I'm way out of the mainstream when it comes to the type of stocks that I research, buy and hang onto. For instance, I've never owned a FANG stock -- Facebook (FB) , Amazon (AMZN) , Netflix (NFLX) or Alphabet/Google (GOOG) , (GOOGL) . But I recently broke out of my mold of "buy small, cheap, beaten-down companies no one has heard of" to take a position in restaurant firm DineEquity (DIN) , which is a bit more mainstream (at least for me).
Yes, I've missed out on the FANGs' big returns, but a leopard can't change its spots -- and this leopard can't get his head around the idea of buying an Amazon that trades at 161x 2018 consensus earnings estimates. Add in the fact that AMZN has a minuscule 1.2% trailing-twelve-month net profit margin but rose 56% in 2017 and the stock is priced to take over the world, which I'm unconvinced it can execute to perfection.
Ditto for Facebook, although that company's valuation isn't actually all that crazy at "only" 27x 2018 consensus earnings estimates. That is, assuming that FB has the legs to keep going and that "Facebook Fatigue" doesn't ultimately send the company to the social-media graveyard.
I suspect FB isn't there yet. Last week I was teaching basic business skills to some young entrepreneurs in Haiti (our hemisphere's poorest country) and was surprised to see that most of them had personal Facebook pages and were eager to set up ones for their businesses as well. (My own personal bias against FB isn't all financial; it's just that if I see one more parent post how much they love their children or write about their latest colonoscopy, I'll burst.)
As for DineEquity, that's the parent company of the Applebee's and IHOP chains, which are primarily franchises. DIN is definitely beaten down -- I have my standards, after all -- but it pays an industry-leading 7.5% dividend and has a compelling-enough story for me to initiate a small position in the firm.
True, DIN fell 29% last year, making it one of 2017's worst-performing restaurant names among those with $250 million or more in market capitalization. In fact, the stock has fallen about 50% since February 2015 despite a broad market rally during that time. Last year's same-store sales were also challenging (to put it mildly), falling 7.7% at Applebee's and 3.2% at IHOP during in the third quarter.
But by other measures, DIN is one of the cheapest names in the sector, selling at just 10.5x or so 2019 consensus earnings estimates. The company's franchise model also means that net profit margins are normally very solid -- in excess of 15% in each of the past two fiscal years. All else being equal new lower U.S. corporate-tax rates should also help DineEquity improve its margins.
On the downside, DIN is a bit more heavily leveraged than I'd normally like to see. The company's $1.4 billion in debt helps push irs enterprise value (market cap plus debt minus cash) to just over $2.2 billion. The company's 97-cent-per-share quarterly might also scare away some investors who fear that the payout isn't sustainable.
That said, recent channel checks to my local Applebee's were much more positive than I would have expected. However, that's just one restaurant out of more than 3,700 Applebee's and IHOP locations. Still all of the above factors were enough to make me take a small position in the stock, fleas and all ... with perhaps with more to follow.