Are these outstanding stocks - what to consider? (Other Stock Exchanges)
Tips B - Other Stock Exchanges. This is a quick guide to diversification concepts as well as case study companies listed in other countries (from a Malaysian perspective). I cover mainly US companies. For each, I assess whether it is a good US stock to invest in. Look here if you want to see the infographics of Bursa Malaysia case study companies. Revision date: 20 Aug 2023
In addition to looking at Bursa Malaysia stocks, I also looked at stocks in other countries. These are mainly US stocks as it has probably the largest stock exchange in the world. The rationale for this is diversification and risk management.
In this context, I will cover 2 things in this post:
- Provide an overview of my risk management approach.
- Provide a summary of all the non-Bursa Malaysia companies that I have analyzed. These include analysis that I publish in Seeking Alpha. For each, I will also express on opinion on where it is a good US stock to invest in.
I have a 3-min video summarizing why I look beyond Bursa.
I define a good US stock as one that can enable you to make money. This will usually be a company with strong fundamentals and a sufficient margin of safety.
The first thing that all investors learn is that you have to think in terms of the risk-reward ratio when looking at a particular investment. While every investment has its upside, there is also a potential downside.
One way to take care of the downside when you invest in the stock market is to have a diversified portfolio. I have several infographics here that look at issues related to diversification - from how to assess risks to portfolio management.
There are several perspectives on diversification.
- You can diversify by spreading your investment to different industries and different market caps.
- I also spread my investments based on the various business economic situations faced by companies eg turnarounds and compounders.
- Another common diversification plan is to invest in both local and global companies.
Geographical diversification can be quite nuanced. It is not necessarily about investing in companies that are listed in stock exchanges other than those in your country.
For example, if you are in the US and you invest in NYSE-listed The Coca-Cola Company, you are investing globally as a significant part of The Coca-Cola's revenue are from non-American sources.
Accordingly, while the infographics in this post covered companies that are listed in other stock exchanges (from a Malaysian perspective), it does not necessarily mean that they do not have operations in Malaysia.
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Contents
1. Baby steps in assessing Permanent Loss of Capital.
2. Baby steps in Asset Allocation for a Value Investor.
4. Baby steps in maintaining a stock portfolio.
6. Steel Dynamics
7. New Toyo International
8. Wing Tai
11. Leggett & Platt
13. Generac
14. Timken Steel
16. Zeus
17. MDC
19. NVR
20. US Steel
22. Stelco
23. Capstone Green Energy
25. Orion Office REIT
26. Meritage Homes
28. Builders FirstSource (BLDR)
29. Vulcan
31. Martin Marietta
32. Masonite (DOOR)
34. Alcoa
35. Kaiser Aluminum
37. Arconic
38. Toll Brothers
Case Notes When I value a non-Malaysian company, I have to use different data for computing the cost of capital. The differences are for the following parameters:
So you should not be surprised to see a different cost of capital for a US company compared to a Malaysian company even if both companies are in the same industry, of the same size with the same debt to equity level, and have similar risks. For beginners, it can be challenging to take into account these differences when valuing companies from different countries. If you still want to invest in companies in other countries based on fundamentals, and you are not familiar with the adjustments to be made it may be better to rely on third-party analyses. Several financial advisers provide such analyses. Those who do this well include people like Seeking Alpha.* Click the link for some free stock advice. If you subscribe to their services, you can tap into their business analysis, valuation, and risk assessment. Then as you become more experienced, you can phase them out. |
1. Baby steps in assessing Permanent Loss of Capital
There are 2 schools of thought when it comes to risks
- Those that view it as volatility.
- Those that view it as a permanent loss of capital.
There are various ways you can suffer a permanent loss of capital. They can be due to stock market changes, portfolio construction, wrong estimation of intrinsic value, and deterioration of the intrinsic value.
A risk management framework can be used to assess the likelihood and impact of each of the threats. This was then used to compare the relative risk of different stocks
The risk management framework was also used to identify the various measures to adopt to mitigate a permanent loss of capital
You can then use the framework to compare the risks between different companies.
2. Baby steps in Asset Allocation
There are 3 questions when it comes to asset allocation
- How many asset classes?
- How to determine that amount for each class?
- How do you rebalance?
Furthermore, any asset allocation plan should satisfy at least 2 goals:
- Perform well under various economic situations. There are 4 main economic scenarios that we live through. These are the results of the combination of inflation vs deflation and economic growth vs depression.
- Provide you with peace of mind. Peace of mind comes from having an asset allocation plan that you can stick with and sleep peacefully at night.
At its core asset allocation is about risk mitigation and should take into account your investment style. My asset allocation plan considering these covers the following:
- Have 3 groups - liquid, safe and risky assets. Within each group, you can have a few different types of investments.
- View the asset allocation through several lenses - 3 Buckets, FAA, and All-Weather.
- When starting young and at the accumulation phase, have an equal amount of safe and risky assets. As your wealth increases cap the amount for the safe assets so that more is channeled to the risky assets.
- At the withdrawal phase, have an equal amount of the safe and risky assets.
3. Baby steps in constructing a stock portfolio.
A stock portfolio is merely a collection of stocks.
- Having a portfolio of stocks is part of the risk mitigation plan.
- You can identify the stocks in the portfolio by either a top-down or bottom-up approach. The important thing is to focus on individual stocks rather than the economy or industry.
- Target to have at least 30 stocks uncorrelated stocks in the portfolio. This is a good balance between maximizing returns from concentration and minimizing risks with diversification.
- Allocate more to those stocks with the most conviction. From a Kelly Formula perspective, this is better than allocating the same amount to all the stocks.
- Scale in and scale out of a position rather than buy or sell in one lump sum.
4. Baby steps in maintaining a stock portfolio
Review your stock portfolio quarterly to ensure that it is still in line with the return and risk objectives.
- There are 2 critical review areas - the portfolio returns and the portfolio risk.
- There are 3 ways to assess the portfolio returns - absolute basis, compared with benchmarks, and risk-adjusted basis.
- To assess risks, compare the current diversification against the portfolio diversification criteria
5. UOA
UOA Ltd is listed on both the Australian (ASX) and Singapore (SGX) stock exchanges. At the same time, the majority of its operations are in Malaysia and undertaken by 2 companies listed on Bursa Malaysia - UOA Development Berhad and UOA REIT.
To get a sense of the crowd’s valuation of UOA Ltd, you need to look at these 3 markets as well as the valuation of all these 3 listed entities in comparison with the infographic.
The conclusion that UOA Ltd is not a value trap is based on the following:
- At the current market price of AUD 0.63 per share, there is an ample margin of safety
- The analysis has not suggested that there will be any impairment of the assets. There is a low risk of reducing its intrinsic value
- While growth will be challenging, the Group would be able to sustain its performance. This means that the Earning Power Value is a reliable indicator of the intrinsic value.
Since value traps and bargains are opposite sides of the value investing coin, it must mean that the market has mispriced UOA Ltd.
The details of the analysis and valuation have been updated in Is UOA Ltd one of the better SGX stocks?
6. Steel Dynamics
Nasdaq-listed Steel Dynamics Inc (SDI or the Group) is an iron and steel Group that can be considered a good company because of the following:
- It is financially strong. The Group has the industry average debt-to-capital ratio while having a higher than industry cash position.
- Both the Steel and Steel Fabrication segments are generating returns that appear to be higher than the cost of funds. While the Metal recycling segment has not performed, it may have contributed to the Steel segment's performance.
- SDI physical steel external shipment has grown at a CAGR of 7.4 % over the past 10 years compared to the USA steel consumption CAGR of 2.3 %. SDI has increased its market share in the USA market.
At the current market price, it is obvious that SDI is not a value trap as it is not cheap from the perspective of the past 12 months' prices. What is the investment thesis then?
- This is Group with a strong growth track record and a leadership team that is a good operator and capital allocator.
- The Biden administration will unfold an economic stimulus plan that will spur the demand for steel. I expect the trade protection measures to continue to provide import replacement opportunities.
The main investment risk at the current price is that even for a 7% margin of safety, you have to assume that SDI can grow according to the long-run US GDP nominal growth rate.
However, I believe that SDI will report a declining profit in 2021/22 with the opening of the new mill. I do expect the market to have a knee-jerk reaction that will provide you with a better buying opportunity. I consider this a good US company.
Over the years, I have also written about Steel Dynamics for Seeking Alpha. Refer to:
7. New Toyo International
New Toyo International Holdings Ltd is a specialty materials packaging group listed on the Singapore Stock Exchange (SGX).
- New Toyo is undergoing a turnaround. Part of the losses in the past few years were due to the impairment and retrenchment costs.
- The packaging printing industry is not a sunset industry and globally the market is projected to grow at 4.7 % CAGR till 2024. This would be positive for the New Toyo turnaround plan.
- The Group has ceased and restructured the loss-making operations and has seen the first signs of improvement in the 1H 2020 results. The challenge for New Toyo is venturing into new areas for any quantum leap.
However, there is an ample margin of safety at the current price when compared to the Asset Value and Optimistic Earning Power Value. The conclusion is that New Toyo is not a value trap. This is because
- I do not expect further impairment of PPE.
- The current businesses have the potential to deliver a steady return.
I first analyzed New Toyo in 2021. I have an update published in Aug 2023 that pulls together all the earlier analysis titled "New Toyo International – a fundamental analysis using the moomoo platform". I still maintains the original investment thesis and consider this a cigar-butt investment opportunity.
8. Wing Tai
Wing Tai Holdings is a leading Singapore property and lifestyle retailing group with 3 main business segments:
- Property Development with both residential and commercial properties. Current projects are in Singapore and Malaysia.
- Property Investments with serviced residences, office buildings, data centres, and hotels. These were developed across several geographical locations.
- Lifestyle Retail. The Group has many branded stores in Singapore and Malaysia with many lifestyle brands as Uniqlo, Topman, and Dorothy Perkins.
Wing Tai is undergoing a turnaround with a past 3-year average return of 3 % compared to the 3 years average return of 9 % a decade ago.
Part of the losses in the past few years were due to the fair value loss from investment properties. Another part is due to the slowdown in property development activities.
As any impairment of the investment properties in Hong Kong will be about 8% of the Total Assets, I would conclude that Wing Tai is not a value trap.
For a long-term value investor, there would be enough margin of safety for any investment in Wing Tai.
- The Group is financially strong and will be able to meet the challenges of a prolonged soft property market.
- Its operations have been diversified to several countries and have recent expansions to new markets (eg Japan, Australia)
The current market price is more than a 50% discount to the Book Value, the normal Earning Power Value, and the Look Thru Earning Power Value. It is a good company to invest in.
For details, refer to the posts of 7 March 2021 and 21 March 2021. There is now an update posted on 10 April 2022.
9. Boise Cascade
Boise Cascade (BCC) is a US NYSE-listed company in the Lumber & Wood Production Industry that I classify as a good company.
It is financially strong with the industry average debt-to-capital ratio while having a higher than industry cash position. Revenue is trending up through a combination of organic growth and M&A exercises.
Management has been able to perform better than its peers from an operational perspective. However, there are issues with capital allocation. Over the past 8 years, the Wood Products segment investment has doubled the segment's operating income for the same period.
At the current price, BCC is overpriced. The investment thesis is that while waiting for the price to decline to below the EPV level, BCC must also improve the business economics. Otherwise, there is no margin of safety at this level.
This requires both a change in the capital allocation approach as well as improvements in the returns. Or else it could be a potential value trap. You should not be surprised that I have concerns about this US stock.
For details refer to the post of 14 March 2021 and 29 March 2021. There is now an update "Boise Cascade - beware of illusory valuations" posted on 22 May 2022.
Over the years, I have also contributed articles to Seeking Alpha about BCC. Refer to
10. Tempur-Sealy
Tempur-Sealy International Inc (TPX) is an NYSE-listed global bedding company. The Group is one of the top 2 bedding industry leaders in the US market.
The bedding industry is not a sunset industry. TPX's two business segments - North America and International - still have organic growth prospects. The industry growth in the US seemed to have been driven by the growth in Housing Starts. But this is not long-term sustainable growth.
My investment thesis is that TPX is a growth trap.
- TPX achieved a lower revenue growth rate compared to the industry.
- In the past 3 years, EBIT/TCE employed averaged 19 %. This is commendable at it is above the cost of funds. But TPX Return on Assets is the worst among its peers.
- While it has created shareholders' value, the share buyback plan was carried out at prices that were greater than the intrinsic value.
- The current market price far exceeds the EPV.
The market is pricing TPX as if it was a high-growth stock. I have shown that it has short-term revenue boosters ie from Housing Starts and anti-dumping. But the long-term outlook is likely to be growth at the US long-term GDP rates.
The current business economics of the Group is good. It is a good US stock. In the short run, it can even overshadow some of the non-value-adding decisions. But if management does not take advantage of this to make the necessary changes, TPX may not have a bright future in the long run.
For details refer to the posts of 9 May 2021, 23 May 2021, and 25 Jul 2021. Over the years, I have also written about the Group for Seeking Alpha. Refer to
- Tempur-Sealy: Time To Exit - Feb 2021
- Tempur Sealy: Still Not The Time To Buy - May 2021
11. Leggett & Platt
LEG is a pioneer in sleep technology. Today the Group conceives, designs, and produces a diverse array of products that can be found in most homes, offices, and vehicles.
By analyzing LEG as comprising a Special Foam division and a Classic LEG division, you can see the growth potential for LEG.
- The Classic LEG division is a “steady” business with revenue growing at a CAGR of 2.2 % from 2010 to 2019.
- The Specialty Foam division is in a growth sector with double-digit revenue growth in 2019.
LEG management has extolled the Specialty Foam contribution to LEG's bedding business. The question is whether it will be able to transform the Group into a growth stock. For this to happen, the following must occur:
- The Specialty Foam division growth must result in double-digit growth for the Group.
- The intrinsic value of the Group must far exceed the current market price.
The revenue growth for the Group in the first quarter of 2021 barely touched 10%. The Group has not reported whether this growth was driven by the Specialty Foam division. At the same time, there is no conclusive evidence that the Group can sustain an overall growth rate of more than 10 % for several years.
There is currently no margin of safety even if you viewed the Specialty Foam Division as a growth segment. At the current price, LEG is a growth trap. Why would you consider this company a good US stock?
For details refer to the posts of 3 Jun 2021 and 27 Jun 2021. I have also written about LEG for Seeking Alpha. Refer to:
12. Worthington Industries
The Group today has 2 major business segments - Steel Processing and Pressure Cylinders. The analysis suggested that WOR is a good company.
- It has been profitable over the past 11 years. This covered 2 hot-rolled steel price cycles and the Covid-19 pandemic.
- It is financially sound with a Debt Equity level lower than the industry average. As of Feb 2021, cash represented 29 % of the total capital employed.
- It has a good track record of growing shareholders’ value.
- The sustained excess returns and the EPV > AV scenario suggested that it has a sustainable competitive edge.
- While there may be limited opportunities for high growth in the US, there is a global demand for its Pressure Cylinder segment products.
At the current price, there is no margin of safety from the EPV perspective. I would argue that there is also no margin of safety from a Conservative Earning with a 2 % growth perspective.
For the price to go higher and hence project some justification for buying, you would have to view WOR as a growth stock.
But the analysis did not provide any evidence of a high growth phase. If you invest based on a high growth expectation, it would be investing in a growth trap. Would you consider company this a good US stock?
For details refer to the posts of 4 July 2021 and 18 July 2021. I have the following updates:
- Worthington Industries - A Sufficient Margin Of Safety Even As A Cyclical Company – Mac 2022 in Seeking Alpha.
- WOR is still one of the better NYSE stocks – May 2022 in i4value blog.
- Worthington Industries: Sum Of Parts Is Greater Than The Whole – Apr 2023 in Seeking Alpha.
13. Generac Holdings
Power generation and storage are the key focus of the Group. Its success is built on its engineering expertise, manufacturing excellence, and innovative approaches.
The analysis showed that GNRC is fundamentally strong.
- It is financially healthy with a 0.6 Debt Equity ratio as of Jun 2021. The Group had been able to increase its ROE from 13 % in 2010 to 24 % in 2020.
- It achieved a 15.4 % CAGR in revenue from 2010 to 2020. About 1/3 of this has been from organic growth. The Group has been able to fund its growth from internally generated funds.
- The generator industry is not a sunset one. There are still prospects for growth. But the bigger growth will be from the international market where GNRC has a small presence.
- Management has a good track record for operations and capital allocation.
- It has been able to create shareholders’ value.
- The main risk - new acquisitions - seemed manageable.
Unfortunately, the current market price does not provide any margin of safety. The market is pricing GNRC at a growth rate that is not realistic. I would conclude that GNRC is a growth trap. It does not look like a good US stock to invest in.
For details refer to the posts of 15 Aug 2021 and 22 August 2021. I have also written about this company in Seeking Alpha. Refer to:
14. Timken Steel (TMST)
Except for its IPO year of 2014, TMST had not been profitable since then. However, the Group is financially strong, and a breakeven analysis showed that the poor performance is due to its operating below its breakeven levels.
The prospects of lower fixed costs, higher selling prices, and larger sales volume meant TMST would be able to be profitable. Given TMST's technical expertise and customer relationships, if it can get align its cost structure with the cyclical product prices, it would be able to turn around.
There is a new CEO/President starting work in Jan 2021. This could be a catalyst to turn the Group around.
The Investment Thesis is that TMST would be able to turn the Group around. If this is achieved there is a sufficient margin of safety at the current market price.
If it failed, the current market price is 1.1 times the Book Value. This would limit the downside if the turnaround is not successful. It is a good US stock.
For details refer to the posts of 5 Sep 2021 and 19 Sep 2021. I have now several updates in Seeking Alpha:
15. Cummins
Cummins (CMI) designs, manufactures, distributes and services a wide range of engine-related products worldwide. These included diesel, natural gas, electric and hybrid powertrains and, powertrain-related components.
CMI is fundamentally strong.
- It has a very low net Debt-Equity ratio.
- It has achieved an average 23 % ROE from 2010 to 2020.
- It has been able to achieve a revenue CAGR of 4.1 % from 2010 to 2020.
- The Group had changed its business direction to take into account the market trends.
- Management is both a good operator as well as a capital allocator.
- The Group has a track record of creating shareholders value.
CMI has a good margin of safety. This comes from assuming that it can deliver high growth rates over the next 10 years. These are single digits growth rates just a few % points above the US long-term GDP growth rates. The numbers are not some mind-boggling growth rates.
I would conclude that there is an investment opportunity here and that CMI is one of the better NYSE stocks to invest in. It is a good US stock. For details refer to the articles posted on 14 Nov 2021 and 28 Nov 2021.
16. Olympic Steel Inc (Zeus)
Zeus is a leading metals service centre that provides metals processing and distribution services for a wide range of customers.
In Oct 2021, I concluded that Zeus had poor business economics. Zeus was in a cyclical sector and as such, the fundamental analysis should be based on its performance over the cycle.
The sector is currently in the uptrend part of the cycle and as such you would expect relatively good results compared to its past. But cyclical sectors mean revert.
My valuation showed that the EPV is only 1/6 of the Asset Value. There is only a margin of safety based on the Asset Value The low EPV relative to the Asset Value implied that the Group had not been effective in using its assets.
Could there be risks that my conclusions are wrong?
- A new CEO took over in 2019 and there are signs of the Group divesting the lower returns business and acquiring those with better margins.
- Management continues to report progress in improving the operations even though the impact has not been significant. There could be a turning point when there is a spike in operating efficiencies
My view is that the weight of history is against this. As such Zeus is not one of the better Nasdaq stocks to invest in. You can understand why I do not rate this as a good US stock. For details refer to the following:
- Is Olympic Steel one of the better Nasdaq stocks? – i4value blog.
- Olympic Steel - Not Creating Shareholder Value – Seeking Alpha, Oct 2021.
17. M.D.C. Holdings (MDC)
MDC is one of the top ten homebuilders in the US. I do not consider MDC fundamentally strong for the following reasons:
- It has a debt level that is higher than the industry. At the same time, it had sold off all its investments in securities to fund its growth.
- It generated cumulative negative Cash Flow from Operations from 2010 to 2020.
- It does not have a sustainable reinvestment rate.
- The revenue growth from 2010 to 2020 was because of the tailwind from the growth in Housing Starts.
- MDC just maintained its market share during the past 11 years. MDC revenue would also be cyclical and its long-term average revenue would be pegged to the long-term Housing Starts average.
- MDC performance compare to the top 5 homebuilders by 2020 revenue is at best average. At the same time, it had not been able to create shareholders’ value
A valuation based on an Optimistic Scenario showed there is no margin of safety. MDC is not one of the better NYSE stocks to invest in. The current market price of MDC only makes sense if you believe that its business is not cyclical. But this would be challenging 6 decades of cyclical Housing Starts. Why would this be a good US stock?
For details, refer to the following:
- Is MDC Holdings one of the better NYSE stocks? – i4value blog.
- MDC Holdings Is A Cigar-Butt Opportunity – Seeking Alpha, Mac 2022.
18. Lohakit Metal
Lohakit Metal (LHK) is a steel company under the Stock Exchange of Thailand. LHK is a fundamentally strong Group.
- It is financially strong.
- It has a strong performance track record.
- Management has a good track record as an operator and capital allocator.
- It has been able to create shareholders’ value.
While the current performance of the Group has been affected by the Covid-19 measures, it had a good performance track record over 2 price cycles.
The performance of cyclical companies will mean revert. As such any fundamental analysis should be based on its performance over the cycle
A valuation of LHK showed sufficient margins of safety under the EPV and EV with growth scenarios.
My view is that with little borrowing, the Group would be able to withstand any negative economic scenarios without any impairment of its assets. In other words, the Asset Value provides a floor value and I am happy with more than a 30% margin of safety based on the EPV. It is a good stock to invest in.
For further details refer to the article posted on 3 April 2022.
19. NVR
NVR is a US home builder. NVR was a good stock to invest in a high inflation environment as follows:
- Over the long term, house prices have increased at a faster rate than inflation and construction costs. The long-term average Housing Starts are also not affected by inflation. This meant that if you value homebuilders from a long-term perspective, you are likely to have more reliable estimates.
- I carried out a valuation of NVR on such a basis. It indicated that there is a margin of safety at the current market price. At the same time, NVR was fundamentally strong. It had a track record of sector-leading returns and creating shareholders' value. It was also financially very sound.
- The key was not the track record. Rather the track record points to an underlying strong management and a good business model. This is important given the uncertainty regarding the duration and short-term impact of high inflation.
The market price of NVR had declined to USD 3,951 per share as of 28 Jun 2022. Despite the decline in the share price, there is still a good margin of safety. As such I would consider NVR as one of the better NYSE stocks to invest in. In other words, it is a good US stock.
For details, refer to the following:
- Is NVR Inc one of the better NYSE stocks? – i4value blog.
- NVR: A Good Jockey On A Strong Horse Riding Into A High Inflation Environment – Seeking Alpha, Apr 2022.
20. US Steel
United States Steel Corporation (X) has transformed itself over the past 10 years. It has reduced its capacity to match its demand and diversified to making steel via EAF mini-mills. Apart from improving its business operations, X has today a stronger balance sheet.
Any analysis and valuation of X should be based on this “transformed” profile. At the same time, steel is a cyclical sector. A valuation of X on such bases shows that there is a margin of safety at the current price of USD 25.50 per share (as of 6 June 2022). It is a good US stock.
I also analysed X from another perspective. X can be considered of comprising 3 divisions – the US, Tubular, and Europe. The US division covers the company’s US flats and the mini-mill segments. The Tubular and Europe divisions are the US tubular and USSE segments
From 2013 to 2021, the main contributor has been the US division. The Tubular division has not generated any cumulative returns. Europe, while profitable, currently faces market and supply risks due to the Ukraine invasion.
The market price has already priced in the downside from Europe. I reached this conclusion based on a sum-of-parts valuation of X.
For details refer to the following:
- US Steel – a case study on getting insights from annual reports.- i4value blog.
- U.S. Steel: A Different Group Than 9 Years Ago – Seeking Alpha, June 2022.
- U.S. Steel: Value Is There Even Without Any Contribution From Europe - Seeking Alpha, Aug 2022.
- United States Steel: Better Positioned For The Coming Recession – Seeking Alpha, Apr 2023.
21. Innovative Industrial Properties
Innovative Industrial Properties (IIPR) is the first publicly traded company on the New York Stock Exchange to provide real estate capital to the regulated cannabis industry.
This is an investment where I cautioned about going in currently based on the following:
- IIPR had grown its lettable area and AFFO per share 6 to 7 folds since its IPO in 2016.
- While the company has grown significantly, this was driven by its financing strategy rather than operating or marketing strategies.
- Its property acquisitions were funded by equity that benefited from increasing share prices. AFFO per share growth was due to the rents increasing at a faster rate than the number of shares.
- The current economic situation is different. It will be more challenging to fund its acquisition via equity given the lower share price. The lower share price also meant more shares issuance which will affect the AFFO per share.
- Given the high-interest rate, the decline in IIPR share price, and the potential recession, this model is no longer tenable. IIPR would find it challenging to grow its lettable areas as well as grow its AFFO per share.
- Looking at IIPR through a no-growth lens, there is no margin of safety at the current market price
You can understand why I don’t consider this company a good US stock. For details refer to the following:
- Innovative Industrial Properties: Growth Will Likely Be More Challenging – Seeking Alpha, Aug 2022.
22. Stelco
Stelco is a Canadian integrated steel manufacturer that was at one time part of the US Steel Group. Its present corporate set-up followed its divestment by US Steel and a re-structuring and 2017 IPO.
Stelco is in a cyclical sector. As such, I analyzed and valued Stelco based on its performance over the cycle. The challenge with Stelco is that data was only available from its IPO year of 2017.
Given this, I took the 2018 to 2020 average values to represent the performance over the cycle. This is based on looking at the past 20 years’ steel cycle pattern and ignoring the past year or so prices.
Stelco is fundamentally strong with a strong growth track record.
- It is financially sound. As of Jun 2022, Stelco has a Total Capital Employed of CAN$ 2.6 billion. About ¾ of this is funded by equity. The company is cash rich with cash accounting for about 57% of the Total Capital Employed.
- It has a good track record. Compared to the top 4 US steel companies, Stelco’s revenue growth and ROA stand out as illustrated in Charts 3 and 4.
- It has a Piotroski F Score of 8 for 2021.
There are margins of safety based on its EPV over the cycle matches the current market price. There are other upsides because of Stelco’s growth track record. At the same time, the steel demand is expected to grow given the recently passed infrastructure plan. This is a good US stock.
For details, refer to my Seeking Alpha articles:
23. Capstone Green Energy (CGRN)
CGRN is an ailing US microturbine manufacturer that has not been profitable since its IPO in 2000.
There are 2 challenges facing CGRN. It has to strengthen its Balance Sheet and turn the business into a profitable one. It would need additional funding to solve the first. But to do this, it has to convince investors and/or financial institutions that it can deliver the second.
But for CGRN to interest investors and/or other providers of Debt, it needs to show that the business is viable. This is not impossible as it has a products and distribution network. The market is growing and there is the possibility of extending its offerings to the air-bearing market.
The historical losses are because it is operating below the break-even levels. There is a growing market but it needs time to rebuild back its sale volume. The current market price is below its Reproduction Value.
All these are positive factors in seeking additional funding. It also makes CGRN an attractive acquisition target. But the funding has to be substantial.
There is value to the business. I estimated that at the current price, CGRN is fairly valued. I would go in if the price drops to USD 1. I do not consider this a good US stock.
For details, refer to my Oct 2022 Seeking Alpha article, "Capstone Green Energy: All Is Not Lost".
24. Walgreen Boots Alliance
Walgreen Boots Alliance (WBA) today is very different from what it was in 2014. Apart from being about 2 ½ times bigger in size in terms of Total Assets, it had just diversified into local clinical care services. There were also additional expenses associated with its Cost Transformation Program (Cost Program).
I would consider WBA as a company in transition. The current performance does not capture the full benefits of the new business segment as well as the cost savings.
There are 2 drivers of change:
- The venture into the business as represented by the US Healthcare segment.
- The Cost Program.
Management has committed to the benefits of the Cost Program. There is a strong operating track record to suggest that it would be successful in its transformation. It is also financially strong to give it time to realize the results
Assuming that both are achieved, then there is a margin of safety at the current price.
However, the success of the US Healthcare segment is still to be proven. I do not expect the US Healthcare segment to be a failure given the management track record. But even if this happens, there is enough margin of safety. It is a good US stock.
For details, refer to my Oct 2022 article in Seeking Alpha “Walgreens Boots Alliance - A Company In Transition”
25. Orion Office REIT
Orion Office REIT is a newly established REIT focusing on the single-tenant suburban office market. It started life at a time when the US economy was experiencing high inflation with signs of a recession. This resulted in asset impairments.
About half of the leases will be maturing between 2022 to 2024. It had not been able to renew some of those maturing in 2022. Growth via new properties may also be challenging.
ONL has challenges with the lease renewal. It also had to contend with asset impairments. As such you should not be surprised that the current market price is about half of its “IPO” price. But it has over-shot on the way down as there are margins of safety from a worst-case NAV and FFO perspectives.
The market has overreacted. A conservative analysis shows that the market price is significantly below a worst-case estimate of the NAV and FFO. This is a deep-value investing opportunity with a margin of safety for its current 4% dividend yield. I would rate this REIT as a good US stock.
For details, refer to my Nov 2022 Seeking Alpha article “Orion Office REIT: Value Opportunities”
26. Meritage Homes (MTH)
The US Housing Starts is cyclical with a 0.72 correlation with MTH's revenue. The Housing Starts had begun to decline and I expect MTH performance to follow.
For companies with significant real assets such as homebuilders, the Asset Value = Tangible Book Value provides a good estimate of the intrinsic value. On this basis, you would think that the intrinsic value of MTH is USD 100 per share as per its Asset Value.
But MTH is in a cyclical sector with a history of impairments during the downtrend part of the cycle. During the last downtrend, MTH wrote off 40% of its Total Assets. I expect its Asset Value to be impaired this round.
One clue about the potential impairment is to compare its Asset Value with the Earnings Value. In the case of MTH, the Earnings Value would depend on your view of the performance over the cycle.
I considered 2 Scenarios and estimated the Earnings Value to be either USD 25 per share or USD 61 per share. On such a basis, there is likely no margin of safety even though the current market price at USD 84 per share is below the Asset Value. I worry about this company being a good US stock.
The positive point is that MTH is financially sound and would probably be able to withstand the impact of a downtrend.
For details, refer to my Nov 2022 Seeking Alpha article “Meritage Homes: Look At Its Performance Over The Cycle”
27. BlueLinx
There is a strong correlation between BXC revenue and US Housing Starts. Housing Starts is cyclical and BXC should be analyzed and valued as a cyclical company.
While BXC's past 2 years’ performance has been record-breaking, it does not represent its performance over the cycle. The Housing Starts has started its downtrend and I would expect the revenue of BXC to follow suit. However, the market is not pricing BXC as a cyclical company.
The real valuation challenge is then what to use as the cyclical values. I have shown that if you use the historical averages, there is no margin of safety.
But if you ignore the cyclical picture and use some projected values, you can have a margin of safety. The real question is whether it is appropriate to use such projected values for cyclical companies.
I have mentioned about the limitations of my analysis. For example, a 20 % lower WACC could match the current market price. My point is that even with this, there is not enough margin of safety.
From a conservative perspective, I would not invest in BXC currently. In other words, it is not a good US stock. For details refer to my Jan 2023 Seeking Alpha article “BlueLinx: The Market Is Not Pricing This As A Cyclical Company”
28. Builders FirstSource (BLDR)
Builders FirstSource achieved tremendous double-digit growth over the past few years. But this was the result of acquisitions and one-off extraordinarily high product prices.
Its 2022 revenue is about 6.5 times larger than that in 2015. While revenue has grown, there are no clear improvements in the margins or asset utilization.
Its strong performance was in the past 2 years. These were due to the tailwinds from the one-off price spike. Washing out the effects of the price spike and looking at its performance over the cycle, it is not a high-growth stock.
While financially sound, BLDR’s performance is tied to the homebuilding sector, which is cyclical. As such, BLDR should be analyzed and valued as a cyclical company. On such a basis, there is no margin of safety at the current price.
A Greenwald analysis showed that is not a “franchise” with a moat. There is no margin of safety based on the Greenwald return formula.
Refer to the following Seeking Alpha articles:
29. Vulcan
Vulcan Materials Company is the largest construction aggregates company in the US. The demand (tonnage) for aggregates in the US is cyclical. While it delivered credible performance over the past 2 years, VMC’s performance over the cycle is lower than the current results.
Notwithstanding its acquisitions, it did not achieve significant growth in its market share. Shipment tonnage over the past 15 years was stagnant and revenue growth was driven by growth in prices. At the same time, it had unsustainable Reinvestment rates.
Based on its valuation over the cycle, there is no margin of safety at the current price. This low value is due to the low cyclical margins, low revenue base, and low cyclical asset turnover.
Refer to my Feb 2023 Seeking Alpha article “Vulcan Materials: No Fundamental Basis For The High Price”.
30. Summit Materials
Summit Materials Inc. IPOed in 2015. Its rapid growth before that was due in large part to its acquisitions which were funded with Equity and Debt.
Post-IPO, SUM continued with the same acquisition strategy. But it had managed to reduce its Debt level partly through new Equity as well as Cashflow from Ops.
Revenue growth benefited from being in the uptrend part of the construction cycle. Revenue growth did not translate into better operating performance. Without the one-off gains, the current ROE would be in single digits.
Sadly, this growth has not created shareholders’ value due to its poor business performance. Until SUM can improve its returns, there is no margin of safety for the retail investor
The market priced SUM as a growth stock. Alternatively, the market thinks that the value of the reserves is not accounted for. In either case, the market is wrong.
Refer to my Mac 2023 Seeking Alpha article “Summit Materials: A Growth Trap For The Retail Investor”
31. Martin Marietta (MLM)
Martin Marietta Materials Inc has managed to grow its revenue at a faster pace than total construction spending over the past 17 years. This was via a combination of acquisitions and changes in the product mix.
MLM serves a low-growth cyclical construction sector. The growths and changes did not translate into positive trends for all the metrics that drove returns. ROE declined. Gross profitability also declined. Capital efficiency got worse.
A Greenwald "Asset Value vs. EPV" analysis indicates that this is not a "franchise”. This is not a growth stock. The appropriate valuation metric is EPV. On such a basis there is no margin of safety at the current price.
Refer to the Feb 2023 Seeking Alpha article “Martin Marietta Materials: Revenue Growth Hides The Real Picture”
32. Masonite (DOOR)
Masonite International Corporation (NYSE: DOOR) is a cyclical company. Its recent good performance was due to being in the uptrend leg of the cycle. There is a strong correlation between DOOR revenue and the US Housing Starts. As such I would peg DOOR's cyclical performance to that of Housing Starts.
There is also a strong correlation between revenue, gross profit margins, and gross profitability. When revenue declines so will these margins and returns. At the same time, SGA appears “sticky”.
While it delivered a 30 % ROE for FYE Jan 2023, its long-term performance and value should be viewed through a cyclical lens.
Based on the cyclical lens, there is no margin of safety at the current market price. The market is pricing DOOR as if it can continue to grow revenue and improve its margins.
For details, refer to my Mac 2023 Seeking Alpha article “Masonite International: The Market Is Not Pricing This As A Cyclical Company”
33. Century Aluminum
Century Aluminum (CENX) is a global producer of primary aluminum. It operates 3 aluminum smelters in the United States and one in Iceland.
CENX revenue grew faster than the demand for aluminum. Together with a 2 PBV multiple, you could think that this is a growth stock. But it is not.
Revenue growth was partly due to the 2021/22 spike in commodity prices. But this is a sector with cyclical prices. The long-term aluminum price growth is only 1 % CAGR.
PAT had not grown over the past 12 years. Gross profit margins were volatile without discernible growth trends. Production had to be curtailed.
There are no fundamental reasons to support a growth picture. Also, a Greenwald Asset Value vs EPV analysis show that this is not a growth stock.
For details, refer to my Apr 2023 Seeking Alpha article “Century Aluminum Is Not A Growth Stock”
34. Alcoa
Alcoa is a producer of bauxite, alumina, and aluminum.
Aluminum prices are cyclical. Alcoa’s earnings would be cyclical given the strong correlation between aluminum prices and Alcoa's gross profitability.
Alcoa could generate significant operating profits under various aluminum price scenarios. However, over the past 9 years, Alcoa had a very heavy tax burden. There were taxes even if it was loss-making. During profitable years, tax rates ranged from 45 % to 108%.
There are two ways to explain the high tax rates.
Based on the tax reconciliation, the high tax rate is due to large changes in the valuation allowances.
Another explanation is that the high tax rate is due to arithmetic issues. The losses in the Domestic operations resulted in lower overall profits. The tax rate is then magnified.
To reduce the high effective tax rate, Alcoa needs to focus on changes in valuation allowances and make the Domestic operations profitable.
For details, refer to the following Seeking Alpha articles:
- May 2023 - “Alcoa: Taxes Are Killing The Value”
- Jun 2023 – “Alcoa: Exploring The Mystery Of High Tax Rates”
35. Kaiser Aluminum
Kaiser Aluminum (KALU) serves the cyclical aluminum sector. But it tries to negate the cyclical impact with its “metal price neutral” approach using Conversion Revenue as the key top-line metric.
There is a 0.85 correlation between Conversion Revenue and aluminum prices making KALU a cyclical company. Any analysis and valuation should be based on its performance over the cycle.
However, only the GE product is cyclical. To value KALU, I had to consider the various products that perform differently. I used a sum-of-parts approach to consolidate them.
On such a part cyclical lens, there is not enough margin of safety. There is only a margin of safety if you ignore the evidence that it is a part cyclical company.
For details, refer to my May 2023 Seeking Alpha article “Kaiser Aluminum: The Metal Price Neutral Approach Is Not Working Fully”
36. Constellium
Constellium CSTM is a global leader in the development, manufacture, and sale of highly engineered, value-added specialty rolled and extruded aluminum products. The company has 3 major business segments with major operations and markets in Europe and North America.
Constellium IPOed in 2013. It had a challenging performance during the first few years. But the past few years' results seem to suggest that it has turned around.
Constellium's 6.8% CAGR in revenue over the past 10 years hides the low shipment growth. Its growth in selling price was also very much lower than that of aluminum.
CSTM is a cyclical company, and any analysis and valuation should be based on its performance over the cycle.
On such a basis, there is no margin of safety. I also have concerns about its profitability and financial strength. As such, this is not an investment opportunity.
For details, refer to my May 2023 Seeking Alpha article “Constellium: Fundamental Issues Coupled With No Margin Of Safety”
37. Arconic (ARNC)
Arconic was listed in 2020 following the split of its parent company into 2 public-listed companies. It comprised the rolled aluminum products, aluminum extrusions, and architectural products of the parent company.
During its 3 years as a public-listed company, Arconic had not been profitable. While revenue had grown by about 2/3 since then, it had incurred losses for the past 3 years. But this is a misleading picture as a significant part of the losses were due to one-off asset write-downs and restructuring charges. Without these, it would be profitable.
This is not a growth stock. There are also concerns about its financial strength and the strategic value of 2 of its business segments.
ARNC is a cyclical company. Despite its short history, its performance and valuation should be based on a cyclical lens. On such a basis and even assuming no further one-off charges, there is no margin of safety.
For details, refer to my May 2023 Seeking Alpha article “Arconic: Fundamental Issues Coupled With No Margin Of Safety”
38. TOLL Brothers
Toll Brothers is US homebuilder and hence a cyclical company. Any analysis and valuation should be based on a cyclical lens.
During the latest Housing Starts cycle from 2005 to 2022 (peak-to-peak), its revenue grew at 3 % CAGR. But this was due to a combination of 1.1 % CAGR in Deliveries while unit selling price grew at 1.8 % CAGR. Part of the growth was due to the 2014 acquisition.
Over the past 70 years, there was no growth in the long-term annual average Housing Starts. However, there was growth in the Housing Price Index. I would not consider the sector as a growth one. But TOL is financially sound.
A valuation of TOL over the cycle on such a basis showed that there is no margin of safety. Even if you assumed that there would be a 1/3 increase in the long-term annual average Housing Starts, the margin of safety is not sufficient.
For details, refer to my May 2023 Seeking Alpha article “Toll Brothers: No Margin Of Safety Even With Uptick In Long-Term Annual Average Housing Starts”
39. Lennar
The homebuilding sector is cyclical. There is a 0.6 correlation between the US Housing Starts and LEN's revenue.
Any valuation of LEN should be based on its cyclical performance, adjusted by the impairment. But the size of the impairment would depend on the duration and depth of the downtrend.
The challenge is in determining LEN’s cyclical value. This is because Lennar is a different entity today compared to the pre-2017 periods due to the acquisitions. At the same time, there is uncertainty about the duration and the peak-to-trough values of the cycle.
To overcome these issues, I had covered Lennar twice over the past few years. The general conclusion remains the same.
Taking all these into consideration, there is no margin of safety. For details refer to my Seeking Alpha articles:
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Disclaimer & DisclosureI am not an investment adviser, security analyst, or stockbroker. The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies. Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them.
The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such.
I may have equity interests in some of the companies featured.
This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you.
Disclaimer & Disclosure
I am not an investment adviser, security analyst, or stockbroker. The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies. Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them.
The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such.
I may have equity interests in some of the companies featured.
This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you.
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