A Harvard egghead stumbles through the countryside and finds a diamond in my field!
I’m a little upset. I’m the guy who spends all my time in small-town USA, and Kent Lucas, Taipan’s resident Harvard brainiac, recently pointed out to me an opportunity right under my nose.
I hate it when that happens.
I’ve spent years talking and writing about and pointing to the tremendous opportunities that most speed past on the interstates at 75 mph searching for that elusive gold ring in the major metros.
Rural USA, in my opinion, is filled with small reservoirs of untapped wealth. For example, the little-advertised and seldom-spoken-of-by-the-talking-heads-on-CNBC municipal bonds from Backwater, USA. These are great, low-risk investments that we’ve spoken tons about here. (Remember, water and/or sewer bonds only.)
Also, the agricultural land chart looks nearly identical to that of gold’s without the wild swings. And I’ll be providing a “how-to guide” on investing in tax-lien certificates at our September Vegas get-together. These perhaps are some of the best values in rural America available today.
And yet, Kent Lucas bested me at what I thought was my own game.
This Harvard egghead comes into Small-Town America, right in my own backyard, and picks up on an unpolished gem I overlooked. For the sake of Kent’s readers who pay good money for his advice (actually, it’s just pennies a day), I won’t mention the name of this business. How ’bout we just call it DAMN Inc.?
I’ll forgive him. When he recommended the stock, it was at $38.50. Today it’s trading at $40.30. That’s 5% in about a month. If he hits his target, you’ll see triple that move and probably in short order. Best part, the move is far from over.
Now, you know I think the equity market is artificially inflated. It’s why I tend to avoid stocks in a world that is controlled by Big Ben and his Federal Reserve (sounds like a bad rock band). However, there are times when it just makes good sense. Damn Inc. falls into that category.
I can barely pronounce, let alone understand, most of Kent’s 11 criteria that a stock must pass before getting on his buy list. In the 18 months I’ve been writing for Taipan, I believe the only stock I’ve mentioned is Netflix (NFLX:NASDAQ) in July of 2010.
NFLX was trading around $115, and I wrote that if it followed its current trend, it had a five-year price target of about $166. I don’t think it hit $166 the next day, but last I saw it was trading at $260. Obviously, I tend to estimate on the conservative side of things.
I did my own homework on Damn Inc. Kent Lucas is right (#@$!); it’s exceptional.
So here’s my friend Kent. He strolls into rural USA and turns around and sees Damn Inc. It’s trading at a reasonable P/E — 15 or 16. It has a remarkable growth story, and has not one, but two large suitors begging to buy the whole franchise at a premium to the current price. A virtual built-in profit.
And that’s only half the story. Like most small businesses outside the metro areas, you’ve got to be many things to many people to survive. This business has three segments and it does all three very well. They are each cash-generating engines, one better than the next.
One drives customers to the store, literally. They are the gas pumps outside of each of the company’s locations. It has decent margins on the extremely competitive retail fuel business. In fact, that’s why I ignored this all together. Who wants to invest in a gas station? (I know, pretty weak excuse for missing this one, but it’s all I got.)
Now, Kent does what Kent does best. He peels back the obvious story and digs. He pointed out that as mundane as this company appears, it has two categories within its small stores that have huge profit margins and accelerating growth.
And that’s where Kent Lucas’ story ends. A perfectly safe, long-term stock pick, for investors with an eye toward capital preservation, safety and growth. It’s a 100% Safe Haven Investor triple play and has been a moneymaker from the moment he hit the print key and turned in his research to have it published.
But this is definitely not where I could end it.
You see, not only do I need to see under the hood of this company (like Kent), but I need to understand why people would willingly pay ridiculously high prices for very ordinary items when gas prices are setting records, the economy is getting worse and the job picture is just plain lousy.
Any grocery store in the country could easily undercut them by a mile. When I originally saw Damn Inc., I thought it sounded like a recipe for bankruptcy, not the “next Wal-Mart,” as Kent’s calling it.
Even with all 11 of Kent’s proprietary formula’s lights flashing green, I couldn’t just jump in. I needed to know more. I need to understand the why of all his numbers screaming “buy.”
And then it hit me. Just like the Damn Inc. under my nose that Kent discovered, the answer was in plain sight. It was the very thing I thought would hamper the stock that has made it work.
It’s the economy, stupid.
I finally opened my eyes. I know we are all subject to the economy. When gas prices are really high, and they squeeze every dollar, someone in rural USA can’t afford to make a 40-mile round trip to Wal-Mart to pick up the one or two items they forgot. They either wait until their next trip, or they buy it from Damn Inc. at a huge premium.
The thing is, everyone knows they’re paying an inflated price, yet no one complains. It’s the convenience premium that now saves a ton of gas and driving time.
As it is for me, the high prices for their other goods go nearly unnoticed. We all think of it as “only a gas station.” It might be the only gas pump in town, and those prices are always in line.
The locals think, “Big deal, it’s only a gallon of milk. I don’t have to drive 35 miles to the grocery store.” Or, “Who cares, it’s only some toilet paper, and it saved me from the expense of filling up my 12-mile-per-gallon pickup for a few more days.”
For the record, those small things ARE a big deal. And who cares? Well, me for one. All the stockholders of Damn Inc. care a great deal too.
And one added bonus: Kent’s not the only pro who’s taken notice. As I said, I did my own homework and found that 92% of the stock is owned by institutions.
Institutions can move markets. I could write a whole story about paying attention to these behemoths, but it’s always better to have institutions owning your stock. It supports the price and you can rest assured they’ve also done their homework. Institutional investors, especially of a 92% magnitude, are the hallmark of a strong business.
I’ve said it too many times to count, but there are remarkable values in our rural countryside; one need only do a little looking and pay attention. It’s what I’ve done for more than 25 years and it’s produced for me more than I could have ever imagined.
I’m a bit embarrassed that it took a Harvard egghead to teach me a lesson I’ve been preaching for years.
P.S. One share of our Damn Inc. is trading for the same price of Kent’s Safe Haven Investor. If you’ve not figured it out, I think the world of his research and this equity, but my favorite reason for recommending this has nothing to do with Kent’s remarkable knack for picking stocks.
I like telling my friends that the economy is so bad that I’ve a Harvard grad doing all my research for less than 50 bucks a year.
Don’t miss this one. Damn Inc. can be found in the June issue of Safe Haven Investor, and there’s still plenty of upside potential left in this one.
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