Investing like a Business Owner: A Growth and an Income Idea for the Decade

For important disclosure information please refer to Important Disclosure Information at the end of this note.

The year 2016 has started on a dismal note with the S&P 500 down 8% year-to-date.  The “worry list” is long and growing:

  • A meltdown in energy
  • A "hard landing" in China
  • The strong dollar
  • Poor market internals 

In times like these, investing in index funds and diversified mutual funds can be challenging.  

A potentially better approach is to take a long-term business owner view towards investing by allocating capital in easy to understand businesses managed by excellent shareholder-friendly management teams.

Here are two such ideas with one geared towards capital appreciation and the other towards current income.

A Long Term Capital Appreciation Idea (Charter Communication)

In a market where fear and uncertainty is high, owning high quality franchise businesses managed by owner/operator management teams can produce superior risk/adjusted returns over the long-term.

One such security is Charter Communications (CHTR).  Charter is pending approval on a transformative merger with Time Warner Cable.  Even if the merger is denied by regulators, Charter presents an attractive investment.  Charter operates in markets where it faces almost no competition from fiber, making it a de-facto monopoly.  The cable industry is a highly attractive recurring cash flow business. With the exponential growth in internet traffic, consumers increasingly view their cable internet service as a utility-like “must-have” product making the cable industry, recession-resistant.

Charter is an under-earning business with a tremendous potential to improve. For example, Charter has only around 50% market share in its footprint that is far too low for a business with no real competition.  Charter’s expenses on programming rights (what they pay media companies to transmit the TV channel) is 30% higher than the cable industry average, on a per subscriber basis, and their capital expenditures and service costs are significantly higher than cable industry averages. These expenses will continue to trend down as Charter winds down its investments.

Charter has the best management team in the cable industry, with Tom Rutledge and Chris Winfrey.  Charter is backed by John Malone and Warren Buffett, who are major shareholders.

If Charter’s business develops the way we expect, the shares could be 100% higher than its current price.

 

High Current Income with Capital Preservation (VEREIT preferreds)

An often neglected area of the securities world and usually offering attractive dividends with limited risk of permanent capital loss is the preferred equity market which is generally considered safer than the common shares.

One such example is VEREIT, Inc. 6.70% Series F Cumulative Redeemable Preferred Stock (Symbol VER-PF) which can be purchased for $23.95 per share (as of 1/14/2016) and offers an attractive 7% current yield.  The shares can only be redeemed by the company for $25 per share, limiting downside.

VEREIT is a leading real estate operating company and owns and manages a diversified portfolio of retail, restaurant, office and industrial real estate assets trading at a discount to its Net Asset Value.  VEREIT's operator agreements with its tenants/operators are designed to provide more security around cash flows by incorporating minimum rental payment provisions.  Consequently, VEREIT doesn’t experience the same highs during very strong markets or the lows in challenging times.  These contracts are called triple net leases where the tenant agrees to pay all expenses associated with the property (eg. real estate taxes, insurance, maintenance and repairs). 

The combination of high quality underlying recurring cash flows, a domestic business with no China exposure, and high dividend 7% yield presents an attractive risk/reward in this current income idea.

 

Important Disclosure Information

At the time this note was submitted for publication, the principals and clients of Burr Capital LLC owned securities issued by VEREIT (Tickers VER and VER-PF) and Liberty Broadband (LBRDK) and Time Warner Cable (TWC).

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Burr Capital LLC), or any non-investment related content, made reference to directly or indirectly in this research will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this research serves as the receipt of, or as a substitute for, personalized investment advice from Burr Capital LLC.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Burr Capital LLC is neither a law firm nor a certified public accounting firm and no portion of the research content should be construed as legal or accounting advice.  A copy of Burr Capital LLC’s current written disclosure statement discussing our advisory services and fees is available for review upon request.