Everything's bigger in Texas. That doesn't just include the oil wells, the Longhorn cattle, and the plates of barbecue you'll find across the state. You can find Texas-sized investment opportunities, too -- and in more industries than you might expect.
Stock market investors don't typically focus on where their companies are headquartered, because in most cases, top stocks do business well beyond their backyard. Yet when you start looking closely at Texas, you'll find a wealth of prosperous companies that either already are or have the potential to become the biggest players in their industry niches.
Image source: Getty Images.
Below, you'll find seven top stocks headquartered in the Lone Star State that could produce Texas-sized returns over the long haul.
7 top Texas stocks
Chuy's Holdings (NASDAQ: CHUY)
Copart (NASDAQ: CPRT)
Crown Castle International (NYSE: CCI)
Enterprise Products Partners (NYSE: EPD)
Howard Hughes Corp. (NYSE: HHC)
Match Group (NASDAQ: MTCH)
Southwest Airlines (NYSE: LUV)
Data source: S&P Global Market Intelligence.
Let's take a closer look at all seven of these companies to see why they present interesting opportunities for investors.
1. Chuy's Holdings
Texas is a great place to eat, and a lot of people visit with the idea of getting a juicy steak or mouthwatering barbecue every day on their trips. But for displaced Texans in other parts of the country, the biggest challenge is finding Mexican food that comes close to satisfying that constant hunger for home. Chuy's is working to solve that problem by taking its unique vision of Tex-Mex food and spreading it across the nation.
Chuy's origins date back to 1982, with a single location in the Barton Springs area of Austin south of the Guadalupe River. As the restaurant chain describes it, founders Mike Young and John Zapp envisioned a "fun and funky Tex-Mex restaurant that served authentic and fresh food in an atmosphere that appealed to everyone." It wasn't long before Chuy's was opening new restaurants across Austin and moving out to other cities within Texas. Yet despite the drive for expansion, each Chuy's location had unique charms, avoiding the trap of rote uniformity in which many big chain restaurants find themselves.
Image source: Chuy's.
Texas was big enough for Chuy's until 2009, when the company decided to make a big expansion push beyond the borders of the Lone Star State. The company opened a Nashville-area location, and from there, the craze began. Chuy's now sports about 100 restaurants spread across 19 states.
The Chuy's experience combines quirky, colorful decor and furnishings with fresh food, including tortillas made while you watch. Prices are quite reasonable, and although there's plenty of competition in the restaurant space broadly and in the Mexican and Tex-Mex niche more specifically, Chuy's stands out due to a level of authenticity that other chains simply fail to deliver.
Recently, Chuy's has seen some business challenges that have forced it to reconsider the pace of its expansion efforts. Low unemployment across the U.S. has boosted labor costs, which are a large part of the restaurant industry's typical cost structure, and higher expenses for food ingredients have also weighed on Chuy's earnings. Yet company management has responded by looking for ways to boost efficiency, choosing to pull back on aggressive plans to grow its store base while still continuing to follow a more modest expansion strategy to extend the Tex-Mex chain's geographical reach further. Chuy's still has work to do to reach its full potential, but there's a lot of opportunity for investors to benefit if the Austin favorite can find the right balance between growth and efficiency and boost its sales and profit at a faster rate.
When it comes to purchasing vehicles, most consumers stick with a couple of common ways to find the cars and trucks they want. Those who can afford new vehicles go to traditional dealers, comparing various makes and models with their needs. Those on a more limited budget typically can choose from a variety of different avenues for buying a used car, from looking through classified ads or going to local neighborhood used-car dealers to choosing a company with a nationwide network of locations and cars.
Yet underneath the massive auto distribution and retail industry is a completely different source of vehicles with which most consumers aren't nearly as familiar. When vehicles are involved in major accidents, get too old to run, or otherwise fall out of use, they often enter the auto salvage industry. Some vehicles can get fixed up and run again, while others will end up getting used for parts or scrap. Regardless, though, the auto salvage industry is a big business -- and there's a lot of money in the cars and trucks that go through its global network.
Copart has become a big player in the salvage business, and with its move to Dallas in the early 2010s, the company has become an important contributor to the Texas economy. Copart's contribution to the salvage industry has been its revolutionary software platform, on which it holds online auctions to get rid of its massive inventory of salvage vehicles. With more than 200 salvage facilities in the U.S., Canada, the U.K., and eight other countries around the world, there are plenty of opportunities for buyers to find the vehicles they want at the prices they want to pay.
Moreover, Copart is constantly growing. Salvage operations are often local and fragmented, but Copart has consistently bought up smaller operations in order to boost its market share. Even though the company still has plenty of competition, Copart has built itself into a leader of the industry, and it's done so while maintaining the fiscal discipline of not overpaying for the businesses it brings under its fold.
Recently, Copart has seen extraordinary results, and that has investors newly excited about the company's prospects. Even though it suffered some disruptions from Hurricane Harvey, which hit Texas in 2017, the disaster also provided massive levels of inventory for Copart's business. Copart now enjoys a huge network effect from its reputation in the industry as the go-to provider of auctions for salvage vehicles, and that should serve as a barrier for would-be competitors for years to come.
3. Crown Castle International
Real estate investment trusts (REITs) are a great way for investors to get both growth and income, as the rules governing their tax-favored corporate structure require REITs to distribute almost all of their net income to their shareholders in the form of dividends. Yet what many investors find surprising about REITs is that they don't all own conventional real estate. Crown Castle International is a great example of this, as it offers a way to cash in on the seemingly endless demand for wireless network infrastructure.
Crown Castle is the largest provider of telecommunications infrastructure in the U.S., boasting more than 40,000 towers helping wireless carriers provide cellular coverage. At the same time, Crown Castle also has different types of telecom assets, including about 65,000 lower-powered small-cell nodes and 70,000 miles of fiber to provide data connections, cloud-computing services, and other applications requiring large amounts of bandwidth. Many of the largest national and regional wireless carriers rely on Crown Castle's assets, as do a substantial number of clients in the technology, energy, utility, and educational sectors.
Image source: Getty Images.
The fact that Crown Castle already has such an extensive network of telecom infrastructure assets is itself a barrier to entry against potential rivals. Local communities often oppose the construction of new cell towers, and while that imposes some limitations on the amount of growth that Crown Castle can achieve, the chilling effect it has on would-be competitors is a huge benefit. Moreover, as small-cell nodes get more popular, the company should be able to capitalize on its expertise in that arena, offering them as an alternative to help carriers implement their 5G upgrade plans.
At this point, Crown Castle is still getting business from companies looking to bolster their 4G capacity, and that's been a big boon to the REIT's organic growth. Despite the extensive amount of depreciation and amortization that its assets produce, Crown Castle has seen solid earnings gains, and favorable performance in its preferred funds from operations metric shows just how lucrative concentrating on the U.S. telecom market has been.
Crown Castle counts income investors among its fans, as its dividend yield has typically stayed in the 3% to 4% range over the long haul -- well above the average for the overall stock market. High yields can signal a lack of growth opportunities, but the coming rollout of 5G and the increasing importance of wireless communications and high-bandwidth demand should combine to provide the Dallas-headquartered REIT with plenty of expansion opportunities. All told, Crown Castle gives investors the best of both worlds, and it's in a good position to keep delivering solid returns for shareholders.
4. Enterprise Products Partners
Some Texans will be surprised to see only one energy company make this list of seven top stocks. That's a reasonable criticism, given the importance that oil and gas exploration and production has within the Lone Star State. Yet from an investment standpoint, the turbulent price movements that natural gas and crude oil have seen in recent years highlight the risks that come with the potential rewards in the oil patch.
One thing that's certain, though, is that oil and gas production in Texas will continue, and the companies that produce it will need a way to get those products to market. That takes energy infrastructure, and midstream leader Enterprise Products Partners has a huge portfolio of assets to help its clients make the most of the oil and gas they produce.
Enterprise has an impressive combination of different midstream energy assets. The company boasts more than 49,000 miles of pipeline delivering natural gas, natural gas liquids, crude oil, refined products, and petrochemicals. The master limited partnership is also a leader in the energy product storage industry, with its salt dome assets giving it a capacity of 260 million barrels of natural gas liquids, refined products, and crude oil storage. Enterprise can also store as much as 14 billion cubic feet of natural gas.
Some energy products require further processing, and Enterprise has the capability to do that as well. The company has 26 different natural gas processing plants, and it has 23 fractionators for natural gas liquids and propylene production.
Finally, as rich finds in Texas and elsewhere have boosted production, the U.S. has become an important energy exporter, and Enterprise has several terminals to facilitate international trade. With locations in the Houston Ship Channel, as well as in Beaumont, Freeport, Morgan's Point, and Texas City, Enterprise has a dozen and a half deepwater ship docks for loading various energy products.
All those assets are paying off for Enterprise in a major way. Even as energy prices have been turbulent, the MLP posted record financial results. As new pipelines have gone into service, they've provided an immediate boost to revenue and earnings. Aggressive capital spending has the company foreseeing further growth into the foreseeable future, yet Enterprise has also been able to increase its dividend distributions consistently. Even though there's already been a big upsurge in activity in key energy-producing areas like the Permian Basin, Enterprise expects that further production increases among its clients will bring additional demand for its energy infrastructure assets, justifying the investments that the pipeline giant has made and making it into an even bigger player in the Texas energy industry.
5. Howard Hughes Corp.
Howard Hughes was a Texas native, born in the Houston suburb of Humble. After attending Rice University, Hughes became a key figure in two very different but equally glamorous industries: Hollywood and aviation. Yet along the way, Hughes also made key investments in real estate that eventually became the heart of the corporation that bears his name. In particular, his holdings in the community of Summerlin near Las Vegas helped Hughes make a name for himself in the real estate field.
Yet Howard Hughes Corp. now has deep roots in Texas. The company, which was spun off from General Growth Properties in 2010, has long held a large property interest in the area north of Houston that became The Woodlands. Now, Howard Hughes also has developments in the Houston-area city of Cypress as well as two developments in the Dallas-Fort Worth metroplex. Overall, the real estate company has 16 properties spanning from Hawaii to New York City.
Image source: Howard Hughes.
Howard Hughes' approach to real estate is different from many developers. The company focuses on large-scale planned communities that integrate commercial and residential space along with the amenities that people expect from modern developments. By building an ongoing relationship with an area, Howard Hughes becomes invested in the success of the entire community, and it works alongside residential homebuilders to ensure a good mix of different types of housing to support all of its properties.
In addition, unlike many capital-poor real estate developers that work on single properties at a time, Howard Hughes has a large inventory of unimproved vacant land. That gives the company a vested interest in continuing to foster growth in those areas, and it ensures that it can continue to profit far into the future rather than having to acquire additional real estate later on when the growth prospects associated with a particular community are much more obvious.
The biggest uncertainty with Howard Hughes right now is what path it will take strategically. CEO David Weinreb has been frustrated with the market's failure to recognize what he believes is the company's true value, and Howard Hughes recently announced that it would look at strategic alternatives in an effort to get investors to acknowledge the overall potential of the business. That announcement had the intended effect, making shareholders excited about the possibility that Howard Hughes might get a buyout offer at a price that's well above where the stock has traded historically. The quality of the real estate developer's assets makes that a definite possibility. Yet long-term investors might prefer it if Howard Hughes does something short of an outright sale, such as spinning off a portion of its assets into a separate entity. That way, investors might well get an opportunity to keep prospering from the company's successful business model.
6. Match Group
Matchmaking is big business, and the rise of the internet has had a huge impact on the way people meet. Match Group is the company behind popular dating and relationship websites and apps like Match.com, Tinder, and OkCupid, and it's become a key player in the budding industry across the globe.
Match Group makes money in two primary ways. First, it sells display ads, allowing it to offer some free services to users. Match also seeks to get money through tiered subscriptions and various additional functions and features that enhance the user experience beyond what free versions offer.
The network effect that Match has developed is its biggest asset. The company recently counted about 8.6 million subscribers, up by more than a million over just the past year. Yet Match recognizes that users can be fickle, and it's careful to keep giving its customers more of the features they want while not trying to push change at such a fast pace that it spooks those who use its services the most. That's prompted moves like the creation of Tinder Plus and Tinder Gold, which give Tinder users more flexibility to make more swipes to indicate interest. Promotion of one's own dating profile and the ability to undo past decisions are also part of the package that draws interest from users willing to pay up for the service.
Even though Match has made a big splash in the U.S. market, there's plenty of potential for it to expand its presence elsewhere. Services like Meetic in Europe and Pairs in Japan and other parts of Asia have given Match more of an international scope, and growth rates in overseas revenue have outpaced Match's domestic gains as that part of the business starts to gain momentum. Match now enjoys about a 50-50 split between subscribers in North America and elsewhere.
Some fear that the days of high growth for online dating services are coming to an end, especially as market penetration among interested users rises to encompass more of the potential addressable market. For now, though, Match still has a substantial amount of runway left for growth, especially when you consider the parts of the world that have yet to discover the full value of dating services. For the Dallas-based dating giant, becoming a household name across the globe could vault Match's share price still higher in the years to come.
7. Southwest Airlines
Few companies can say that they owe their existence to the size of their home state. For Southwest Airlines, though, Texas gave it the opportunity it needed to challenge and eventually surpass the huge national air carriers that dominated early air travel.
Prior to the deregulation of the airline industry in the late 1970s, the federal government imposed extensive control over which airlines could operate in serving certain routes between cities, as well as how much they were able to charge. However, those federal guidelines only applied to airlines that served cities outside of a given state. Founder Herb Kelleher therefore set up Southwest to operate only within the borders of Texas, with a regular route structure that connected Love Field in Dallas with airports in Houston and San Antonio. Despite legal challenges, Southwest's ability to undercut national carriers subject to regulation was upheld.
Image source: Southwest Airlines.
Once federal regulation ended, Southwest quickly expanded its low-cost, no-frills service to neighboring states. The airline has always done things a bit differently, with features like first-come, first-serve open seating in its aircraft. Rather than a pure hub-and-spoke route map, Southwest more than most airlines has hung onto a point-to-point emphasis that sometimes includes additional stops for passengers.
Southwest's attention to customer service is one of its most popular features. The airline's decision not to impose the baggage fees that nearly all of its competitors now force passengers to pay even on a single bag make it stand out from the crowd, demonstrating the value it puts on its customers. Being smart about expenses is a key way the company can afford such measures. Even the original color of Southwest's planes stemmed from which paint colors came at the lowest cost, and even now, the airline's cost-conscious business model has been an important part of what's made it so successful over time.
Now, Southwest serves 100 cities across the U.S. and in close international markets, including Mexico, Central America, and several Caribbean destinations. One of its most influential moves lately has been its expansion of service to Hawaii, making a challenge on another set of popular routes.
Southwest has gone through some recent struggles, many of which are tied to its early adoption of the 737 MAX aircraft, which got grounded in early 2019 following two major crash incidents. The immediate result was reduced capacity and weaker financial performance as Southwest struggled to deal with the gaps in service that resulted from not having its 737 MAX planes available. In the long run, though, investors are confident that the airline giant will keep following the strategic flight plan that has helped it become such a huge player in the industry over the past half-century.
Get the diversification you want from Texas stocks
It might seem like sticking with a particular state would leave you overexposed to the local economy, and that might be the case if the only stocks you chose to buy were associated with the Lone Star State's famous energy industry. But with this slate of seven stocks, you'll get a sampling of companies that span the entire global economy, and that makes them worth a closer look for those who can see the potential that Texas has as a strong supporter of businesses.
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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Crown Castle International, Match Group, Southwest Airlines, and Howard Hughes. The Motley Fool recommends Copart and Enterprise Products Partners. The Motley Fool has a disclosure policy.