Dear Partner,
In January I began purchasing stocks to fill our portfolio, below I will discuss some of our positions and why I think they are valuable.
But first, what are the goals of Veld Strategies? Veld Strategies was created to provide an above-average return on invested capital while protecting it from permanent losses. I accomplish this by buying securities which are undervalued compared to the industry or the stock market when I think there is a strong indication that they will appreciate. Oftentimes these companies are the secondary or tertiary beneficiaries of the latest trends in industries where the big names have already become overvalued.
Two such businesses in the semiconductor industry are Vishay (VSH) and ST (STM). We have seen that this industry tends to grow faster than the stock market on average, and these businesses provide the power transistors and other components required to make the big-name chips work within the circuits of which they are a part. Based on normal earnings of $2.50 per share and valued at 15x earnings, Vishay should be worth $37.50 where today it trades below $23. In addition to transistors and other ICs, ST also makes chips found in low-powered computers based on the hugely popular ARM architecture. For this reason I think it can be valued closer to the average for the stock market at 16x earnings. Based on normal EPS of $4.35 it should be worth over $69 where today it trades closer to $45.
Encore Wire (WIRE) is another business that I believe will benefit from recent and longstanding developments such as the infrastructure bill, long-term shortage of homes, and shift towards electrification. Their products are used in residential and commercial applications both in new development and during remodeling. This is attractive because remodels tend to increase when new development goes down. It has one of the strongest balance sheets of any business I have seen with a credit facility that remains untapped despite recent expansion. Based on normalized earnings of $22 per share and a 13x earnings valuation, it should be worth over $280 where it currently trades around $214.
The past few years have seen record high temperatures along with record sales of AC units, and now a spending bill to provide subsidies for efficient HVAC upgrades. Among other things, Mueller Industries (MLI) is a maker of copper tubing used in AC’s and heat pumps. The fundamentals of the business are strong and the company is poised for future growth. Based on normal earnings of $5.30 per share and valued at 13x earnings, it should be worth close to $69 where today it trades around $46.
Of the major automakers operating in the US, Stellantis (STLA) represents an exceptional value at the present. They are the third largest US manufacturer of pickup trucks and the largest seller (in multiple segments) of electric vehicles in Europe. Stellantis are in the process of introducing four new platforms across all their brands which will streamline production and ensure continued profitability during the costly rollout of electric vehicles. Based on normal earnings of $6 per share and valued at 10x earnings, Stellantis should be worth over twice as much as where it trades today around $25.
When evaluating the quality of a business I like to consider not just the fundamentals and earning potential but the product as well. Toll Brothers (TOL) is a business that succeeds in all three categories. A maker of homes that isn’t building on the cheap, they are strong on the balance sheet and their growth is supported by the shortage of housing stock. I believe the company stands to appreciate by at least 50% based on their past year’s earnings and a 12x earnings valuation, this would see the stock worth around $150 where it currently trades closer to $99. D. R. Horton (DHI) is the largest homebuilder in America, and based on normalized earnings of $14 per share I expect it to be worth $196 at 14x earnings where it currently trades around $148; This means a discount of over 30% today.
Terex (TEX) and Oshkosh (OSK) are two companies I believe will benefit from a historic lack of infrastructure spending and the new infrastructure bill that has been authorized by the US government. They make, among other things, the machinery required to process rock into concrete and deliver it to job sites. Based on normal earnings of $7 per share, Terex should be worth $91 at 13x earnings where it currently trades around $57. Based on the strength of its defense technology, I believe it is fair to value Oshkosh closer to the average for the stock market at 16x earnings; with normal earnings of $8.60 per share, it should be worth over $137 where today it trades around $105.
In conclusion, it has been a productive start to the year and I maintain a positive outlook for the year ahead. As always, the valuations presented here represent what I believe the companies are worth today. If there are questions that remain unanswered by this letter, I remain available to answer them at your convenience.
Warmest regards,
Jake Strauss
Veld Strategies 