The Winklevoss twins: The Value Investing Congress was last week, and we at Insider Monkey were in attendance. While the Winklevoss twins got most of the social media attention, there were some great stock picks from this year’s batch of presenters. If you did want to create a so-called “VIC Portfolio,” here’s how to start it with four specific names.
Supremex and Glentel
This Canada-listed small-cap duo comes courtesy of Guy Gottfried and Rational Investment Group. Supremex Inc (TSE:SXP) is an envelope manufacturer that has a dominant market presence in Canada and the potential to double its dividend. Glentel Inc. (TSE:GLN) is a wireless communications company that is cheap, has a solid dividend, and massive growth potential due to "new relationships not yet contributing to results," according to Gottfried.
In his presentation appropriately titled “Needles in a Haystack,” the fund manager listed three reasons why investors should consider Glentel: (1) its management and capital allocation strategies are shareholder friendly, (2) the aforementioned growth potential, specifically through its connections with Target and BJ’s, and (3) a “depressed valuation.” Gottfried calculates that Glentel trades at a deeply discounted price-to-free cash flow multiple of 7.5x. Industry norms—depending on the classification—range between two and three times higher than this level.
Supremex, meanwhile, is a bit of a different type of play. Gottfried argues that low liquidity and “sparse” analyst coverage leave this stock underappreciated. He thinks that the company, which has a payout ratio below 25%, can up its dividend twofold and yield 15% a share.
At Insider Monkey, we tout United Rentals, Inc. (NYSE:URI) pretty highly and for good reason. The stock was our market-beating small-cap strategy's No. 1 stock pick for at least four consecutive quarters, and shares of the rental behemoth are up 54.5% over the past twelve months.
The crux of any bullish thesis on United Rentals is founded in the belief that a U.S. economic recovery will continue, particularly in the construction markets. What sets URI apart is the fact that it absolutely dominates the rental equipment industry in a post-recessionary macro environment where consumer-spending habits have changed significantly. In layman's terms, preferences have switched to favor rental equipment over the purchasingof actual big-ticket machinery, and one hedge fund manager explained this phenomenon in detail at last week's VIC.
Mick McGuire, manager of Marcato Capital Management, issued a presentation titled "Don't Buy This Recovery," with the word buy in italics, thus implying that investors should rent it with United Rentals instead. McGuire shared that he and his team like the company for five reasons: (1) favorable cyclical trends, particularly in the U.S. construction market, (2) the “secular shift toward renting,” (3) advantages of scale due to the RSC acquisition in 2012, (4) a “favorable” capital structure, and (5) a cheap valuation.
Regarding the last point, McGuire and Marcato estimate that United Rentals trades at a mere 4.0 times 2015 estimated EBITDA. This is about 23% below long-term averages.
This isn’t technically a VIC pick, but it’s still worth mentioning while we have you.
The most notable discussion at the conference might have been Donald Yacktman’s answer to a question about Microsoft Corporation (NASDAQ:MSFT). While the manager of Yacktman Asset Management gave a 14-page slideshow examining the process of “viewing stocks as bonds,” the real meat of his talk came when an attendee asked him why he prefers Microsoft to Apple Inc. (NASDAQ:AAPL). Yacktman stated emphatically that Microsoft’s margins are protected while Apple’s are not, primarily due to more competition in the smartphone space.
In 2013, at least, Yacktman has been dead on, as shares of Microsoft are up nearly 23% year-to-date. Apple, on the other hand, has seen its stock price drop by 8% over this time frame. See Yacktman’s full slideshow here, and check back with Insider Monkey for more hedge fund updates and maybe even some info on the Winklevoss Twins.
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