Newsletter VII-Infrastructure Week
Pretty brief on the news front this week – I’ve decided to focus exclusively on company-related topics for future newsletter releases, to keep these sections a little more brief and in-line with the general theme of Hourglass Investing.
Bad News for Airbnb
Airbnb “has in effect been banned from the Big Apple”, according to the company, after the city stomped down on homeowners renting properties out through the platform. Those wishing to do so must now register with the city to have their unit approved for vacation rentals, and that approval must then be verified by Airbnb. Failing to register could result in fines of up to $5K for homeowners who continue to rent out their properties without approval.
With occupation rates soaring over the last couple years and cities becoming increasingly constrained on the number of housing and rental properties available for local residents, a municipal crackdown on Airbnb (and other vacation rental properties, which are also affected by these new rules) has always been one my large bearish concerns over this industry.
As more housing units, that are otherwise perfectly viable for long-term residential renting, are used for vacation rentals, available housing is reduced and the effects of that are subsequently felt in housing/rental costs. It is simply more economic for cities to stomp on the vacation rental industry than to build new houses, and the political clout for local politicians wanting to be seen as doing something about the housing crisis in some cities should not be ignored – I wouldn’t be surprised to see more cities follow New York’s approach to vacation rentals.
Planet Labs Gets Smashed
Planet Labs shares got absolutely hammered after releasing Q2 results that were in-line with their expectations and some improvements in operational efficiency. However, shareholders were not impressed with the paltry 11% YoY revenue growth and lowered guidance for FY23 based off prolonged sales cycles and the pushback of some larger contract signings. My investment thesis remains unchanged – gross margins continue to expand and the business itself continues to focus on the rollout of its next generation of high-resolution Pelican satellites.
Materially, nothing is different about the company, but the sentiment around the stock is suddenly bullish – not wholly without cause, but I think the general narrative surrounding this quarter’s results have been overblown.
Deep Economy – Bill McKibben
Deep Economy is a book that aligns my interests in economics and my values in a brighter future and a more equal world. McKibben critiques the current economic model and its focus on ‘more, more, more’ at whatever cost. This incessant push for growth, he argues, has led to inequality, social and environmental degradation, and personal unhappiness across the world.
McKibben instead champions a local economic system that focuses on local production and consumption – food, energy, culture – to meet basic wealth requirements, increased emphasis on interpersonal and community relationships, and sustainable practices designed to halt and repair the environmental damage we have wrought on natural systems. Throughout the book, he examines regions that have successfully implemented alternative and local economies – the results are inspiring, and it makes for a wholly uplifting read if, like me, you sometimes begin to feel a little gloomy about the global state of affairs and the impacts of commerce on the environment, people, and society as a whole.
Deep Economy was also my first introduction to Bill McKibben, and I have since come to read many more of his books – though Deep Economy is the only book (that I know of, at least) in which he focuses mostly on economic conditions, everything I have read from him, including books on environment, community, and humanity, has been equally thought-provoking and grounded in real-world concerns. I highly recommend Deep Economy as a foundational read for investors that are looking to invest in line with their values, and if you enjoy the content/writing style within Deep Economy, to branch out towards McKibben’s other books as well.
I’ll keep this one short and sweet this week – I’m basing this investment tidbit off a question I’ve received from several readers and friends to date, and that is “How do you research?”. I’m always very explicit with you all that I don’t offer a stock picking service, and don’t feel comfortable doing so – my power lies in research, and all I hope to do is provide you with access to very thorough, single-source research. Unfortunately, I can’t cover every company in the markets, try as I might, and so I love receiving this question from people that are hoping to extend my research process towards companies they are interested in to make their own decisions.
So with that said, I’m all too happy to provide my research process to anyone who might ask. I thought today I’d go over, in brief, a few of my favourite sources for research, both for specific companies and for general investing insight.
10-K – This is the single most valuable and boring source of information for a company. I’d say about 70% of the information I gather about a company, its business model, and the capital allocation strategy is from the last 3-5 years of 10-K reports. It’s crucial to go back in time a little bit as well and study more than the most recent year to see how management’s views on the business are changing, and whether there were any older mistakes they may be glossing over in more recent reports.
Earnings Calls – Similar to the 10-K, these give great insight into management and the business/company as a whole, but in contrast the earnings calls often reveal some tidbits that you wouldn’t otherwise find in the 10-K. The questions from analysts are also invaluable and might help provide a look at the things professionals are focused on with the stock. Finally, they give you a great sense of the actual personality of management – are they personable and charming? Corporate and robotic? Visionary and inspiring? I think these are very important things to know.
Glassdoor – You’ll know this one if you’ve read any of my previous research – I always pay attention to Glassdoor to see how employees view the corporate culture and the effectiveness of management. It’s not necessarily a make or break when it comes to my final investment decision, but it is certainly a factor in how I grade the company.
Investor Sources – Individual investors often provide some very thorough research into companies and may be thinking about a company in a unique way from how you are thinking about it. I particularly encourage you to find people you disagree with and pick apart their arguments (you can just write this, I’m not encouraging you to become a Twitter warrior!). Always approach this unverified research with a grain of salt and don’t just believe everything you read without backing it up of course, but these can be very effective sources for broadening your vision on a company and perhaps finding some information you weren’t able to locate in the 10-K / earnings calls. Great sources for these are Substack (of course), Twitter, Commonstock, and Seeking Alpha (big grain of salt required with these ones sometimes though).
General Investing Knowledge
Annual Shareholder Letters – Many of the greats, including Buffett and Howard Marks, produce annual shareholder letters that detail their approaches, thoughts on the market, and general investment strategies for their funds. These can basically be thought of as biblical texts for investors – even if you are a growth investor, there is something to learn from Buffett’s value-oriented approach to the markets. Even if you are a value investor, there is something to be learned from the growth wizard himself, Peter Lynch, and his old shareholders letters. Read as many of these as you can. They go back decades. You don’t have to emulate them word for word, in fact I’d recommend against it, but use it to compile your own foundation of investing knowledge.
Investor Sources – Similar to how individual investors often make great content on specific companies, other investors are focused on the larger investing picture and provide great content on strategies and compiling general knowledge. Once again, you can find these types of investors through Substack, Twitter, and podcasts (check out my investor spotlight below for a specific recommendation!)
The Investing for Beginners Podcast – Andrew Sather & Dave Ahern
I thought I’d branch out from my usual spotlight on other Substack authors and include one of my favourite podcasts, one that I’ve recommended to anyone getting started on their investing journey. And make no mistake, this podcast is not exclusively for beginners; Andrew & Dave do an excellent job of creating entertaining podcasts that are useful for a wide range of investors, from the very very new to the experienced. I’ve often found myself throwing on an episode of theirs, even if I understand the topic, and then still coming out of the epi with some new information or a new perspective.
The Investing for Beginners Podcast is one of a pretty small basket of stock/investing podcasts that I genuinely enjoy listening to, and the two do a great job of consistently producing high-quality episodes, bringing on awesome guests, and more generally keeping investing topics exciting to listen to. I can’t recommend the podcast enough, so check it out below and make sure to give them a follow on the podcasting platform of your choice! You can also find IFB on Twitter & Commonstock, as well as their website.
This Week’s Watchlist
Sterling Infrastructure – STRL -1.72%↓
Sterling Infrastructure is no newcomer to the markets. The $2.5bn U.S. based company has been a publicly traded company since 1992, but has traded mostly flat over huge stretches of that time. Now, however, Sterling finally seems to be on an upwards trajectory after a switch-up at the top of the management team – the 2017 takeover of CEO Joseph Cutillo saw Sterling expand the scope of the company’s vision from its previous focus on capital-intensive civil projects. Sterling now focuses on providing building and transportation infrastructure markets, which are set to benefit from tailwinds from the Inflation Reduction Act, as well as E-infrastructure solutions for high-tech manufacturers, data centers, e-commerce distribution centers, commercial, warehousing, and energy.
Targeting the infrastructure needs of fast-growers, growing sectors, and critical players in the economy has worked wonders for Sterling – over the last 5 years (basically since the CEO switch-up), the company has returned a 41% CAGR and recently had a nice little 28% pop following the release of their Q2 earnings report, which saw across the board growth in revenues from all segments, as well as margins, EBITDA, and net income.
It was a very strong quarter for Sterling, but despite the pop in share price it is still only trading at 1.4x EV/S and 22x earnings. The company is never likely to earn extremely lofty valuations, as it operates with fairly narrow margins, but YoY growth figures for revenues have clocked in at 15% and 25% in 2021 and 2022 respectively (+22% TTM), and they are very capital efficient. Given that and a relatively surface level examination of the company, I’d say that 1.4x revenues may be a pretty attractive valuation – at least enough to warrant a deeper look.
What’s New at Hourglass
Podcast Episode VII – Duolingo
This week’s podcast episode is fresh out, this time throwing it back to one of my favourite analyses so far, Duolingo. This was a super fun company to analyze, with stellar network effects & a brilliant management team, and a very exciting investment opportunity, which made for an equally fun podcast! I dive into the products and business model, balance sheet, some of Duolingo’s growth opportunities, and how they’ve built a brilliant position to defend their market position.
As always, the episode format is quite a bit shorter than the deep dive articles, so it makes for a great listen if you want a brief overview of Duolingo without fully committing to diving into the company. Check it out below if you’re interested in Duolingo!
WSP Global – Deep Dive INCOMING!
Apparently September is infrastructure month. On trend with this week’s watchlist stock, Sterling Infrastructure, I’m taking a look at one of its much larger infrastructure competitors, WSP Global (Ticker: WSP.TO). WSP is a rollup of engineering and consulting firms with global operations across a wide variety of sectors within the wider infrastructure industry. The company trades at a market cap of about $24bn CAD, manages strong organic growth on its acquisitions, and has expanded revenues at a low double-digit growth rate over the last 3 years.
I’ll be putting the finishing touches on that article over the weekend so that I can get it to you all on Monday morning! Keep an eye out for that article popping into your inbox, and subscribe below to be sure you don’t miss it!