Can't Chase Them Now - Industrials
This is my favorite group of stocks. I used to advise portfolios that were so filled with old rusty manufacturing companies, it looked like I was building a junkyard.
Right now I just cannot find an industrial I want to own. Nearly all have run so much since their October lows, I just cannot find a decent risk/return situation. The one industrial that is in the model portfolio, RXO a freight broker, is a recent spin-off.
Maybe I should just ignore the October lows, look at the current valuation, and hold my nose and buy. Conceptually that sounds reasonable, but in the real world I just cannot do it. I worry every moment that 2022 earnings are “peak” earnings.
It is exactly situations like this, that can never be recreated in a textbook, but occur every day in the real world, that explain why I am writing this blog. By “thinking out loud”, just like my chess friends, I hope to learn and teach something.
I started with a Diamond Hill owned stock I had done some work on last year, as my “king of the hill”, and I just could not knock it off.
Gates Industrial - GTES - $14 - At 12x earnings, and 1.3x book, this is a reasonably priced stock. These guys make belts and hoses for lots of industrial equipment, including EVs. GTES is a well run company that came out of private equity in 2018. The overhang of shares keeps the valuation reasonable. Someday these folk’s will make a $1.50, and the stock will be $25, and the PE guys will sell to the momentum folks, just watch. However, the stock was under $10 in October, and I just cannot live with the downside risk. Can I find something to beat it?
Trinity Industries - TRN - $29 - I really wanted this stock to work. This was the first stock I ever bought as a young portfolio manager in 1985. The new Trinity has a big leasing subsidiary that I just cannot decipher. Management tells me leasing reduces volatility, but the strategy has not been tested by a recession. These guys are great at building railroad cars, but leasing scares the crap out of me.
Alaska Air - ALK - $53 - Somehow the transports are considered pat of industrials. JBLU has been my favorite airline stock, but recently they made a stupid acquisition of Spirit. ALK is well run, and has a solid balance sheet. This stock almost makes sense at 10x, but I am just too worried that travel has benefited from pent up demand. Maybe such macro silliness should be ignored, let’s watch.
AerCap - AER - $63 - Many small cap managers love the aircraft leasing companies. I just cannot stand the credit risk. Didn’t Billy Shakes say “neither a borrower, nor a lender be”. Sorry for my bias against guys with bad balance sheets, that lend planes to other guys with bad balance sheets.
Plug Power - PLUG - $17 - Someday I want to be smart enough to tell if hydrogen is really going to work. These are old, slow talking, manufacturing guys that have lots of experience handling hydrogen. No earnings for over 10 years, this should be my company. Has the “Inflation Reduction Act’ given these guys a chance to succeed? I need to really dig into the competitors like Bloom Energy - BE - before I get comfortable.
Goodyear Tire - GT - $11 - GT is kind of unique because they choose not to give earnings guidance. Twenty years ago I might have tolerated this, but now I have safer stocks to choose from. I always liked Cooper Tire, so to me the acquisition made sense, but the timing was strange. GT made over $4/share not that long ago. This could be a home run, or a bankruptcy. At 58% EV/sales for decent brands, maybe I am being too conservative. If I had confidence in the economy, I might be a buyer. Interest coverage less than 3x, but historical free cash flow is ok.
Astec Industries - ASTE - $46 - ASTE should benefit from government road building. Again, the stock is up almost 50% in four months. Same song, different verse. More of a force in the Southeastern US. Market share might not be what it once was. Is the road construction order flow right around the corner?
Flowserve - FLS - $35 - I looked through 18 different process control companies (really I did, I am a sick bastard) that were covered by a regional broker. I was stunned by how expensive these stocks were. Almost all the companies were doing well in 2022, but the stocks already reflected this strong performance. Of the 18, FLS was the cheapest. FLS could be interesting, if they can ever get back to 2013-4 margins, but these is no clear path.
Columbus McKinnon - CMCO - $39 - What could better than a winch maker. This is neat little company at only 1.3x book, but the stock is up 50% since October. I just cannot pull the trigger.
Daseke - DSKE - $7.5 - These guys talk a great game about consolidating the flatbed truck business. They have a bad balance sheet like all former SPAC’s. Can they make it in the world of higher interest rates? A very tough call. I will be watching. Market cap < $500 million.
Lindsay - LNN - $157 - Always sells at 20-25x earnings, but the growth never materializes. Great technology, but global footprint means someone is always having a problem. All you can do in wait for a mistake. This is the one stock that is not up 30%+. I want to own this stock before I die.
I looked at 2 dozen others. Lots were old friends. Right now rusty old manufacturing companies are hot. This too shall pass.
GTES is my best idea, but not good enough to throw Masco out of the model portfolio. It is a tough call. There is more work to be done on stocks like Plug Power and Goodyear, but at first pass, none of these stocks make the model portfolio.