Hydrogen Flavored Donuts Anyone?
It is always my instinct to search for new ideas, but as I restart writing more frequently, I want to review my top 10 list. However, at the end of this short piece I will give you two new ideas to think about.
Let’s start with the most controversial of my top 10, Chart Industries - GTLS.
I think it is important for you to understand how I got to this idea.
When I started writing 18 months ago I came across a busted growth stock called Bloom Energy - BE. BE had a huge backlog relative to the size of the company. The generalist in me could not resist learning a new industry. Of course, to understand Bloom all you had to do was understand the entire climate change debate. After a few days of watching Youtube videos I came down squarely in the middle. I can see merits in the arguments of both sides. I learned enough to determine that we will need to improve our “hydrogen technology” if we want to store more of the solar and wind energy we produce.
Bloom was too complicated, and is too tied to specific provisions of tax laws designed to assist hydrogen production. Chart looked like a great alternative, but they had had just made a large acquisition outside of hydrogen that damaged their balance sheet. Debt was more than 5x EBITDA, so I took a pass on GTLS.
I always watch the portfolio of Barrow, Hanley, Mewhinney, and Strauss in Guru Focus. Jimmy Barrow was alway a hero of mine. Legend is he threw a punch at the Merrill Lynch chemical analyst that refused to put a buy recommendation on Union Carbide at $12, but eventually did when the stock reached $30. Jimmy took the business very seriously. Jimmy is retired, but the new managers he trained always have interesting ideas in their portfolio. For several year their largest holding was Hess, rather than Exxon or Chevron. Hess and their Guyana property was very difficult to understand, but it took smarts and guts to own.
One of Barrow, Hanley’s top 10 ideas for several years has been Air Products and Chemicals - APD. APD is a large industrial gas supplier with a significant “hydrogen kicker”. If you want a large cap name to play hydrogen, then APD is the answer. When APD bounced down from $300 to $220, I took a long look, but eventually passed because their industrial exposure is just too significant. Looking at APD made me think about GTLS again.
Here is would be great if I could write 5000 words explaining GTLS to you, but I just cannot do that detailed type of writing anymore. It just take too long. So please settle for 5 bullet points.
GTLS engineers, produces, and builds the systems (including tanks) to store and transport hydrogen. They also build systems to store and and transport LNG. Maybe 30% to 50% of GTLS businesses have 15% to 20% medium term growth rates because of the buildout alternative energy projects. For a stock selling at 10x times the very reasonable 2025 estimate, the potential growth is impressive.
GTLS is difficult to understand because big projects can make earnings “lumpy and bumpy”. Wall Street hates this, and I love it. To quote the great value investor Ralph Waldo Emerson, “consistency is the hobgoblin of small minds”. If you don’t understand this reference, please pause here and read the great essay Self-Reliance. It will be a wild ride, but margins should improve.
The balance sheet has recovered enough to make GTLS a solid idea. GTLS has long history on successful acquisitions. They were more of a “pure” hydrogen story before this deal, but the Howden price was reasonable, and so far the integration seems smooth. Two years later debt is now about 3.5x EBITDA and the firm target is 2.5 - 2.0x by 2026.
The CEO, Jill Evanko, came to GTLS in 2017 as the CFO. In this type of complex company I prefer having a financial person in charge. She came after several years at Dover Corp, which always had the reputation of being a “mini-GE”, or at least being a very good buyer of companies.
GTLS also has exposure to to carbon capture, water treatment, nuclear, lithium mining, and food storage. Everybody needs to store industrial gases. The idea is - ”Don’t own the coal mine, buy the company that makes the coal mining equipment.”
Growth/Value investor Ron Barron owns 2.7% of GTLS
NEW IDEAS
If you have read this far, congratulations, you get two interesting new ideas selling near their lows.
When you find a stock you really like, check to see who owns a big chunk. Then check to see what other ideas this big owner has in his portfolio. Plagarism is allowed in the investment business, and the dirty secret is we do it all the time.
I give Ron Baron credit because he is difficult to classify as either growth or value. He is a little of both. Of course Baron does own 17% of my top 10 ideas list member, Red Rock Resorts, so he must be the smartest guy in the world.
Looking at Ron Baron’s holdings, two ideas jump off the page:
Krispy Kreme - DNUT - These guys came out of bankruptcy 3 years ago and the stock has gone straight down from $20 to $10. By the end of the year DNUT will begin selling donuts at over 12,000 McDonald’s locations. Is it possible Western civilization is ending? Stay tuned. The current idea is not to build new stores, but build 75,000 “points of contact” where DNUT will install a cabinet and sell donuts. Baron owns 6%
FIGS Inc. - FIGS - These folks came public at $50, and the stock is now under $5. They sell “higher” fashion scrubs and health care garb. Sales have gone from $100 million to over $500 million in just 4 years. They have $200 million in cash and no debt, yet somehow Wall Street hates them because their forecasts have been to aggressive. I still have lots of questions, but I will investigate. Baron owns 15%
Okay, thats enough writing for one morning. I will now drive about 10 miles to find the nearest Krispy Kreme location. When I awaken from my sugar coma, I hope to be looking up at a nurse in an attractive FIGS uniform.