Lots of readers have been sending questions our way about Porter Stansberry’s new high-cost Stansberry Venture Value newsletter, which is his attempt to build a service that essentially recommends small cap value stocks for long-term compounding value.
An admirable goal, and I guess we’ll start to learn in the coming year or two how it’s going so far — he says in his new promo for this service, which he describes as a search for “10X Stocks,” that he is making the first two recommendations right now… and readers are curious about what those might be.
Most folks aren’t going to plunk down $7,999 for a lifetime subscription to something that was just launched (that’s what Porter is charging for “charter” subs — for $7,999 plus annual $299 renewals you get Stansberry Venture Value, the new service, along with their other high-end newsletter, Stansberry Venture Technology (which is Dave Lashmet’s letter, it took the place of the old Phase 1 letter Stansberry previously offered, which focused on illiquid mining, biotech, tech and other small cap picks, and has been through a number of editors over the years).
I’m a little skeptical that they’ll be able to consistently sell a high-cost newsletter built on a long-simmering idea like “capital efficient small cap value, with compounding power” — so it probably makes good business sense that they’re doing this as an up-front “lifetime” charge. Most investors, regardless of whether or not they know that they’re being crazy, prefer to chase hot stories… and small value stocks are almost never hot stories, if they do provide 1,000% returns it’s almost always over decades. But, well, if anyone can sell it it’s probably Porter — he’s certainly built a massive and successful business on the back of his fantastic ability to sell newsletters.
But that’s beside the point — the question from readers is, what are those initial picks that he’s making? I don’t know that I can give you a definitive answer, he’s a little tight with the clues in this pitch… but we’ll see if we can at least come up with some guesses for you on this Friday afternoon.
Porter launches with a look back at the companies that could have provided you with 1,000%+ returns over the last 20 years or so — and he discards the ones that, like tech and biotech, were largely lucky (and far riskier) picks that you wouldn’t have chosen out of a crowd when they were young… the “regular” small companies that can grow like that is what he’s looking for:
“They were stocks with sustained 20-year run ups that, with dividends reinvested, look like this:
“Polaris Industries (snowmobile manufacturer)… total gains of 1,951%
“Eagle Materials (cement and concrete)… 2,393%
“PACCAR (heavy duty trucks)… 2,609%
“Expeditors International (logistics)… 3,261%
“RLI (specialty insurance)… 2,951%
“For some reason, most investors don’t get excited about these kinds of stocks.
“But I’d say that’s because they don’t know the secret I’m about to share with you.
“And here’s the part that thrills me: these are the safest and easiest ’10x’ companies to find and buy.
“So how do you do it?
“That’s the secret I’m going to share with you today…”
Who doesn’t love a secret, right? He calls these “D-Factor” companies:
“Companies that radically outperformed everyone else in steady, reliable “meat and potatoes” businesses…
“…typically without ever taking a dime from venture capital… waiting for an approval from the FDA… or transforming the world with a device like the iPhone.
“This second group does not have an official name. Until now.
“I call these firms “D-Factor” companies.”
And these are apparently often the kinds of companies that lots of value investors like to look at…
“… a lot of the highest-returning stocks we identified fit into categories we already know inside and out, and love. Such as…
“Companies that sell addictive products like alcohol and nicotine.
“Retailers that sell basic goods whose sales don’t falter in a bad economy.
“Companies with a beloved brand and a wide “moat” to competition.
“But there’s one more critical attribute…. Every ‘10x’ stock in our study started out with an extremely low D-Factor.”
He says that this “D-Factor” screening combines three main factors — size (looking for smaller market cap stocks), revenue growth, and capital efficiency.
And, he says, he also incorporates measures of debt, valuation and volatility… so it’s not a simple screen that we can replicate easily without a lot more information, but we know that Porter has often talked about capital efficiency — which is, in shorthand, the ability of a company to finance its own growth and still return a lot of cash to shareholders… capital efficient firms make enough money, or have low enough capital requirements, that they don’t have to sell more shares or borrow money and make frequent big capital investments (new buildings, new facilities, new equipment) to grow.
And then we get some hints…
“I recently shared a low D-factor business I love at a private conference in Las Vegas, where attendance tops out at one or two thousand people.
“In fact, if you had been Vegas this past year, you would have heard about one of the most incredible low D-Factor stocks I’ve ever come across.
“It’s the ‘10x’ version of McDonalds….
“But at our recent conference in Las Vegas… I mentioned the name of a company that’s very similar toMcDonalds. Its business is built around a rival brand of burgers and fries (one that you’ve definitely heard of).
“And… just like McDonalds… it’s found a way to generate huge amounts of cash through the franchise model.
“But there’s one big difference:
“This company has a low D-Factor… with a market cap well under $1 billion.
“And that’s after rising 150% since 2012….
“I’d honestly be surprised if this stock isn’t at least a 10-bagger in the coming years.”
This one I can’t be sure of, but the best guess I came around to after churning those clues around in the ol’ Thinkolator for a while is the biggest franchisee in the Burger King system, Carrol’s Restaurant Group (TAST).
It’s a bit odd, because they don’t really benefit from that “royalty” model like McDonald’s does — they pay royalties to Burger King (QSR), not the other way around (though Burger King does own 21% of TAST, and TAST owns “right of first refusal” for additional franchises in about a third of the country).
The “way to generate huge amounts of cash” that they’ve found, if this guess is right, is essentially arbitrage — they’re bigger, more efficient, and have better pricing power with suppliers and cheaper access to capital than small franchise operators, so they instantly make restaurants more profitable as soon as they buy them from those small operators.
Does that make it a compelling buy? I don’t know — I looked briefly at TAST a while back because they also spun out Fiesta Restaurant Group a while ago (Pollo Tropical and Taco Cabana are the brands there — Chris Mayer, with a similar focus on 10X long-term returns, teased FRGI as one of his watchlist stocks back in September).
Why make this a match? Well, it is focused on a competing brand of burgers and fries… and the stock has has had returns of about 150% since 2012, depending on which dates you use (I can’t find many other sub-$1 billion hamburger companies that can say that — Nathan’s Famous is probably a closer match on some of the metrics hinted at, but it’s certainly not a hamburger chain). I wouldn’t say that it’s particularly capital efficient, and it is fairly high in debt, but it looks like they are good financial managers. The company has earnings of about 50 cents a share, and isn’t expected (by the small number of analysts who follow them) to grow earnings very quickly, so if there’s something particularly appealing about TAST to put you over the top into being enthused about investing in the stock, let me know.
And, as I said, that’s just a guess.
The other reasonable match is A&W Revenue Royalties (AW.UN in Toronto, AWRRF OTC in the US), which is dramatically more capital efficient — they really do just own the royalty chunk of the A&W restaurant chain, which is still fairly popular and widespread in Canada, and they have a pretty consistent record of 10%-ish revenue growth with very low cost of capital and, as effectively an income trust, pay out all their earnings as dividends (current yield is right around 4.5%, it appears)… so if you include dividends, the total return since January of 2012 is indeed around 150%.
A&W has been covered quite a few times in this space because it was a high yielder that has been pitched by a couple different newsletters over the years, the biggest risk I’d identify here, without having looked at the company’s financials at all and with no idea what their growth ambitions might be, is that the stock has historically traded largely as a dividend vehicle… and the dividend yield is about as low as it has ever been (it has averaged about a 6% yield since the financial crisis, and often had a double-digit yield before that… so if investors demand a higher yield like that from A&W in the future, the stock price will have to fall unless they’re raising the dividend dramatically — the dividend does go up, but it’s usually pretty gradual… the dividend per share today is about 25% higher than it was a decade ago).
For what it’s worth I also quickly looked at Red Robin, Habit, Shake Shack, Bojangles, Arcos Dorados and Biglari Holdings, which can all arguably be called sub-$1 billion hamburger restaurant chains, and none of them popped to the top of my list… and some that might be more compelling miss the cutoff because of larger size (Jack in the Box, Wendy’s, Sonic, etc. etc.). It’s certainly possible I’ve missed others, I freely admit that this is mostly a guess. Feel free to comment below if you have other thoughts on that. I do like the notion of being atop a franchise system, but the idea of being a rung below the top as the top franchisee instead of the franchisor I’d have to work a bit to get my head around.
And… that’s all I’ve seen so far. I hear tell that Porter also hinted at another pick or two on the webinar he hosted when this new product was introduced recently, but haven’t reviewed that call (I just went by what’s in the ad that’s currently circulating)… maybe I’ll have a chance to go back and take a look at that in the future, or you, dear readers, can feel free to chime in if you have thoughts on “10X” value opportunities, pitched by Porter or otherwise.