When looking for stocks to build a portfolio, investors should look for a plausible path to long-term expansion at a reasonable price. However, investors don’t have to pay too much or settle for low growth to find such companies. BJ Wholesale (NYSE: BJ), International Business Machines (NYSE: IBM), and meInnovative industrial properties (NYSE: IIPR) can provide both the portfolio diversification and the potential returns needed to grow one’s portfolio without undue risk.
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BJ’s operates 221 warehouse clubs in the eastern United States. However, it differentiates itself from its peers as Costco and Walmart‘s Sam’s Club through a hybrid approach with the grocery store. BJ’s emphasizes fresh food and offers smaller packaging than its direct peers.
Additionally, BJ’s was one of the few companies to switch to the better by the pandemic. Once a heavily indebted and slow growing retailer, the pandemic has resulted in record sales. Revenue in 2020 jumped 17% from 2019 levels and net income increased 125% over the same period.
The company also reported $ 676 million in free cash flow, an increase of 276% from 2019 levels. With that money, BJ repaid $ 574 million of its obligations, bringing total debt to around 1 , $ 1 billion. Not only did this reduce interest expense by 22%, it also gave the business a positive value after subtracting liabilities from assets. This value, also known as equity, now stands at over $ 319 million.
The increase in sales has helped BJ’s shares rise by around 75% over the past 12 months. Despite this increase, it is trading at around 15 times earnings. In comparison, Costco sells 37 times its profits while Walmart’s P / E ratio stands at around 30. That makes BJ a good deal by comparison.
However, BJ has not provided any forward-looking guidance, suggesting the company is uncertain how it will fare if pre-pandemic buying patterns return. Nonetheless, declining debt levels have permanently improved BJ’s business by freeing up capital for store improvement and expansion. This should lead to faster growth and higher income over time.
IBM appears well positioned to reverse years of decline as it makes a major transition. She began to split what she now calls NewCo, her managed infrastructure services business, into a separate company. IBM plans to run the spin-off later this year.
IBM will continue to build supercomputers, operate computer systems and provide financing. However, the new growth engine for the company has become the hybrid cloud.
Hybrid clouds allow public and private clouds to interact. All major cloud companies offer hybrid cloud services, and so far IBM accounts for less than 2% of the cloud infrastructure market, according to Kinsta.
However, IBM stands out with a default architecture designed to address compatibility and complexity issues that can arise with hybrid clouds. The efficiencies created by such a system could give IBM a competitive advantage over AmazonAWS and Azure, Microsoftthe cloud platform of.
The split could also help NewCo. Revenues fell in the global technology services to which NewCo now belongs. Nonetheless, NewCo will retain an order book of $ 62 billion. With a management team focused exclusively on this business, it has a chance to reverse this decline.
Separation cannot come too soon. IBM had a terrible quarter, experiencing a 5% drop in turnover in 2020 over a 12-month period. This happened despite growing cloud revenue of 19% over the same period. The company blamed the change in buyer behavior amid the pandemic for the overall decline.
Nonetheless, the spin-off offers hope for IBM. CEO Arvind Krishna, who ran IBM’s cloud before taking over as CEO, estimates the company’s revenue will grow by half of a digit after the split.
Investors seemed to have become optimistic. The P / E ratio, which struggled to exceed 15 before 2021, has now risen to around 22. It is still well below Microsoft’s multiple of 37, however.
In addition, the annual dividend of $ 6.52 per IBM share yields about 4.9%. IBM and NewCo are committed to dividing this dividend and are committed to its future growth. Since the $ 10.8 billion annual cash flow easily covers the $ 5.8 billion annual cost of the payment, continued increases in the overall payment remain likely.
Certainly, the uncertainty remains because IBM did not specify many financial details about the spin-off, such as the dividend split. In addition, it does not represent a significant percentage of the market at the moment. Still, investors will soon own an IBM heavily focused on the cloud and a NewCo exclusively focused on its backlog. This will leave investors with two tech companies that could potentially anchor a portfolio.
Innovative industrial properties
Innovative Industrial has properties reserved for the production of cannabis. However, instead of existing as a “marijuana company”, it functions more as a real estate investment trust (REIT), deriving income exclusively from real estate leasing.
This offers several competitive advantages. Since he does not grow cannabis, he is not subject to the restrictions of Schedule I, rules that make weed illegal at the federal level. So, he is enjoying the marijuana boom without this obstacle.
In addition, the restrictions in Schedule I make producers ineligible for bank loans. This benefits Innovative Industrial, as it can buy the property from a producer and lease it to the previous owner. This approach provides producers with financing while giving Innovative Industrial a revenue stream and an opportunity to acquire more properties.
Additionally, New Frontier Data predicts that the U.S. cannabis industry will experience a compound annual growth rate (CAGR) of 18% through 2025.
The growth of Innovative Industrial and its 100% occupancy rate seem to confirm this expansion of the industry. In fiscal 2020, revenue of $ 117 million was 162% higher than 2019 revenue. This led to net profit of $ 64 million, an increase of 191% over the same period. Funds adjusted for operating income, cash provided after adjustment for capital improvements, amounted to $ 98 million, an increase of 180% from last year’s levels.
As a REIT, it must pay at least 90% of its net income in dividends. However, thanks to the massive growth, the payment has increased in each of the last four quarters. Shareholders now earn $ 5.12 per share in cash annually, a cash return of about 2.6% at current prices. Such successes have enabled the Innovative Industrial share to increase by 190% over the past 12 months.
Between that increase and the rise in earnings and dividends, its P / E ratio now stands at around 60. Although it doubled last year, this valuation is unlikely to deter investors given the increases to three. profit figures.
Nonetheless, the only thing that could bring uncertainty to this business is, ironically, legalization. If producers can get bank loans, they have one less reason to sell their property to Innovative Industrial. However, the REIT can purchase property outside of sale-leaseback agreements. Additionally, with full occupancy and the industry poised for further rapid expansion, the business is expected to continue to thrive.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of the board of directors of The Motley Fool. Teresa Kersten, an employee of LinkedIn, a subsidiary of Microsoft, is a member of the board of directors of The Motley Fool. Will healy owns shares of IBM and Innovative Industrial Properties. The Motley Fool owns shares and recommends Amazon, Costco Wholesale, Innovative Industrial Properties, and Microsoft. The Motley Fool recommends the following options: January 2022 long calls at $ 1920.0 on Amazon and January 2022 short calls at $ 1940.0 on Amazon. The Motley Fool has a disclosure policy.
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