Here’s a brief overview of some recent investments made over the past few weeks.
TripAdvisor (TRIP)
We purchased stock in TripAdvisor as a growth investment. This is a unique stock that has tremendous long-term growth potential if management can execute. I’m sure almost everyone is familiar with TripAdvisor. They run a site where users can write reviews of travel experiences on everything from destinations, hotels, tours, restaurants, etc. I believe they have successfully achieved what nearly every tech company is shooting for: the network effect. This is the term that describes when a network starts to fuel its own growth. For example, more users on the site means more reviews; more reviews leads to more users and more hotel/vacation listings; more listings attract more users, and so on in a virtuous circle.
Their global network of 3.5 billion users per year and almost 500 million per month is what makes the company unique. The monthly user base has grown by almost 30% annually since 2011. At this point it would be extremely difficult for a competitor to replicate with any success. Most of the competition has focused on the actual booking of hotels and flights whereas TRIP has spent years focusing on building the network and is just now starting to also list bookings on the site. Despite influencing nearly half of all travel decisions, they capture less than 0.30% of all global online travel spending, leaving a long runway to gain market share over time.
The company has struggled to monetize the user base (make money from bookings) the past couple of years so the stock has been crushed. I started to look into the company over a year ago but thought it was still too early. With the stock trading near a 5% Free Cash Flow yield, I now think it’s an attractive entry as a long-term investment. There is pressure from increased TV advertising in the industry which could hurt earnings in the short-term but I feel it’s now worth the risk. Plus, the price action was very positive following the latest earnings release (big turnaround on high volume). This is usually a sign that shorts are covering and the bottom is near. The best entries are typically made early, ahead of the full turnaround, when it’s still contrarian.
There’s also an unusual situation with TRIP that I should mention. John Malone’s Liberty Media owns a very large portion of TRIP stock through a separate entity called Liberty TripAdvisor Holdings (LTRPA). They own 22% of the common stock but another 12.8 million shares of the class B voting shares which gives them a majority stake from a voting perspective. John Malone is notorious for creating complex investment structures and is a stickler about taxes. He acquired the TRIP stake at a very low cost so it’s unlikely he’ll sell the shares unless it’s back to TRIP in a tax efficient deal. This means that TRIP is unlikely to be taken over by a competitor (because LTRPA will vote against it) but I contend that this is a good thing. I think TRIP has the potential to return multiples on our initial investment so I don’t want someone coming along and acquiring the company.
TRIP – 6 years (weekly)
Assurant (AIZ)
Assurant is an insurance company that has been going through a multi-year transformation of their business model to focus on their highest return business units and create a more stable profile by beefing up the fee-based revenue units. Most people know them as Assurant Health but they actually wound down their health operations and spun-off their employee benefits business over the last year or so. The business now has 3 main units:
- Lifestyle – Warranties that cover personal items like mobile devices, appliances, etc.
- Housing – Renter’s insurance, mortgage insurance, title insurance, etc.
- Preneed – Insurance policies that cover funeral expenses
The Lifestyle and Housing units are by far the two largest segments, but the Preneed unit actually delivers the highest rates of return. By focusing on warranties instead of your more typical insurance coverages, there’s less competition and the overall cash flow profile is more stable year to year. The main focus has been on building the recurring, fee-based lines of coverage. These types of businesses generally demand higher valuations in the stock market but I don’t think this is fully reflected yet in AIZ’s stock because it’s still trading in line with most P&C insurers on a P/B and dividend yield basis.
The other attractive feature is the company’s capital return policies. Assurant has boosted the dividend (currently yielding ~2.25%) each year since they went public in 2004 and has also bought back well over 60% of the shares outstanding. Their main focus right now is making acquisitions that can boost growth but the stable cash flow profile will allow for continued increases in the dividend and opportunistic buybacks as well. Management expects to increase ROE over time and grow EPS by 15% per year moving forward.
AIZ – 1 year (daily)
First Hawaiian Bank (FHB)
Lastly, we bought stock in First Hawaiian Bank as an income investment. FHB is a small regional bank that operates primarily in Hawaii but also has a few branches in Guam and Saipan. I much prefer the smaller regional banks over the large Wall Street investment banks. The company was privately held by BNP Paribas until last year.
First Hawaiian is the oldest and largest bank in Hawaii with 36.6% market share. They offer most of the traditional banking services like consumer and commercial lending, deposits, credit cards and wealth management services. Hawaii has one of the brighter economic outlooks for states in the US. The population is expected to rise 7% annually, visitor expenditures have been climbing at a 4% clip, and the unemployment rate is down to 2.7% as of July. This has translated to consistent deposit and loan growth over the years, and a track record of higher profitability than their competitors.
The stock yields over 3%. With a payout ratio under 60%, there’s plenty of room for future dividend increases. The banking business model is also leveraged to changes in interest rates. They make most of their money on Net Interest Margins (NIM’s) which is the difference between the rates at which they can borrow and lend. Rising short-term interest rates increase profitability so it adds a nice bit of diversification against bonds through the inverse correlation.
FHB – 1 year (daily)
FHB (black) vs 10-year Treasury bond (red): consistently negatively correlated
Thanks for following!
-Nick