This article discusses the top 10 stock picks of Charles Paquelet’s Skylands Capital at the end of the second quarter.
Charles Paquelet has been heading Skylands Capital since he started the fund in 2004. However, Skylands Capital’s origin can be traced back to 1983 when its predecessor firm Strong Capital Management launched the first of its five private investment portfolios.
Mr. Paquelet graduated from Case Western Reserve University’s Weatherhead School of Business in 1987 with a Bachelor of Science degree and then proceeded to get his MBA from Indiana University in 1989. He is also a CFA charterholder. Before joining Strong Capital Management, Mr. Paquelet worked as a financial analyst for B.F. Goodrich & Company.
At Strong Capital Management, Mr. Paquelet served as the portfolio manager for four mutual funds, an offshore hedge fund, two private investment partnerships and several separate accounts. In 2004, with support from Strong Capital Management’s owners and senior management, Mr. Paquelet led a management buyout of the former’s hedge fund business unit, resulting in the creation of Skylands Capital.
Skylands Capital’s Portfolio
Skylands Capital takes pride in doing on-ground research. According to the fund, its employees visit between 500 and 700 companies annually, talking to their management and evaluating opportunities. At the end of June, the fund revealed holding 148 positions in its 13F portfolio with an aggregate value of $682.115 million, a considerable decline from the $826.07 million aggregate value it had reported at the end of the first quarter. Skylands’s top 10 stock picks, which included names like Arch Resources, Inc. (NYSE:ARCH), General Motors Company (NYSE:GM) and Apple Inc. (NASDAQ:AAPL) accounted for over 45% of its portfolio’s aggregate value at the end of Q2. We will discuss those stocks in detail in this article.
Photo by Austin Distel on Unsplash
Our Methodology
To select Skylands Capital’s top 10 stock picks at the end of June, we looked at the fund’s most recent 13F filing submitted with the SEC. Including Skylands Capital, at Insider Monkey, we actively track the portfolios of 912 hedge funds and share our findings with our readers.
Best Stocks to Buy According to Charles Paquelet’s Skylands Capital
10. Grand Canyon Education, Inc. (NASDAQ:LOPE)
Skylands Capital’s Stake Value: $14,870,000
Percentage of Skylands Capital’s 13F Portfolio: 2.17%
Number of Hedge Fund Holders(Q1): 21
There was a noteworthy decline in smart money’s interest in Grand Canyon Education, Inc. (NASDAQ:LOPE) during Q1 as the number of hedge funds tracked by us that held the stock declined by around 25% in that period. After suffering a more than 50% decline between mid-2019 and March 2020, Grand Canyon Education, Inc.’s (NASDAQ:LOPE) has been mostly trading in the $70 to $100 range since then.
On August 4, Grand Canyon Education, Inc. (NASDAQ:LOPE) reported its FY2022 second-quarter numbers. Though the company managed to top analysts’ EPS estimates by $0.01, declaring $0.85 in non-GAAP EPS for the period, its revenue of $199.75 million was $1.31 million lower than analysts’ expectations. Additionally, for its fiscal Q3, Grand Canyon Education, Inc. (NASDAQ:LOPE) lowered its service revenue guidance. The company now expects Q3 service revenue to be between $207.3 and $209.3 million from the $209.8 million and $218.0 million range it had predicted earlier.
9. Oshkosh Corporation (NYSE:OSK)
Skylands Capital’s Stake Value: $15,531,000
Percentage of Skylands Capital’s 13F Portfolio: 2.27%
Number of Hedge Fund Holders(Q1): 28
Skylands Capital upped its stake in specialty vehicles manufacturer Oshkosh Corporation (NYSE:OSK) marginally by 4% during the second quarter. Oshkosh Corporation’s (NYSE:OSK) stock has declined by over 27% year-to-date but is still up almost 250% in the last decade.
Oshkosh Corporation (NYSE:OSK) was founded in 1917 in the town of Oshkosh in Wisconsin. The company had a long history of regular dividend payments before the financial crisis forced it to stop paying dividends in early 2009. In late 2013 Oshkosh Corporation (NYSE:OSK) resumed paying quarterly dividends and, since then, has managed to rebuild its reputation among the dividend investor community. Oshkosh Corporation’s (NYSE:OSK) annual dividend payment per share has grown by close to 12% annually in the last five years. The company currently pays 55.12% of its net income as dividends and, based on its current stock price, has a forward dividend yield of 1.78%.
8. Beacon Roofing Supply, Inc. (NASDAQ:BECN)
Skylands Capital’s Stake Value: $17,620,000
Percentage of Skylands Capital’s 13F Portfolio: 2.58%
Number of Hedge Fund Holders(Q1): 14
Skylands Capital has held a stake in Beacon Roofing Supply, Inc. (NASDAQ:BECN) for a very long time. As per regulatory filings, Skylands initiated its stake in the company for the first time in the third quarter of 2004. Beacon Roofing Supply, Inc. (NASDAQ:BECN) has been a distributor of residential and non-residential roofing materials and building products to contractors, home builders, and retailers since 1928.
For its FY2022 second quarter, Beacon Roofing Supply, Inc. (NASDAQ:BECN) reported earnings per share of $2.12 on revenue of $2.36 billion on August 4, beating analysts’ expectations by $0.15 and $80 million. During the quarter, the company saw y-o-y sales growth in all three of its line of business(LOB). While sales in the residential line of business grew 22%, non-residential and complementary sales were up by 40% and 19%, respectively, compared to the same quarter last year.
7. Owens Corning (NYSE:OC)
Skylands Capital’s Stake Value: $21,647,000
Percentage of Skylands Capital’s 13F Portfolio: 3.17%
Number of Hedge Fund Holders(Q1): 26
Owens Corning’s (NYSE:OC) stock has largely remained stable and rangebound during the last one year. However, hedge funds’ interest in the company seems to be on the decline. At the end of the first quarter, 26 hedge funds covered by us reported a stake in Owens Corning (NYSE:OC), down from 35 at the end of 2021.
Earlier this month, Owens Corning (NYSE:OC) disclosed acquiring Illinois-based spray polyurethane foam insulation manufacturer Natural Polymers for an undisclosed sum. Natural Polymers products are used for construction and building applications, and Owens Corning (NYSE:OC) expects to grow this business significantly in the coming years.
6. FMC Corporation (NYSE:FMC)
Skylands Capital’s Stake Value: $21,787,000
Percentage of Skylands Capital’s 13F Portfolio: 3.19%
Number of Hedge Fund Holders(Q1): 26
FMC Corporation (NYSE:FMC) was Skylands Capital’s sixth favourite stock pick at the end of June. Shares of FMC Corporation (NYSE:FMC) recently made their all-time high of $140.99 in April this year but have corrected almost 25% since then.
Aristotle Capital Management, an independent/employee-owned investment management organization, is also bullish on FMC Corporation (NYSE:FMC). In its first quarter 2022 letter to investors, here is what the firm said about the company:
“FMC is an agricultural sciences company providing solutions for the protection of crops from different pests. Its products are used by farmers to ensure bugs, weeds and fungi do not negatively impact their harvest. Headquartered in Philadelphia, Pennsylvania, the company has a rich history dating back to 1883 when inventor John Bean set out to build a better insecticide spray pump. Over the decades, through acquisitions, FMC became a disparate collection of chemical companies. FMC has transformed itself to solely focus on crop chemicals, having acquired DuPont’s crop chemicals portfolio in 2017, and completed the separation of its lithium business in 2019. FMC is now one of the largest patented crop protection companies globally.
Its presence is balanced both geographically around the world, as well as from a crop exposure standpoint, with soybeans being the largest at roughly 20% of total revenue. In terms of products, FMC’s portfolio skews toward insecticides, which account for over 60% of its revenue. The remainder are herbicides (~25%), as well as fungicides and other crop chemicals (~15%).
High-Quality Business
Some of the quality characteristics we have identified for FMC include:
- Strong portfolio of brands allowing for differentiation outside of price, as many customers refer to the brand name, not the active ingredient;
- Strong competitive position with many products being either protected by patents or niche products, perhaps unlikely to be targeted by generics;
- Oligopolistic industry, as FMC is one of just five companies that collectively contribute the majority of research and development performed on crop protection chemicals; and
- Capable management team with operational experience and ability to commercialize new products.
Attractive Valuation
We believe FMC’s current stock price is offered at a discount to our determination of the company’s intrinsic value given our estimates of both enhanced margins and higher earnings on a normalized basis.
Compelling Catalysts
Catalysts we have identified for FMC, which we believe will cause its stock price to appreciate over our three- to five-year investment horizon, include:
- FMC is poised to benefit from its focus on crop chemicals, as yield gains are needed to support rising food consumption in emerging markets;
- Continued margin improvements from its product pipeline. These new products should be particularly effective against insects, weeds and fungi that have grown resistant to traditional crop chemicals; and
- Further cross-selling of FMC products to DuPont customers. For example, in Argentina, 78% of the customers it gained from the DuPont acquisition were unique to FMC, providing cross-selling opportunities.”
5. General Motors Company (NYSE:GM)
Skylands Capital’s Stake Value: $27,946,000
Percentage of Skylands Capital’s 13F Portfolio: 4.09%
Number of Hedge Fund Holders(Q1): 76
Though Skylands Capital increased its stake in General Motors Company (NYSE:GM) by 6% during the second quarter, GM remained the fund’s fifth-largest holding at the end of that period. General Motors Company (NYSE:GM) has been trying to increase its portfolio of Electric vehicles(EV) over the past few years.
To ensure a continuing supply of lithium, which is heavily used in EV batteries and has witnessed an exponential rise in demand over the past few years, General Motors Company (NYSE:GM) recently signed a deal with Livent Corporation (NYSE:LTHM). According to the terms of the agreement, General Motors Company (NYSE:GM) will get a 6-year guaranteed supply of lithium by prepaying Livent Corporation (NYSE:LTHM) $198 million.
General Motors Company (NYSE:GM) recently raised $2.25 billion in debt through two debt offerings. It raised $1 billion through senior unsecured notes yielding 5.4% due in 2029 and another $1.25 billion through unsecured notes yielding 5.6% due in 2032. The company plans to use the proceeds from these offerings to finance or refinance the projects it has mentioned under its Sustainable Finance Framework.
4. Crown Castle International Corp. (NYSE:CCI)
Skylands Capital’s Stake Value: $43,748,000
Percentage of Skylands Capital’s 13F Portfolio: 6.41%
Number of Hedge Fund Holders(Q1): 50
The number of hedge funds covered by us that held a stake in Crown Castle International Corp. (NYSE:CCI) at the end of March increased to 50 from 39 at the end of 2021. Among them, billionaire Ken Fisher’s Fisher Asset Management held the most number of shares of the company at 2.76 million, valued at close to $510 million at the end of the first quarter.
Crown Castle International Corp. (NYSE:CCI) is the second largest specialized REIT by market cap currently in the United States. It operates approximately 80,000 route miles of fiber and 40,000 cell towers across the country. On July 22, Deutsche Bank analyst Matthew Niknam increased his price target to $185 from $183 but maintained a “Hold” rating on the stock.
3. Arch Resources, Inc. (NYSE:ARCH)
Skylands Capital’s Stake Value: $45,226,000
Percentage of Skylands Capital’s 13F Portfolio: 6.63%
Number of Hedge Fund Holders(Q1): 45
Coal mining company Arch Resources, Inc. (NYSE:ARCH) has seen a multifold increase in its stock price since late 2020 on the back of increasing demand for coal globally. Though the stock has cooled down quite a bit from the all-time high of $183.53 it made recently, it is still trading up by over 42% year-to-date.
Arch Resources, Inc. (NYSE:ARCH) has announced two massive special dividends of $7.86 and $5.75 per share for its shareholders since the beginning of this year. These special dividends are on top of the current $0.25 per share dividend the company pays every quarter. However, several analysts think that Arch Resources, Inc.’s (NYSE:ARCH) stock is overvalued at the moment solely due to the company’s recent spectacular financial performance. According to them, the stock can fall significantly once the demand for coal, which is now considered a fuel of last resort, starts to cool off.
2. Apple Inc. (NASDAQ:AAPL)
Skylands Capital’s Stake Value: $45,768,000
Percentage of Skylands Capital’s 13F Portfolio: 6.7%
Number of Hedge Fund Holders(Q1): 131
Smartphone giant Apple Inc. (NASDAQ:AAPL) has remained Skylands Capital’s second favourite stock pick for over two years. During that time, shares of Apple Inc. (NASDAQ:AAPL) have appreciated by more than 90%.
Apple Inc.’s (NASDAQ:AAPL) sales from its services business, which primarily constitutes revenues from its App store, has shown double-digit growth for the past several years. However, as that business matures and its growth flattens out Apple Inc. (NASDAQ:AAPL) is looking at other avenues for growth, such as Apple TV+ and Apple Card.
Apple Inc. (NASDAQ:AAPL) recently announced that as part of its promotional effort for its new animated movie ‘Luck’, users of Apple Card could get a free Apple TV+ subscription for three months.
1. Union Pacific Corporation (NYSE:UNP)
Skylands Capital’s Stake Value: $57,605,000
Percentage of Skylands Capital’s 13F Portfolio: 8.44%
Number of Hedge Fund Holders(Q1): 89
Skylands strengthened its stake in its top stock pick Union Pacific Corporation (NYSE:UNP) by purchasing an additional 28,300 shares during the second quarter. Shares of the railroad major have been on a consistent upward trajectory for the past many years. In the last 5 and 10 years, Union Pacific Corporation’s (NYSE:UNP) stock has appreciated by 121% and 275%, respectively.
Union Pacific Corporation (NYSE:UNP) has been a hot favourite among the dividend investing crowd for many years now. It has consistently increased its per-share dividend payout in the last 17 years. In the last five years alone, Union Pacific Corporation (NYSE:UNP) annual dividend has grown at a CAGR of close to 15%.
Out of the 18 analysts covering Union Pacific Corporation (NYSE:UNP) on Wall Street, 11 currently have a ‘Hold’ rating on the stock. The consensus price target for the stock among those 18 analysts is currently $248.48.
You can also look at Simon Sadler’s Segantii Capital is Bullish on These 10 Stocks and 7 Best Stocks to Buy According to Stephen Feinberg’s Cerberus Capital Management
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Disclosure: None. 10 Best Stocks to Buy According to Charles Paquelet’s Skylands Capital is originally published on Insider Monkey.
