Author: Taylor Dart

Two Standouts in the Gold Sector

Posted on by Taylor Dart

While the cyclical bear market in the S&P-500 (SPY) has created buying opportunities, the real value can be found in the Gold Miners Index (GDX).

This is because the sector has endured a 22-month bear market, sending many names down 60% from their highs.

Although several names offer compelling buying opportunities, two stand out as offering a rare mix of growth and value. These are i-80 Gold (IAUX) and Sandstorm Gold Royalties (SAND).

Investing in the precious metals sector can be treacherous and intimidating, with several names to choose from, multiple pitfalls, and lengthy technical reports describing each mine.

For this reason, the sector is often avoided by generalist investors. The proposition becomes even less interesting if we mix in a declining gold price.

However, there is one key trait in gold miners that allows investors to worry less about the gold price: production growth. The key is selecting names with growth and low-risk business models with a high probability of successful execution, which is easier said than done.

Sandstorm Gold Royalties (SAND)

Sandstorm Gold Royalties is a precious metal royalty/streaming company, giving it a lower-risk business model within the sector. This is because it provides upfront capital to operators/developers to construct/expand mines, and in exchange, it receives a portion of metal production over the mine life.

The result is that it’s highly diversified (dozens of revenue streams and jurisdictions), and it’s protected from inflation as it doesn’t have to pay for sustaining capital or get hit by rising operating costs.

In addition, it enjoys very high margins (80% plus gross margins), with it simply receiving gold deliveries of metals at a low fee ($10/oz to $500/oz gold) vs. $700/oz to $1,300/oz costs for operators.

The other major benefit of this model is that any discoveries on properties where it holds royalties are gravy, given that the mine can continue to deliver ounces for decades even if the mine life was estimated at only several years initially.

A couple of examples are an investment in Goldstrike which turned $2.0 million into $1.0 billion paid in royalties, and an investment in Cortez which translated to a 500% plus return for Royal Gold. This is why royalty/streaming companies commonly trade at a premium to their net asset value. Continue reading "Two Standouts in the Gold Sector" →

Restaurant Stocks: "David vs Goliath"

Posted on by Taylor Dart

It’s been a rough year thus far for the restaurant industry, with a pullback in traffic, higher costs due to commodity/wage inflation, and a challenging environment for some companies from a traffic standpoint.

The result is that much of the group has become un-investable, and some names are looking worse by the month, including Red Robin (RRGB), which will post its third straight year of heavy net losses in FY2022.

Given this backdrop, the best strategy is to focus on the industry leaders and those with proven business models enjoying unit growth and still enjoying strong restaurant-level margins.

However, in a sector where there are still several names with these attributes, it’s tough to decipher which are the best to own. In this update, we’ll compare newly public restaurant operator First Watch (FWRG) with long-time franchiser Dominos Pizza (DPZ) and see which is the better name to own in the current environment.

Scale & Business Model

Dominos and First Watch are akin to David and Goliath from a scale standpoint, with Dominos being the largest pizza company globally with ~19,300 restaurants and First Watch being an emerging breakfast chain with ~450 restaurants.

The differences in the business model are also night and day, with Dominos being a 98% franchised model with a significant international footprint and First Watch being a primarily company-owned company model, with just 22% of its restaurants being franchised currently.

While Dominos’ operators have seen some headwinds due to elevated cheese prices and difficulty securing drivers from a margin standpoint, Dominos is more inflation-resistant than First Watch, given its franchised model where operators bear the brunt of higher costs.

The good news is that First Watch still has very respectable restaurant-level margins, even if they dipped 440 basis points in the most recent quarter. Besides, this margin erosion was largely due to a conservative pricing approach to maintain its value proposition. Plus, as its alcohol mix grows and it’s rolled out to 100% of the system, we could see some additional benefit from a margin standpoint.

That said, Dominos is the clear winner from strictly a margin standpoint, with 30% plus gross margins and double-digit operating margins vs. First Watch at 21% and 4%, respectively, on a trailing-twelve-month basis.

Domino’s Pizza - 1 / First Watch - 0 Continue reading "Restaurant Stocks: "David vs Goliath"" →

2 Apparel Stocks Bucking The Trend

Posted on by Taylor Dart

It’s been a rough past month for the S&P-500 (SPY), with the index down 15% in less than 30 trading before Wednesday’s rally.

The continued weakness can be attributed to the view that a 4.0% terminal rate for the Federal Funds Rate may not be enough to bring inflation to its knees, given how sticky inflation has been to date and with supply chain issues remaining in place.

Higher rates result in growth stocks becoming less attractive, given that higher discount rates must be used to discount future cash flows. At the same time, there is a greater risk of a hard landing, which does not paint a rosy picture of 2023 earnings for S&P-500 companies.

However, while many stocks are seeing declining earnings with pressure on profit margins, quite a few companies are bucking the trend, and given the general market weakness, they’ve found themselves trading at extremely attractive valuations.

Two names that stand out are Capri Holdings (CPRI) and Deckers (DECK), which both hail from the apparel industry group and are on track to grow annual earnings per share at double-digit levels this year.

Just as importantly, they’re expected to see new all-time highs in annual earnings per share next year as well. Let’s take a closer look below:

Capri Holdings (CPRI)

Capri Holdings is a global fashion company with three iconic brands: Versace, Jimmy Choo, and Michael Kors. While luxury brands might be considered the last thing that one is shopping for in a recessionary environment, they benefit from a very affluent customer base that’s seeing much less pressure than lower-income consumers to their discretionary budgets.

Meanwhile, from an industry standpoint, the personal luxury goods market continues to grow at an impressive rate. Based on recent research, sales are expected to grow 10% from FY2019 levels this year and are forecasted to increase another 20% from FY2022 to FY2025.

Given that Capri owns some of the strongest brands, it’s in great shape to capture some of this growth. In fact, its long-term goal is to increase total revenue to more than $8.0BB, up from FY2023 estimates of $5.85BB. This is expected to be driven by the following: Continue reading "2 Apparel Stocks Bucking The Trend" →

WPM vs HL: Which Silver Stock is a Buy?

Posted on by Taylor Dart

It’s been a volatile year thus far for the Silver Miners Index (SIL), with the ETF starting the year out by outperforming the S&P-500 (SPY), up 9% as of April.

Unfortunately, this 1500 basis point outperformance has since reversed to a massive underperformance, with the SIL finding itself down 35% year-to-date. The sharp reversal can be attributed to the plunging silver price, combined with inflationary pressures, which have severely impacted margins for the group.

In fact, some of the worst producers, like Endeavour Silver (EXK), now operate at negative all-in-sustaining cost margins.

While Endeavour Silver is an obvious name to avoid from an investment standpoint, given that it’s producing at $21.00/oz and selling its ounces below $20.00/oz, a few names have been dragged down unjustifiably by the terrible sentiment sector-wide.

Two of these names are Wheaton Precious Metals (WPM) and Hecla Mining (HL), and they’re sitting at 45% off sales despite being much lower risk than their peers.

In this update, we’ll look at which is best suited for one’s portfolio:

Business Model

Hecla Mining and Wheaton Precious Metals (“Wheaton”) have two very different business models. While they both sell a significant amount of silver, Wheaton is a streaming company, while Hecla is a producer.

This means that Hecla actually operates its four mines in Canada and the United States, a business model that carries higher risk and makes Hecla more sensitive to inflationary pressures.

In Wheaton’s case, the company receives deliveries from several operating partners and is immune from inflationary pressures.

The reason is that Wheaton provides an upfront payment and, in exchange, gets a portion of metal produced over the mine’s life without worrying about rising labor/fuel costs or growth/sustaining capital. The result is that WPM has a much higher margin business, enjoying 76% gross margins and 63% operating margins on a trailing twelve-month basis. Continue reading "WPM vs HL: Which Silver Stock is a Buy?" →

2 Restaurant Stocks In Undervalued Territory

Posted on by Taylor Dart

It’s been a challenging year thus far for the restaurant industry, with dollars typically allocated to entertainment and a Friday night out wrestling to steal priority from rising gas bills, elevated energy costs, and higher mortgage rates.

Some restaurants have resorted to discounting to drive traffic, while others have relied on menu innovation and limited-time offers vs. promotional activities to protect their already softening margins.

FRED Personal Saving Rate

(Source: Twitter, ND Wealth Management, Steve Deppe)

Those brands that are the most out of touch have continued to raise prices at a double-digit pace to ensure they maintain margins, with Chipotle (CMG) being one such offender. While this is likely to protect margins in the interim and allow the company to meet earnings estimates, it could backfire over the medium-term, with loyal customers feeling taken advantage of after being hit with consistent menu price increases in a recessionary environment.

Although this has made it difficult to invest in the sector, a few names are doing a great job navigating the current environment, and following recent share price weakness, they’ve slipped into undervalued territory.

One is a new breakfast chain that’s bucking the negative traffic trends in the casual dining space and enjoying industry-leading retention due to a key competitive advantage. The other is a pizza chain that’s enjoying strong unit growth, and while it’s having a tough year, annual EPS is forecasted to hit new all-time highs in FY2023 and FY2024.

Let’s take a look below: Continue reading "2 Restaurant Stocks In Undervalued Territory" →