BRENDAN WOOD INTERNATIONAL SHAREHOLDER POLL
For Immediate Release – New York, NY, April 8th, 2020 (TopGun Press)
Three weeks ago, the professionals in the BWI Shareholder Panel reported that they intended to be net buyers within three months, would upgrade their portfolios, buy oversold names and expected a recovery, to January 2020 prices, within three to six months.
The latest poll results date from last Friday, a dark day preceding Monday’s surge. In other words, professional investor conviction has remained steadfast during the worst of the Coronavirus crisis. If anything, buying conviction has increased a little, as per the BWI Shareholder poll numbers below. Ninety six percent of the pros said they would be net buyers within 90 days and the same 96% believed that the effects of the virus would cease to be investment deterrents within six months. Eighty percent also predict a January 2020 price recovery well within a half year.
Given the conviction of big ticket investors, on what targets is this buying power about to be unleashed? Target ideas range all over the index but the consensus on TopGun companies is the equivalent of a silent majority.
“Every investor we talk to seems to have a handful of names in their sights. Typically these top of mind names are stocks the investor sees as highly undervalued. It’s fascinating that each investor comes up with a new name(s). There are almost no repeats. When we look at our Shareholder Confidence Index Data, many of the names on the buying lists are not in high demand and according to investors, will not be in high demand, despite being technically undervalued. The value trap is a product of deep value selections which investors at large cannot rally behind, in other words, companies that may well be undervalued but fail to meet other broadly operative and essential investment criteria. However, what investors at large inevitably agree on are the names at the top of the Shareholder Confidence Investment Quality Index. These are the companies that investors consider the best run companies in the world. Almost all equity portfolios include some of these TopGun, often iconic, names. TopGun companies are apt to be fully priced or over priced because of their quality and performance. When TopGun prices drop due to panic selling, investors almost reflexively increase their positions, but they are more excited by that “value idea” which captures the imagination. The quiet upgrading of TopGun names is a silent storm,” says Brendan Wood, Chairman, Brendan Wood International.
Interested in the returns on BWI’s TopGun names? Click the link.
BWI TopGun Names
INVESTOR POLL:
1) Are you planning to be a net buyer in the near term 3 months? (Net buyer means own more $ in equities than you do today.)
Yes = 96% (92% last week)
No = 4% (8% last week)
2) Will you be buying using cash reserves or switching existing positions into higher quality names that were overpriced but have become cheaper?
Cash Reserves = 34% (33% last week)
Switching Existing Positions into Higher Quality Names = 62% (59% last week)
3) How long do you think that decreasing real spending, lower earnings and supply chain issues directly caused by Coronavirus will prevail as deterrents to investing?
1 Month = 0% (0% last week)
3 Months = 45% (42% last week)
6 Months = 51% (51% last week)
1 Year = 4% (7% last week)
4) Will markets/prices come back to January 2020 levels? 0-100%
Yes = 90% (87% last week)
No = 10% (13% last week)
5) How long will this recovery take?
1 Month = 1% (1% last week)
3 Months = 35% (35% last week)
6 Months = 45% (43% last week)
12 Months = 13% (13% last week)
12-18 Months = 6% (9% last week)
6) How do you rate the future effect of a change in the US administration from Trump to a democrat in November as a market performance risk 0-100%? (Risk of a negative impact on prices)
Yes = 55% (58% last week)
No = 46% (42% last week)
Average Level of added risk = 38% (40% last week)
TYPICAL INVESTOR COMMENTARY:
We’ve been crazy busy because investors are trying to figure out where to move where it’s safe. We’re doing deep dives on all of the global software and IT services companies we cover. We issued a note last week. There is only one company we have a concern about and that’s Sabre because of its connection with the airline industry.
With all of this uncertainty and the re-pricing of markets as well as the changing regulatory environments that we will see with these companies in telecom and Internet, there are a lot of unknowns out there. For a number of publicly-traded companies, it is a question of whether they will survive or not. A big part of the job right now is re-assuring clients about their investments. The challenge for us is that this pandemic came out of left field. We had been anticipating a correction this time next year. A number of prognosticators were predicting another Trump presidency in November 2020 and, with it, a rally this year. Most thought that the market would hang in there this year. No-one thought that this Black Swan of a virus called Novel Coronavirus (COVID-19) would cause the carnage that it has caused to the financial markets and the global economy. But, history tells us that every ten years or so there is a correction of some sort. And some of those events aren’t all that material. This, too, will pass. With evaluations having been as high as they have been for as long as they have been, the higher the multiple, the headline doesn’t have to be much to spook the market. That’s what we’ve run into here. We believe that most institutional investors were anticipating some sort of a pull-back. But, it’s come as a surprise that it took something as seemingly stupid as a trivial virus from China that made its way to Europe and, ultimately, North America. President Trump has been the coronavirus-denier-in-chief. It wasn’t taken as seriously in Canada as it should have been either, at the outset.
I would like I think July is when we’re going to start to see that pick up. So three to four months from now.
I personally think a change to a Democrat causes less risk. Other people might disagree with me. Now, it depends on which Democrat, like I’m talking about a moderate, not Bernie Sanders. But if it was Biden, for example, I would think that was less risk than Trump. I’m talking at the margin. Maybe 15%.
Maybe I would say quality cyclicals will do better. I’m trying to balance. Obviously, some of the names have held up better. Once the recovery comes there’s a bit of a inflection where the ones that were beaten up will have catch-up trades. Badger Daylighting is a good example of a quality cyclical where it’s been hit hard because they’re seeing big revenue headwinds, but no balance sheet risk. Boyd has held in better, so Boyd would be in that camp as well.
Some of the staples and the independent power producers are resilient companies. Companies like Jamieson Wellness, Andlauer Healthcare Group and Boralex Inc continue to be resilient.
I would move into high quality names. You’re seeing names that are never cheap, like Fastenal. It doesn’t look like it’s a kind of a super bargain, but where it’s at now is probably the cheapest I’ve ever seen it. I’m seeing a lot of those that are rarely cheap and have gotten better.
I’m thinking we maybe have another month or so where things could get worse here in terms of the market and everything, but hopefully that’s going to find a bottom in one to two months or so.
I think a change in administration to a democrat will increase the risk. I think it’s just minor at this point given who’s likely to be running against Trump. So like 25% or something like that.
I think Fastenal will be resilient just because they’re the best of breed industrial distributor. They haven’t sold off nearly as badly as some of the others but once you start seeing better data, those guys will take off for sure.
I think Trane Technologies will be resilient because I think they have better investor sentiment whether that’s right or wrong. Johnson Controls also. Either way, both those guys with their HVAC business will benefit from their ESG plays and their strong growth potential. So I think those guys will both do well.
The homebuilders like DR Horton and Lennar should do well. Horton will have the stronger growth so Horton will probably be slightly ahead of Lennar. Although Lennar has a hidden multifamily business, which I think it’s not well known, and once that thing starts maturing, it is really going to help the stock.
I would say Fastenal has cyclical end markets but distributors have counter cyclical free cash flow. They just draw down their inventory and you actually see free cash flow spike in times like this and they can use that for buybacks, special dividends or M&A at depressed multiples, so I think Fastenal will be the most resilient especially among distributors out there.
Masco will be resilient now that they’re just providing plumbing fixtures, paint and that sort of thing, which is less cyclical. You may delay a complete kitchen remodel, where you’re not buying cabinets or flooring, but you’re still probably going to replace plumbing fixtures if they break and you’re still willing to paint because it’s relatively inexpensive.
Masco sold their cabinets business and their windows businesses and are sitting on a ton of cash that they were going to buy back shares, but now they don’t necessarily have to. They have a cash hoard going into this, so they’ve got a good moat to protect them.
Deere & Co. has a cost cutting plan already in place and agriculture as an end market is resilient in itself. It also has good leadership.
AGCO has great management, proven ability to cut costs and good end market.
Volvo has I think has great leadership. The truck is like a heavily cyclical on market and so it’s quick to go down and it’s quick to come up so the cycles are faster. It has the best management team out of the names we cover.
Hochtief is a construction company, so you might want to think it’s not resilient but when I started following it, this was in 2007 then when the financial crisis came up, I was worried and talked to IR who said they hope that they will be able to dive through the problems with their huge order backlog. I didn’t believe it then but it did work out for them and I think that this time around, it might well be the same because they have a broad regional footprint. They are active in Australia and Central/East in London and Southeast Asia. They’re active in North America as well. They have 10% equity ratio, that’s the weak spot, but they have a huge order book. Basically 70% of their sales are coming from the orders and they have a very flexible cost structure because typically, the construction companies in the form of contractors, they source out between 60 to 90% of all the sales volume, which means that they can easily adapt to fluctuations in sales. I believe that also fluctuations in sales will be limited.
Heidelberg Cement was hit pretty hard by the 2008 2009 crisis. Bear in mind that this has been a crisis where single housing starts in the US have collapsed because this was the bubble which burst and still they made it to buffer EBITDA in a way that it was only down 25% which was a pretty good development, I would say. I think that the broad regional footprint also here and their very high margins should allow them to weather the storm pretty well because if you have high margins, you’re thin margins always make you typically more vulnerable in the crisis than high margins because there’s lower fixed costs typically relative to sales. I would definitely assume that the stock would be more resilient.
ATS is most resilient and will bounce back because of healthcare which is quite a growth area right now for obvious reasons. This company will do quite well. The stock is still trading at a premium relative to kind of the worst case potential outcomes. I think it feels that investors are ready to pay that premium just because they know that this is a business that will survive. If this thing is going to be 15 months or 24 months, these companies will still be there, which is not something you can say about a lot of other industries.
WSP, Stantec and Toromont are most resilient and will bounce back because these are high quality companies, undelivered balance sheets, very strong management, especially for WSP and Toromont.
About Brendan Wood International:
Brendan Wood International (BWI), formed in 1970, is a private partnership generating independent performance audits globally. Brendan Wood debriefs large institutional investors worldwide on a daily basis. There are 2000 investors in the investor panel collectively managing + $40 trillion invested in the 1400 companies on the BWI Index. Relying on real time performance intelligence, the firm advises public companies, institutional and activist investors, investment banks and broker dealers on strategy, performance and recruitment of TopGun talent. The firm’s partners have formally presented at 1000+ C level strategy meetings and corporate off sites in fifty cities. Brendan Wood founded the exclusive TopGun Club, a performance based institution.
We wish to emphasize that all reports, evaluations and assessments contained herein, represent Brendan Wood International’s subjective judgment and opinions, based on our years of experience and on information obtained by us in the course of our research. Much of the factual information contained in the reports has been obtained by us from third parties on whose responses we have relied in good faith, independent verification by Brendan Wood International being, under the circumstances, impossible. While we believe that you will find our reports to be an invaluable tool in formulating your own strategies and judgments, the foregoing should be borne in mind. Under no circumstances should any ratings or evaluations of individuals’ performances in these reports be considered as a sufficient basis for making decisions concerning the careers of individuals, including such matters as promotions, compensation arrangements, terminations, etc.
This report is not meant as investment advice and should not be interpreted as advising on the value of a company’s securities, the advisability of investing in, purchasing or selling any company’s securities or any other conclusion relating to investment/divestiture of a company’s securities. Finally, this report is not intended as an offer or solicitation for the purchase or sale of any company’s securities.
Related Links:
www.TopGunPress.com
www.brendanwood.com
@BrendanWoodIntl
Contacts:
Jordan Novak
Partner
Brendan Wood International
+1 416 924 8110
jnovak@brendanwood.com
Amanda Knott
Managing Director
Brendan Wood International
+1 416 924 8110
aknott@brendanwood.com
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