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June 2014

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23

Thank You, Dad.

June 15, 2014 – Comments (5)

Today I made the move to Alexandria, VA, in preparation for the beginning of my journey at Motley Fool HQ. It was fitting that I arrived in Alexandria today, on Father’s Day. My father’s somewhat sudden and unexpected passing two years ago continues to shock me to this day -- I miss him very much -- but his inspiration remains strong as ever. 

My introduction to both investing and the Fool came simultaneously from my dad when I was 12 years old. The two of us visited Fool HQ together in 2007 when I was 14. 

My dad was a quality friend, musician, woodworker, storyteller, teacher, investor, and father -- among countless other qualities I continue to admire. I strive to live in his spirit and example each day. 

Last year, Warren Buffett shared these thoughts about his father (who passed away in 1964): 

“My dad was my greatest inspiration. He was my hero when I was six and he is still my hero now. He is an inspiration to me in every way.”

My father remains in my heart as I begin this phase of my life in Alexandria, fittingly enough, on Father’s Day. Ever a true Fool at heart, I know he is with me in spirit. 

Thank you, Dad, for everything.  [more]

Recs

5

5 Myths Socially Conscious Entrepreneurs Need to Ignore

June 09, 2014 – Comments (0) | RELATED TICKERS: TSLA , SCTY , NSRGF

Great article in Fast Company that addresses five common myths/objections when it comes to running conscious enterprises. While the article is geared toward entrepreneurs, I believe "thinking like an entrepreneur" is a helpful practice for investors. If nothing else, this entrepreneurial mindset can help us focus on qualities in a business such as purpose, long-term vision, culture, and other items that might be left by the wayside in typical Wall Street circles. When evaluating potential investments I increasingly focus on the leadership, purpose, and culture of a business first, and ideally find a business with a 'conscious culture' and the financial growth/cash flow production to back it up. 

Here are some snippets from the article (which I recommend reading in its entirety): 

5 Myths Socially Conscious Entrepreneurs Need to Ignorehttp://www.fastcompany.com/3031509/the-future-of-work/5-myth...

A series of powerful forces are changing business as we know it. From the speed of communication to information accessibility, all lead to increased transparency and a more global perspective.

Whether we choose to define the newest iteration of capitalism as Shared Value, Conscious Capitalism, Institutional Logic, Benefit Corporations, Triple Bottom Line, SRI, ESG, or Regenerative Capitalism, the fact is companies that don’t update their business practices are significantly less likely to thrive. Meanwhile, those that harness the power of purpose are capturing significant value and creating meaningful competitive advantages along the way....

This new, holistic approach to business may be the most significant movement of our time, as well as the most misunderstood. Below are five pervasive myths surrounding stakeholder capitalism today:

MYTH #1: IMPACT INVESTING IS A FANCY TERM FOR GIVING MONEY AWAY.
Reality: Smart companies understand purpose and profitability go hand in hand.


Historically, it’s been easy to lump investing for impact in with philanthropy. When Google CEO Larry Page recently and publicly stated he’d rather give his money to Elon Musk than to charity, his message underscored a common belief that creating positive impact is necessarily tied to giving away your money.

Whether you agree or not with Larry’s view that visiting Mars is philanthropic, his point is not that charity is misguided but that businesses built with purpose and run by inspired leaders can change the world and improve lives in the process, all while creating outsized financial returns.

Mr. Musk’s entrepreneurial approach to capitalism, represented by his success at Solar City and Tesla, is built on innovation and emerging technologies and demonstrates well two key elements of next generation capitalism: building companies specifically to address social and environmental challenges, and harnessing certain advantages that purpose can create to win....

MYTH #2: ENVIRONMENTAL AND SOCIAL WELFARE ARE THE GOVERNMENT’S RESPONSIBILITY.
Reality: Businesses taking a holistic approach to growth unlock unrecognized value and create competitive advantages.


While the fundamental purpose around which a company is built can yield compelling opportunities, equally, if not more important, is how a company conducts its business.

In their 2011 Harvard Business Review article, Michael Porter and Mark Kramer define shared value as the expansion of “the total pool of economic and social value” available to both corporations and surrounding communities. Companies who practice a shared-value approach investigate untapped revenue sources within their immediate environment, finding ways to maximize profitability by--not in addition to--improving human lives and promoting environmental welfare.

Unlike philanthropy, shared value is not external to profitable business practices but integral to them. Porter and Kramer cite cashew producer Olam International, which stopped shipping nuts from Africa to Asia for processing in cheap factories and opened local processing plants, training and hiring workers in Tanzania, Mozambique, Nigeria, and Cote d’Ivoire instead. The move allowed the company to cut shipping costs by up to 25% while establishing deep roots in a community vital to its long-term survival....

MYTH #3: THE POINT OF CORPORATE SUSTAINABILITY IS TO IMPROVE REPUTATION--ANYTHING MORE HURTS SHAREHOLDERS.
Reality: Sustainable companies outperform their unsustainable counterparts.


A growing body of research shows that companies who invest in a holistic stakeholder approach--through policies benefiting shareholders, employees, local communities, consumers, supply chain partners, and the environment in concert--perform significantly better in the long term than those who don’t.

Using a value-weighted portfolio of Fortune’s 100 Best Companies to Work For, Wharton Professor Alex Edmans strikingly found that companies who invest in the happiness of their employees see greater financial returns, as can companies who employ socially responsible investment screens. Research by Harvard Business School professors Robert Eccles and George Serafeim, and Ioannis Ionnou of the London Business School, indicates companies who voluntarily invest in sustainable practices “significantly outperform their counterparts over the long term.”....

MYTH #4: IT’S HUMAN NATURE TO PRIORITIZE PROFIT OVER SUSTAINABILITY.
Reality: Consumers are more educated than ever about sustainability and corporate values, and they’re voting with their money.


Rhetoric surrounding sustainability isn’t changing--it’s already changed. Thought leaders worldwide understand responsible consumerism doesn’t mean privation. The old “doom and gloom” model of environmental responsibility has been replaced by one recognizing resource scarcity on a planet rapidly heading toward 9 billion people and valuing resource efficiency, innovation, and socially/environmentally responsible processes.

A recent BCG study summarizes another key driver of this shift: The millennial generation--representing $1.3 trillion in annual spending--engages with brands far more extensively and personally than older generations, and expect their values to be reflected in brands they purchase. They value careers that serve the greater good, products and services connected to social causes. They will also be the most influential generation our country has seen, numbering 78 million in 2030....

MYTH #5: STAKEHOLDER CAPITALISM IS A CHOICE.
Reality: Stakeholder capitalism is vital to an industry’s continued survival.


It’s well past time to start thinking about financial profit as only one element of a much larger contextual system--one including personal, social, and environmental regeneration. Human welfare, environmental sustainability, employee happiness, and social benefits are critical elements of the larger system in which we, and the companies we build and/or work for, are tied. The idea that a corporation somehow exists outside of that, subject only to the shareholder’s profit motive, is not just short-sighted but irresponsible. In the end, each of these constituents is inherently tied to long-term financial success. Without shared value creation across these areas, there can be no long-term profitability.
 -http://www.fastcompany.com/3031509/the-future-of-work/5-myth...

I think these are important trends for Foolish investors to follow, particularly when identifying businesses poised to generate significant value for many years and decades ahead. 

Best,
David K  [more]

Recs

2

Pencils IRA Purchase: RetailMeNot (SALE)

June 06, 2014 – Comments (2) | RELATED TICKERS: SALE , GRPN , COUP

When it comes to shopping, people love discounts. Retailers also love attracting new customers. RetailMeNot (SALE) helps both parties meet in the middle -- whether through its website or mobile app -- and has already grown sales more than 12 times over the past four years. For the five reasons explored below, I believe RetailMeNot's growth story is just getting started and offers an opportunity for patient investors to enjoy market-beating returns over the long run. 

1. Purpose-driven business 

RetailMeNot oversees a platform where customers looking for deals are matched with retailers offering discounts. Whether it be digital coupons or other deals, RetailMeNot's network grew to more than 60,000 retailers and brands offering deals to customers in 2013. Consumers want deals and retailers want to offer deals to attract consumers. RetailMeNot -- today the world's largest digital coupons marketplace -- operates a platform which serves as a win-win for consumers and retailers alike. 

Founder and CEO Cotter Cunningham explains that the company's mission "is to be the number one place where consumers go to find the best offers, whether shopping online or at a store." Says Cunningham: 

"We continue to reinforce our leadership position by not only helping consumers find our best digital coupons, but also creating an efficient channel for leading retailers to engage with a large, enthusiastic audience."

Boiled down to its simplest form, RetailMeNot's purpose is to help consumers save money by matching them with retailers offering discounts and deals. 

2. Innovative products and services 

The beauty of RetailMeNot is the company's growing network of retailers and brands offering deals to consumers. "We have created a marketplace for retailers to drive sales by showcasing their offers to consumers," says Cunningham. According to Cunningham, each consumer saves $20 on average through RetailMeNot. In contrast to Groupon, which Cunningham describes as a platform where small businesses give big discounts sporadically, RetailMeNot helps big businesses -- including Southwest Airlines, Starbucks, and Macy's -- give small discounts everyday. With more than 560 million visits to its website in 2013 (up from 350 million in 2011) and 16 million downloads of its mobile app, RetailMeNot is clicking in consumer engagement.

The RetailMeNot portfolio also includes Voucher Codes, the largest digital coupons marketplace in the United Kingdom, in addition to several other URLs and businesses in countries such as Germany, the Netherlands, and France. All have the same basic function: helping match consumers with the best deals from their favorite retailers and brands. Deals and discounts appeal to consumers around the world, and RetailMeNot is tapping into this global market. 

There is especially extensive potential for RetailMeNot in the mobile market. "Now that more than 50 percent of American adults are smartphone owners," says Michael McGuire, research vice president at Gartner, "marketers are compelled to develop mobile strategies that ensure their products and services can be found, and purchased, by consumers on the go." An April 2014 survey from Gartner found that companies allocate on average 28.5% of their total marketing budget to digital marketing, up 20% from 2012 levels. Digital marketing spending is expected to increase 10% in 2014.

Customers with RetailMeNot's mobile app are notified when they are in the proximity of retailers offering deals, in addition to having the opportunity to conveniently search for deals on the go. Revenue through mobile devices now represents 15% of RetailMeNot's overall sales, with mobile revenue increasing127% year-over-year in the first quarter of 2014. Mobile app sessions skyrocketed to 125.3 million in the first quarter of 2014 from 20.2 million in the same period last year. 

RetailMeNot stands to benefit as more retailers and brands engage in ever-increasing volumes of digital marketing. Winterberry Group, a marketing consulting firm, projects digital ad spending to top more than $50 billion in 2014. Over the next five years, do you think more or less marketing dollars will go toward digital marketing? Think about it. I expect current trends to continue and anticipate growing digital marketing spending in the years ahead. If this is indeed the case, RetailMeNot presents a timely opportunity for patient investors to take advantage of a marketing industry evolving toward the digital market. 

3. Visionary, experienced, involved leadership 

President and CEO Cotter Cunningham founded RetailMeNot in 2009. Formerly the COO of Bankrate.com, Cunningham began to "develop a hypothesis and business plan around the online coupon industry." The formation of RetailMeNot soon followed, and the company continues to grow its global presence as the top destination for consumers looking for deals and discounts. 

While RetailMeNot is a young company, the business itself is overseen by a variety of experienced leaders. CFO Douglas Jeffries brings executive experience from Palm and eBay, while CTO Paul Rogers was an engineer at Google and has worked with RetailMeNot since the company's inception. The company's board of directors includes Gokul Rajaram, product engineering lead at Square, a commerce company perhaps best known for its mobile credit card reader for Apple and Android products. Rajaram also served as an advertising director for Facebook and was the Product Management Director for Google Adsense. Brian Sharples, the co-founder and CEO of HomeAway, a leading marketplace of vacation rentals worldwide, also serves on RetailMeNot's board.

All but three of RetailMeNot's executives and board members are under the age of 50, and bring with them a slew of experience related to eCommerce, advertising and marketing, and developing vibrant marketplaces online. Management continues to focus on research and development, with total funds allocated to product development increasing from $4.39 million in 2011 to $30.37 million in 2013. So far in 2014 product development spending has increased 80% year-over-year to $10.71 million. 

In addition to focusing on innovation, management recognizes the value RetailMeNot brings to retailers and brands around the world. Marketers will follow the eyeballs, and as RetailMeNot racks up more visitors each quarter the network becomes all the more valuable to current and potential retailers looking to attract consumers with deals and discounts. Building relationships with retailers, therefore, is very important for the long-term success of RetailMeNot. RetailMeNot recently entered a strategic partnership with General Growth Properties (GGP), a real estate investment trust whose portfolio includes 120 malls in 40 states. This partnership will boost brand awareness by making RetailMeNot the "preferred digital coupon provider across GGP malls."

This focus on innovation overseen by an experienced leadership team -- which also recognizes the importance of strategic partnerships -- bodes well for the future of RetailMeNot. 

4. Consistently increasing cash-flow production 

RetailMeNot has been free cash flow positive over the past four fiscal years, and the company itself just went public in July 2013. The company grew operating cash flow from $2.61 million in fiscal year 2010 to $31.53 million in the 2013 fiscal year, producing $25.04 million in free cash flow over the course of the year. While the company's cash flow production hasn't been increasing in a straight line -- as is often the case for young and growing businesses -- RetailMeNot continues to produce solid free cash flow, helping build a sturdy balance sheet with $196.47 million in cash and $39.56 million in debt. 

RetailMeNot has grown sales at an average annual pace of 87.83% over the past four years to $209.84 million in 2013, with sales increasing 51% in the first quarter of 2014. Most importantly, RetailMeNot has become more effective when it comes to translating customer visits to its website and mobile app into sales. Net revenues per visit increased from $0.16 in 2010 to $0.37 in 2013 and reached $0.39 in the first quarter of 2014. 

5. Strong company culture 

"We believe people work hard for us," says founder and CEO Cotter Cunningham, "so we need to work hard for them." RetailMeNot delivers on this promise to employees. Whether it be perks such as free meals offered each workday to employees, fun employee outings (go-kart racing, anyone?), or weekly company-wide "transparency meetings" to go over month-to-date sales and other metrics, RetailMeNot’s culture has translated to strong ratings from employees on Glassdoor (a site where employees can anonymously rate their place of work).

Cunningham receives an 89% approval rating from employees on Glassdoor, while the company as a whole receives a 4.2/5 rating from employees. This is all the more impressive when compared to the 3.2/5 employee rating for Coupons.com and 59% employee approval rating of CEO Steven Boal, or the 2.9/5 employee rating for Groupon and 61% employee approval rating of CEO Eric Lefkofsky. RetailMeNot makes a conscious effort to support and reward employees, and it shows in the company's superior ratings by employees on Glassdoor compared to its competitors. 

Valuation and risks

The primary risks I see for RetailMeNot at this point are increased competition, whether from more established players such as Groupon or perhaps slightly smaller players like Coupons.com. I highly doubt that only one of these businesses will be successful in the coming years -- especially considering how quickly the digital marketing field is growing -- but it remains something to watch closely nonetheless. 

The company’s stock-based compensation is another item to watch closely. Since the company just IPO’d last year this number is a bit tricky to track, but if stock-based compensation expenses continue to rise at a quick rate (it more than doubled year-over-year to $5.01 million in the first quarter of 2014) I will be more concerned and reevaluate my thesis. I don’t mind if margins are pressured by product development costs in the short-term, but I don’t like the idea of stock-based compensation being an ongoing drag on margins in a severe way. 

So far as valuation goes, the recent decline of the stock -- due to largely unfounded fears of the Panda 4.0 algorithm update from Google -- presents what strikes me as an opportunity for patient investors. RetailMeNot continues to grow by leaps and bounds, increasing retailers and users on its network, and is also steadily increasing average revenue per visit to its site. All of these are great trends for investors and I expect will help the company continue to grow nicely in the coming years. 

I believe the company can expand sales at an average pace of 30% annually for the next three years -- and likely can maintain comparable revenue growth rates (between 25%-30%) on average over the next five years -- in which case the stock will likely outperform the market. With the recent drop in share price I think RetailMeNot is poised to deliver average returns of approximately 15% annually over the next five years. I will continue to follow the company and update my thesis as necessary, but as it stands I am confident in the likelihood of RetailMeNot to outperform the market over the next five years. 

Foolish bottom line 

"We believe we're in the very early stages of a large market opportunity as retailers increase their use of digital marketing solutions to engage consumers," said Cunningham during RetailMeNot's most recent conference call. I am inclined to agree. RetailMeNot is poised to benefit from the confluence of two major trends: increased smartphone adoption and growing amounts of marketing dollars specifically allocated to digital marketing. 

With a business model appealing to customers (through deals and discounts), retailers (by offering access to a growing and engaged consumer audience), and employees alike, I like the company's chances of expanding over the long haul and outperforming the market in the process (thus also adding shareholders to the list of grateful stakeholders). Welcome to the Pencils IRA Project, RetailMeNot. 

Best,
David K 

For more on the Pencils IRA Project: http://www.fool.com/retirement/iras/2014/02/15/the-best-ira-...  [more]

Recs

4

Initial Analysis of MarketAxess (MKTX)

June 03, 2014 – Comments (0) | RELATED TICKERS: MKTX

MarketAxess (MKTX) seems to be doing a terrific job capitalizing on a niche by providing an electronic trading platform for fixed-income securities (such as corporate bonds). The company’s electronic trading platform serves as a tool for institutional investors to participate more efficiently in the world of corporate bonds and other fixed-income instruments.  [more]

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