One of my favorite ways to find investment ideas, whether it be smaller value stocks or larger mega-caps, is to look through the holdings reports of mutual funds and exchange-traded funds (ETFs). They’re a treasure trove of information.
Now, before jumping in, it’s important to remember that mutual funds report their holdings on a monthly or quarterly basis. Although you might be looking at an actively managed fund, the holdings might have changed significantly since publication.
For this article, I’ll look at the Janus Henderson Small-Mid Cap Value Fund (MUTF:JVSIX), an actively managed portfolio of 52 stocks with a weighted-average market capitalization of $5.7 billion.
As I said, reported portfolios tend to get outdated quickly. In the case of JVSIX, it has a portfolio turnover of 150%. This means the entire portfolio turns over 1.5 times per year. That’s a lot.
So, to reduce the possibility of buying something that’s past its due date, I’ll select seven smaller value stocks that have positive trailing 12-month (TTM) free cash flow (FCF) and an FCF yield of at least 4%, which signifies a reasonable amount of value is present.
- Casey’s General Stores (NASDAQ:CASY)
- Commercial Metals (NYSE:CMC)
- Nomad Foods (NYSE:NOMD)
- MSC Industrial (NYSE:MSM)
- WNS Holdings (NYSE:WNS)
- CDK Global (NASDAQ:CDK)
- Leggett & Platt (NYSE:LEG)
I recommend you try this process for yourself sometime. It’s a great way to develop ideas for your portfolio.
Value Stocks to Buy: Casey’s General Stores (CASY)
Casey’s made an acquisition in March with its long-time rival, Alimentation Couche-Tard (OTCMKTS:ANCUF). The Canadian-based owner of Circle K Stores agreed to sell 49 stores in Oklahoma to Casey’s for $39 million in cash.
Couche-Tard is selling 306 of its North American stores, including 269 in the U.S. and 37 in Canada. The sale of these stores is part of a network optimization strategy it began last fall. Couche-Tard has more than 14,200 stores in 26 countries. It won’t miss the locations.
For Casey’s, it means a major addition to its Oklahoma footprint of stores. Right now, I estimate it has approximately 45 in the state. The addition of the Couche-Tard stores will almost double the number of stores in Oklahoma.
That’s excellent news if you live in Oklahoma and own CASY stock.
If you’re a business historian, you might remember that Couche-Tard tried to buy Casey’s back in 2010. It ultimately dropped its $38.50 a share bid for the convenience store chain. 7-Eleven was also in the mix at one point, but it too dropped out of the hunt.
Commercial Metals (NYSE:CMC)
If Joe Biden’s infrastructure plan goes ahead, Commercial Metals should be very busy over the next few years. That’s because it’s the No. 1 producer of rebar in the U.S. and Poland.
The company’s vertically integrated operations enable it to be a low-cost producer of products used in highways, bridges, airports, buildings and much more in both the U.S. and Europe. The infrastructure market accounts for 37% of its shipments, with non-residential shipments second-highest at 32%. Residential (16%) and OEM/agriculture (15%) round out the sales mix.
Both year-over-year and sequentially, its sales and earnings continue to grow. In large part, that’s due to its vertical integration, which starts with collecting raw scrap for its milling operations that turn out straight rebar and other construction-related products. The rebar is then sent to 58 locations across the U.S. to be cut and shaped to a project’s specifications.
The trick is doing this efficiently. Commercial Metals achieves this goal and shareholders profit as a result. Over the past five years, CMC has had an annualized total return of 15.4% through April 7. Year-to-date, it’s up 52.7%.
There appears to be more room to grow.
Nomad Foods (NOMD)
When it comes to frozen foods, if you live in Europe, there’s a good chance you’re buying products from Nomad Foods. With brands such as Birds Eye, Findus, iglo, Aunt Bessie’s, and Goodfella’s, it’s got your last-minute dinner choices covered.
In June 2017, I recommended Nomad among a group of seven stocks to buy at any price. Well, that’s a bit of a misnomer. Each of the seven stocks I picked was from a certain dollar range. In Nomad’s case, it was between $10 and $20. At current prices, it’s basically doubled in price in less than four years.
I liked it, in large part, because it was a creation of Martin Franklin, one of the brightest financiers and serial acquirers anywhere on the planet. It didn’t hurt that Bill Ackman was a big shareholder, too.
Today, Franklin still owns 7.4% of the company. That’s a good thing.
On March 29, Nomad announced it would acquire the frozen food business of Fortenova Group for 615 million euros ($732 million). The purchase gives it two excellent brands: Ledo and Frikom, both No. 1 in market share in many Baltic countries, including Croatia, Hungary, and Slovenia.
It is the company’s first foray into ice cream. The purchase ought to leave shareholders anything but cold.
Value Stocks to Buy: MSC Industrial Direct (MSM)
A year ago February, MSM was one of 10 mid-cap dividend stocks to buy that gave investors both income and capital appreciation over the long haul. At the time, it was yielding 4.2% and down 8% over the past 52 weeks. I considered the distributor of metalworking and MRO (maintenance, repair and operations) products and services a nice value play.
A year later, it’s yielding 3.3% and is up 60.5% over the past 52 weeks. That’s quite a turnaround. However, despite the gains, the 6.4% FCF yield suggests it’s still a value play.
When I recommended MSM, it had begun a three-part plan to reignite growth.
On April 7, the company reported Q2 2021 results that suggested its plans to improve the businesses’ top-and-bottom lines is working. Despite choppy market conditions caused by the novel coronavirus, it reported sales that were down by 1.5% to $774.0 million, while adjusted net income rose 1.1% over last year to $80.5 million.
“The improving environment and continued execution of our growth and cost take-out programs are combining to position us well. We are now emerging as a stronger company and are poised to reaccelerate growth,” CEO Erik Gershwind said in its earnings announcement.
It’s a work in progress worth considering.
WNS Holdings (WNS)
WNS Holdings is a global leader in business procurement management (BPM) solutions. That means it puts its nearly 43,000 employees worldwide to work, helping large organizations work more efficiently while saving money on all the products and services they require to run their businesses.
The company reported third-quarter results in January. Revenues and earnings were generally flat to a year earlier. However, it was able to add nine new clients in Q3 2021 and expand its relationship with 14 existing clients.
In 2021, it expects revenues and earnings to fall from 2020. It’s not surprising then that its stock is down 0.4% YTD compared to 8.8% for the U.S. markets as a whole.
Long term, however, WNS has performed admirably for shareholders, up 22% on an annualized basis over the past decade.
The X’s and O’s of how it makes money is very mundane. Its history is anything but.
WNS started in 1996 as a division within British Airways. It got so good at procurement that it started providing these services to third parties in 2003. Around the same time, Warburg Pincus acquired a controlling stake and installed a new management team. By July 2006, it was a public company. Warburg Pincus sold off its last shares in February 2013.
I think they did alright on their investment.
CDK Global (CDK)
Many things go into the buying and selling of cars – much of it behind the scenes and out of plain view of the customer. CDK Global has played a part in this process for more than 40 years.
Like many investors, I had never heard of CDK Global until I saw the holding in Janus Hendersons’ mutual fund. It turns out that the company uses software and technology to deliver seamless, workflow-driven solutions for its automotive customers.
It makes money by selling software subscriptions to automotive retailers. Its flagship product is Dealer Management System (DMS), a suite of products covering virtually every nook and cranny of an automobile dealership. Whether it’s sales, service, parts, auto financing, or something as mundane as document management, CDK Global’s got an application.
As you can imagine, it’s a competitive business, so innovation remains an important part of its focus.
Recently, it added PayMaple to the CDK Global Partner Program, which is 430 partner companies strong, providing more than 600 applications auto dealers can use to run their businesses.
On March 1, CDK Global announced the sale of its international business to private equity firm Francisco Partners to focus on its North American business. The company got a good price – 15 times adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) or $1.45 billion – it will use the $1.3 billion in after-tax proceeds to cut its debt by close to half what it is now.
Better times lie ahead.
Value Stocks to Buy: Leggett & Platt (LEG)
If you like dividend stocks, Leggett & Platt should be to your liking; it yields 3.5%. It recently increased its dividend for the 49th consecutive year. The average dividend yield for the S&P 500 is less than half that.
When I think of Leggett & Platt, beds and mattresses always come to mind. However, the company is a lot more. It also makes car-and-truck seating support solutions, furniture, and even carpet padding.
To say that 2020 was a challenging year would be an understatement. They say what doesn’t kill you makes you stronger. If that’s the case, Leggett & Platt ought to have an excellent year ahead of it.
In 2020, sales fell by 10% to $4.28 billion, while adjusted earnings per share fell 17% to $2.13. On the bright side, it finished 2020 with net debt of $1.55 billion, 17% lower than in 2019 and just 2.44 times its 12-month adjusted EBITDA.
Looking ahead, it expects sales of $4.75 billion in 2021, with earnings of $2.45 per share, both at the midpoint of its guidance.
The company hasn’t rewarded shareholders all that much over the past decade. I could see that changing. In the meantime, get paid 3.5% to wait for its stock to come around.
That’s what value stocks are all about.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
