Thinking Out Loud + More Building Products
One of the inspirations for me to start writing this investing blog is the excellent teaching methodology used by a handful of chess podcasters.
Even if you just barely know the rules of chess, there is a lot to be learned from the podcast below:
Listening to an “expert” explain their thought process is an excellent way to learn a subject.
Doing a careful “post-mortem” is also a great learning method
Often the best “players” are not the best teachers
I started to play competitive chess at age 45, and after about 5 years got I to be an average competitive player (rating about 1650, advanced beginners are about 1000, top 5% of players are 2000, grandmasters are 2500+). Challenge me at SeniorChess58 on Chess.com.
One of the key ways that I got better at chess was to listen to a good teacher explain why they were making certain moves, WHILE THEY ARE PLAYING THE GAME. Hearing them “think out loud” was such a great teaching tool. It was also great to listen to them do a post-mortem to reconcile their thoughts with what was objectively correct in perfect 20/20 hindsight.
The podcaster here is John Bartholomew, an International Master. While John is a great player, he is not one of 1800 Grandmasters in the world. John is one of the best teachers in the world, because he can explain a very complex subject in simple terms to average players.
Over the next few years I hope to do exactly what John does in this video. I hope to “think out loud” as I decide which stocks to choose, and then eventually go back and review those decisions a year later.
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Over a week ago I started reviewing the building products industry, but stopped when I found the spin-out MasterBrand - MBC. After some work I decided the spin-out was too leveraged, but I will continue to watch. That leaves Masco - MAS - as still “king of the hill”
I skipped over Fortune Brands -FBIN - fairly quickly. They are in many ways a similar business to Masco, but I worry they are too much of a “financial engineer”. This company was a spin-out of the old American Brands, the #3 tobacco producer in the 1980’s. They are trying to portray their plumbing business as the sexier sounding “water management'“. I will pass and watch from the sidelines.
The next company on the list was deck maker Trex - TREX. This is essentially a larger version of AZEK reviewed in the previous post. I wish I could decide what “trough” earnings will be for this rapidly growing company. TREX is building some large plants near the top of the cycle. I will pass for now.
What I really want to find is the “next TREX'“. TREX was a $3 stock not that long ago, that got as high as $130. What $50 million market cap building product company will be the next 40+ bagger?. I want to know. We will look at smaller caps later. Every single analyst who reads these words should go back to TREX in 2014 and ask, “What did I miss?”. These kind of stocks can change your career/life.
Another solid stock for the last 10 years is Simpson Manufacturing - SSD. Selling at 13x earnings and 2.3x EV/sales, I will watch this company going forward, but it seems too expensive here. SSD relies more heavily on new housing starts, and others look cheaper in this segment. Again, I want to find the next SSD that Wall Street will get excited about.
Griffon Industries - GFF - is another stock selling at new highs I will pass on at current valuations.
The stock that really made me stop and think was Mohawk Industries - MHK - $119. The stock sells for 6x peak earnings, and trades near book value. MHK is a big player in carpet, but is also important in all flooring, like tile and wood. They have been built by a slow aggregation of smaller acquisitions. Only recently, they have been big buyers of their own stock. The balance sheet is in great shape
Even with all these positives, the stock has underperformed in the last 1,3,5, and 10 years periods by substantial amounts. Expectations are very low with only 2 buys and 15 hold/sells. 25 years ago I might have called this the perfect value stock, but today I hesitate. Maybe I am too worried about the “macro”. Maybe I have become become a giant “chickshit”. The only real large owner is Boston Partners, and I do not like the other things they own. The T Rowe Price Mid Cap Value Fund has a small 1% position, that is a small positive.
MHK does not have a nice presentation. That makes analysis more difficult. Maybe they are just buying stock back and laughing at Wall Street. Or maybe MHK will lose $8/share if housing starts fall another 20%.
Logic makes me want to recommend MHK, but the desire for serenity makes me stick with MAS. It is a close call.
Should MAS make it into the model portfolio> That is an interesting question best left for another day.
This is not a complete review of the building products industry. These were only the 10 listed by a regional broker. There is more work to be done on some of the smaller stocks.