The earnings reports from the big favorites like Apple (AAPL), Chipotle (CMG) and Microsoft (MSFT) have been the talk of the town. My only thoughts on those stocks are that Apple really needs to do something with all that cash and I think the best use would be to buy the Baltimore Orioles and purchase the contracts of Mike Trout, Kris Bryant and Bryce Harper for outrageous sums of money.
Microsoft is a great company, but my overriding thought when I think about Microsoft is that I want 10 minutes alone in a room with just me, the developer of Windows 8 and my baseball bat collection. As to Chipotle, I think the current valuation for a taco stand is ridiculous, but then again my wife and adult kids find it nearly impossible to drive by one without buying a burrito, so I could be wrong.
Instead of dwelling on these stocks, I spent a good deal of time pondering the private equity mindset and what you would need to work on. I watched the Orioles drop a close one to the Yankees and doodled a bunch of notes on my ever-present legal pad. I made a few calls and talked to some folks who engage in private equity activity and came away from the evening with a few additional thoughts. In addition to attention to valuation, patience and a very long time frame, the ability to think ahead a bit can also help you figure out which sectors and individual stocks you might want to include in a long-term, private equity-like portfolio.
While macro stuff is not my strong point, I feel like I can identify some segments of the world we live in that are more or less have-to-happen situations. Obviously, small banks fit well into my long-term view of the world. Smaller banks are going to have an increasingly difficult time keeping up with regulatory and technology costs. They will find that it makes more sense to sell to a larger competitor rather than struggle to remain independent. This simple trend should make us all a lot of money over the next decade.
The next powerful trend is one that I hate to see, but the fact is that without a social and political revolution, the federal government will continue to play a larger role in the lives of its citizens. It is developing programs for medical care, social programs, energy policy and a host of other areas that are going to require huge expenditures. A whole bunch of that money will find its way into the hands of consulting companies like Willdan Group (WLDN), Provident Service Group (PRSC), CACI International (CACI), FTI Consulting (FCN) and Ameresco (AMRC) that provide specialized consulting services to the various government agencies that will develop and oversee these programs.
Another area that is going to see an enormous amount of spending in the future from both governments and individuals is education. The difference in pay between college graduates and non-graduates is pretty well documented, and technology continues to eliminate lower-end, labor-intensive and service jobs. While I have been short Apollo Education (APOL) since Steve Eisman gave his presentation on for-profit schools back in 2011 at the Value Investing Congress, I am seeing signs that the industry is sorting itself out. I mentioned yesterday that, at current levels, I like National American University Holdings (NAUH). The stock is cheap and I think the company is doing a solid job of providing educational services and not just running a student loan financing scheme like some of its competitors.
I have talked to several parents here in town about the Florida public schools' virtual school program. It has been all raves without one serious complaint. The program is run by K12 (LRN) and I think we will see more school systems around the country begin to offer this alternative to traditional classroom education. If it continues to improve its execution and delivery, K12 could be one of the great growth stories of the next decade.
I am a huge fan of Universal Technical Institute (UTI) as well. It trains professional automotive, diesel, collision repair, motorcycle and marine technicians, and these are professions that I don't see being replaced any time soon. The cost of advanced robots to work on a wide range of makes and models would just be crippling to the average repair shop. These are skill sets that will involve people turning the right wrenches in the right places for a long time to come. A good mechanic who also has business skills can do very well in life. The stock is a little rich for me right now, but it's near the top of my "buy in a crash" list.
Keep in mind that no matter how much I think the sector can grow, my constant traveling companions are Hetty Green, Andy Beal and Mr. Womack. Valuation is always the first criteria, but buying cheap stocks in a sector where the money pretty much has to be spent eventually can help get us closer to private equity-like returns over the next five to seven years.
