Over the past several years, few stocks have rewarded investors as much as SolarEdge Technologies (SEDG 5.12%). Since the beginning of 2017, the company's stock is up a remarkable 550%. Even those gains are surpassed by Shopify (SHOP 5.47%), which has seen its stock rocket nearly 700% higher over the same period. At the same time, Tanger Factory Outlet Centers (SKT 3.28%) investors have lost almost half of their investment value, even after adding back in one of the most generous dividends on the market.
So what do these three have in common? I already own shares of all of them, but they're also at the top of my "buy next" list of stocks. To put it simply, even with the fantastic gains SolarEdge and Shopify have delivered, they have incredibly bright prospects, while Tanger looks like the stock equivalent of the baby who's been thrown out with the bathwater.
Keep reading to learn why I plan to buy more shares of all three companies in the near future, and why you should consider doing the same.
A (solar)edge on the competition
SolarEdge reported its second-quarter results on Aug. 7, and investors responded by sending the stock up 25% on the day. In short, SolarEdge continues to outperform investors' expectations, growing sales and earnings at an incredible rate. More significant -- and maybe the biggest reason I have SolarEdge on my buy list -- is where management is focusing its efforts and future capital allocation: diversifying across alternative energy products and services.
In particular, the company has made big investments in energy storage, which should prove to be one of the highest-growth segments of the energy business in the decade ahead. On SolarEdge's Q2 earnings call, founder and CEO Guy Sella said that the company's battery storage product is "expected to be available worldwide in the first half of 2020."
But that's only the start. Sella said the company expects to spend $50 million to $60 million over the next 18 to 24 months on equipment and facilities to support mass production of SolarEdge batteries. This will substantially increase the company's revenues as those facilities come online over the next several years.
Put it all together and you have a founder-led business, a proven leader in its niche supplying the solar industry with a key component, now stepping heavily into a related market that is very complementary to its existing business. Considering the massive growth the next couple of decades will see in the solar industry, SolarEdge is worth owning. Trading for only 21 times expected 2019 earnings, it's worth buying at today's price.
Fixing a mistake
In June, I sold about half of my stake in Shopify, and for a reason that I've learned to regret over the years: valuation. In short, I expected the share price would fall from its highs, as profit-taking from the big recent run-up and investor sentiment shifted.
Guess what? Shopify's stock price is about 9% higher today than it was when I sold, and I've been reminded that short-term thinking rarely works out over the long term. And that has me thinking it's in my best interest to just reestablish my full position, and not get caught up in price anchoring.
To put it another way, I don't own Shopify based on what its stock price will do this week or next, or even this year or next. Shopify is in my portfolio based on what the business is likely to do over the next decade. The company grew revenue 48% last quarter, increased adjusted earnings per share sevenfold, and continues to become a favored e-commerce platform for merchants big and small.
Yes, it trades for an insanely high 29 times sales and 353 times projected next-year profits -- and non-non-GAAP (adjusted) profits at that. But it also has a path to continue its growth -- as well as surprising optionality -- for many, many years to come. The reality for retail is, most companies need a true expert to make e-commerce work as part of their total strategy, and nobody has come close to doing this as well as Shopify.
Another founder-led business that's a proven leader with massive growth ahead of it, Shopify isn't a "sell at the top" stock, but one to hold for the long term. If anything, it makes an ideal stock to buy more of when -- and if -- the market decides to sell.
Zigging while the retail-pocalypse bears zag
Tanger Factory Outlets seems like it can't do anything right -- at least, that's the case if you look at its stock chart over the past few years:
Yes, the real estate investment trust (REIT), which specializes in upscale retail outlet centers, has struggled under the weight of older, underperforming properties. But the market's reaction has been to lump it in with every struggling regional mall owner in the country, while the bulk of its portfolio has done pretty well, and management has done a solid job focusing on its best assets and unloading the stragglers.
Simply put, the market seems convinced it should continue to value the company based on its earnings trajectory, while ignoring the improvements management has made. Through the first six months of the year, Tanger generated $1.09 per share in funds from operations -- or FFO, a better proxy for profitability for REITs than earnings -- giving it an FFO payout ratio of 65%. That means after paying shareholders, it has substantial cash left over to reinvest back into the business to strengthen it.
At recent prices, the dividend yield is pushing 9%, and the payout really isn't at any financial risk. Moreover, the decline in FFO we have seen over the past several quarters has been an expected result of focusing on its best assets, and is expected to reverse over the next year. Moreover, it consistently sports an occupancy rate above 95%, and sales at its properties continue to climb, approaching $400 per square foot this year, strong metrics that indicate its tenants are both happy and enjoy strong results from Tanger's properties.
With a yield of nearly 9% and a strong niche in the part of brick-and-mortar retail that's performing well, Tanger looks too good to pass up at these levels.