment trust that has emerged as a market leader in this young and fast-growing segment of residential real estate.
Most on-campus housing options in American Campus Communities’ 68 current markets are residence halls built in the 1950s and 1960s. In fact, the median age of on-campus housing options in these markets is more than half a century. In these markets, 78% of students live in other types of housing, but about two-thirds of the off-campus housing supply consists of landlord-run single-family homes and traditional apartment communities.
American Campus Community gives students a third option: modern communities that were specifically designed to meet the needs of college students. These communities have modern technology infrastructure, as well as more student-focused amenities and policies. For instance, in a traditional apartment, you generally aren’t on a separate lease from your roommates, but this can be done in student-focused housing.
Not only is American Campus Communities’ product far superior to its competition, but it’s just as affordable. Outdated on-campus housing costs an average of $722 (shared) or $916 (private) in the company’s markets, making the $751 average monthly price tag of American Campus Communities’ properties surprisingly affordable.
As I mentioned, this industry is still in its infancy, and there’s no shortage of demand for higher-quality student housing. Plus, the company’s 4.7% dividend yield represents less than 70% of 2018’s expected funds from operations, or FFO (the REIT equivalent of "earnings") — a rather low payout ratio for a REIT. So, there’s no reason to think the income won’t get even better over the coming years.
Top 10 Biotech Stocks For 2018: Phillips 66(PSX)
Refining giant Phillips 66 (NYSE:PSX) and Canadian energy infrastructure behemoth Enbridge(NYSE:ENB) initially pitched Gray Oak to oil shippers in early December. At the time, they envisioned a 385,000 barrel-a-day pipeline that would move crude from several connection points in West Texas to refineries and export docks along the Texas coast starting in the second half of 2019.
The project has evolved since then. Phillips 66 is no longer a direct investor in the pipeline, choosing instead to have its master limited partnership (MLP) Phillips 66 Partners take the lead. The MLP will hold a 75% interest in the joint venture (JV) building the project. Enbridge, likewise, won’t initially invest in the project but instead is one of the third parties that has the option to acquire up to a 32.75% interest from Phillips 66 Partners. Joining Phillips 66 Partners will be refiner Andeavor (NYSE:ANDV), which will own a 25% interest in the JV.
Not only has the ownership structure changed, but so has the scope of the project. Phillips 66 Partners now envisions a 700,000 barrel per day oil pipeline, which could ultimately move up to 1 million barrels per day if they secure additional contracts with shippers. Further, the pipeline will transport oil not just from producers in the Permian but also from the Eagle Ford Shale in South Texas.
On top of building this pipeline, Phillips 66 Partners and Andeavor have teamed up with Buckeye Partners (NYSE:BPL) to construct a new marine terminal in Corpus Christi, Texas. Buckeye will operate the South Texas Gateway Terminal and own a 50% stake in the JV while Phillips 66 Partners and Andeavor will split the remaining 50% interest. Both projects should enter service by the end of 2019.
Top 10 Biotech Stocks For 2018: Entravision Communications Corporation(EVC)
Entravision Communications Co. (NYSE: EVC) is a Spanish-language media company based in Santa Monica, Calif.
Entravision’s profit potential lies with the nation’s rapidly expanding Latino community, which makes up the majority of Entravision’s customer base.
From 2000 to 2014, Latino immigration accounted for more than 50% of the nation’s total population growth. In the same period, the nation’s total Latino population expanded to roughly 55 million people.
Over the next 10 years, the American Latino population is expected to expand by another 24 million Latino Americans – an increase of over 30%
This growing audience is already showing in the company’s growth. Over the last year, the company had a return on equity of 49.84%. That’s over 350% higher than the industry average of 11.99%.
With an expanding consumer market continually seeking new content from major Hispanic media outlets, it’s likely that Entravision will experience sustained growth well into the future.
EVC currently boasts a perfect VQScore, and Wall Street agrees with us. Analysts have put a high price target of $11 on the company’s stock – a 119% increase on today’s price of $5.02.
Top 10 Biotech Stocks For 2018: AppFolio, Inc.(APPF)
Lewis: Yeah, it certainly seems like there’s a pretty good growth runway ahead of it. Why don’t we talk about company No. 2, and this is AppFolio?
Feroldi: Sure. This is a company that I really like a lot, too. These guys cater to the needs of small and medium-sized businesses that are kind of in niche, niche markets that you wouldn’t normally think of, and none of these are consumer-facing. AppFolio was founded, and their initial target market was the property management business. So, you think about companies that own, say, a small apartment complex or a multi-family building. If you were a property manager, what kind of things are critical to making your apartment profitable? Well, you need to attract clients. You need to make sure that they’re paying their bills. You need to be able to foster communication between the client and the property manager if there’s maintenance things. You need to help with background checks on potential tenants and screening.
So, there’s a hodgepodge of software that’s out there that can help with each of those things. AppFolio basically took all of that and put it together on a cloud-based platform, and they sell their service to property managers. So, they can come on to AppFolio’s platform, they pay a small subscription fee, and they get access to basically all of those services in one easy-to-use cloud-based system that can be managed through a cellphone or on a tablet.
Lewis: And you talk about this market, and even just hearing you describe it, property managing software, there’s a niche there. [laughs]
Feroldi: It’s pretty niche.
Lewis: There’s a pretty clear niche. And frankly, it’s a space that’s probably a little too small for big players to want to hop in.
Feroldi: Absolutely, yeah. There can be a big advantage to stay in the niche. The big software boys, it’s just not a big enough market for them to go after, to really invest the resources to make a customized solution. But, AppFolio, they’re not so much a property management company as they are just trying to dominate a few small niches, and by combining them together, they can grow into a much bigger software platform.
Lewis: Yeah. They’re getting outside property management, right? They’re doing something in the legal space, as well?
Feroldi: Exactly. A couple of years ago, they bought a company called MyCase, which caters to the needs of legal professionals. So, you think about a small law practice. Well, they also need help with billing and tracking their time and attendance and marketing themselves. There’s always back-office stuff that these companies need help with. So, AppFolio recently entered into that business, too, through an acquisition. It’s still very small, it’s less than 10% of their revenue. The property management business is about 90% of their market right now. But, between these two, they’re adding customers to both platforms at a double-digit rate.
The way that they make money is, their customers pay a recurring monthly subscription fee just to be on the platform, but they also sell premium, what they call value-plus services, on top of that. So, if you wanted AppFolio’s app to facilitate taking money out of the client’s checking account and sending it over to the property manager, like, so they can pay their rent, AppFolio’s platform can do that for them, and they charge an extra small fee for that. Or, if they wanted to do a detailed background check when they’re screening for tenants, you can also do that on AppFolio’s platform, but they also charge a small fee for those kinds of services.
Lewis: You talked about the stickiness of the platform. I think they have a customer retention rate of 97% or something crazy like that.
Feroldi: It’s extremely high. That’s a big reason why I love software-as-a-service businesses. Once a customer gets into the platform, and their entire back office gets set up around using this platform, it becomes extremely painful for them to consider switching providers, because everything is built for this one platform. So, it makes the business very, very sticky.
Lewis: And, you have employees that are trained on using that, right? So, there’s the actual friction of switching systems and maybe not having the data interplay the way that you would like it to, but there’s also the cost of having to retrain employees to use these programs or to bring in vendors and review these offers from new vendors, which is going to be tough for everyone’s time, especially if you’re a smaller business.
Feroldi: Absolutely, especially since, if you’re a smaller business, you don’t really have time to do that kind of stuff. AppFolio is growing its top line extremely quickly. Last year with 40% year over year top line growth, about $144 million in revenue. So, again, they’re going after niche markets, but they’re still big enough to actually become profitable, become cash flow positive. Their balance sheet is squeaky clean. Another thing I like about this company in particular is, the founders of the business are the Chief Technology Officer and the Chief Strategy Officer, so they’re still very involved. Very high inside ownership rates. And, this is another company that just gets rave reviews from employees about the culture that they have.