What is the Millennial Trade?

Family in Front of House

I don’t understand millennials.  But I realize that needs to change if I’m going to continue investing in the stock market.  As the largest demographic since the baby boomers enters adulthood, their behaviors and preferences will obviously play a dominant factor in determining which companies succeed and which companies bomb out over the next several years.

We’ve all heard the sweeping generalizations about the 80 million or so millennials out there:  urban dwellers, renters, entitled career climbers, more health conscious, more burdened with debt, more attention seeking, more comfortable challenging authority, more liberal, more diverse, negative patience, and more talented than any generation before it.  

This post could go in a lot of different directions, but I want to focus on one trend that is being driven in part by millennials, which is the significant increase in both new supply for apartments and rental rates, particularly in urban infill locations and cities with strong job growth trends like Denver, where I live.  To give you an idea of how hot the rental market has become in Denver, average apartment rents have increased 9.5% in the last 12 months alone despite delivery of almost 10,000 new units, which is more than what was delivered in the last 10 years combined.  Up to this point developers can’t build new projects fast enough to meet the demand of young professionals who (i) want to live in an urban environment, (ii) can’t afford a down payment on a house, and (iii) are willing to pay whatever it takes to have the newest space in the heart of the action.  This trend is certainly not unique to Denver- it comes as no surprise that multifamily REIT’s are up over 30% in the past year amidst the perfect storm of rising rents and record low interest rates.

I get that the urban density trend is not going away any time soon and that millennials think about housing differently than prior generations, but I recently came across a few data points relative to Denver that have led me to believe that the rental market is officially jumping the shark.

According to a recent study by Zillow, typical renters in Denver are spending 31.8% of their income on rent compared to 21.6% historically.  Additionally, average rents in Denver have risen to $1,712 per month, compared with a median mortgage payment of $1,375.

When I see the data above, all I can think to myself is (i) there is no way that spending over 31% of your income on rent is sustainable or desirable under any circumstance, and (ii) I suspect this is driven more by the circumstances of millennials (single with debt) than their true long-term preferences.  We won’t know how deeply entrenched millennials’ views on urban living are until they start having families and are faced with more difficult consequences and trade-offs of the urban vs. suburban environment.

I’m fairly confident I know the answer to both questions above, but the tricky part is the timing.  (It’s like shorting treasuries- eventually everyone knows that rates are going up, but anyone who has shorted them so far has likely been crushed due to poor timing.)

All this rambling leads me to the conclusion that I’m interested playing the overheated rental market by looking at the home builder stocks, particularly KB Homes (KBH), Pulte (PHM), or maybe Taylor Morrison (TMHC).  Despite rising home prices and low interest rates, the home builder stocks haven’t seen the same kind of appreciation that apartment players have experienced.  In fact, many home builder stocks are actually down over the past 12 months (KBH, for example, is down 1% over the last 12 months and Taylor Morrison is down 14%).

I find this particularly strange because in a place like Denver, the existing home sale market is also on fire- there is virtually no inventory available and multiple buyers are showing up the day most homes are listed.  My personal observation has been that most people with children and funds available for a down payment are seeking a very similar style of living that was preferred by prior generations.  There may be little nuances about proximity to public transportation or willingness to forego big lawns, but I think that the home builders are poised very well to benefit from millennials in the manner that apartment developers have seen to date- especially since they seem to be willing to pay up for quality new construction.   In fact, I would think that the apartment REIT performance and Home Builder stock performance should eventually converge given how close the cost of renting has come to the cost of home ownership over the past year.  That could mean a huge drop in multifamily REIT values to meet up with home builder stocks, a “meeting in the middle” of both asset classes, or a big rise in home builder values to catch up with the multifamily players.  2 out of the 3 scenarios result in home builder stock appreciation.

From a valuation and financial stability standpoint I feel OK about buying some home builder stocks today:  PHM, KBH, and TMHC all have attractive forward P/E’s between 9 and 12, ample land inventory, strong revenue growth over the past year and great reputations for being quality home builders.  When looking at debt levels and Price/ Book, however, one group stands out from the pack:  Pulte Homes (PHM)- they have shockingly less debt than their competitors (0.4 debt/ equity ratio vs. upwards of 3.5 for TMHC and KBH), ample cash,  and an attractive Price/ Book ratio of 1.5, which his below the industry average of 1.8.  As a result is doesn’t come as a surprise that PHM is the one stock in the group that has seen some decent price appreciation in the last year at 11%.

I have surveyed several smart people about their views on the home builder market, including two seasoned professionals in the industry.  While they generally agreed with the long-term demographic factors favoring home builders, there were some valid short-term concerns raised such as timing on millennial taste-shifting, overhang from the huge run homebuilders have already experienced in the past 5 years, rising construction costs, and rising rates.

Before investing I need to do some more research and dig deeper into their filings to confirm that the business is poised for growth and well positioned against its peers, but I think the time is ripe to add a home builder to the ATG portfolio.  This is just the first of many “Millennial Trades” we’ll ponder in building a portfolio that can withstand, and prosper from the onslaught of these strange beings.


Long on WWE, Round 2…


It has been a while since my last post. The market keeps going up, the economy is adding jobs, and the threat of interest rates rising is increasing. All these things make me more nervous about the market. As a result we are back to focusing on under-performers, forgotten names, or perhaps out of favor brands. I discussed World Wrestling Entertainment (WWE) a while back. It was an out of favor brand that started to build some high expectations, only to come crashing right back to its out-of-favor price point. (The stock went from 12 to 30 and back down to 12 in a couple of months.) So let’s revisit it:

At this price point I think WWE is back to being out of favor. The two catalysts for its brief rise and fall were a TV contract renewal and subscriber figures for the WWE online network. Expectations for both were high, and reality was a cruel mistress. So back to the basics. The dividend is 4% a year. With massive insider ownership, I see them protecting the payout as that’s how management can continue to take money out of the business. Management has not had a great track record- a juiced-up Vince McMahon promises a wild ride. They have plowed money into numerous dead end ventures (XFL anyone?). But WWE is the really the only large scale wrestling brand around. While I have passed my wrestling phase (it lasted through college, don’t judge), that doesn’t mean they don’t have a large fan base here in the states.

They continue to produce media stars every few years, with the Rock being the pinnacle of their branding success. And yet they continue to fail at leveraging this star power into consistent earnings. WWE also rolled out their own movie division that produced movies starring their talent. (It was a bust, not XFL level, but a bust.) Revenue for the company is growing at low single digits, which is nothing to brag about. And they are expecting a net loss this year as they transition to online delivery from one off pay-per-views.

So what’s the good news? They have almost no debt (~$30 million), expectations are low, and they trade at 14-15x next year’s earnings per share (EPS). It’s a long tenured brand and consistently a top ten cable program. And while I own it I can collect a nice little dividend. If subscriber numbers creep forward or cost cutting exceeds expectations I’ve seen the impact a little hype can have on the stock price.

We’ll start small but ATG is initiating a position in WWE. Hopefully we won’t get body slammed*.

*- I’m sorry… couldn’t resist.


Patiently waiting pho growth…



If a stock I suggest ever goes down a few points, I’m sure to get an e-mail from my uncle.  “I’m losing so much money in XYZ!” It used to make me feel bad.  I was the cause of someone losing money, they trusted me and I failed.  The horror!  First, stock investing is risky, I think that’s understood by most people.  Second, judging a stock on its daily performance, or weekly, or monthly, is much too short-sighted.  Investing for one month, one week, is a very difficult exercise, and unless you know something the market doesn’t (it’s called being a Martha Stewart), it’s something I would advise against attempting.

So, the ATG has a couple big movers in its first weeks of investing.  VNM (Market Vectors Vietnam ETF) has taken a turn for the worse, down about 7% since ATG bought an initial position 3 weeks ago.  The country itself isn’t in any real danger(at least I haven’t heard anything, but I’ve always been suspicious of Laos), but the index took a tumble.  VNM is one of the stocks Maverick and I agree on.  We want emerging market exposure.  Over time poorer countries with stable leadership should outgrow richer nations as globalization continues.  Vietnam is an underappreciated economy with over 70 million people and an average age of 29 years old.  It’s growing faster than its neighbors, and has a reasonably well-diversified economy.  (Services ~40%, Industry ~40%, Agriculture 20%)  They have crude reserves.  (It’s their largest export). 

This Vietnam index has retail, oil & gas, banking, fertilizer, and the largest company is a conglomerate that does everything mentioned.  The index will be a good  measure of the economic growth of Vietnam.  I’m looking forward to the next purchase so we can average down.  Nothing has changed with my long-term thesis, I can now just buy at a better price.  Of course this ties into risk management, and position sizing, which we will talk about another time.



ATG Investment Fund: The Initial 7…

throwing dart


The ATG Investment team has finally gotten off its ass and opened its joint  investment fund.  On a monthly basis we will update the positions and share true performance of the fund in the “Current Portfolio” tab of this blog.  On April 17 we established initial positions in 7 different securities and allocated a total of 25% of the available capital to these stocks.  Over the next several months we intend to slowly build up the investment fund to approx. 80% invested in the market with 20% in cash as a buffer.  The investment allocations of each security are reflective of our perception of current price- for example, WWAV has a smaller allocation than ESV currently due to the recent run up in its price before we established an initial position.  If pricing dynamics change 30-60 days from now, we will adjust the allocation to try and take advantage of pricing and build a more favorable basis in any given security.   We plan to limit the total number of different investments at any given time to around 10.  Our logic is that its enough to provide meaningful diversification but not too many to lose focus or dilute the ATG team’s best overall ideas.

Without further adieu, below is the initial ATG portfolio:


ATG Portfolio- 4-20-14


OZM (Och-Ziff), ESV (Ensco), CLNY (Colony Financial), WWAV (White Wave Foods), and PFF (iShares Preferred Shares ETF) have all been discussed in prior ATG posts.  GOOGL (Google Class A) was a bit of an impulse, last minute add to the portfolio in light of their recent modest price drop.  Any portfolio should have some high quality tech exposure, and GOOGL is probably the most reasonably priced of the high growth names at 17x 2015 forward earnings.

VNM (Market Vectors Vietnam) is an ETF that tracks the Vietnamese stock market.   Both Maverick and moMANon have had the opportunity to visit the country before and are in agreement that this is our favorite emerging markets bet right now (and favorite southeast Asian cuisine option).  I’m sure an ATG post is forthcoming laying out our argument for the opportunity.

Overall we’re trying to build a portfolio that balances attractive yield (PFF, ESV, OZM, CLNY) with higher growth/ beta securities (VNM, WWAV, GOOGL) in hopes of beating the S&P 500 and earning positive returns even if the market ends down for the year.   We are also trying to stay true to the original ATG principal that any security we pick is one that we’d be comfortable holding for several years to ride out any wild, unpredictable  market moves.


As always, we welcome any feedback or thoughts as we build up the portfolio and share the performance publicly.  To avoid any misunderstanding from potential readers, I want to make it clear that the ATG Fund represents only a portion of the ATG team’s respective personal investment strategies.  Any responsible personal investment strategy should have diversification among various investment classes (stocks bonds, real estate, etc) and have a meaningful percentage of diversified index/ mutual fund holdings in addition to any individual securities.  For any readers who’d like to talk more about an overall investment strategy, write us a message and we’ll be happy to share our thoughts.











Digging Deep for Value- Avalon (AWX) and Gravity (GRVY)

ImageWhile I have some time in between jobs, I’ve decided to spend a little more time researching small cap stock opportunities (market cap under $100 million).  I’m going to pick around 5 of these companies to invest in, and they will be a VERY SMALL portion of the overall allocation given my inexperience in stock-picking these types of companies and their inherent risk.  Below are my first picks.  They both have the unique trait of a net asset value (assets minus liabilities) that is significantly greater than the market value of the entire company.  In theory, if you were to buy the companies at their current market cap, immediately shut down both companies today and sell off the assets, you would bank a sizable profit.  In reality they are cheap and probably fairly valued at current levels for a reason!   

  1.  Gravity Co, Ltd.  (GRVY).  This is a South-Korean based online gaming company that went public on Nasdaq in 2005 at around $13.50 per share.  At the time they had some wildly popular online games (namely Ragnarok) that attracted over 40 million users worldwide, but internal corruption/ lawsuits, divestitures, and declining success of their latest game releases has led their gradual drop to around $1.00 per share since the beginning of this year ($31 million mkt cap).  Their cash bleed in the past 12 months has been around $6 million.

Foreign micro-cap, declining revenues/ losses, and no visibility into positive earnings in the near future- yes, that’s some bad news and not worth risking much dough on.  The good news, however, is that as of 9/13, Gravity had approx. $63 million of current assets (of which $50 million is cash/ short term investments).  If you offset this against their total liabilities of $18 million, you are left with a net value of $45 million, compared with a current market cap of $31 million.  That’s $14 million of cushion on top of valuing Gravity’s non-current assets (PP&E, intangibles, etc.) and their business at a $0 value. 

I realize this is a very risky play, but they still have revenues coming in from their legacy games, several hundred employees working hard to come up with new games/ revenue streams on tablets and mobile, and ample cash to try and stop the bleeding.  Plus, I was in a band called “Gravity” (see picture up top), so perhaps it was destiny for me to take a flier on this one 😉



  • Avalon Holding (AWX).  This is an interesting company.  They have two primary business segments (i) waste management/ landfill services and (ii) ownership/ operation of three golf courses and associated recreational facilities at the Ohio/ Pennsylvania border.  Unlike Gravity, Avalon’s stock price has risen substantially in the past year (from a low of $3.50 per share to around $5.50 today), due to significant increases in their operating income from waste management operations as compared to a year ago, as well as additional revenue sources and wealth creation in the Ohio/ Pennsylvania corridor attributable to the shale gas boom.  They have also upgraded one of their courses (Avalon Lakes), which is fully operational after an $8 million renovation and $150 green fees.  Net operating income for the waste management division through September was $2.9 million compared with $2.2 million as of September 2012.  The golf course operations have been breaking even the last few years.
  • Avalon’s current market cap is around $21 million, representing a 0.53 price to book value.  While most of their asset value is non-current (i.e. the three golf courses they own), there is a significant cushion between net assets (total assets minus liabilities) of approx. $40 million and a current $21 million market cap.  This amazes me in that it looks like Avalon will be profitable this year with no significant capital exposure as far as I can tell.  The reported asset value of their three golf courses and related facilities (which look nice from I can tell on the website and include a Pete Dye designed course) are $30 million by themselves.  There has got to be something here that I’m missing, because it seems like an investment in Avalon represents a stake in the promising waste management business where they are experiencing material revenue growth, with three golf courses and recreation facilities basically thrown in for free.   My understanding is that the chairman/ founder owns a controlling 67% stake, which may partially account for the huge discount, but from what I’ve read he’s been prudent about executive comp and growing the business.     

    If it sounds too good to be true, it usually is, so I would love any input from readers out there who think I’d be crazy to put up a small bet on these two companies.  In the meantime I’m long Avalon and the laws of Gravity.