Stock Research: DPZ

I researched Domino's Pizza (DPZ) because it shares the same qualities that led me to purchase shares in Starbucks. They have a focused brand/product line and embrace technology. Way back when Domino's started the turnaround I was amazed by the online experience in ordering pizza. While I never liked the pizza I was sold on the self-deprecating commercials enough to try it again.

Domino's has good growth momentum. They have expanded overseas in almost all emerging markets while staying aligned with their domestic philosophy to deliver pizza fast. In contrast I found Yum's international plan to promote Pizza Hut as premium dinning experience short-sided. I understand the international desire for Western products allow companies to charge a premium, but paints the brand as a fad that could fall out of favor as new Western trends are adopted.

In addition, in most international countries everything is driven by mobile accessibility. With Domino's superior mobile applications and extensive online order capabilities it is better positioned to become ingrained in the populations daily lives. I find the scenario of young adults ordering pizzas on their phones better for growth than a family's special night out at a Pizza Hut sit-down restaurant. If you look at the trends in technology, online order systems like GrubHub and Eat24 are exploding in popularity (according to the 2013 annual report over 40% of orders in Q4 were digital). Domino's is essentially a restaurant with its own custom GrubHub service and with the expansion into other non-pizza offerings this could be a vertically integrated dinning experience.

Domino's is profitable with growing revenue, earnings per share, and good operating margins but here's the bad. They have a large amount of debt compared to assets. $1.5 billion in long term debt compared to $500 million in assets but the upside is they are still generating free cash flow and have refinanced that debt until 2019. Buying into Domino's is buying into the success of their international expansion and ability to take enough market share from competitors to grow revenue at least 3x in the next 5 years.

Stock Research: AAWW

As fuel becomes the primary cost for airlines and worldwide delivery services expand it's always a good idea to look at the air freight business. Atlas Air Worldwide Holdings (AAWW) is a company that takes the capital expenditure hit by purchasing aircrafts and leasing them out to air cargo companies. Atlas Air gets a consistent income stream and airlines get the flexibility to add/reduce capacity.

When it comes to aircraft leasing there are two specializations. One is cargo aircrafts where Atlas Air operates in and the other is passenger aircrafts through companies such as Fly Leasing. While the customer base is larger for passenger aircrafts the turnover is greater because airlines always want the most fuel efficient planes available. This means higher capital expenses and the ROI would not be as great since the aircrafts become outdated quicker than cargo planes.

Further, businesses can specialize in a particular type of leasing. Wet leasing is a lease that includes the aircraft, crew, maintenance, and insurance (ACMI) while dry leasing is just the aircraft itself. For most of Atlas's history it has been a wet lease operator but is starting to expand its dry leasing operations with six new 777 freighters in order to mitigate reduced demand for ACMI contracts. This is a good strategy if only to expand its customer base and gain more presence, especially since there is large demand for dry leasing.

I like the simplified operations of Atlas. For one they only own Boeing aircrafts which makes maintenance and crew training cost efficient and they have identified three aircraft body styles that are suitable for all their needs while retiring the one-off models. Financially Atlas Air is undervalued. It has a P/B value of 0.7 and a P/E of 10 with healthy operating margins and consistent EPS. The only downside is there is no growth catalyst for the company or in the industry right now.

Book Club: Common Stocks and Uncommon Profits

Common Stocks and Uncommon Profits by Philip A. Fisher was the second investment book I read that Warren Buffet endorses. Instead of listing a series of formulas and metrics that should be researched to gauge a stocks worth he pays attention to the characteristics of the business. What products they make, how efficient management is doing, what is the public's perception of the company? This book is great at getting you to think of the mental questions you should be asking yourself when picking a stock.

My main takeaway is the concept of scuttlebutt (or water-cooler talk). Usually the advice goes that when someone gives you a stock tip there is a high chance that stock is already overvalued and ripe for a pull back. I see it more as a mood gauge for the overall market and can avoid hot sectors or monitor for short term positions on major pull back days. I also like to take note of popular companies and revisit them after the crazy has died down. This is why I started watching Mad Money and reading articles on Seeking Alpha daily.

Parsley Energy (PE) and Rite Aid (RAD) are two speculative stocks I picked up using this logic. Right now there is a gold rush for natural gas in US shale and everyone is throwing money at the large companies like Pioneer and EOG. Instead of buying into companies with years of growth priced in I chose the small Parsley Energy that operates in the same region and could grow or be acquired. Rite Aid was purchased because it's a popular turnaround play that dropped significantly from reduced guidance that chased away unrealistic investors expecting a price pop. If it regains irrational price momentum then I would benefit heavily but if not I still purchased at a discount and can benefit from the company's intended turnaround plan.

Stock Research: CRM

Salesforce.com (CRM) is a product I'm very familiar with considering it's being used in companies I've worked for. While traditional software developers hate the "no software" sand boxed ideology I can see the huge upsides for companies that aren't "in the software" business but want to have a customized platform. Salesforce is a proper cloud solution because it's not just a virtual server you buy time on like AWS or Azure that still requires a huge development team. I would best compare it to a Blogger or Wordpress website. Sure you can write all the fancy php/javascript code to develop an amazing web experience but in some situations a template solution works just as well but saves thousands of dollars.

Reading over Salesforce's latest fiscal results it's exciting to see the large revenue growth but what's more interesting is the expenses. Salesforce grossed close to 950 million in profits and spent 990 million in operating expenses in the last quarter but 65% of it's expenses were in marketing and sales. Salesforce is still a young company and is wisely spending money to grab as many customers as it can and get them embedded into their proprietary ecosystem. Right now the focus is brand awareness and making customers feel confident in their product. If you remove marketing cost, Salesforce is actually profitable.

I'm a buyer of Salesforce for two reasons. One is the freeing of company data from in-house networks. At one point in time business was conducted on paper, something that you could take anywhere. Then computers came about and chained employees to a desk; however, with the explosion of smartphones/tablets and ubiquitous internet connectivity work can once again be conducted out of the office but the resources/cost needed to securely deliver this experience is out of reach for most companies to do themselves. Second is the continued abstraction of software. At one time developing software meant writing assembly code to modify bits on a computer. Then we moved to higher level natural language syntax and in the future software development can be as simple as drag and drop. Salesforce is just another iteration of this evolution. For the foreseeable future there will always be "software" companies like Microsoft/Salesforce who develop the tools but for any company whose business is not to sell software there really is no need to have a large development team.

Book Club: The Intelligent Investor

The Intelligent Investor by Benjamin Graham is considered the Bible of value investing and if you Google top investing books this one appears on almost every list. It's a long read at over 400 pages but it gives a good foundation to any individual investor. The first half explains the basics of how the stock market works and what expectations you should have when investing. The second half focuses on applying Graham's philosophy to securities analysis.

It's amazing how Graham's methods were derived almost half a century ago but most of his predictions were correct and direct parallels over what he saw during the Great Depression occurred during the tech bubble. Graham goes for reliable growth over long time scales so you'll never pick multi-baggers or hear about your stocks in the news.

My takeaways are to look for stocks that are undervalued (ie having a low Price to Book value) and show consistent growth over a number of years. Investing with Graham's methods would have you avoid high growth (high P/E) stocks like Yelp in exchange for slow growers like Caterpillar. I could only imagine what he'd think of Amazon.

Ensco (ESV) and  Rowan (RDC) are two stocks I picked using Graham's methods. At the time Ensco had a P/B of 0.93 (below 1 is what you're looking for) and a P/E of 8.33 and Rowan had a P/B of 0.79 and a P/E of 15.32 (below 20 is preferable). These stocks have actually turned out to be very profitable in the short time I've held them and I'm only now starting to hear them mentioned in the news.

Portfolio Highlight: RAD

I'll admit I picked Rite-Aid (RAD) because it's been brought up a few times by Jim Cramer. I wasn't seriously considering buying until they updated their guidance to a more conservative .30 per share and the stock sold off 8%. This shook out the short term investors looking for a quick pop and presented a nice discount for starting a long position.

Rite-Aid's turnaround plans are to transition into more of a neighborhood health clinic and away from the low margin drug retail store which is being encroached upon by Wal-Mart/Target who are additionally expanding into pharmacies and clinics. This would bring Rite-Aid inline with how CVS operates with their successful in-store pharmacy and MinuteClinc. Rite-Aid has already started with the acquisitions of RediClinc, a small Texas clinic business that they plan to add as a feature in stores and Health Dialog, a healthcare service business.

While they are still debt heavy I believe management is on the right track to expand into healthcare service, remodel and modernize performing stores and promote their Wellness+ loyalty discount program. Once I see progress toward integrating clinics into stores I next expect to see partnerships with health insurance companies for me to remain invested.

Portfolio Highlight: PE

Now that I have what I think is a pretty stable portfolio going I think it's time to start adding more risk and right now the two hottest sectors are bio-pharmaceuticals and natural gas drillers. Personally I find energy companies more interesting which makes researching them feel less like homework so that's how I ended up on Parsley Energy (PE).

This is actually a recent IPO stock and it did well considering how bad other IPOs were doing. They are a very small and focused natural gas driller in the Permian Basin in Texas which is third to the Bakken and Eagle Ford shales. They already have the land and are using the growing revenue from their existing vertical wells to fund additional wells and expand into more higher yielding horizontal wells. IPO funds will be used to pay down debt and buy more land purchases. As a long term pick I'm expecting to see consistent well expansions and revenue growth.

Stock Research: CHD

I initially assumed Church & Dwight Company (CHD) was a restaurant company based on the name but it's actually a Non-Cyclical goods company with a small portfolio of well-known brands. Among them are Arm & Hammer, Trojan, and Oxi Clean. Based on the revenue from the Arm & Hammer brand I'm actually surprised they haven't changed the company name.

On the metrics side this is one of the few companies I've put into my spreadsheet that turned up almost green for everything. They have consistent operating margins over 15%, EPS growth averaging 12%, and ROE over 15%. Only their PE is at 25 and PEG at 1.79.

I plan on starting a position to add some recession defensive holdings to my portfolio while still benefiting from mid cap growth. While the laundry detergent market has become saturated they are expecting growth from their recent vitamin acquisition.

Stock Research: ROL

In order to balance out my large cap heavy portfolio I started searching for sub-10 billion companies. Rollins (ROL) was one that showed up in my screener that had me curious because it met a lot of the Lynch metrics. For one "Rollins" is a boring name and according to Marketwatch there are only 4 analyst watching it. In fact this company is so boring Google finance didn't even have a link to their website and after reading the description I still didn't know who they were. Once I found the website I realized this is a parent corporation for many pest control companies, one of which is Orkin which I have heard of.

Rollins is a profitable company with good operating margins above 10% and high ROA and ROE with no debt. It's EPS has also consistently grown an average of 10% over the past 10 years. They are a global company and have a strong position in the sector with few competitors and a business that's recession proof.

While most of my Lynch and Graham metrics were met, the stock's high PE ratio of 35 isn't justified by its low growth rate of 10%. This is one I'll revisit when either the growth rate picks up to over 15% or the PE drops to around 25.