Tesla Tanks


Last week, we analyzed Tesla stock and if you should invest after sharing the data. Our answer was a definite no, but we understand FOMO is hard to overcome (even for ourselves) so we recommended dollar cost averaging for anyone looking to quickly invest into Tesla. The last few days, Tesla stock has dropped 34%. Even at these prices, Tesla’s valuation remains elevated. Given this, we would not be surprised if Tesla has much further to fall even if it climbs upwards in the short term.


Pandemic Winners 


Most of the stock gains since the pandemic started have been driven by stocks that are large beneficiaries of a shut down. Think Netflix, Zoom, Facebook, Google, Amazon, etc. However, we believe these stocks are now valued far above fair value. Even if their respective businesses continue growing, it will take time for these companies to grow into their new valuations.


Front Running The Recovery 


Investors are handsomely rewarded for taking risks during periods of high uncertainty. As we’ve seen since the March 2020 crash, investors that deployed their cash despite the doom and gloom have been rewarded for selecting companies that benefited during the pandemic. Today, investors can still make a bet on the long term recovery of the economy by investing in fairly valued stocks that will benefit from a return to normal. We understand that there is a lot of fear about a potential flu and COVID outbreak this winter. However, we know today that wearing masks and maintaining some social distance does generally work. Furthermore, we show clear signs that the economy is recovering. Moreover, American ingenuity is still alive and well. We think it’s time to make a bigger bet on the US recovery by carefully selecting high quality investments that will perform well during this recovery. So, while it’s plausible the recovery may gain or lose steam based on waves of COVID outbreaks, we do not see a scenario where the economy will fully shut down again.



3 Recovery Stocks We’re Investing In 


As we look at the recovery, we are looking to invest long term in beneficiaries of a post pandemic world at fair valuations. However, it is important to be careful and avoid landmines. For example, investing in companies that are heavily focused on commercial real estate are likely to struggle well past the recovery. Clearly, the whole world is rethinking remote and office work. Without further ado, these are our top picks for the recovery:


GROWTH: Slack Technologies (Ticker: WORK, Growth Stock) 


Slack is a very interesting company with a bright future in our new remote work world. Firstly, We expect that remote work will become a normal part of many companies moving forward, even when the pandemic ends. Similar to the e-commerce boom, this is an example of a slowly increasing trend (remote work) turning into a rapid transformation. Secondly, Slack describes itself as “the collaboration hub that brings the right people, information, and tools together to get work done.” Here at Return On Time, we could not agree more after using Slack the last 6 years. Slack has transformed organizations by facilitating real time internal communications. In particular, we’ve found growing value in Slack as adoption has continued. Today, many of our key partners share Slack channels with us so that we can stay connected in real time. This type of collaboration allows an entirely different experience between two partners – we are more able to grow and solve problems together. Thirdly, in our opinion, Slack is a far better product than Microsoft Teams. The stock has really been poorly received since IPO returning -31.7% partially due to the threat from Microsoft Teams. Most importantly, earnings just came out yesterday and the company continues to show strong financial results with $215.9M in revenue, break even earnings (better than expected), and three quarters of ~50% revenue growth.


While it’s possible that Slack may need to be acquired by a larger synergistic company (ex: CRM) to maximize shareholder value, we believe they will be able to do so at a premium. Even though Slack is still an expensive growth stock, it is one of the few growth stocks that will benefit from structural changes in work without any real upside in stock price thus far. We’ve initiated a small position in WORK so far and expect to increase our position based off earnings progress. We begin initiating a position in WORK in October 2019 at $24.52 and continue to invest regularly utilizing a dollar cost averaging strategy.


DIVIDEND: Vanguard High Dividend Yield Index Fund ETF (Ticker: VYM, US Dividend ETF) 


VYM is an ETF that follows the FTSE High Dividend Yield Index and has an extremely low expense ratio of 0.06%. This index only includes high dividend paying US companies. In addition, it excludes REITs. VYM consists of companies like Johnson and Johnson, JPMorgan Chase, Procter & Gamble, Intel, Verizon, AT&T, Pfizer, and other large, mature companies. In total, VYM allows you to gain exposure to 430 high dividend paying US companies. Check out the full list of VYM’s holdings. As we shared in one of our recent newsletters, value stocks are now at the cheapest valuations relative to growth stocks since 2000. Currently, the PE ratio for the S&P500 is 29.6 or roughly double the mean. In comparison, VYM is currently at a PE ratio of 16.72. Thus, while we believe the general stock market index is overvalued, VYM is interesting due to low valuations. Best of all, you get paid a nice ~4% dividend yield to hold VYM. Worth noting, VYM dividends have grown the last 10 years with an average 5 year growth rate of 8.29%. In addition, the ETF has recovered better than most other dividend ETFs since the pandemic started. While SPYD (another US high dividend ETF) is down nearly 30% still, VYM is only down 3.62% for the year.


VYM is an interesting ETF to invest in dividend paying companies that will do well in a return to normal. While it’s more lucrative to study and only invest in select companies, VYM provides broad industry diversification and company exposure to maximize a positive outcome long term. We begin initiating a position in VYM in late March 2020 and continue to invest regularly utilizing a dollar cost averaging strategy.


REIT: STORE Capital (Ticker: STOR, US Net Lease REIT)


Store Capital is a Net Lease REIT. A Net Lease REIT is essentially a real estate investment trust that focuses on leasing real estate properties to single tenants under net leases where the tenant is responsible for the payment of most, if not all, operating expenses including property taxes, insurance, and maintenance. Here is why we like STORE Capital. Firstly, STORE is a well diversified REIT that consists of over 2,500 properties in 49 states leased to more than 500 tenants. As of June 2020, 99.5% of spaces are occupied with a weighted average of 14 years remaining on lease contract terms. In addition, the average annual lease growth is 1.9% that will deliver built in growth. Secondly, STORE is very well diversified across a broad number of business categories, such as medical/dental, elementary/secondary schools, pet care, restaurants, car dealerships, and even food processing plants. In total, about 65% of their rent comes from service businesses, 17% comes from manufacturing businesses, and 18% comes from retail businesses. Thirdly, Warren Buffet’s Berkshire Hathaway has increased its investment in STORE and currently owns 10% of shares outstanding. Most Importantly, as of mid August 2020, STORE is collecting about 86% of contractual base rent for the month of August. As the CEO stated, no new tenants requested lease deferrals during August. The CEO feels confident the high level of rent collections will allow them to return to pre-COVID levels. The CEO is also wonderfully transparent and recently posted a case for STORE.


Given that STORE Capital is still down nearly 30% to date, it offers a strong entry point to long term investors. In the meantime, you get paid a 5% dividend yield to wait. We initiated a position into STOR a few weeks ago and continue to invest regularly utilizing a dollar cost averaging strategy.


Bottom Line 


The death of non-tech businesses is greatly exaggerated. While the pandemic will leave permanent changes in the economy, we continue to believe that there are a significant number of companies that will greatly benefit from a return to a [new] normal. That said, given various bubbles

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