Warren Buffett has proven that buying great companies at good prices and holding them for as long as possible can lead to amazing returns. The trick is finding great companies at good prices.
With that in mind, we asked three of our contributors to offer up a stock that meet both the value and long-term worthy criteria, and they came up with Pattern Energy Group Inc (PEGI), Synchrony Financial (SYF 1.89%), and BofI Holding, Inc. (AX 2.21%). Keep reading below to learn why these three stocks are worth buying now, and worth holding for the long-term.
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A long-term renewable energy play
Travis Hoium (Pattern Energy Group): Long-term investors looking for value in energy don't need to look further than yieldcos who provide contract-protected cash flows for decades to come that will be paid in the form of a dividend. Pattern Energy Group has 2,644 MW of wind projects in the U.S., Canada, and Chile that have an average 14 year contract life remaining. And many of those projects will generate revenue for years, if not decades, after their initial contract is complete.
Management projects $140 million to $165 million of cash available for distribution (CAFD) in 2017, which at the midpoint means shares trade at just 14.2 times CAFD, a great value for investors given the long contracts and asset life behind the cash generation, and the very nice 6.9% dividend yield is icing on the cake. Right now, the dividend of $1.67 per share annually is equivalent to a 6.9% dividend yield, and the payout is expected to grow as management issues new debt and shares to buy more renewable energy projects, provided those acquisitions are accretive to the dividend.
Investors looking for long-term wins in energy should know that renewables are taking the world by storm. And companies who own renewable energy projects with long-term contracts to sell energy not only have assets with a certain return profile, they have projects that will likely be extremely valuable as renewable energy demand grows worldwide.
Retail's best friend
Brian Feroldi (Synchrony Financial): More consumers are choosing to pay with plastic nowadays, which makes sense given the convenience, security, and perks that come with paying by credit card. However, retailers are charged a few percentage points each time a consumer pays with plastic, which eats into their profits. That's why more and more retailers are choosing to roll out their own private label credit cards. Doing so not only cuts down on their transaction costs but it also provides them with lots of data about their customer's shopping behavior.
However, setting up a private label credit card network isn't exactly a small task. That's why scores of retailers choose to partner with Synchrony Financial. This former General Electric subsidiary is the largest provider of store-branded credit cards in the country. Big name retailers such as Lowe's, Amazon, Gap, and even Walmart have partnered with Synchrony for years to help get their private label credit card networks up and running. Given the cost savings and customer data, I think the odds are good that more and more retailers will continue to join the private label credit card bandwagon in the years ahead.
While Synchrony's long-term growth trajectory looks bright, investors recently learned that the company's credit metrics are on the decline. That lead to higher loan loss provisions and sinking earnings, which has caused Synchrony's stock to drop more than 20% year to date.
While declining credit metrics are worth keeping an eye on, Synchrony's stock has fallen so much that shares now trade for less than nine times forward earnings. That's an attractive price for a company that is expected to grow profits in excess of 8% over the long-term and also offers up a dividend yield of 1.8%.
The future of banking is on sale right now
Jason Hall (BofI Holding): Fewer and fewer people ever visit their local bank branch, but the traditional banking model continues to dominate the landscape because bank fee structures are generally built to support the expense of a brick-and-mortar operation.
But there's little competitive advantage to having a local branch anymore, and online-only banks like BofI Holding are starting to capitalize on this by taking customers away from big banks, paying higher yields on deposit accounts, and charging lower fees and lower interest rates on loan products. For the growing number of people who never use a local branch, moving to an online bank is becoming an easy decision.
For BofI, this has led to double-digit growth in customers, deposits, and loan balances for a number of years. It's also led to outsize profit growth, since its branchless model is much cheaper to operate, and more profitable since its operations require less cash to run.
This means far greater returns on capital employed and returns on equity than traditional banks. Here's how it compares to U.S. Bancorp and Wells Fargo, two of the most-efficient and most-profitable big retail banks:
BOFI Return on Equity (TTM) data by YCharts
Yet despite being significantly more profitable and growing at a much faster rate, the market isn't currently paying much -- if any -- of a premium for BofI, either on an earnings or book value basis:
BOFI PE Ratio (TTM) data by YCharts
This is at least in part due to the very high short interest in BofI, after a number of allegations against the company and its executives and a pending lawsuit.
But even with the risk that creates (which I think is overstated after more than one year and zero regulatory issues), BofI is very cheap for its high profitability and growth rate, and also right in the center of what banking will look like in 20 years. That could make for an amazing long-term value investment.
