Industrials
Investors seem to believe the business is more cyclical than it is causing OC to trade at a far steeper discount to the market than it deserves. Management has successfully raised prices and controlled costs meaning its financial results look more like those of a growth company. Yet its shares trade at <14x earnings and an EV/Adjusted EBITDA of just 7.3x. Both figures represent >40% discounts to the S&P 500 Index. KCR also finds it notable that both their Large Cap Value and Large Cap Core models rank OC in the top 100 despite significantly different loadings. When a stock is highly ranked across models with divergent mandates, it signifies greater potential interest across the investor base.
Edition: 191
- 26 July, 2024
Building an all-weather environmental strategy
Rising interest rates were detrimental to renewable energy stocks in 2023, underscoring that using solely renewable energy plays as short hand for climate change investing is myopic and risky. The consequences of climate change go far beyond a low-carbon energy transition and the associated investment opportunities (and risks) are equally numerous and varied; building an environmental portfolio requires careful consideration of the macro backdrop. In the current macro context, the Sustainable Market Strategies team find US plays particularly compelling. Newly listed Veralto Corp, Owens Corning and Weyerhaeuser are three companies that should do well next year and are tackling three distinct environmental problems.
Edition: 175
- 08 December, 2023
Owens Corning (OC) & Beacon Roofing Supply (BECN)
Materials
Residential roofing checks reveal very strong start to 2022 - 1Q22 SSS growth expectation is 20-25% (Feb was insane with most contacts suggesting SSS up 40%+; Jan & Mar both likely grew 15-25%). Contacts suggest the Jan price increase is gaining solid traction and many think the Apr increase is going to be huge. Inflation is the offset which keeps getting worse, but the industry has benefited from inflation and Northcoast thinks this can continue. Overall, they view their checks favourably for manufacturers and distributors and raise their full year estimates for OC and BECN.
Edition: 132
- 01 April, 2022
Healthcare
The share price fell ~80% last time Gradient turned bearish back in 2017. Key concerns highlighted in their 12-page report this time round include: 1) No evidence of sustainable organic growth. 2) Inventory build looks far more ominous than management describes. 3) Other current liabilities may have provided a temporary boost to revenue and profit. 4) Risk of negative adjustments to previous tax returns. 5) Elevated executive sales. 6) Shares trade at a substantial premium relative to historical averages and vs. peers.
Edition: 129
- 18 February, 2022
Suspicious Overearners: Buckle (BKE), HCA Healthcare (HCA) & Owens & Minor (OMI)
Two Rivers’ model seeks companies that are potentially “over-earning” - defined as companies with unusually high margins relative to their own history or relative to the industry. Provides fertile hunting ground for shorts if the reasons for the margin increase are either unsustainable or fraudulent. The best short candidates include:
BKE - No sales growth pre-Covid. Gross margins have since risen from 40% to 48% and EBITDA margins from 14% to 25%.
HCA - Incremental gross margins have reached 40% vs. sub-20% GAAP. Trades at record high EV/S and EBITDA multiples.
OMI - Stock trades based on the continuation of very high margins. Insiders are suddenly and sharply selling off shares.
Edition: 116
- 06 August, 2021