Rental Stocks: Which Is Number One?
Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The rental business is a very diverse and unique segment of the economy. People and businesses rent everything from televisions and video cameras to nail guns, bulldozers, semi-trucks and cars. Generally speaking, people tend to rent items they need whether or not there is a recession. After all, most rentals are used to perform an essential but temporary task. Sure, there are instances where renting is done more out of a want than a need, but you'll find more construction companies renting and leasing trucks than individuals borrowing Ferraris.
This article reviews five rental companies, plus we at Insider Monkey will glance at what some hedge funds have been doing with their holdings. Tracking hedge funds' stock picks by looking at their recent 13F filings can help the average investor generate serious outperformance (Check out Insider Monkey's market winning-strategy here).
First, let's look at Rent-A-Center (NASDAQ: RCII):
Rent-A-Center is the largest rent-to-own store chain in North America. As of 2011 they operated an estimated 47% of all rent-to-own stores in the United States and Canada. Recent years' financial results show that after three years of slightly negative revenue growth, the company experienced revenue increases in 2010 and 2011 of 6% and .12% respectively. Additionally, Rent-A-Center's net income has grown since 2007 by a compounded rate of over 20% due to lower interest payments, resulting from reductions in long-term debt. Their stock, however, is down a little over 8.5% since the beginning of 2011.
Roberto Mignone, the manager of Bridger Management, reported third quarter 13F holdings of 525,000 shares (see Roberto Mignone's top stock picks). Rent-A-Center represents 1.32% of his portfolio and is his 28th largest holding. The largest fund holding comes from Adage Capital Management, reporting 1.75 million shares held in 3Q 2012 after increasing their stake in the company by 35%. Adage Capital typically beats the S&P 500 by an average of 4.5%.
Next, let's check out Aaron's, Inc. (NYSE: AAN):
Aarons is one of Rent-A-Center's main competitors, specializing in leasing and retail sale of various consumer electronic, household appliance, residential furniture and other accessories. Aaron's stock is up over 9.5% since the start of 2011 and has compounded annual revenue growth of almost 8% since 2007, with revenue increasing steadily each year. One thing that sticks out on Aaron's balance sheet is an increase in long-term debt from an average of approximately $51 million over the prior four years up to $141.61 million as of 3Q 2012. This isn't too concerning, though, considering they have over $1 billion in current assets.
Mark Travis's hedge fund, Intrepid Capital Management, keeps 2.21% of his portfolio in Aaron's, placing this stock in his top 20 holdings. Intrepid focuses mostly on the financial, services and technology sectors, and Aaron’s positioning indicates a very bullish vote of confidence from this hedge fund.
Third, we will discuss McGrath Rentcorp (NASDAQ: MGRC):
McGrath Rentcorp is a business-to-business rental company that focuses on renting and selling modular buildings, electronic test equipment, and liquid and solid containment tanks and boxes. Since 2007, McGrath has grown annual revenue at a compounded rate of over 5% while growing their bottom line by almost 4%. The company’s stock is trading roughly around the same price as its opening price in 2011, which was around $29.78.
McGrath isn't as popular among hedge funds as the previous two we've discussed, but Chuck Royce's hedge fund Royce & Associates was holding 291,300 shares in 3Q 2012 based on their latest 13F filing. Additionally, David Dreman's hedge fund, Dreman Value Management, keeps about 0.1% of their portfolio in McGrath (see David Dreman’s favorite stock picks).
One interesting fact about these two hedge funds is that both employ a value based investing approach when selecting stocks. Although McGrath Rentcorp makes a very small portion of both hedge funds' portfolios, it looks like these two billionaires believe this stock is undervalued.
Up fourth is Ryder System (NYSE: R):
Ryder System, a diversified rental business, operates in three segments: Supply Chain Solutions, Dedicated Contract Carriage, and Fleet Management Solutions. Through these segments, Ryder Systems offers leasing, contract maintenance, and commercial rental of tractors, trucks and trailers in addition to other vehicles. They even provide drivers for vehicles. Interestingly, Ryder also offers supply chain consulting solutions to their customers in addition to distribution management, IT and engineering solutions, and various other support services. Their stock is up about 1.6% since the beginning of 2011.
Like McGrath, Ryder System is another of David Dreman's holdings. Unlike McGrath, Ryder almost makes Dreman's top 50 holdings, coming in 57th, making up almost .7% of his portfolio.
Last but certainly not least, we’ll discuss United Rentals (NYSE: URI):
United Rentals is a well-known equipment rental business that rents and sells over 3,300 different classes of equipment to customers. The company’s equipment is used by construction and industrial businesses, utilities, homeowners, government entities and manufacturers. Shares of URI are up over 124% since the start of 2011, beating the rest of its aforementioned peers quite considerably. With compounded annual revenue growth of nearly 6% from 2008-2012 and EBITDA growth of nearly 40% per year from 2010-2012, this stock definitely has our attention, and it's no surprise shareholders have been well rewarded.
Paul Tanico's hedge fund Castlerock Asset Management keeps 8.33% of its portfolio in United Rentals, while Sean Cullinan's Point State Capital holds $97 million or roughly 1.62% of his portfolio in the stock. Point State Capital is the largest reported hedge fund holder of URI as of 3Q 2012. Of the players mentioned here, United Rentals is the most popular rental company among the hedge funds we track, and considering it's actually up over 1,900% from 2008 lows, this doesn't surprise us the least.
In conclusion, we have some good rental stocks to choose from. But overall, United Rentals looks like the best choice for investors right now. Not only do they have solid financials and excellent stock performance in both the past year and recent years, but they are a very popular stock in the smart money’s circles. With six consecutive quarterly earnings beats, this rental company looks like it's ready to continue making fresh highs in 2013.
This article is written by Mark Jones and edited by Jake Mann. Insider Monkey's Editor-in-Chief is Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of McGrath RentCorp. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!