Vodafone Group Plc (ADR) (VOD) is expecting $130 billion in cash and stock from Verizon Communications Inc. (VZ) early next year when Verizon buys Vodafone‘s interest, and Vodafone is looking to maintain its 5% cash dividend post-deal, says Stuart Shikiar, Chairman and Chief Investment Officer of Shikiar Asset Management Inc.
“Vodafone is based in London, and for the last 15 years it has had a 45% interest in Verizon Wireless, which is the real cash cow of Verizon, and that asset is extremely valuable — so much so that Verizon decided to buy it from Vodafone. At closing, early next year they will pay Vodafone $130 billion in cash and Verizon stock,” Shikiar said.
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Vodafone currently pays a 5% cash dividend, which Shikiar expects to continue, and as a company with a low multiple, high cash dividend and other catalysts to propel the stock higher, VOD is one of Shikiar’s larger portfolio holdings.
“The catalyst there was that we own a company in two businesses we like, technology and telecommunications. Its valuation when we purchased it was very reasonable. Vodafone pays a 5% cash dividend, which it still will post deal, and we were very happy to own it whether or not they sold Verizon Wireless, but our view was that at some point they would indeed get a deal done and that it would become an even more attractive investment. Vodafone really checked all the boxes that we look for in an important holding, in fact our third largest,” Shikiar said.
Its not unusual that a CEO of a company will cheer his earnings, especially when he beats his competitors in profitability. Dr. Patrick Michael Byrne is no exception. As the CEO of Overstock (OSTK), he boasts in a recent interview that “a well known hedge fund manager” declared that the CEO has become “the most hated man I’ve ever known in my entire life.”
Dr. Byrne goes on to declare in this interview that the profitability of Overstock should create a valuation greater than Amazon, the growth-stock-investor favorite that lost over a $100 million in the last 12 months. Dr. Byrne notes: “But they were trading at about 800 times our valuation, I think, so that was bizarre. But according to value investing, what really matters is not absolute dollars earned; it’s dollars of earning per share. And I suspect we are going to make more money per share this year than Amazon is, and I’m not sure that it’s not a reasonable goal for us to keep our per-share earnings higher than Amazon… It is going to be a great test of value investing.”
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Dr. Byrne does not recommend Overstock for retail investors as he believe hedge funds increase the volatility of the stock beyond the tolerance of individual investors:
“…We are a battleground stock. That means there is a lot of manipulation in our stock. There are some hedge funds on one side who picked our stock as a good stock to target and manipulate. A bunch of really bad guys got involved in our stock, including some people who are now in the headlines with handcuffs on them, so it’s a dangerous stock. “
As the development of Overstocks’ business overtakes the reputation of its controversial CEO, there is the possibility that value investors will come to embrace the stock. Until that time, investors can only watch from the sidelines as the company outperforms Amazon on profitability metrics.
Jim Birchenough, M.D., is a Managing Director at BMO Capital Markets and is their senior biotechnology analyst. In an interview less than a year ago, he named Onyx Pharmaceuticals (ONXX) as one of his top midcap picks. Since Onyx just announced its acquisition by Amgen (AMGN), I thought I would take a look at the other recommendations from the good doctor.
In an astonishing group of buy calls in his interview, the other biotech stocks in his recommended portfolio have an average return of over 30%.
| Company | Ticker | 9.17.12 Price | 9.9.13 Price | Change |
| Celgene | CELG | $76.81 | $148.24 | 86% |
| Gilead | GILD | $32.90 | $62.08 | 95% |
| Regeneron | REGN | $149.71 | $274.00 | 83% |
| Onyx | ONXX | $81.26 | $124 | 52% |
| United Therapeutics | UTHR | $58.08 | $74.12 | 27% |
| Ariad | ARIA | $23.50 | $22 | (2)% |
| Synta | SNTA | $7.99 | $6.62 | (17)% |
| Rigel | RIGL | $10.30 | $3.77 | (63)% |
| Isis | ISIS | $14.46 | $31 | 110% |
This amazing rate of return is even more impressive when considering that the small-cap stock picks pulled down the average. Rigel in particular proved to be the loser of the bunch and has recently hit new lows due to the failure of its asthma drug to prove itself during trials. This comes on top of its partner AstraZeneca (AZN) pulling the plug on its promising rheumatoid arthritis medication after disappointing trials as well.
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The top picks are all highly liquid stocks, so investors have the best of both worlds, a stunning investment with the ability to exit at propitious moments, such as when a company like Onyx gets a definitive offer by Amgen.
Birchenough’s continued success will be decided on additional validation of his investment thesis:
“I think the biggest things thematically that we’re seeing from a technology perspective is continued focus on molecular diagnostics guiding molecular therapeutics in oncology, in particular. And so what we’re starting to see is companies succeeding at identifying key drivers of cancer-cell growth, identifying with diagnostics what those drivers are, and targeting those patients specifically with highly effective drugs.”
Only additional returns will create proof of Dr. Bircenough’s stock picks. So if you missed his prescient calls last time, you might be motivated to pick up the phone and make an appointment for a house call to discuss his current predictions. After all, its not every day that ordinary investors have access to venture-capital-type returns.
Please note that Gilead has had its stock split 2:1 in the period measured.
Rosetta Stone Inc (RST) is moving to the broad area of learning through technology by adding over 16 million language learners with the acquisition of Livemocha, and by increasing its Enterprise & Education business to over $80 million in gross annual sales with the acquisition of Lexia Learning, says Stephen Swad, President and Chief Executive Officer of Rosetta Stone Inc.
“[Livemocha] has a state-of-the-art, robust and extensible learning platform. That platform was something that we were in the midst of building, and we saw it nearly complete at Livemocha. Purchasing the company accelerated us by about 12 months toward that end destination of having a flexible learning platform. And the second reason we bought it is Livemocha has an extremely largely community of language learners that totals over 16 million — one of the world’s largest language learning communities — and we thought that would be a nice complement to the suite of products and services Rosetta Stone owns,” Swad said.
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The acquisition of Lexia Learning then extended RST beyond language learning to the the broader area of learning through the use of technology, Swad says, and bolstered the company’s Enterprise & Education business to over $80 million in gross annual sales.
“Lexia is a reading technology company, and I believe reading represents a tight adjacency to language learning and a natural place to take Rosetta Stone as we extend into new categories of learning,” Swad said. “I was very attracted to the technology that Lexia deploys, which enables children to read using technology. Lexia provides a great assistance to teachers to help flag where students need help, something that is sorely needed in our K-12 environment. They also have patent-pending technology called Assessment Without Testing, by which they can predict the outcomes of students without testing, saving classroom time and enabling the student and the teacher to be more productive. So the technology also was very appealing to us.”
American Public Education (APEI) offers lower tuition to students and offers programs that are of interest to prospective employers, while at the same time serving a very strong military niche market, says Peter P. Appert, Managing Director and Senior Research Analyst at Piper Jaffray & Co.
“In the case of APEI, their point of differentiation is really price. They have the lowest tuition rates of any of the for-profit institutions. They basically are competing, from a pricing perspective, with community colleges. If I’m paying $650 a credit at many of the for-profit institutions, the tuition rate at APEI is $250 a credit,” Appert said.
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Appert says APEI‘s highly differentiated business model has allowed the company to grow earnings and enrollment despite a general malaise in the education industry.
“It’s the ability to identify those niche areas and dominate them that has worked for these companies and enabled them to post impressive enrollment growth, even as the industry has been shrinking. And that’s been the key from the perspective of sustainability of earnings growth and the key in terms of superior investment performance,” Appert said.
China Distance Education Holdings Ltd (DL), China’s largest online professional testing provider, is expected to continue to deliver significant top-line growth and an attractive dividend yield for the year, and will see continued success of its core accounting professional test, says Ella Ji, Executive Director and Senior Analyst at Oppenheimer & Co. Inc.
“DL is our top pick among macro names. It is China’s largest online professional testing services provider. The stock has run a lot in the past few months; now it’s above $10. If it pulled back on profit taking, we would certainly recommend people buying on any such potential weakness. DL has achieved very significant top-line growth in the past year, and also it looks like momentum continues for this year,” Ji said.
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DL‘s Accounting Professional Qualification Exam has seen cash revenue up over 50% as of last quarter and is expected to deliver more growth on a full-year basis, Ji says. With the company delivering an attractive dividend yield as well, DL one of Ji’s top picks.
“For one of its core tests, the Accounting Professional Qualification Exam, the cash revenue is up over 50% as of last quarter, and we think on a full-year basis they can easily achieve more than 30% growth for this core test. On top of this strong momentum, DL has been issuing a dividend of $0.48 per ADS in the past two years, so the dividend yield is around 4%, and that’s still very attractive. So we remain ‘outperform’-rated for this company,” Ji said.
Grand Canyon Education (LOPE) leverages its physical campus to create brand power, increasing enrollments despite industry malaise and presenting students with a compelling value proposition relative to not-for-profit universities in Arizona, says Peter P. Appert, Managing Director and Senior Research Analyst at Piper Jaffray & Co.
“The key points of differentiation for Grand Canyon are the strong campus presence, a focus on degree programs that are in demand, such as health care and education, very competitive tuition pricing and a Christian affiliation, which is fairly important to a certain subsegment of the market,” Appert said.
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Appert highlights the value proposition of LOPE, saying students get smaller classes at a lower price than state institutions in Arizona and where interacting with professors will therefore be more difficult, as might be finishing the desired degree in four years.
“The marketing pitch is, Grand Canyon will give you private-school education with smaller classes, more attention from the professors, the major you want and get you out within the four years at the same price you’d pay to go to the big state institution,” Appert said. “It’s a very compelling value proposition, and that has created significant brand equity for them, which they have translated into significantly above-industry-average enrollment growth.”
Bridgepoint Education Inc (BPI) is now in a solid position to focus on reasonable and sustainable growth, as the company has differentiated itself in the market by being a low-cost, online-focused education provider, says Joseph D. Janssen, a Vice President at Barrington Research Associates, Inc.
“Although they just went through a tough and lengthy accreditation transfer from HLC to WASC, and Bridgepoint has not been focused on growth, but now with that behind the company, management can focus on growth again, but growing at a reasonable and a sustainable rate,” Janssen said.
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BPI is one of the lowest-cost education providers with student-friendly credit transfer options, Janssen says, with a traditional campus at its core yet a large focus on online learning. In an arena of increased competition, these types of characteristics are what can make a company like BPI a solid player in the long run, Janssen says.
“The ones that will survive have a differentiated product, competitively priced, with a good brand — these are the ones we think will make it in the long run. Right now, we believe the low-cost, high-quality online-focused providers and the high-quality vocational players make it,” Janssen said.
K12 (LRN) provides online education materials and services to students from kindergarten to 12th grade, where the online penetration rate is still below 1% and where the headwinds against higher-education companies do not necessarily apply, says Jeffrey M. Silber, Managing Director and Senior Analyst at BMO Capital Markets Corp.
“We’ve seen a secular change where students in the K-12 sector more and more are taking online classes. The online penetration rate in higher education is somewhere in the low teens, 12%, 13%. The online penetration rate in the entire K-12 sector is probably less than 1%. Yes, it’s never going to go to 12% or 13%, but can it go from 0.5% penetration rate to 1%? Certainly, and potentially even higher,” Silber said.
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Silber says LRN has received some negative attention due to its focus on lower-than-average students as they have expanded, but he says that despite the underperformance relative to traditional schools in the area, the company has outperformed the schools they compete against.
“LRN is the 800-pound gorilla in the space. They operate in over 30 states, with more to come, and they probably have more students than most of their competitors combined,” Silber said. “This is also one that we’ve been recommending throughout. Again, we’ve had some hiccups here and there, but it’s been one of the best-performing stocks in the group year to date.”
DeVry Inc. (DV), along with other vocational schools, is well-positioned in both the U.S. and overseas markets in terms of the long-term competitive dynamic, in addition to students realizing a better return on investment with vocational programs, says Peter A. Appert, Managing Director and Senior Research Anayst at Piper Jaffray & Co.
“The vocational schools are competitively better positioned going forward than those operating in the degree completion market, because the competitive dynamic is different. If I want to train to become an auto mechanic, which is a highly skilled job that pays pretty well, the return on investment from pursuing a program…can be quite compelling, and there is not a ton of competition. The not-for-profit institutions don’t compete as actively in some of the vocational markets,” Appert said.
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DeVry has been actively expanding its international presence, especially in Brazil, where the competitive dynamic is more attractive, with stronger demand due to the lack of alternatives for prospective students, Appert said.
“For many international economies to sustain growth, for second-world economies to become first-world economies, you need a more educated work force, you need higher college participation rates. So in Brazil, DeVry creates that opportunity, and there is very strong demand. They have high-quality programs. It’s a very large, underserved market historically, with limited capacity, limited competition; a great opportunity given macroeconomic conditions and secular growth in the economy to ride the wave of increased college participation rates. The execution has been good, making Brazil a very attractive market for DeVry,” Appert said.
