Lincoln National

Ticker: LNC, Buy below $66.

Lincoln National is a Fortune 250 American holding company, which operates multiple insurance and investment management businesses.

Why I Would Buy

  1. Cheap – LNC is currently selling for > 8x trailing earnings and forward earnings.
  2. Below Book – The stock can be purchased below it’s book value (P/B: 0.93).
  3. Return on Equity – RoE has been at a high single digit level for the past decade.
  4. Low Payout Ratio – The dividend is a respectable 2%, but a payout ratio below 20% affords plenty of opportunity for future dividend growth.
  5. Strong Buyback – Management has announced an aggressive share buyback program, which is likely to be accretive to shareholders given the low valuations of the stock.

What Could Go Wrong

  1. Credit Rating – Long term debt of LNC is rated BBB+ by S&P, I would’ve liked higher ratings.
  2. RoE – Although decent, consistent double digit returns would’ve made the stock more attractive
  3. Relative Valuation – Not particularly cheap when compared to other large life insurers.

 

Disclosure: I am long LNC, please read additional disclosures here before taking any action based on this post.

 

TCP Capital Corp.

Ticker: TCPC, Buy below $16.

TCP Capital Corp is a Small-Cap Business Development Company that is focused on middle market lending.

Why I Would Buy

  1. Dividend – Yields over 9%. This dividend is well covered by Net Investment Income (110% dividend coverage in 2017).
  2. Insider Trends – Officers has been aggressive buyers for last 12 months, especially so within the last 3 months.
  3. Credit Ratings – TCP Capital’s debt is rated investment grade, a testament to the company’s strong balance sheet.
  4. Cheap – TCPC currently trades below its book value.
  5. Fee Structure – TCPC has one of best advisory fee structures in the BDC industry, its base and incentive fee compensations are shareholder friendly.

What Could Go Wrong

  1. High Beta – BDCs like TPC that serve the middle markets are strongly correlated to the domestic US economy, and will suffer disproportionately in an economic downturn.

 

Disclosure: I am long TCPC, please read additional disclosures here before taking any action based on this post.

The Interpublic Group

Ticker: IPG, Buy below $24.

Why I Would Buy

  1. Cheap– Interpublic trades at less than 14 times forward earnings and 1.1 revenues.
  2. RoE – Return-on-Equity is my favorite metric, IPG has maintained double digit returns on equity for the past decade.
  3. Dividend – Currently yields over 3%.
  4. Contrarianism – IPG is near a 52 week low.

What Could Go Wrong

  1. High Beta – Advertising and media spend are strongly correlated to global economy, and is first spending to be cut in a downturn.
  2. High Payout – Payout ratio has been steadily climbing, and is nearing 50% of earnings.

Disclosure: I am long IPG, please read additional disclosures here before taking any action based on this post.

Kroger Inc

Ticker: KR Buy below $25.

Why I Would Buy

1.       Cheap– Kroger trades at about 13x trailing earnings and 11x forward earnings.

2.      High RoE – Regular readers know that returns-on-equity is my favorite metric for picking stocks; Kroger has maintained double digit annual returns-on-equity during the past decade.

3.      Low Payout Ratio – Kroger pays about 2% dividend, but the payout is only about 20% of earnings.

4.      High Ratings –Both Morningstar and S&P rate the stock at 4 out of 5 stars.

What Could Go Wrong

1.       Highly Leveraged –Kroger has a large degree of indebtedness, more than that of its peers and more than I am comfortable with. Greater than 65% of the company’s capital structure is debt.  

2.      Low Credit Rating –This is related to the point above. Kroger has credit rating that is barely investment grade (Moody’s Baa1).

3.      Industry Risks – Kroger is grocery chain, selling groceries is a cut throat retail business with thin margins.

Disclosure: I am long KR, please read additional disclosures here before taking any action based on this post.

Aircastle Ltd

Ticker: AYR, Buy below $25.

Why I Would Buy

  1. Cheap– Aircastle trades at about 11x trailing earnings and 10x forward earnings.
  2. Concentrated Institutional Holdings –  More than 35% of outstanding shares are held by two large and savvy institutional investors: The Ontario Teachers’ Pension Plan Board and the Japanese conglomerate Marubeni.
  3. Dividends – AYR yield an attractive 4+%.
  4. Selling Below Book –Aircastle currently trades at 90% of its book value.

What Could Go Wrong

  1. Highly Leveraged –Aircastle like all leasing companies has a large amount of indebtedness. Greater than 70% of the company’s capital structure is debt.
  2. Significant Industry Risks – Aircastle structures it’s leases such that the cashflow from leases does not always the cover cost of their planes, Aircastle counts on being able to sell or re-lease their planes  at lease expiration. This may become difficult to accomplish if there is a prolonged downturn in air passenger or cargo demand, this can  occur due to any number of factors — higher fuel prices, global recession etc.

Disclosure: I am long AYR, please read additional disclosures here before taking any action based on this post.