First off, happy holidays to all. I hope you're taking the time today to relax, rejoice in the comfort of family and friends, and reflect on all the things that have made you who you are today.
The holidays also give us time to reflect on what might become of the future. Here at The Motley Fool, we're regularly preaching the ethos of long-term investing. We firmly believe that buying and holding quality companies over the long run will allow you to remove your emotions from the equation and maximize your gains via compounding. Consider these stocks the big gifts wrapped under your tree, and you don't open these gifts until you've hit your golden years.
But it isn't the holidays without stocking stuffers. Stocking stuffers are usually smaller gifts, but they can still bring the gift recipient a lot of joy. Consider a stock-based stocking stuffer to be a company that isn't entirely on solid footing, and is a bit riskier than your typical buy-and-hold stock. However, stock-based stocking stuffers could offer a higher rate of return than mature dividend-paying companies. They may not deserve a big position in your portfolio, but they may be worth a nibble and represent the perfect end-of-the-year stocking stuffer.
Although each individual's risk tolerance and investment goals differ, and you'll certainly want to keep your own in mind when examining whether these companies may be right for you, here are three stocks to consider adding to your portfolio as true stocking stuffers.
Alliance Resource Partners (NASDAQ:ARLP)
Coal stocks have been absolutely beaten into a pulp over the last couple of years. Low natural gas prices have encouraged some electric utilities to begin switching their coal-fired plants over to natural gas-burning plants. In addition to the abundance of natural gas being recovered via U.S. shale, natural gas is a cleaner burning fuel than coal, providing even further impetus for the switch with tougher Environment Protection Agency Laws calling for a reduction in carbon emissions. The end result is we've witnessed a handful of coal producer bankruptcies (James River Coal and Patriot Coal), with others, such as Arch Coal, hanging on by a thread.
But the coal industry is far from dead. The Energy Information Administration points out that coal was still the primary electricity generation source in 2014 at 39%. This isn't to say natural gas isn't gaining ground, but it points to coal not disappearing overnight. With this in mind, it could be worth adding shares of Alliance Resource Partners, arguably the best-run coal producer, to your "holiday stocking."
One advantage Alliance Resource has over its peers is that it establishes contracts many years in advance for its production. If coal demand continues to weaken, this could become troublesome for Alliance Resource, but having a good portion of its future production already locked up means only a minimal amount of its production is exposed to wholesale price fluctuations.
Another important point is that Alliance Resource has a far healthier balance sheet than its peers, and it regularly recovers coal at a lower overall cost. Whereas many of its peers dealt with net debt levels in the multibillions of dollars, Alliance Resource Partners' current debt-to-equity is 92%, and it's generated in excess of $320 million in levered free cash flow over the trailing-12-month period.
Lastly, we have a dividend yielding a whopping 20%. Understandably, I do expect a dividend cut to conserve cash despite the company projected to maintain healthy positive free cash flow even with depressed coal prices. But a dividend yield in excess of 8% is certainly sustainable, in my view.
Spirit Airlines (NASDAQ:SAVE)
Low-cost airline Spirit has been grounded in 2015 with major airlines, such as American Airlines Group, directly competing against low-cost carriers than have been undercutting their ticket fares. The news clearly has Wall Street and investors worried, with Spirit cutting its full-year guidance despite fuel prices being well off their highs. However, for investors looking to add an attractive stocking stuffer to their portfolios, Spirit Airlines could be quite the catch.
One aspect of Spirit that could have investors seeing blue skies is that it has one the youngest fleets. According to AirFleets.net, Spirit's ongoing capacity expansion has allowed it to push its median plane age down to just 5.1 years. Newer planes mean better fuel efficiency and far fewer maintenance repairs. This all translates to lower expenses and potentially higher margins.
Spiirit's no-frills pricing policy also means that the optional fees it collects go straight to its bottom line. Spirit's low fares act as dangling carrots, and its ancillary fees are set up in such a way as to minimize potentially costly person-to-person interactions. In other words, Spirit gives its passengers a price break for taking care of ancillary fees before reaching the airport, or at a kiosk within the airport. Doing this should allow Spirit to continue to deliver superior margins relative to many of its peers.
Spirit also has an exceptionally healthy balance sheet for an airline. Spirit currently sports a net cash position of roughly $211 million. Comparatively, major airlines have net debt on their balance sheet of between $5 billion and $12 billion. Having such a robust net cash position affords Spirit the ability to expand by utilizing its cash flow as opposed to digging itself into a debt hole as so many other airlines have done.
Inovio Pharmaceuticals (NASDAQ:INO)
There's perhaps no industry that can be more hit or miss for a stocking stuffer than biotech. Most biotech companies aren't turning a profit, meaning investors are often valuing biotech stocks on some combination of emotion, future treatment potential, and peak annual sales potential. It makes valuing these companies quite the inexact science. One, though, that may warrant your attention is clinical-stage cancer immunotherapy and infectious disease vaccine developer Inovio Pharmaceuticals.
Inovio's had a bit of a rough year as talk of prescription drug reform has picked up in Congress and the number of prospective cancer immunotherapies has grown. If Inovio's immunotherapies do make it to pharmacy shelves, they're likely to have big price tags, and they may even face competition.
However, Inovio's pipeline diversity and its proprietary DNA-based development platform are what make the company so intriguing. Inovio's lead drug is VGX-3100, an immunotherapy designed to treat cervical dysplasia caused by human papillomavirus types 16 and 18. In a phase 2 study, VGX-3100 demonstrated a statistically significant improvement over the placebo in terms of disease regression and HPV clearance. It also has exciting vaccines in development for the treatment of hepatitis B, hepatitis C, Ebola, and Middle East Respiratory Syndrome.
Backing up Inovio are two key partnerships: MedImmune is partnered with Inovio for the development of IL-12-targeting INO-3112 for cervical cancer and head and neck cancer caused by HPV types 16 and 18. Inovio also has an ongoing collaboration with pharma giant Roche for INO-1800, a DNA-based vaccine designed to treat hepatitis B. Securing high-profile partners suggests that Inovio is having little trouble monetizing its platform and that other companies see value in its research.
If you're looking for a company with a lot of promise but an equal amount of risk, Inovio might be a stocking stuffer to consider.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool has the following options: long January 2017 $35 calls on American Airlines Group. It also recommends Alliance Resource Partners and Spirit Airlines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.