Lately, on Industry Focus: Tech, we’ve focused on the megacap businesses that have been dominating the news — at the cost of shedding some light on smaller companies with massive growth potential. In this week’s episode, host Dylan Lewis talks with Fool.com contributor Brian Feroldi about following ultra-compelling small-cap tech companies.
Tune in to find out how each business works, how companies like AppFolio thrive in markets that are too small for the big guys, the biggest risks investors should know before taking a closer look at these companies, which particular one is the most exciting story today, and more.
Top 5 Tech Stocks For 2018: The Goodyear Tire & Rubber Company(GT)
You’ve likely heard new-vehicle sales in the U.S. are currently plateauing, which makes it difficult to sell a near-term growth story for automakers. Nonetheless, the auto industry has trends that could provide strong growth for Goodyear despite the company’s being sold off with the rest of the industry — it currently trades at a paltry forward P/E of 6.6, per Morningstar estimates.
Total sales are plateauing, but the sales mix is wildly shifting in favor of larger vehicles such as SUVs, crossovers, and pickup trucks. That means more larger tires on the road, and that means better margins for Goodyear. In 2009, light trucks were 45% of the U.S. new vehicle market; that exploded in the years since to 68% during the first quarter of 2018. Further, LMC Automotive predicts light trucks will generate roughly 73% of the market as soon as 2022.
A sales mix in the Americas with such a large percentage of light trucks is one growth catalyst for Goodyear, but there’s a long-term catalyst as well: driverless vehicles. Consider that by 2030, 25% of global miles traveled will be shared, according to The Boston Consulting Group, and the autonomous market will be a $7 trillion business by 2050, according to an Intel report. As the market shifts to fleet ownership, rather than individual consumers, Goodyear could leverage its physical-store tire services to sign partnerships with fleet owners, which could become a lucrative business.
Granted, the driverless-car future is an uncertain one, but one thing is certain: Tires, and other products associated with driverless cars, will become much more complex. That means growth — long-term growth — for Goodyear if it can leverage its distribution network, innovative tires, and service bays to carve out its place in the market.
Top 5 Tech Stocks For 2018: Amphenol Corporation(APH)
Aphria (TSE: APH) is an early leader in Canada’s high-growth cannabis industry. With a market cap of $2.4 billion, Aphria is the second-largest cannabis company in Canada behind Canopy Growth Corp’s (TSE: WEED) $6.6 billion.
Shares of Aphria are traded on the Toronto Stock Exchange under the ticker symbol APH. Shares are also traded on US, OTC (over-the-counter) markets under the ticker symbol APHQF.
If there is one stock to own to profit from the cannabis revolution, Aphria is the choice. Let me explain…
Aphria Is Benefitting From A Legal Monopoly
Aphria won the cannabis lottery back in 2014 when it received an exclusive permit to grow and sell cannabis from Health Canada, the regulatory agency responsible for issuing permits.
At last count, more than 1,000 companies have applied for a license. But as it stands, Health Canada has only issued 93 permits — and Aphria is one of the lucky recipients.
This exclusive permit gives Aphria two powerful and sustainable competitive advantages. First, it gives Aphria a huge head start on the competition. Second, it will protect Aphria from new competition.
Health Canada will issue more permits in the next few years. But it is deliberately restricting the number of permits to encourage young cannabis companies’ profitability, as this will help to remove illegal cartels from the cannabis trade.
Aphria Is Constructing A 1 Million Square Foot Greenhouse
After securing its exclusive permit, Aphria quickly turned its attention to building one of the largest cannabis greenhouses in the world. The company’s 1 million square foot, state-of-the-art cannabis greenhouse will be one of the largest in the world when completed.
The new facility will include:
— 700,000 square feet of Dutch-style greenhouses.
— 230,000 square feet of infrastructure, including new level 9 vaults.
— Automation of the greenhouses, processing areas, and warehouse facilities.
— Annual production capacity of over 150,000 lbs of cannabis.
This new greenhouse positions Aphria to be the number one low-cost provider of cannabis in Canada — and eventually the world as it continues expanding into international markets.
The final phase of the project is projected to be completed this summer.
Top 5 Tech Stocks For 2018: Boeing Company (BA)
I was one of many in the business media writing about Boeing Co’s (NYSE:BA) stellar first-quarter earnings April 25. Boeing delivered adjusted earnings per share of $3.64, 41% higher than the consensus estimate. While we’re on the subject of beats, its free cash flow was $2.74 billion, 84% higher than analyst expectations.
“Well it’s not every day that a mega-cap company beats consensus by 40 percent,” Robert Stallard, an analyst with Vertical Research Partners said in a note to clients. “The wall of cash that the company is generating makes it hard to be absent from the stock.”
Based on an enterprise value of $196.4 billion and a trailing 12-month free cash flow of $12.6 billion, Boeing has an FCF yield of 6.4%, a perfectly decent yield for a company that’s firing on all cylinders at the moment. Here’s what I had to say about Boeing in April a couple of weeks before earnings:
“Now that I’m back on Boeing wagon, I do believe that Boeing stock could deliver 20%-25% compound annual growth over the next five years,” I wrote April 10. “If it does, a $1,000 stock price is not out of the realm of possibility.”
After its strong first quarter, I have no doubt it’s possible by 2023.
Top 5 Tech Stocks For 2018: Phillips 66(PSX)
Phillips 66 (NYSE:PSX) is a welcome breath of fresh air in the energy space. That’s because while many energy stocks were slowing dividend growth down to a trickle during the oil-price collapse starting in summer 2014 – or even cutting payouts – Phillips 66 has kept the income pipeline flowing.
Namely, since 2014, this refiner and midstream company has juiced its dividend by nearly 80%, including a substantial 11% hike last year.
PSX should have plenty of ammunition for another dividend increase come early May, when it typically makes an announcement. That’s because the company reported yet another excellent quarter a couple months ago that beat the pants off analyst estimates – profits of $1.07 per share were well ahead of the consensus estimate of 86 cents.
But the spending won’t end there. Phillips 66 also plans to spend $500 million more on capital expenditures in 2018 than it did in 2017, which should fuel growth over the coming years.
Top 5 Tech Stocks For 2018: Brookfield Renewable Powerr Fund(BEP)
When investors are looking at the energy industry today, there’s a lot to consider. Volatile oil prices can make big oil stocks risky, changing utility markets have hurt formerly safe utility companies, and even natural gas isn’t the profitable business it once was. But renewable-energy production around the world is growing, and companies that own renewable assets can generate consistent cash flows capable of funding dividend growth for years to come.
One of the best dividends for in-the-know investors is Brookfield Renewable Partners, a yieldco that owns 16,000 megawatts of generating capacity around the world. Eighty percent of that capacity is hydropower, but the company is adding more wind and solar assets after acquiring a 31% interest in TerraForm Global and a 16% interest in TerraForm Power (NASDAQ:TERP).
What’s unique about Brookfield Renewable Partners is that it’s not as tied to the idea of issuing stock to fund acquisitions as many yieldcos have been in the past. Instead, it expects to grow its dividend 5% to 9% annually and use any excess cash from the business to grow cash flow organically. If you look at the dividend over the past decade, you can see that the strategy has resulted in steady growth:
Energy markets can be volatile, but a renewable-energy company like Brookfield Renewable Partners usually buys projects backed with long-term contracts to sell energy to utilities under a set rate. Yieldcos that can do that well will be big winners for investors, and that’s why Brookfield Renewable Partners is a great dividend stock today.