Aristotle - AWK, STZ, and GNTX !?!?

Today’s subject will be Greek philosophy. Well, not really, but that sounds very intellectual. Aristotle was not only young Alexander the Great’s teacher, but he is also credited (or discredited), as being the first economist. If in the next few years any of my readers should conquer all the territory from Greece through Persia, that would be very cool.

Actually I stumbled across a manager called Aristotle Capital, and I want to discuss some of their holdings.

At the end my conclusion is that American WaterWorks - AWK - $125, Constellation Brands - STZ - $161 , and Gentex - GNTX - $24 , are all ideas to think about.

Let’s discuss how I got to that conclusion.

I did a low price/book screen and noticed that Essential Utilities - WTRG - $36 was near a low and 1.5x book. I have always wanted to own a water utility, but they have always been too expensive.

A quick glance at WTRG showed little promise. They bought a big gas utility pre-COVID, and are still having trouble digesting that acquisition. With so many municipal water systems too buy, that purchase never made sense. The company did not offer any good investor presentations. The yield is only 3.6%, and there was a research report from several years ago that was critical of WTRG’s accounting. All that gave me a quick pass on WTRG.

Just to be complete I had to look at the industry leader American Water Works - AWK - $125. At first glance, who in their right mind would pay 24x earnings for a utility. I have met this management team several times over the years, and I know they have an impressive “story”. There are 15,000 municipally owned water systems, and they are all acquisition targets.

AWK does have a great investor presentation, and it is quite convincing. They have almost a “baked in” 7% to 8% growth in rate base. When an electric utility wants to expand, everybody squawks, especially the regulators. When the new capital request is for repairing old infrastructure to provide clean water, every regulator just nods their head and says yes. Throw in a few acquisitions and you get almost a guaranteed growth rate of 8% for AWK. Maybe 24x is a bargain.

The folks at Aristotle Capital certainly think so. Aristotle Capital is a $43 billion hedge fund with a fascinating portfolio. They own very little of the usual junk. Their largest holding is the boring industrial Parker-Hanifin, and the second largest holding is the solid homebuilder Lennar. Their 5th largest holding is the brilliant Williams-Sonoma, and the 6th largest in my favorite Corteva. Aristotle also owns 9% of the only bank I even tolerate, Cullen/Frost. These Aristotle guys are very smart.

They only buy a few new stocks every year, and hold them for a long time. This Spring Aristotle started buying AWK in the $120’a, and now own 3.5% of the company. AWK’s all-time high is $180, so buying the stock at $120 is not completely crazy.

Let’s call AWK a reasonable, but defensive, idea. Let’s see what else Aristotle owns. I almost stopped at chemical maker RPM International - RPM - $120, but it too close to its high. Alcon Labs - ALC - $88 is another cool idea, but a little too expensive. I got to know co-founder William Conner years ago TCU, so I know the story. If you can tolerate a French stock maybe Michelin - MGDDY is worth considering. It is interesting that Aristotle also started a Verizon - VZ - $41 position in 2024.

Then the next name hit me “boom”. Constellation Brands - STZ - $161, down from $270. Wow, I missed that fall. It will be interesting to watch what Aristotle does with this position in their soon to be released SEC filing.

STZ has always been a growth story that was too expensive. Now problems with tariffs and slow liquor consumption put the stock at just 12x earnings and a 2.5% yield. The STZ folks are pretty arrogant, but their brilliant long-term growth gives them a reason to be. This is a tough call. Modelo and Corona are a solid base, and they have new beer brand called Pacifico. They even have watermelon flavored beer. STZ still has room to grow because they have not completely built out their distribution. Wine and spirits are a problem, but STZ has stuck to the high end of this market. Leverage is down around 3x EBITDA, and buybacks are plentiful. This is a very interesting idea. Let’s see if Aristotle sticks with it.

The Michelin idea made me think if there were any other auto parts stocks I wanted to think about down here. The first name that came to mind in Gentex - GNTX - $24, down from $37. GNTX has an 80% market share in fancy mirrors, but only 36% of cars have fancy mirrors. Like STZ, GNTX has always been too expensive. Now, in this horrible market for autos, the stock sits at 13x earnings. They have no debt, and several value guys own the stock. Margins are well below pre-COVID peaks. Yikes, I really do not want to own an auto parts stock. GNTX does both EV and ICE power trains equally well. They have new technology in backup cameras. Because I don’t want to think about Michelin, or even Goodyear - GT - $8, I will at least consider GNTX.

Your Aristotle lecture is over, go conquer something.