by Will Ashworth | October 7, 2013 1:49 pm
A little over a year ago I recommended three conglomerates to own — ones that weren’t named Berkshire Hathaway (BRK.B).
The trio’s average total return through October 4 is 33%, 14 percentage points higher than the SPDR S&P 500 (SPY). In an attempt to prove those picks were more than just dumb luck, I’m offering another round of picks. Here are three more conglomerates unrelated to Warren Buffett I think you should own.
This small-cap industrial conglomerate consists of five operating segments, its biggest being its food service equipment group, which contributed $395 million in revenue (56% of overall sales) and $39.5 million in operating profits (47% of overall operating profits) in fiscal 2013.
In terms of growth, its electronics products segment exhibited the biggest year-over-year increase in revenue (more than doubled) thanks to its 2012 acquisition of Meder Electronic, a German manufacturer of magnetic reed switches, which are often used in door sensors for alarm systems. Now the company’s second-largest segment, it’s making a major contribution to Standex International’s (SXI) overall profitability.
So what makes it worth the investment?
Over a seven-year period starting in 2007, the company repositioned itself by selling off eight businesses — responsible for 57% of its overall revenue — whose profits weren’t cutting it. In its place, Standex made 18 bolt-on acquisitions for a total cost of $251 million, returning $275 million to the top line. At its lowest point in fiscal 2009, its earnings had fallen to $1.32 per share. Four years later, they’re up to $3.51 — a 28% compound annual growth rate. It’s an entirely different business from a decade ago.
As I mentioned earlier, its food service equipment group is by far the biggest piece of the company’s business. Its customers include Starbucks (SBUX), 7-Eleven, and Kroger (KR). It manufactures everything required for a food service operation from walk-in coolers to refrigerators to commercial ovens.
While we’re not talking about huge growth in revenues or earnings, Standex is incredibly consistent. Without fail, it’s going to deliver 10% operating margins. That puts an earnings floor on its business.
Its stock is up 13.7% year-to-date through October 3 — 590 basis points less than the S&P 500. Over the past decade, it has achieved a total return of 17.9%, 657 basis points higher than the index. More importantly, over the last 11 years it’s had just one year of negative returns. Consistency is the name of the game for SXI.
One of the most successful value investors in the US is Mason Hawkins, CEO of Southeastern Asset Management, a Memphis-based money manager with $34 billion in assets under management. Hawkins buys stocks that are trading at no more than 60% of their intrinsic value.
While I have a hard time accepting that intrinsic value actually exists, Hawkins uses this arbitrary number to provide a large margin of safety when buying. His track record suggests the strategy works.
Southeastern’s biggest mutual fund is Longleaf Partners (LLPFX), an 18-stock portfolio invested amongst $7.7 billion. The fund’s largest position at 8% of the portfolio is Loews Corporation (L), a holding company run by the Tisch family whose interests include insurance, offshore drilling, oil pipelines, oil exploration and production, hotels and other equity investments.
Much like Hawkins, the Tisch family believes in value investing and doesn’t put money into play unless it expects a very good deal. That requires a lot of patience, but patient investors are the very best kind — just look at Warren Buffett.
I won’t bore you with the minutiae of each of Loews’ businesses. Suffice it to say, the Tisch family has a long history of building value for shareholders. In recent years — the past five out of six — its stock has underperformed relative to the S&P 500. That underperformance isn’t common over its 54-year history. That’s why Hawkins has been buying its stock since 2010. He expects the company to return to its market-beating performance.
If I could only own one stock for the next 20 years, Loews would be at the top of my list.
When recommending conglomerates, I like to go with at least one choice that’s a little out there. Grupo de Inversiones Suramericana S.A. (GIVSY) or Grupo Sura for short, is a Colombian holding company with investments in banking, insurance, asset management, food products, cement and others.
Although most people wouldn’t be familiar with the company — even those investing in Latin America — the company has traded on the Colombian Stock Exchange for 67 years. Americans can pick up the ADR over-the-counter with two ordinary shares per ADR.
Latin America is certainly fraught with problems: currency devaluations, chronic inflation, massive poverty. However, the middle class is growing. Between 2000 and 2010, the middle class population in Latin America increased by 48% to 152 million. Grupo Sura’s investments play directly into this profound demographic shift.
The company generates most of its revenue from dividends it receives from its various investments along with its portion of its equity investments. In fiscal 2012 Grupo Sura saw revenues increase 45% to $378.3 million, with net profits up 64% to $308.3 million. Over the past five fiscal years it has achieved 119% growth in its profits. In the second quarter (ended June 30, 2013), its revenues and net income grew 10% and 6% respectively. It’s definitely a vehicle of steady growth.
If you’re interested in Grupo Sura but don’t want to buy over-the-counter, a good option is to buy the Global X FTSE Andean 40 ETF (AND), which invests in the economies of Chile, Peru and Colombia. Grupo Sura has a weighting of 3.75% and its 44.1%-owned (voting rights) Bancolombia S.A. (CIB) has a weighting of 3.91%. The ETF hasn’t performed the best since its inception in February 2011, but I expect better times ahead.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.
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