It’s pretty clear that more and more shopping is being done online these days to the point that retailers who were behind the curve or still brick-and-mortar focused are under a lot of pressure, leading to store closings and even a wave of bankruptcies. I recently made two new investments that I believe are positively affected by these trends. One is a high growth stock that goes with the trend and the other is an income focused (dividends) contrarian investment.
The Growth Stock – Cogint (COGT)
I’ll start by saying that Cogint is a small company and a very volatile stock so it’s probably not appropriate for conservative investors unless it’s a small speculative position. Cogint does Data Fusion which is a subset of Big Data. They basically accumulate tons and tons of private and public data that seems totally unrelated to “fuse” it together into insightful and actionable information for companies by building profiles on people. This offers online advertisers valuable insights in consumer trends. In a world that is becoming ever more interconnected, being able turn all of this data into actionable insights is immensely valuable for companies.
Cogint has gone through a big transformation over the last year and half by merging with two other companies, IDI and Fluent. Together, they have built a unique data platform that merges both real identity and intent/interests through both offline public information like bankruptcies, court rulings and auto records, and online data like surveys, websites you visit, things you purchase, etc. For example, IDI has access to regulated data while Fluent is one of the best at capturing real-time data and activity online. This makes the full scope of insights that Cogint can reach very broad.
On their recent earnings call, management highlighted strong growth they’re seeing in performance marketing, which is basically lead generation for companies by telling them who to market to and when. Cogint gets paid when their insights lead to sales and with more shopping being done online, there’s a lot of demand to optimize online marketing. Additionally, they just launched their information services platform last May so this is still in the early stages of ramping up.
I initially found the company after it popped up on a screen from a lot of insider buying. Cogint has a very experienced management team that includes some of the pioneers of the data fusion industry 10 years ago. They built one of the first Data Fusion companies and sold it for close to $1 billion (which is now their outdated competition), and it looks to me like they’re doing it again. They know the value that they have in their proprietary platform and now that growth is ramping up, they’ve been buying a lot of stock. Margins are currently in the mid to 20% range but management has also highlighted that past platforms were running in the 70% to 80% margin range. I think Cogint is potentially at the early stages of a multi-year runway of rapid growth.
Cogint (COGT) – 3 years, weekly
The Income Stock – Tanger Factory Outlets (SKT)
Tanger is a pure-play outlet shopping center Real Estate Investment Trust (REIT) that operates 44 upscale properties in the US and Canada. As retail stocks have come under pressure in the last year, the mall based REITs have been pulled down as well. However, I think this is the classic throwing the baby out with the bathwater scenario. A lot of the traditional enclosed malls and strip malls have been struggling from department store weakness but the outlets have held up relatively well and I believe will actually benefit from the troubles that mall-based retailers are going through.
For starters, I think the concern over the death of brick-and-mortar stores is overblown. People in the investment world are acting like physical stores are going to totally disappear forever, which is ridiculous. There are certain things that people are willing to buy online, and there are some things that they want to touch and feel and try on before they buy. I went to the outlets closest to my house a few weeks ago and it was packed (Under Armour’s outlet was by far the most popular). Physical stores aren’t going to disappear, we’re simply going through a long unwind because there was entirely too much existing retail space in the US (far more than any other country on a per capita basis). Tanger estimates that total outlet retail space is about 70 million square feet in the US, which is less than the total retail space of the city of Chicago alone.
The outlets offer companies a way to sell directly to the consumer without a department store, like Macy’s, acting as the middleman. This saves money for the customer. Plus the outlets often have last year’s inventory so they’re willing to sell it on sale. In an environment where the consumer is hurting from continually rising costs (like healthcare) but stagnant wages, people will try to save money wherever they can. This is similar to my thesis on Ross Stores.
Tanger hasn’t been immune to the slowdown in the retail industry though. They’ve had some companies break their leases early as they’re closing stores across the country. They addressed this on their recent earnings call. It happens every cycle and they view it as an opportunity to bring in stronger companies (the hot brands that are in demand). It’s a short-term blip that leads to long-term growth. They also mentioned that there’s very strong demand from some of their larger tenants for additional locations since, when managed right, the outlets tend to be cash cows for these companies. They’re better diversifying the tenant mix as well. 10 years ago clothing retailers made up over 80% of tenants. Today it’s down to 58% as Tanger is bringing in more companies in the home goods and fast-casual food arena.
From their recent earnings release:
“Outlets remain a very important and profitable channel of distribution for brand name and designer retailers and manufacturers, as evidence by our high level of occupancy. Our consolidated portfolio was 96.2% occupied as of March 31, 2017 despite having recaptured 324,000 square feet of space since the beginning of 2015 related to bankruptcies and brand-wide restructurings by retailers. During the first quarter of 2017 we extended our record to 54 consecutive quarters of consolidated portfolio same center net operating income growth. We are pleased with these achievements notwithstanding the challenging environment for retailers,” commented Steven B. Tanger, President & Chief Executive Officer. “Given solid retailer demand for outlet space and our fortress balance sheet, Tanger is positioned to weather current headwinds and store closings in the retail environment, as we have successfully in similar parts of the cycle for the past 36 years,” he added.
What I like about Tanger specifically is the company’s discipline. They have a very strong balance sheet, certain covenants that restrict them from taking on too much debt, and rigid rules about opening new locations. They won’t take the risk to build a new outlet center without having at least 60% of the space filled through lease commitments and just recently converted a big chunk of floating rate debt into long-term fixed rate debt. This allows them to manage down cycles, like right now, and prevents them from getting into trouble with low return properties. Tanger has also increased the dividend each year since going public in 1993, pays out less than 60% of Adjusted Funds from Operation (AFFO – which is cash flow for REITS) which gives them room to boost the dividend while still being able to invest in their properties, and have consistently maintained over 95% occupancy ratios.
The stock has been hammered over the last year, dropping over 35% from its high. This has pushed the dividend yield up to 5%. The only other time Tanger has traded at these valuations was the Great Recession in 2008/2009. I estimate the NAV to be around 25% higher than where SKT is currently trading which provides a very nice margin of safety in one of the best run REITs that focuses solely on an area I expect to see stable growth. Tanger has traditionally traded at a premium (with a corresponding lower dividend yield) to some of the other premium mall REITs but is now trading at a discount. I think this is a big overreaction, likely exacerbated by the grouping of stock movements from ETF fund flows, that has created a very attractive opportunity for dividend income investors. I haven’t seen too many glaring disconnects like this since 2009. Lastly, Tanger has a couple of joint ventures with Simon Property Group (SPG), the behemoth in the premium mall REIT space (17x larger than Tanger), which means Simon knows Tanger pretty well. If Tanger’s stock remains depressed at these valuations, I would not be surprised at all to see Simon make an offer for the company.
*all slides came from Tanger’s recent earnings presentation
Tanger (SKT) – 5 years, weekly
Thanks for following!
-Nick