This article is part of our Rising Star Portfolios series.
Last week I introduced a new screen designed to find negative-free-cash-flow companies with a chance to explode (in a good way). In short, I want companies like Home Depot (NYSE: HD) in 1985 -- which gained 1,500% over the next 16 years while exhibiting negative free cash flow all along the way.
Of the 23 companies that passed my screen, the following have a realistic chance of joining my Rising Star portfolio:
- MAKO Surgical (Nasdaq: MAKO) -- makes a robotic surgical system for knee and hip arthroplasty procedures. While cash losses from operations are diminishing, management expects capital expenditures to keep increasing.
- A123 Systems (Nasdaq: AONE) -- makes rechargeable lithium-ion batteries and battery systems for the transportation industry and electric power grids. Management expects continued negative free cash flow for the foreseeable future as it continues to expand manufacturing.
- Seaspan (NYSE: SSW) -- operates a fleet of container ships that it charters to large shipping clients on long-term, fixed-rate contracts. It has added 14 ships over the past year or so and intends to "significantly expand" the fleet in the coming years.
- Zipcar (NYSE: ZIP) -- see below.
These four most closely resemble Home Depot in its early days. I'll look at each of them in more detail in future articles, but today I'll focus on Zipcar.
Zip-a-dee-doo-dah
Zipcar operates an innovative car-sharing service in 15 major metropolitan areas and 250 college campuses. The company has around 650,000 members, who typically pay an annual fee of $60 and hourly rates of close to $8. "Extra value plans" for more frequent drivers waive the annual fee but have a minimum monthly commitment.
The business is expanding and growing rapidly. Revenue, for example is up 36% over the past 12 months. This kind of growth has attracted attention in two ways. First, of course, is competition. Hertz, U-Haul, and Avis have all joined in the fun, though none of them is currently challenging Zipcar for supremacy. Second is alliances. Zipcar and Ford (NYSE: F) have entered into a two-year deal to bring more Ford vehicles into the fleet. The partnership also makes me think Ford might ponder a buyout offer for Zipcar, which sports just a $575 million market cap.
If you'd like a more detailed look at the company, my colleague David Meier has laid out a compelling buy case. Now let's take a closer look at the similarities between Zipcar and a young Home Depot.
The next Home Depot?
I set up my screen to find high-growth companies that are investing cash back into the business at a high rate. If we look more closely at Home Depot's characteristics circa 1985, we find:
- Positive net income in all but its first year.
- Net income increasing every year but one.
- Cash from operations jumping around from negative to positive before taking off.
Zipcar differs in that it has not yet had positive net income in its nearly five fiscal years. However, it moved from negative to positive cash from operations after two years and has been growing that figure steadily.
I think the company quite nicely fits the spirit of what this screen is looking for, and the market is not recognizing its potential:
Zipcar is a strong candidate to join my portfolio. I'll look at the other candidates soon and make a decision in the coming weeks. You can keep up with everything by following me on Twitter and adding the companies you're interested in to your free, personalized watchlist:
- Add Zipcar to My Watchlist.
- Add Seaspan to My Watchlist.
- Add MAKO Surgical to My Watchlist.
- Add A123 Systems to My Watchlist.
