We in the U.S. are living through a period of sustained economic growth, but not all asset classes are created equal. Sure, a piece of real estate or a well-timed buy of corporate bonds might produce good returns over time, but many studies have shown that almost nothing matches the long-term potential of equities.
Exhibits A and B are these two well-known companies. Once under-appreciated and overly ignored, they have roared back to give dedicated shareholders big returns on their investments.
Sirius XM Radio
As a stock, satellite broadcaster Sirius XM Radio (NASDAQ:SIRI) nearly went off the air soon after the 2008 merger of its predecessors: Sirius Satellite Radio and XM Satellite Radio. After both endured years of financial struggles -- largely due to heavy spending in the hunt for subscribers -- the post-merger company dangled on the edge of bankruptcy.
Luckily for it, Liberty Media came to the rescue with a $530 million loan, which also gave it a 40% stake in the broadcaster -- eventually increased to a majority -- and a pair of board seats. Also, Sirius XM's share count ballooned by 60% in order to satisfy the conditions of the deal.
It was a smart investment. Sirius XM started to do a better job of attracting subscribers, helped in no small measure by robust growth in sales of new cars in the post-Great Recession period. Last year, the company crossed the 31 million subscriber mark, which was more than 50% higher than its tally at the beginning of this decade.
Fundamentals are improving along with the customer count. Revenue has marched steadily upwards, advancing from just over $3.4 billion in 2012 to slightly more than $5 billion four years later.
Net income has leaped higher in each of the past three years to land at $746 million in 2016, while annual operating and free cash flow are both at all-time highs. The latter two line items have created room for the return of the company's modest dividend, which was relaunched late last year. The company has even gone the invest-in-the-competition route, spending $480 million to grab a big stake in Pandora.
The market has noticed these improvements. The stock recently teased its all-time, post-merger high, and currently stands at over $5.50 per share. That's a more than hundred-fold increase from its level at the time of the bankruptcy scare.
We hear a lot about the disruption of traditional industries these days. The banking industry, which has traditionally relied on wide branch networks staffed with legions of employees, is a prime candidate for this.
Enter BofI Holding (NASDAQ:AX), a lender that conducts its business entirely online. Since there's no need to hold expensive real estate or maintain an army of workers, the company enjoys cost advantages its traditional competitors can only dream of.
Its efficiency ratio -- a bank's non-interest expenses as a percentage of revenue -- stood at 39% in its most recently reported quarter, well below the nearly 60% of Bank of America or the 57% of JPMorgan Chase, both solid performers in their own right.
And yes, BofI is growing notably these days. Total revenue increased by 7% in the aforementioned quarter to $92 million, with net income rising by 10% to hit just over $32.5 million. Contributing to this was 14% growth in deposits (to $6.9 billion), and a loans-and-leases tally that rose 16% to $7.3 billion.
Not everything is sunshine and roses for BofI, though. It's a big target for short sellers because of a investigation into alleged money laundering activities. The probe is led by the Justice Department, based on accusations that surfaced a few years ago.
The company vehemently denies any wrongdoing, and given its recent rise in the stock price, investors appear inclined to believe it. Meanwhile, it's broadening the scope of its lending, reducing its heavy dependence on mortgages by pushing into niche areas such as business equipment leasing and tax refund loans.
BofI is a real roller coaster stock that carries higher-than-average risk because of that investigation by the Feds. But its fundamentals are very impressive, showing that the company is doing a fine job leveraging its advantages as an online-only lender. Determined investors who managed to hold tight since the stock's financial crisis-era trough have seen it rise from barely above $1 to around $28 as of this writing.
The value of virtue
It's hard to stay optimistic when a stock's price dives; the natural instinct is to cut losses and move on to new investments. Every now and then, however, a company with a solid foundation goes through a tough period. Sirius XM basically has a monopoly on satellite radio, which began to pay off when this became a common feature in new cars. BofI Holding always had cost advantages even the best incumbent banks couldn't beat.
For investors willing to ride through the valleys, then, the ultimate rewards can be substantial. Patience is not only a virtue, it can make us a lot of money in the right circumstances.