CWS Market Review – May 18, 2021

“I have no idea how this works.” – Dave Portnoy

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You’re not alone, Dave. I recently said that I’ve been waiting 15 years for Nike (NKE) to pull back. Alas, it’s never hit the bargain bin. The sneaker company only seems to climb higher.

See that flat blue line? That’s actually a 1,075% gain for the S&P 500. It just looks flat in comparison to 26,000% for Nike.

For the overly literal who missed my point, I meant to say that sometimes it’s worth paying a premium for a company. Especially if it’s a premium company. There’s little point in trying to save 15% on the buy while missing the next 1,500% move. Pennywise and billions foolish.

This is a key point in stock analysis. Nike is a wonderful company and by most conventional metrics, it’s over-priced. It’s almost always overpriced. Even now it’s going for 43 times this year’s earnings. Yet it’s still done so well.

What are we missing? When you’re overly focused on a stock’s value you may overlook its most important asset, that being its ability to grow. All investing is at some level growth investing. A good investment may double its P/E Ratio. It’s rare but it happens. But a company often can grow the E in the P/E Ratio (the earnings) by many, many fold.

Here’s a thought exercise. Imagine if you know beforehand that a stock will grow its earnings by tenfold in, say, ten years. Are you going to haggle much over 10 cents on the buy price? I wouldn’t.

Warren Buffett often cites Ben Graham as his mentor. Buffett worked for Graham, and his eldest son is named Howard Graham Buffett. But there’s another inspiration to Buffett’s thinking and that’s Philip Fisher (the father of Ken Fisher). Fisher as much as anyone can be called the father of growth investing. His best-known book is Common Stocks and Uncommon Profits. Fisher stressed the importance of a long-term perspective and buying for growth.

John Train said that Warren Buffett is 85% influenced by Benjamin Graham and 15% by Philip Fisher. That sounds about right. Of course, too much of a focus on growth investing can be a pitfall as well. It can lead you to vastly overpay for a stock. With investing, there’s a magic formula outside of discipline and patience.

I was recently looking at the stock of Celanese (CE). This is one of those big companies that doesn’t get much attention in the trading universe. The company has a market cap of $20 billion and about 8,000 employees. Still, you rarely hear it mentioned in investing circles.

What do they do? Celanese is the world’s leading producer of acetic acid. Sexy, I know. Still, the stock has outperformed Netflix over the past one, two and three years. Who would have guessed that?

The truth is, there are lots of companies like Celanese but too many investors shy away from investing in all but a few well-known stocks. There are thousands of stocks out there and they’re not all overpriced.

A good clue that a company has a strong market position is what I call the nice, smooth earnings line. This is when companies consistently increase their earnings-per-share.

Here’s an example. This is the earnings-per-share history of AmerisourceBergen (ABC).

2005: $0.83
2006: $1.08
2007: $1.31
2008: $1.46
2009: $1.69
2010: $2.17
2011: $2.54
2012: $2.76
2013: $3.14
2014: $3.97
2015: $4.96
2016: $5.62
2017: $5.88
2018: $6.49
2019: $7.09
2020: $7.90
2021: $8.53 (est)
2022: $9.10 (est)
2023: $9.93 (est)

Notice how it’s a nice, steady climb.

My Watch List

I’m often asked how I go about finding the stocks for my Buy List. What I do is track a Watch List of about 100 stocks. These are stocks that I generally define as good stocks. They usually have thriving businesses and consistent operating histories.

I think of the stocks on the Watch List as the minor leagues and the Buy List is like getting called up to the majors. I’m constantly adding and deleting names to the Watch List. I’m not terribly disciplined, and the list often grows larger than 120 stocks. That’s too many. I’ve recently pared the list back to 100 stocks.

Here’s a sample of 20 stocks that are currently on my Watch List.

You can see the entire list by joining our premium service.

Stock Focus: Tyler Technologies

I’ll highlight one of the Watch List stocks above. Tyler Technologies (TYL) of Plano, Texas is the largest U.S. software company that’s solely focused on the public sector. That’s a nice market to focus on since the government has deep pockets and it never goes bankrupt.

Tyler’s software comes in handy for a local government trying to manage its mission. This includes dozens of different applications. Local governments have to do a lot from managing payroll and accounting to billing and HR management. Tyler helps smooth the process. More importantly, it controls costs.

Tyler divides its software business into six categories: appraisal and tax software and services, integrated software for courts and justice agencies, enterprise financial software systems, planning/regulatory/maintenance software, public safety software, records/document management software solutions and transportation software solutions for schools.

Tyler has implemented 21,000 installations in more than 10,000 local government agencies. Tyler doesn’t just work in the U.S. The company has aided governments in Canada, Australia and many other countries.

Consider some numbers. The software market for state and local governments is currently at $15 billion per year. In the U.S., the government exists at several levels which means there are thousands of government agencies at the state and local level, plus school districts. Moreover, many of the current systems used by governments are outdated and in desperate need of an upgrade. You’d be shocked to learn how many government offices still use filing cabinets.

It looks like this year Tyler will pass the $1.3 billion revenue mark, plus reach 5,600 employees.

Last year, Tyler’s subscription revenue grew 12.6%. Free cash flow was up over 50%. Approximately 30% to 50% percent of Tyler’s new software clients choose their software-as-a-service (SaaS) model, as new business continues to gradually transition toward subscriptions.

Tyler is very popular with its client base. The company maintains a 98% retention rate. That’s very good when two-thirds of your revenue is recurring subscriptions. The company has a solid balance sheet. Since 2002, Tyler has bought back nearly 28 million shares.

Tyler has impressive plans for growth. The problem with local governments is that they often operate on several disparate systems. In simple terms, they don’t talk to each other. They have no incentive to. Tyler wants to bring them all together. That way, the government can be more efficient and more responsive to their constituents.

Here’s Tyler’s remarkable growth in EPS. Another nice, smooth line:

2012: $1.00
2013: $1.51
2014: $2.09
2015: $2.54
2016: $3.49
2017: $3.92
2018: $4.80
2019: $5.30
2020: $5.52
2021: $6.15 est
2021: $7.09 est

Like Nike, I’ve been waiting for Tyler to get clobbered, and we recently got our chance. The stock had an earnings miss for Q4. The shares also got dinged after Tyler went to the bond market to fund some recent acquisitions.

A few weeks ago, Tyler reported Q1 earnings of $1.43 per share which beat the street by 11 cents per share. That was up 14% over last year’s Q1. Not good enough. In March, Tyler was as high as $480 per share. Lately, it’s around $400.

This year’s estimate for $6.15 per share is ambitious but very doable. Best of all, the American Rescue Plan Act has $350 billion earmarked for state and local governments.

This is a strong growth company with a solid moat. I’d like to see TYL come down a lot more. Still, the ghost of Nike shares lost haunts me.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

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Posted by on May 18th, 2021 at 3:49 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.