📈 Stock Ideas <$5 Billion in Market Cap

👉 Before we begin..

As you all read from this post — I’ve begun working closely with Quantbase to launch a dividend growth fund on their platform. When backtested to 2012, the fund’s strategy outperformed the S&P 500 by +80% (assuming dividends reinvested).

🎉 Well, it’s happening! In a few weeks time you’ll be able to invest any amount of money toward a market-beating dividend-first strategy alongside me.

I plan to invest $10,000 into the fund upon launch (January), with the a personal goal of having $80,000 in the fund by EOY 2023. This fund will act as the backbone of my dividend growth portfolio.

The quantitative rules of the fund are simple:

• Only select from stocks inside of the S&P 500

• Only select from stocks whose dividend yields are in the top 40%

• Only select stocks whose dividend growth rate is at least 2X the average — assuming the above perimeters

• Rebalance every 8 weeks

Below are images of the fund’s backtested performance as well as annual dividend yields and growth rates:

• Average dividend yield — 4.36%

• Average dividend growth rate — 10.16%

I want us to build wealth together — and I want that process to be as easy as possible for everyone involved.

If you wanted to participate alongside me throughout my dividend growth portfolio’s journey to $2M — this fund is how you do exactly that. Similar to a robo-advisor, you would just deposit money into this specific strategy on their platform and Quantbase takes care the rest.

There have been a lot of questions around costs — we’re working hard to ensure that investing into this fund is completely free for paying Rate of Return subscribers, and incredibly affordable ($5 / month, same as Robinhood Gold) for those who are free subscribers.

Consider joining me when the fund is live in a few weeks!

For those of you who might be worried about using new platforms (especially after what happened with FTX), I can assure you Quantbase is SEC-registered and backed by some of the best investors — including Y-Combinator.

I’ll share a much more detailed post about this fund soon — stay tuned!

Our Favorite Stocks Right Now

Welcome back to another edition of “Our Favorite Stocks Right Now,” something we haven’t done a good job keeping up with. Regardless, we’re happy to be reintroducing this series to you all.

In this edition, we’ll be covering two very well-known names.

Each of these companies are currently trading with a market capitalization less than $5B — offering investors an opportunity for meaningful upside, assuming all goes well.

We find ourselves constantly talking about the $100B+ companies (semiconductors, cybersecurity giants, EV titans, etc.) but don’t spend enough time analyzing the smaller names out there.

Let’s “kick” things off!

⚽️ Academy Sports and Outdoors (ASO)

Jumping right into things with Academy Sports & Outdoors (ASO) — this is a timely analysis as DICK’S Sporting Goods (DKS) just shared with their investors some incredible quarterly earnings results (strong comparable sales growth YoY).

I think for us to truly understand what ASO does and how they generate their money, we first need to understand what DKS does — and compare their similarities.

The Company and their Footprint

It’s pretty straightforward.

Both ASO and DKS generate revenue by selling sporting goods through their retail locations across the country. Think fitness equipment, golf equipment, hunting and fishing gear, apparel, as well as footwear.

However, their footprints are very different.

DKS is operating 860 retail locations — while ASO is operating only 261 retail locations. That means DKS is running an operation 3.3X larger than ASO — this is important to remember for later. 

Unlike DKS, ASO prides themselves in being hyper-localized. This means if the company opens a retail location near a lake where people tend to fish for salmon, the store will specifically sell fishing equipment optimized for catching salmon.

ASO doesn’t just sell your run-of-the-mill cookie cutter sporting goods equipment, but instead make sure to sell equipment that provides utility to their customers in relation to where the store in located.

DKS has 3.3X as many locations as ASO — despite this, DKS only generates 1.8X the amount of annual revenue.

Yes, ASO is expected to average $26M / year in revenue per location in 2023 while DKS is expected to average only $14M / year. Because ASO is selling hyper-localized sporting goods equipment, they’re able to move through it much more quickly.

ASO is planning to open +100 new locations over the next 5 years — which should result in +$2B in additional annual revenue.

Their Financials

ASO has seen continued momentum across both their top and bottom lines.

Since 2019, the company has been growing their revenue at a +19% CAGR (compounded annual growth rate) — from $4.8B to $6.8B. We should expect ~$6.5B in revenue for 2022, a -4% decrease when compared to 2021’s post-Covid “let’s all go outside” figures.

Despite their revenue growing at “just” +19% annually — their gross margin grew at +31% and their adj. EBIT grew at a +119% during the same time period.

This tells us two things:

1. ASO is not only able to grow their revenue in a meaningful way — but through economies of scale and operating leverage, the company has a demonstrated history of cost optimization.

2. As the company continues expanding their footprint, it’s reasonable to expect their bottom line will grow exponentially.

The company has also done a wonderful job paying down their debt and improving their leverage profile. In 2019, the company carried $1.5B in long-term debt. Today, this figure is hovering around only $680M.

Throughout that same time period, the company’s leverage ratio (net debt / adj. EBITDA) has also improved from 4.1X to 0.2X — incredible!

Valuation

ASO is a company that seems to have a lot of potential and the ability to hit $10B in annual revenue by the end of the decade. Their margins are expanding, operating leverage is kicking in, and have a clear path to 360 retail locations across the country.

They’re paying down long-term debt, returning cash to shareholders both through the forms of share repurchases and dividends, and they’ve only scratched the surface with e-commerce.

At $50 / share, the company is trading at ~7X forward earnings and ~4X forward adj. EBITDA. Compare this to DKS’ ~10X forward earnings and ~5.5X forward adj. EBITDA. On the surface, it seems like a great deal — which it very well could be.

But I want to remind everyone that companies like ASO and DKS are selling products classified as consumer discretionary, which means they’re not needed. I don’t need a soccer ball like I need Tylenol or eggs.

As the macro environment continues to evolve — some would argue in the wrong direction — companies like ASO might begin to see softer sales catalyzed by fewer transactions and smaller ticket sizes.

With all of that being said — I’m intrigued by the company’s business model, their growth levers, their management team (CEO is ex-CEO of Footlocker), and their financial profile. Their current discount to DKS could mean the company is undervalued.. or that DKS is over-valued.

I’m a happy buyer under $45 / share — but would love to open a position under $40 / share. Assuming a similar ~10X forward earnings multiple on the company would mean a potential price target of $70 / share in the coming 24 months.

💊 Hims & Hers Health (HIMS)

This is a company that I’ve had the absolute “pleasure” of investing into way too early — back when "growth at any cost” was still viable investing strategy (incredibly low risk-free rate).

However, this company is very special.

They went public via SPAC — but unlike other SPACs who have completely flopped, HIMS shined. Let’s begin by talking about the company’s operational and financial standings upon making their public debut in 2020.

The Public Debut

Launched in 2017, HIMS is a healthcare tech company that was built to connect those seeking medical care with licensed providers who are able to help. You simply download their app, share your location and your birthday, and you’re immediately offered the option to be treated for a wide range of ailments.

This includes:

• Sexual health

• Hair & skin

• Mental health

• Everyday healthcare – think primary care, allergies, cold & flu

But that was only the first step. HIMS doesn’t exactly make their money by offering one-off video consultations — but instead subscriptions.

After users meet with a doctor (likely looking for a specific treatment), the doctor would then prescribe some sort of HIMS-branded generic medication — delivered monthly to the user’s doorstep.

In 2020, the company shared this investor presentation detailing their business, their total addressable market, and the growth levers they planned to use in order to take their business to the next level.

I wanted to callout two main statistics:

1. 2M cumulative telemedicine consultations

2. Having resulted in 250K active customer subscriptions

It’s also important to callout that these subscriptions were becoming more and more valuable for the company — as their quarterly revenue per active subscription continued to climb quarter-over-quarter.

Continued Execution

Since making their public debut in 2020, the company has continued to execute against their growth levers — in a very big way.

During their most recent quarterly earnings report (Q3) we learned the company generated $145M in revenue, expanded their gross profit margins to 79% (compared to 71% in 2020), and added +174,000 new subscribers quarter-over-quarter — bringing their total subscriber count to 991,000.

They also shared with us that they’ve conducted 8.8M cumulative medical consultations — compared to that 2M figure in 2020.

In 2022, the company launched an incredibly intuitive mobile app — offering 24/7 care, original content, and 1-click shopping.

Something that caught my attention, specifically, was how sticky their subscription revenue has become over the last few years. In the image below you can see how nearly all of the “new revenue” generated every year translated into “repeat customer revenue” the following year.

As of Q3, the company has:

• Long-term retention: 85% online revenue retention from subscriptions with a tenure of at least two years

• Strong unit economics: a less than one year payback period on marketing investments

• Margin improvement: expected to become adj. EBITDA positive in Q4 and remain in such position for the foreseeable future

Valuation

At $6 / share, HIMS is a $1.2B company. This means the company is trading at ~1.7X their 2023 revenue expectations, despite being adj. EBITDA profitable, projected to grow +40% — all while maintaining margins of 79%.

In the company’s 2020 investor presentation, they shared their 2022 financial projections — revenue of $233M, gross profit of $175M, and an adj. EBITDA loss of -$9M.

According to the company’s Q3 2022 investor presentation, HIMS will do $520M in revenue, $400M in gross profit, and will flip adj. EBITDA positive this year. These figures are more than double of what the company was hoping to deliver!

If you’re an aggressive investor looking to invest into a company disrupting a massive market (healthcare) — HIMS might be right for you.

Here are a few more reasons why I like the company:

• Predictable subscription revenue — 90% of quarterly revenue

• Exceeded expectations — strong management team

• Expected to flip free cash flow positive in 2023

• Gross profit margins similar to those of a tech company — 79%

• Clear runway for growth — deca-billion total addressable market

I’m happy to continue dollar-cost averaging into my HIMS position at $6 / share — but of course, the lower the better given this company’s solid future.

Again, these companies are likely to experience meaningful volatility as the macro backdrop continues to deteriorate. Be patient, be purposeful, and most importantly — be disciplined with your investing if you decide to follow my lead on these ideas.

Disclaimer: This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.