Solve These Tough Data Problems and Watch Job Offers Roll In

Late in 2015, Gilberto Titericz, an electrical engineer at Brazil’s state oil company Petrobras, told his boss he planned to resign, after seven years maintaining sensors and other hardware in oil plants. By devoting hundreds of hours of leisure time to the obscure world of competitive data analysis, Titericz had recently become the world’s top-ranked data scientist, by one reckoning. Silicon Valley was calling. “Only when I wanted to quit did they realize they had the number-one data scientist,” he says.

Petrobras held on to its champ for a time by moving Titericz into a position that used his data skills. But since topping the rankings that October he’d received a stream of emails from recruiters around the globe, including representatives of Tesla and Google. This past February, another well-known tech company hired him, and moved his family to the Bay Area this summer. Titericz described his unlikely journey recently over colorful plates of Nigerian food at the headquarters of his new employer, Airbnb.

Titericz earned, and holds, his number-one rank on a website called Kaggle that has turned data analysis into a kind of sport, and transformed the lives of some competitors. Companies, government agencies, and researchers post datasets on the platform and invite Kaggle’s more than one million members to discern patterns and solve problems. Winners get glory, points toward Kaggle’s rankings of its top 66,000 data scientists, and sometimes cash prizes.

Ryan Young for Wired

Alone and in small teams with fellow Kagglers, Titericz estimates he has won around $ 100,000 in contests that included predicting seizures from brainwaves for the National Institutes of Health, the price of metal tubes for Caterpillar, and rental property values for Deloitte. The TSA and real-estate site Zillow are each running competitions offering prize money in excess of $ 1 million.

Veteran Kagglers say the opportunities that flow from a good ranking are generally more bankable than the prizes. Participants say they learn new data-analysis and machine-learning skills. Plus, the best performers like the 95 “grandmasters” that top Kaggle’s rankings are highly sought talents in an occupation crucial to today’s data-centric economy. Glassdoor has declared data scientist the best job in America for the past two years, based on the thousands of vacancies, good salaries, and high job satisfaction. Companies large and small recruit from Kaggle’s fertile field of problem solvers.

In March, Google came calling and acquired Kaggle itself. It has been integrated into the company’s cloud-computing division, and begun to emphasize features that let people and companies share and test data and code outside of competitions, too. Google hopes other companies will come to Kaggle for the people, code, and data they need for new projects involving machine learning—and run them in Google’s cloud.

Kaggle grandmasters say they’re driven as much by a compulsion to learn as to win. The best take extreme lengths to do both. Marios Michailidis, a previous number one now ranked third, got the data-science bug after hearing a talk on entrepreneurship from a man who got rich analyzing trends in horseraces. To Michailidis, the money was not the most interesting part. “This ability to explore and predict the future seemed like a superpower to me,” he says. Michailidis taught himself to code, joined Kaggle, and before long was spending what he estimates was 60 hours a week on contests—in addition to a day job. “It was very enjoyable because I was learning a lot,” he says.

Michailidis has since cut back to roughly 30 hours a week, in part due to the toll on his body. Titericz says his own push to top the Kaggle rankings, made not long after the birth of his second daughter, caused some friction with his wife. “She’d get mad with me every time I touched the computer,” he says.

Entrepreneur SriSatish Ambati has made Kagglers a core strategy of his startup, H2O, which makes data-science tools for customers including eBay and Capital One. Ambati hired Michailidis and three other grandmasters after he noticed a surge in downloads when H2O’s software was used to win a Kaggle contest. Victors typically share their methods in the site’s busy forums to help others improve their technique.

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H2O’s data celebrities work on the company’s products, providing both expertise and a marketing boost akin to a sports star endorsing a sneaker. “When we send a grandmaster to a customer call their entire data-science team wants to be there,” Ambati says. “Steve Jobs had a gut feel for products; grandmasters have that for data.” Jeremy Achin, cofounder of startup DataRobot, which competes with H2O and also has hired grandmasters, says high Kaggle rankings also help weed out poseurs trying to exploit the data-skills shortage. “There are many people calling themselves data scientists who are not capable of delivering actual work,” he says.

Competition between people like Ambati and Achin helps make it lucrative to earn the rank of grandmaster. Michailidis, who works for Mountain View, California-based H2O from his home in London, says his salary has tripled in three years. Before joining H2O, he worked for customer analytics company Dunnhumby, a subsidiary of supermarket Tesco.

Large companies like Kaggle champs, too. An Intel job ad posted this month seeking a machine-learning researcher lists experience winning Kaggle contests as a requirement. Yelp and Facebook have run Kaggle contests that dangle a chance to interview for a job as a prize for a good finish. The winner of Facebook’s most recent contest last summer was Tom Van de Wiele, an engineer for Eastman Chemical in Ghent, Belgium, who was seeking a career change. Six months later, he started a job at Alphabet’s artificial-intelligence research group DeepMind.

H2O is trying to bottle some of the lightning that sparks from Kaggle grandmasters. Select customers are testing a service called Driverless AI that automates some of a data scientist’s work, probing a dataset and developing models to predict trends. More than 6,000 companies and people are on the waitlist to try Driverless. Ambati says that reflects the demand for data-science skills, as information piles up faster than companies can analyze it. But no one at H2O expects Driverless to challenge Titericz or other Kaggle leaders anytime soon. For all the data-crunching power of computers, they lack the creative spark that makes a true grandmaster.

“If you work on a data problem in a company you need to talk with managers, and clients,” says Stanislav Semenov, a grandmaster and former number one in Moscow, who is now ranked second. He likes to celebrate Kaggle wins with a good steak. “Competitions are only about building the best models, it’s pure and I love it.” On Kaggle, data analysis is not just a sport, but an art.

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How these Founders Pivoted from a Failing Startup at the Last Minute and Created a Million-Dollar Business

“Make better decisions with feedback from real people.”

This mission lies at the core of User Interviews, a startup in Cambridge, Massachusetts that gives consumers a platform to voice their opinions on new and innovative products–while getting paid for their time.

User Interviews isn’t the first company to recruit participants for market research studies, but believe their differentiation is in their technology-based approach and commitment to a world-class user experience. The website makes it easy for consumers to connect with companies running research studies that they’re interested in.

“We started this company because we saw that the most successful products are built by companies that deeply understand their customers,” said Dennis Meng, one of the co-founders of User Interviews. “We wanted to make that easier to do.”

Meng and his co-founders, Basel Fakhoury and Bob Saris, realized the importance of getting feedback from customers from their experiences working on on their first startup together. They were building a mobile app that would give travelers 24/7 access to upscale hotel concierge service. After spending a year developing the app, they launched it and were horrified to realize that nobody cared to use it. In a desperate effort to salvage the app, they started gathering as much user feedback as they could. At one point, the trio even resorted to buying refundable plane tickets just so they could go through airport security to sit and talk to travelers. After talking to hundreds of travelers, the three founders finally came to terms with the fact that their app would never take off. “If we had talked to them earlier, we would have known much sooner that our app wasn’t going to be successful.”  Luckily, based on the difficulties they encountered, the team realized there might be a huge untapped opportunity to help companies connect with consumers to gather feedback.

From the ashes of the mobile app business rose User Interviews, one of the first automated platforms for recruiting and scheduling participants for market research studies and product tests. Though User Interviews initially targeted other startups as potential clients, discussions with product managers and marketers at larger firms helped the team realize that conducting consumer studies was just as much of a struggle for well-established companies.

“I once heard someone describe running a startup as riding a bike while building it,” said Meng. “That description couldn’t have been more accurate for us. Before we even had a website, we had companies trying to pay us for our services. We had dozens of paying clients before the first version of our technology platform was complete.”

Fast forward to today – the company now counts hundreds of companies as clients, including the likes of Pinterest, DirecTV, Colgate, Yahoo, and Pandora. They’ve also paid out over $ 1 million in incentives to the consumers who have participated in their clients’ studies. However, when asked, Meng says that the most surprising thing he’s learned is that people care as much about improving the products they’re reviewing as they do about the money. “People like the money, but even more than that – they like having a voice.”

From this simple concept has grown a burgeoning industry giant, and the last few months have been exciting ones for User Interviews. They recently raised $ 1 million in a seed round led by Accomplice Ventures, which they’ve already used to hire several new employees. Over the next few years, Meng, Fakhoury, and Saris plan to introduce User Interviews to thousands of companies and millions of consumers across the country.

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GE Is A Horrible Dividend Stock So Choose These 2 Dividend Kings Instead

I’m a big fan of contrarian value investing, having recently taken stakes in two beaten down dividend stocks trading at 52-week lows.

So when I see a blue chip like General Electric (GE) trading at not just a 52-week low but also one of its highest yields in almost a decade, it certainly piques my interest.

BUT there is a big difference between being a contrarian and foolishly investing in something with horrible dividend growth prospects.

So let’s take a look at three reasons why I’m avoiding GE like the plague, and instead have 3M (MMM), and Illinois Tool Works (ITW) on my EDDGE 3.0 portfolio buy list.

GE’s Flailing Turnaround Drama Continues

After a failed 16-year tenure at GE, Jeffrey Immelt has left the company, to be replaced by John Flannery, who promises to finally unlock the company’s strong growth potential.

The problem is that while Flannery, a 30-year veteran of the company and former head of GE Healthcare, has a solid track record as a turnaround artist, the strategy he’s outlined is no different than Immelt’s.

Specifically, Immelt wanted to return to GE’s industrial roots by selling off the vast majority of GE Capital (the company’s most profitable and FCF rich segment) and focus on core industrial brands.

Now back in 2009, this made a lot of sense. After all, GE Capital’s implosion during the financial crisis is what nearly bankrupted the company and forced it to slash its dividend by 68% back then.

And with strict new banking regulations, GE didn’t want the headache of holding onto the financial businesses that aren’t directly tied to financing customer acquisitions of its industrial products.

However, where Immelt went so badly wrong is to use the one-time windfall from the sale of GE Capital to buy back copious of stock rather than reinvest into expanding the company’s industrial portfolio.

Chart GE Revenue (TTM) data by YCharts

And since GE sold off not only its financial arm, but numerous other “non-core” businesses as well, the result has been a steady decline in sales, earnings, and especially free cash flow, which is what ultimately funds and grows the dividend.

Source: GE Investor Presentation

Now Flannery says he’s going to double down on Immelt’s failed strategy by selling off even more businesses, such as selling off its water division for $ 3.4 billion.

Now some GE bulls will argue that this water sale was necessary in order to close the acquisition of Baker Hughes (BHGE).

However, let’s remember that GE made a bunch of its energy investments at the top of the oil cycle (overpaid) and the merging of Baker Hughes with GE’s oil business, and then spinning it off as a separate company isn’t going to be a major needle mover for the company.

In fact, GE paid Baker Hughes shareholders a $ 7.4 billion special dividend, and because it now owns just 62.5% of the new company, even if oil prices recover to $ 60, and management realizes its planned synergies, the bottom line benefit to GE shareholders will be $ 0.08 per share in 2020.

In other words, if everything goes right (including much higher oil prices that management has no control over), then the deal will increase GE’s EPS by 10% over a three-year period or 3.2% CAGR.

Which basically shows the problems facing GE, specifically that management is flailing and churning through assets while burning cash in an effort to “do something” to hopefully refire the growth engines.

In the meantime, the company’s short-term moves appear nothing more than desperate window dressing to appease Wall Street.

For example, the company recently announced it was selling its five corporate jets to save money. However, as analysts have pointed out the cost savings will be minimal ($ 333,000 last year), and using charter planes could end up actually increasing expenses in the long run.

The company is also ending its company car program for 700 executives, as part of a $ 2 billion cost cutting effort (by the end of 2018).

Now don’t get me wrong, I applaud any effort to cut costs, especially by this much and this fast.

However, let’s be realistic. In 2016, GE’s total compensation to its top five executives was $ 78.2 million, $ 8 million of which was through perks such as company cars and private jet travel.

Which means that the savings that Flannery is talking about can’t be obtained by such PR stunts.

What’s worse? Even if GE’s is able to cut costs by $ 2 billion by the end of next year, given that it’s generated NEGATIVE $ 2.5 billion in free cash flow in the past 12 months, it would still not be FCF positive; much less be able to cover its $ 8.6 billion dividend.

Or to put another way, GE needs to grow to save its dividend and its status as a dividend investment, something it’s not been able to accomplish over the past decade.

3M And Illinois Tool Works: Dividend Kings With Far Superior Fundamentals

Whereas GE’s track record in the past decade has been terrible, 3M and Illinois Tool Works have proven themselves some of their industry’s highest quality names.

Chart GE Revenue (TTM) data by YCharts

Now keep in mind that between 2012 and 2016, the world’s been in an industrial recession, thanks to the bursting of several commodity bubbles (due to China pulling way back in infrastructure spending).

Add to this the worst oil crash in over 50 years, and all industrial companies have struggled with top line growth.

However, the difference between GE and its far superior rivals is that they’ve managed to adapt their business models, through cost cutting and increased sales of their highest margin products, to generate impressive EPS and FCF/share growth.

Company Operating Margin Net Margin FCF Margin Return On Assets Return On Equity Return On Invested Capital
General Electric 12.6% 6.1% -2.1% 1.9% 9.2% 2.7%
3M 24.7% 17.7% 17.6% 16.0% 45.9% 19.6%
Illinois Tool Works 23.2% 15.5% 13.8% 13.9% 44.6% 17.4%
Industry Average 12.9% 8.6% NA 4.8% 15.9% 6.1%

Sources: Morningstar, CSImarketing

In fact, when we look at these companies’ profitability profiles, specifically margins and returns on capital, a great proxy for the quality and effectiveness of their respective management teams, we see that GE isn’t even in the same ball park.

For example, Illinois Tool Works’ response to the industry turnaround has been to consolidate over 800 regional units into just 85 global ones.

Source: Illinois Tool Works Investor Presentation

The company has also sold off lower margin, commoditized segments, such as decorative surfaces and industrial packaging, to focus on higher margin segments, which are growing faster than the global industry as a whole.

This is why ITW now expects organic growth to be be at least 2.5% above the industry norm going forward.

Add to this steady cost cutting of over 1% a year, and it’s not hard to see why Illinois Tool Works is now one of the industry’s best FCF generating machines, which allowed the company to hike its dividend by an incredible 20% in 2017.

Better yet? ITW’s experienced management team believes its current strategy will be able to continue generating double-digit dividend growth (and total returns) for the foreseeable future.

Meanwhile 3M’s turnaround strategy has similarly been a great success, especially compared to the horror show at GE.

3M: Industry’s Innovation Leader

Just like Illinois Tool Works, 3M has responded to the global industrial recession with disciplined and well executed changes, especially a focus on streamlining its operations, and targeted bolt and highly accretive bolt-on acquisitions.

Source: 3M Investor Presentation

However, the company hasn’t skimped on its bread and butter, well allocated R&D spending that is the key driver of its historic innovation success.

This spending (5.9% of revenue in last 12 months) is expected to boost its healthcare sales by 2% to 4% a year, while $ 500 million to $ 600 million in cost cutting should further grow EPS by about 1.5% a year.

In the meantime, about 50% of 3M’s sales are in fast consumable products, resulting in far stronger recurring cash flow than GE (or most peers). The company also benefits from strong exposure to emerging markets (47% of sales) which should increase to 50% by 2020.

That in turn will allow 3M to grow faster than most industrial stocks, including about 10% EPS and FCF/share growth, which in turn should drive some of the industry’s best payout growth in the coming decade.

The bottom line is that while GE is churning assets, and burning through shareholder cash, both Illinois Tool Works and 3M have successfully proven their ability to adapt to tough industry conditions and continue growing investor profits.

This bodes extremely well for their dividend focused investors, especially now that the industry is recovering.

Dividend Profiles Are No Contest

Company Yield TTM FCF Payout Ratio 10-Year Projected Dividend Growth 10-Year Potential Annual Total Return
General Electric 4.1% -34.0% 3% to 4% 7.1% to 8.1%
3M 2.2% 50.9% 8% to 11% 10.2% to 13.2%
Illinois Tool Works 2.1% 45.4% 10% to 12% 12.1% to 14.1%
S&P 500 1.9% 34.7% 6.1% 8.0%

Sources: Gurufocus, Morningstar, Fast Graphs, CSImarketing.com, Multpl.com

Ultimately as a long-term dividend growth investor, I’m concerned with three things: the yield, the safety of the dividend, and its long-term growth potential.

That’s because historically dividend growth stocks’ total returns follow the formula yield + dividend growth. And while true that GE’s yield is currently far superior to those of the market, and 3M and Illinois Tool Works, it’s also not sustainable.

After all, GE’s negative free cash flow means that it is having to pay the dividend out of cash on the balance sheet and or debt. And even once the company does return to FCF profitability, it will have to grow its cash flow at a torrid pace just to cover the payout, much less lower its payout ratio to a sustainable level of 40% to 60%.

On the other hand, both 3M and ITW have highly secure payouts, courtesy of conservative payout ratios and far stronger balance sheets.

Company Debt/EBITDA EBITDA/Interest Debt/Capital Current Ratio S&P Credit Rating
General Electric 3.69 3.84 48% 1.85 AA-
3M 1.92 42.88 48% 2.22 AA-
Illinois Tool Works 2.17 14.55 57% 2.32 A+
Industry Average 2.09 7.71 45% 0.83 NA

Sources: Morningstar, Fast Graphs, CSImarketing

And let’s not forget that as dividend kings, 3M and ITW have grown their dividends every year for 58 and 53 years, respectively.

Chart GE Dividend data by YCharts

This means that both companies have far more shareholder friendly (and conservative) corporate cultures, with proven track records of sustaining and growing their payouts during even the most turbulent of economic and industry conditions.

Chart GE data by YCharts

That in turn has resulted in far superior total returns over the past decade; a trend I expect to continue long into the future.

Valuation: GE Isn’t As Undervalued As You Think

Chart GE data by YCharts

In terms of performance in the last year, it’s no contest. 3M and ITW have benefited from the Trump bump in industrial stocks, while GE has been falling steadily.

Of course, from a valuation perspective that’s not a good thing.

Company Forward PE Historical PE Yield Historical Yield % Of Time Yield Has Been Higher (Last 22 Years)
General Electric 13.4 17.5 4.1% 3.2% 1%
3M 22.6 16.4 2.2% 2.4% 72%
Illinois Tool Works 21.2 15.8 2.1% 2.2% 34%
Industry Average 23.1 NA 1.3% NA NA

Source: Gurufocus, Yieldcharts

After all, it means that industrial stocks in general are trading at very high levels, with both 3M and ITW far higher than their historical PE ratios.

Meanwhile GE, at least from this short-term perspective, appears to be on sale.

This is especially true when we look at GE’s yield compared to its historical average. In fact, over the past 22 years, GE’s yield has only been higher about 1% of the time, while 3M’s has been greater 72% of the time, and ITW’s 34%.

However, when we take a longer-term, 20-year forward view, things look a bit different.

Company TTM EPS 10-Year Projected EPS Growth Fair Value Estimate Growth Baked Into Current Share Price Margin Of Safety
General Electric $ 0.80 5.5% (conservative case) $ 9.47 17.3% -61%
11.0% (bullish analyst consensus) $ 14.59 -147%
3M $ 8.77 10.0% $ 167.62 13.7% -29%
Illinois Tool Works $ 6.18 10.7% $ 119.91 14.0% -27%

Sources: Morningstar, Fast Graphs, Gurufocus

Normally, I like to use a discounted free cash flow analysis to determine an approximate fair value for stocks such as this. However, since GE is cash flow negative right now, we need to look at a discounted earnings model instead.

Using a 9.0% discount rate (the opportunity cost of money since a S&P 500 index ETF would have historically generated 9.0% CAGR since 1871), we find that indeed both 3M and Illinois Tool Works are substantially overvalued (meaning they are both “holds” right now).

However, GE is actually far more overvalued, even if you assume that the analyst consensus of 11% EPS growth over the next decade is correct. In reality, I think the company will generate far slower growth which means that its shares are far more overvalued than 3M and ITW’s.

And so while today may not be a good time to buy 3M or Illinois Tool Works, it’s an even worse time to add GE to your portfolio.

Risks To Consider

While I’m a huge fan of 3M and Illinois Tool Works, and eventually plan to own both, there are nonetheless some major risk factors to consider.

First, all industrial conglomerates are cyclical since their business is tied to the health of the global economy, and especially commodity sensitive industries such as mining and energy.

Currently accelerating economic growth and a recovery in commodity prices (especially oil) means that 3M and ITW’s bottom line growth prospects have the wind at their backs.

However, a global recession could quickly unravel this and throw up strong growth headwinds. And given the strong rally in the past year, both dividend kings could face a strong pullback in such a scenario (which will make for a potentially great buying opportunity).

Next we can’t forget that due to their international sales, both 3M and ITW also face significant currency risks. Specifically that a strong dollar (which is likely to result from rising US interest rates) could slow top and bottom line growth because their products would become more expensive overseas. In addition, local currency sales would be converted to fewer dollars for accounting and dividend payment purposes.

Chart ^DBLUSD data by YCharts

In the past year, the US dollar has actually declined significantly (helping boost both company’s profits), but given the natural volatility of currencies, and where the Fed is signaling that rates are going, investors can’t necessarily expect this trend to continue.

Bottom Line: GE Is A Wet Cigar Butt, While 3M And Illinois Tool Works Are Grade A Gems Worthy Of Your Watch List

Don’t get me wrong. GE is currently pricing in such low expectations that it’s possible that it might have a strong short-term bounce if only management can suck less than expected.

BUT as a long-term dividend growth investor, I’m not willing to speculate on such an eventuality, not when there are so many far superior investing alternatives right now.

And while 3M and Illinois Tool Works may not currently be attractively priced, I’m far more eager to place them on my watch list and wait for the next market correction to add these two dividend growth legends to my portfolio, than take a wild eyed gamble that GE can finally turn its ailing ship around.

And if you currently own 3M and Illinois Tool Works, then I recommend continuing to do so, as they both are epitomes of a “buy and hold forever”, sleep well at night (SWAN) dividend growth stocks.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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