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“Seven Times More Profitable Than Apple with Zero Competition”

What's Cabot's August "Stock of the Month?"

By Travis Johnson, Stock Gumshoe, August 20, 2014

Now that Apple is a few weeks from the release of their next i-device, lots of teasers will come floating out about “better than Apple” or “buy this before Apple’s new iPhone” or the like. That’s a pattern we’ve seen ever since the original iPhone sent shares of suppliers soaring — or, indeed, even before that when suppliers to the iPod (remember when that was the world’s breakthrough “must have” product?) could double in a matter of weeks.

But this time our “more profitable than Apple” stock has, well, nothing to do with Apple at all. This is a teaser pitch for the August “Stock of the Month” from the Cabot folks, who similarly tease us most months about the next hot stock on their radar — Cabot Stock of the Month is one of those “entry level” newsletters that tries to take the best idea from across a publisher’s stable of letters and share it each month. Last time we looked at this letter a couple months ago it was teasing Qualcomm (which is an Apple supplier, coincidentally), which is a fine stock but fell after their last earnings result because of soft forward guidance… so what are they teasing this time?

Here’s how they get us interested:

“Just Look at My August Stock of the Month and You’ll See Why I Can Make You this Money Doubling Guarantee

  1. This company is riding a wave of unstoppable growth that’s already made it seven times more profitable than Apple, handing investors 1,446% annual average gains since March of 1992. That’s enough to turn a $10,000 investment into $3.2 million!
  2. Analysts expect the company to deliver another double-digit earnings surprise not only for Q3 but also for FY 2014—all while they’re projecting another 21% earnings growth for FY 2015.
  3. When you add to that the fact that the company has virtually no competition in its space, you can see why I’m willing to back this recommendation with a 12-month guarantee.”

And some specific clues? You betcha — here’s what they give us:

“… this is the kind of company that Ray Kroc worked for before he founded McDonald’s $75 billion empire.

“But instead of selling milkshake mixers across the country, the family behind this monopoly-like fortune manufactured and sold ovens to restaurants.

“Today, they’ve expanded their operations to not only making dishwashers, refrigerators, freezers and ice machines but also mixers, slicers, shredders, drink dispensers, and ventilation systems”

And they provide a long list of their customers, including pretty much every fast food or fast-casual restaurant chain you’ve ever heard of, and say that…

“… they dominate this sector no differently than Apple dominates digital music, Sirrus dominates satellite radio, and Space X dominates commercial space in the United States—only their profits are much, much bigger.

“So it’s no wonder that the world’s top 20 institutional and mutual fund holders own nearly $8 billion worth of this company’s shares.”

So who is it? Thinkolator says it’s certainly Middleby (MIDD), which has been around for 126 years after starting as Middleby Marshall, a producer of industrial-strength “movable ovens” (think assembly line).

And this stock always makes me a big grouchy, because I owned it back in 2005 at around seven or eight dollars a share (split adjusted) and sold most of it at a 100% gain a year or so later because it was getting a really pricey growth valuation (I had bought it because I thought it was cheap). A quick look at the chart will tell you that after it fell back down to $8 or so during the financial crisis it proceeded to become one of the great growth stocks of the last five years — getting over $100 a share for a while before coming back down to the current mid-$80s. I’ve glanced at it a few times along the way, but the weight of my personal experience with the stock (“I missed it”) has kept me from getting back in.

Which is a personal failing, I recognize. One of the many psychological things that keeps us out of good investments. But recognizing the mistake doesn’t mean I can always avoid it.

Middleby has been brilliantly built through acquisition by CEO Selim Bassoul.. and they’re not quite a monopoly provider of food service equipment, but they do get awfully close to that in some segments, particularly when it comes to their quick-cook ovens or conveyor ovens that you see in pretty much every fast food place or food court. They’ve been growing earnings at a 20%+ clip pretty consistently for years, and analysts think they’ll continue to grow earnings at 20% or more a year for the next five years (though it’s expected to be down from that slightly in 2014, with growth of 17% anticipated).

So it’s definitely a growth stock, a play on the continuing wave of restaurant growth around the world and the need to continue upgrading and making restaurants faster and more efficient… and more recently, with their acquisition of Viking, it’s become somewhat of a play on housing. And it’s priced as a growth stock at about 26X earnings.

If they are able to come anywhere near those analyst growth estimates (and the next year’s estimates have been rising lately), then that’s actually a pretty nice price to pay for the stock — and a $5 billion industrial stock that’s growing earnings at 20% and has been consistently very well managed for a decade, well, that’s nothing to sneeze at… but they probably do have to keep the acquisitions train going if they’re going to continue to grow like this. (Yes, I thought they were going to start having to see growth tail off eight years ago, too, since they were looking expensive then at 30+ times earnings, but growth has kept rolling right along).

As a growth stock, they’ve had some big ups and downs — up big when they beat on earnings back in February, down pretty sharply when they disappointed on earnings three months later — but over the long run it has worked out pretty well. I think I first hear of it from Tom Gardner at the Motley Fool back in the early 2000s when it was a small cap stock, maybe in 2003 or 2004 (I don’t think I’ve written about them since Stock Gumshoe launched back in 2007) … so if he’s been recommending it all along the way that’s been a nice ride.

Of course, I’m still bitter… so take your own opinion on this one and let ‘er rip — use the friendly little comment box below if you’ve got a perspective to share on Middleby.


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AllanTrends
7 years ago

Bitter? You call that bitter? I bought AAPL in the 1990’s at $13, held for a year and sold out at $26, thinking I was master of the universe and then refused to buy it back to this day. Now THAT’s bitter.

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gummydave
gummydave
7 years ago
Reply to  AllanTrends

Wow, I was just going to agree with Travis, having also sold MIDD way too early. But I think you “win” this one Allan. At least you just made the rest of feel a bit better 🙂

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matt
matt
7 years ago
Reply to  AllanTrends

Ditto. I bought AAPL in the 1990’s at $13 also. I sold at $70 thinking I was a friggin’ genius. I looked at AAPL a few years ago in the high 100’s thinking no way it was worth almost two hundred dollars. Yeah, I’m a friggin’ something alright…

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Eric
Eric
7 years ago
Reply to  matt

Apple is up over 4400% in the last 10 years meaning a $10,000 investment 10 yrs ago, would be worth close to $500,000 today. Compare that to Google’s gain of 1900+% as it celebrated ten yrs this week as a publicly traded co.

cxtboyko
cxtboyko
7 years ago
Reply to  matt

OK, got you both beat, boys. I bough Apple at around $20 back then and sold it AT A LOSS during a small pullback. Same for Starbucks. Poor, naive me.

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retireby52
retireby52
7 years ago
Reply to  cxtboyko

Yep who was it that said the better the company the higher the chance that you’ll sell too early. I wonder if PCLN will be one of those for me since its already up 30% since I sold it. Even worse I sold LNG.AX at around 60c about 3 months ago and its now at around A$4 with I think Seth Klarman recently buying

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Bob Baker
7 years ago
Reply to  matt

Matt,
All we can do,is learn from our past mistakes.
Since June, people have a rare opportunity to buy AAPL at still a low price.
Those who do, I believe will be happy at Christmas time.

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jonomalley
7 years ago

Thanks for brightening everyone’s day, Alan! 🙂
I’ve been watching MIDD for a year after hearing about it from the Fools, and i kept waiting to buy it on a good dip, but it seems to hold pretty steady. The day I finally decided to pull the trigger, about ten days ago, I opened my etrade app to buy it and behold: a 15% jump (commence throwing iPhone). I remember watching Tom Gardner of the Fools interview him. One statement really stood out: he’s mentioned realizing he had become a 10 bagger in the past decade and was very determined to do it again this next decade. Tom Gardner (the lesser of the two Gardner bros apparently at stock pics- but still a good record I think) refers to Bassoul as his favorite of all CEO’s, which is a pretty big thing for a guy in his position to say. I’m just going to buckle down and buy this one for the long haul and stop waiting for a dip. Incredibly well run, profitable company that has too many good things going for it to be a losing proposition over the long term. Thanks for the post, Travis.

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Jim Leavenworth
Jim Leavenworth
7 years ago

Travis, dude, surely you jest. Just going by the CW most options expire worthless, so it stands to reason that most winners of the options game are the options writers and personally I wouldn’t short a stock even if I had a crystal ball.

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arch1
7 years ago