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Bank of Hawaii Corporation (NYSE:BOH) $BOH

Bank of Hawaii Corporation (NYSE:BOH) $BOH

Bank of Hawaii Corporation is a bank holding company that operates through its subsidiary, Bank of Hawaii. Founded in 1893, it is the second largest bank in the island state of Hawaii. The bank provides a range of financial services and products primarily to customers in Hawaii, Guam and other Pacific Islands.

Hawaii’s banking industry is much more consolidated than the banking industry in other U.S. states. From 1994 through 2015, Bank of Hawaii’s deposit share in that state ranged from about 27% (on the eve of the 2008 financial crisis) to 32% today. Generally, Bank of Hawaii has had a deposit share of about 30%. In most U.S. states, no bank has anywhere near 30% of all deposits. This means the bank is largely insulated from competitor actions.

The banking industry ordinarily has high customer retention, minimizing rivalry among firms. And the banking industry in Hawaii--unlike most other states--is an oligopoly. An oligopoly where each of the oligopolists has a very, very loyal customer base. Hawaii’s population growth is low. New branches are rarely opened in the state. In fact, Bank of Hawaii has shrunk its number of branches even while increasing its deposits. It’s a wide moat stock. If interest rates never rise, it’s a wide moat stock that would be on a trajectory to return 7% a year.

If interest rates increase, it’ll then be a wide moat stock on a trajectory to return 10% a year. And if you buy the stock today and then hold the stock while the Fed raises interest rates – you’ll get a one-time boost in reported earnings. Bank of Hawaii will be an acceptable but not especially profitable investment if the Fed never raises interest rates. Once the Fed does raise rates, it’ll be a good long-term investment from that point on. And in the medium-term – say from 2016 through 2021 – Bank of Hawaii is an excellent speculation on higher interest rates. The stock should provide excellent annual returns during the 5-year period where interest rates increase at the fastest pace. That time may be now. That part is speculative. But it adds to the stock’s appeal.

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Luxottica (Borsa Italiana: LUX)

Luxottica (Borsa Italiana: LUX) $LUX

Luxottica Group S.p.A. is the world's largest eyewear company.

Based in Italy, it is a vertically integrated designer, manufacturer, distributor and retailer of eyewear brands, including Lenscrafters, Sunglass Hut, Pearle Vision, Sears Optical, Target Optical, Eyemed vision care plan, and Glasses.com. Its best known brands are Ray-Ban, Persol, and Oakley.

Luxottica also makes sunglasses and prescription frames for designer brands such as Chanel, Prada, Giorgio Armani, Burberry, Versace, Dolce and Gabbana, Miu Miu, Donna Karan, Stella McCartney, and Tory Burch.

The company operates its retail segment principally through its retail brands, which include LensCrafters, Sunglass Hut, Pearle Vision, ILORI, The Optical Shop of Aspen, GMO, OPSM, Laubman & Pank, Oakley O Stores and Vaults, David Clulow, and its retail licensed brands, Sears Optical and Target Optical. The company wholesales in over 150 countries across five continents and has approximately 50 commercial subsidiaries.

Luxottica has a rare business model. Since 2008 it has converted 58 cents of every dollar of EBIT into free cash flow. This is the equivalent of a company with a 35% tax rate converting 90% of reported after-tax earnings into free cash flow. Luxottica was also paying interest during this time. And it was growing its sales at rates above nominal GDP growth. In the future, when Luxottica has no debt left and grows at a slower rate – it will convert more than 90% of reported earnings into free cash flow.

If you're looking for a stock to buy and hold forever – Luxottica is your stock. This is a perfect buy and hold forever stock.

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Restaurant Group PLC (LON:RTN) $RTN

The Restaurant Group PLC is a United Kingdom-based operator of more than 500 restaurants and pub restaurants offering table service, counter service, sandwich shops, pubs and bars. The company also operates a concessions business, primarily in United Kingdom airports.

The Restaurant Group operates under the brands Frankie & Benny's, Chiquito and Coast to Coast. Frankie & Benny's is classic American and Italian style food and drinks. Chiquito offers a range of authentic Mexican and Tex-Mex dishes. Coast to Coast offers classic American food including double burgers, stone-baked calzones, distinctive steaks, seafood and South-West American specials.

TRG is a growth stock. It targets 850 to 900 locations within the next 8-10 years. That means the company would more than double its revenue by 2025 if everything went according to plan. That’s a big ‘if’.

The stock is very cheap. In relative terms, it’s one of the cheapest stocks we’ve written about in Singular Diligence. Right now, TRG trades at a huge discount to U.S. restaurant chains and prices paid in the past for acquisitions of U.K. restaurants. TRG trades at an unusual discount for a restaurant that isn’t seriously troubled.

The Restaurant Group combines relatively good growth prospects with a relatively low price. It
is cheaper than many peers while also having better growth prospects than those peers.

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MSC Industrial Direct Co Inc (NYSE:MSM) $MSM

MSC Industrial Direct is an MRO (maintenance, repair, and overhaul) distributor focused on the metalworking industry.

MSC can trace its roots to Sidney Jacobson’s Sid Tool Company founded in 1941 in Manhattan. To diversify its sales, in 1961 Jacobson started a catalog business offering discounted prices on imported cutting tools. Since it was a catalog instead of a store, the book was able to offer a wide range of products. By 1964, it had over 150 pages. Today, MSC’s catalog – known as the “Big Book”--has over 4,000 pages, with customers in all 50 states, through a network of five customer fulfillment centers (four in the United States and one in the United Kingdom) and 106 branch offices (104 in the United States, one is located in the United Kingdom and one in Mexico).

Over the next 5 years, MSC can increase sales, increase margin, and pay out free cash flow without additional investment in infrastructure. It is cheap today compared to what MSC will be earning in 2021.

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Commerce Bancshares NASDAQ:CBSH $CBSH

Commerce is a regional bank based in Kansas City that can trace its roots to the Kansas City Savings Association founded in 1865 (the year the American Civil War ended). By 1903, the bank was named Commerce and headed by William Thornton Kemper. It has been in the Kemper family for at least the last 113 years.

Commerce is still run by the Kemper family. The current President and Chief Operating Officer John Kemper succeeded his father in 2013 to create an unbroken line of Kemper sons running about 110 years and five generations. This is a family run bank.

Commerce gets the vast majority (91 percent) of its deposits from Missouri (about 72 percent) and Kansas (19 percent).

Commerce is not a growth stock. But, it’s a good value stock. The combined level of growth in deposits per share – this number is boosted by the annual stock buybacks – and the dividend yield is high enough to outperform the S&P 500.

Commerce is a safe and boring bank. When it’s priced to outperform the S&P 500, it should be bought.

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W W Grainger Inc (NYSE:GWW) $GWW

W.W. Grainger, Inc. distributes the products needed to keep a large business running smoothly. It sells light bulbs, motors, gloves, screwdrivers, mops, buckets, brooms, and literally thousands of other products.

The most important thing to understand about Grainger is the nature of the orders customers are placing with the company. The orders can be fairly random looking – almost every business needs a mop, a screwdriver, a small motor, a light bulb, etc. even if it’s far from the core business. The average order size is small, but needs to be filled rapidly. Customers often require next day shipping on most items. This means Grainger has to keep a lot of inventory on hand. They also have to offer credit terms to customers. So Grainger has a lot of inventory and a lot of receivables. It has low turns. But, it has high margins. This surprises some people. Investors and analysts see 40% gross margins and wonder how that can be. Can a middleman really mark-up basic, boring products like we’ve talked about here – mops, buttons, motors, light bulbs, etc. – by 50% to 70% over the price they paid for that product? The answer is yes.

Grainger has grown 10% a year since going public 40 years ago. And, it has grown sales to large
businesses by more than 8% a year since the financial crisis. Earnings grow even faster than sales. So, Grainger is a growth stock. In fact, it’s a growth at a reasonable price stock.

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Omnicom Group Inc. (NYSE:OMC) $OMC

Omnicom Group Inc. (NYSE:OMC) is one of the world’s largest “marketing services” companies. It is a publicly traded holding company that owns many different agencies. Omnicom breaks its revenue down into four categories: advertising (50% of revenue), customer relationship management (34%), public relations (9%), and specialty communications (7%).

All of the global creative agencies are great businesses and Omnicom is no exception. When run right in terms of costs, capital allocation, etc. all these companies can make for great long-term investments. All of them will be great businesses in 5, 10, and 15 years from now. They’ll have many of the same clients. If we had to pick one best stock in the ad industry though it’d be Omnicom. It’s the company with the best financial results. It has the best history of capital allocation. And Omnicom’s agencies win more awards than anyone else. It's also the cheapest.

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Prosperity Bancshares, Inc. (NYSE:PB) $PB

Prosperity Bancshares, Inc. is a financial holding company.

The company operates through its bank subsidiary, Prosperity Bank (the Bank). The Bank provides a range of financial products and services to small and medium-sized businesses and consumers.

Prosperity is the second largest bank headquartered in Texas (behind Frost). Unlike Frost, Prosperity is a serial acquirer. The bank was formed in 1983 to acquire the former Allied Bank in Edna, Texas. During the 1980s, Texas banks began failing in huge numbers. In 1986 alone, a total of 175 Texas banks failed. Prosperity was able to grow by acquiring failed Texas banks.

The Bank operates 245 full service banking locations, including 62 in the Houston area, 30 in the South Texas area, 36 in the Dallas/Fort Worth area, 22 in the East Texas area, 30 in the Central Texas area, 34 in the West Texas area, 16 in the Bryan/College Station area, six in the Central Oklahoma area and nine in the Tulsa, Oklahoma area.

Prosperity has an unusually high earning power on its deposits. Discover why Prosperity is able to gather each dollar of deposits more cheaply than other banks and then make more money per dollar of loans it makes.

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Fossil Group, Inc. (NASDAQ:FOSL) $FOSL

Fossil Group, Inc. is a global designer of consumer fashion accessories, notably watches and jewelry, handbags, small leather goods, belts, and sunglasses.

The company gets about 55% of sales from brands it pays royalties to license and about 45% from brands the company owns. Licensed brands include Emporio Armani, DKNY, Diesel, Burberry, Michael Kors, Adidas, Marc Jacobs, Karl Lagerfeld, Tory Burch, and Kate Spade. Company owned brands include Fossil and Skagen.

Fossil is a large brand (about $2 billion in sales at retail and $1.3 billion in revenue booked by the company). Skagen is a small brand. Fossil gets most of its sales and profits from two brands: the Fossil brand (which it owns) and the Michael Kors brand (which it licenses).

The stock is extraordinarily cheap. It is much, much cheaper than either Swatch or Movado, which we have covered in previous notes. It’s not an exaggeration to say that Fossil trades for about half the price of a “normal” stock in “normal” times.

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BOK Financial Corporation (NASDAQ:BOKF) $BOKF

BOK Financial Corporation (NASDAQ:BOKF) is an Oklahoma-based financial holding company controlled by billionaire George Kaiser offering full service banking in Oklahoma, Texas, New Mexico, Northwest Arkansas, Colorado, Arizona and Kansas/Missouri. BOK Financial is very different from most banks because it is controlled, and run differently: Most banks are owned by institutions like mutual funds and index funds that turnover the shares of the company rapidly. Banks rarely have large shareholders. The executives--despite owning little of the stock--are often quite powerful. That’s not the case here. Kaiser owns 68% and the entire board and all the top executives own another 1% of BOKF. Kaiser is a very long-term, controlling shareholder. He was already the second largest shareholder of Bank of Oklahoma 35 years ago. And, 24 years ago he bought majority control of Bank of Oklahoma from the FDIC when he formed BOK Financial. Since he has held stock in the bank’s predecessor for over 35 years and has been the controlling shareholder of BOK Financial for 24 years, he is likely to be patient. He is not an especially high profile figure nationally. However, he is well known in the energy industry. Tom Ward, Chairman and CEO of Sandridge Energy said he has "sought Kaiser’s advice numerous times throughout his career, calling him ‘the most astute investor I’ve ever met. I look at George Kaiser as being probably the most influential businessman in my life as far as someone I could look up to and take his advice not only about business but about how he lives.” This last statement is probably a reference to Kaiser’s charitable giving. The former CEO of Chesapeake Energy, Aubrey McClendon said George Kaiser “is widely regarded as the smartest oilman in the business. He went to work early in his life at a small, family-owned oil company and built it through hard work, good decision-making and reasonable risk-taking into one of the largest private producers of oil and natural gas in the industry.” For investors seeking a very long-term holding, BOKF is an attractive investment to hold from now through 2020.

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