10 Long-Term Stock Picks of Skylands Capital

Published on August 22, 2022 at 9:32 am by Tim Frederick in Hedge Funds, News

In this article we present the list of 10 Long-Term Stock Picks of Skylands Capital.

Charles Paquelet’s Skylands Capital is a Milwaukee-based asset management firm that was founded in 2004 by Paquelet, a finance industry veteran and chartered financial analyst who previously served as a principal at Strong Capital Management, Inc., where he managed several funds and accounts.

Prior to that role, Paquelet was a financial analyst for B.F. Goodrich & Company. Paquelet earned a B.S. from Case Western Reserve University’s Weatherhead School of Business and an M.B.A. from Indiana University.

One of Skylands Capital’s core philosophies is that the shares of companies fluctuate far more than their underlying businesses. The firm seeks to capitalize on those fluctuations by trading around a group of core positions, which explains why the firm has held many of its positions for 5-10 years.

It also believes that the competency of companies’ management teams can’t be underestimated, which is why it typically meets with more than 500 management teams annually to gain insight into their strategies, competitive advantages, and growth prospects before settling on any investment decision.

In the second quarter, Skylands Capital uncovered 15 companies that it liked enough to add to its 13F portfolio, while selling off 13 of its former holdings. That level of activity amounted to less than a 20% turnover rate, which the fund hasn’t topped in two years. The market value of its 13F portfolio stood at $682 million on June 30, while its assets under management was $889 million as of March 23.

Skylands Capital’s holdings have been held for over 21 quarters, or more than five years on average, showing the long-term conviction it has in many of its investment decisions. In this article, we’ll take a look at its ten favorite long-term picks, which are companies that the fund has owned for at least five years. General Motors Company (NYSE:GM), Apple Inc. (NASDAQ:AAPL), and Crown Castle International Corp. (NYSE:CCI) are three of the long-term stock holdings of Skylands Capital that the fund maintains a great deal of conviction in.

Photo by Alexandr Bormotin on Unsplash

Our Methodology

The following data is gathered from Skylands Capital’s Q1 13F filing with the SEC. We follow hedge funds like Skylands Capital because Insider Monkey’s research has uncovered that their consensus stock picks can deliver outstanding returns.

All hedge fund data is based on the exclusive group of 900+ funds tracked by Insider Monkey that filed 13Fs for the Q1 2022 reporting period.

Long-Term Stock Picks of Skylands Capital

10. Norfolk Southern Corp. (NYSE:NSC)

Value of Skylands Capital‘s 13F Position: $13.1 million

Number of Hedge Fund Shareholders: 48

General Motors Company (NYSE:GM), Apple Inc. (NASDAQ:AAPL), and Crown Castle International Corp. (NYSE:CCI) are some of the most prominent long-term holdings of Charles Paquelet. One of his less well-known long-term holdings is railroad operator Norfolk Southern Corp. (NYSE:NSC), which he’s owned since the second quarter of 2010.

Paquelet trimmed his fund’s stake in NSC by 4% during Q2, to 57,670 shares. Norfolk Southern Corp. (NYSE:NSC) shares have gained nearly 400% since July 2010. Overall hedge fund ownership of NSC fell by 19% during the third quarter of 2021. Thomas Bailard’s Bailard Inc is another long-term shareholder of NSC’s, dating back to 2008.

Norfolk Southern Corp. (NYSE:NSC)’s $3.3 billion in revenue during Q2 topped estimates, though its $3.45 in EPS fell slightly short. Widespread rail shipping disruptions prompted the Surface Transportation Board to request details from carriers like Norfolk Southern related to how they plan to restore service. The company is working on returning service to 2019 levels by launching greater incentives for new recruits to combat staffing challenges, as well as by implementing a new model to oversee and control its daily operations.

9. Oshkosh Corporation (NYSE:OSK)

Value of Skylands Capital‘s 13F Position: $15.5 million

Number of Hedge Fund Shareholders: 28

Skylands Capital’s raised its stake in Oshkosh Corporation (NYSE:OSK) by 4% during Q2, pushing the size of its holding to 189,075 shares. A major supplier of light defense trucks to the U.S military, Oshkosh has been a member of Skylands’ 13F portfolio since Q4 of 2010. OSK shares have gained a modest 145% since the end of 2010.

Supply chain challenges and rising inflation haven’t done Oshkosh Corporation (NYSE:OSK) any favors in Q2, as its adjusted EPS plunged by 80% year-over-year to $0.41, prompting management to cut the company’s 2022 EPS guidance by 36% at the midpoint of the former guidance, to $3.50. Things could ultimately become even worse, as several analysts are predicting a machinery downturn that companies don’t seem to be modeling for yet. Deutsche Bank analyst Nicole DeBlase lowered her price target on OSK to $101 from $118 in July, while keeping a ‘Buy’ rating on shares.

Aristotle Capital Management Value Equity laid out its bullish thesis on Oshkosh Corporation (NYSE:OSK) in the fund’s Q1 2022 investor letter:

“Oshkosh is typically a North American market share leader in its respective equipment types and supplies a wide swath of industries and end customers. For instance, it is the global leader in aerial work platforms through its JLG brand. It is also the largest light defense truck supplier to the U.S military, with its Joint Light Tactical Vehicle (JLTV) chosen to replace the Humvee in 2015.

We had previously owned Oshkosh in our Value Equity portfolios for the better part of a decade. As long-time admirers of the company’s quality characteristics, and through our diligent process continuing to closely follow as management creates ways to improve, we have once again found an opportunity to be investors.

High-Quality Business

Some of the quality characteristics we have identified for Oshkosh include:

-Pricing power stemming from its leading market share positions in nearly every business segment, vital nature of its products and industry concentration;

-Diversified product line and customer base, as well as high barriers to entry in many of its businesses, such as fire trucks, aircraft rescue vehicles and defense; and

-Consistent positive FREE cash flow generation, even during the 2008 financial crisis when most of its segments faced the steepest downturn in a generation.

Attractive Valuation

Through market share gains, we expect operating margins and FREE cash flow to be higher on a normalized basis. Thus, we believe Oshkosh shares are offered at a discount to our estimates of the company’s intrinsic value.

Compelling Catalysts

Catalysts we have identified for Oshkosh, which we believe will cause its stock price to appreciate over our three- to five-year investment horizon, include:

-Further innovation and technological improvements, particularly in the electrification of its vehicles, which could drive additional demand;

-Continued rollout of its recently awarded U.S. Postal Service vehicle contract and market share gains for its JLG aerial work platforms;

-Increased international orders for its JLTV military trucks as countries around the world replace aging Humvee fleets. In addition, further development of its aftermarket business can help improve profitability; and

-Strong balance sheet can give management the ability to run a balanced capital allocation strategy that advances organic growth and returns cash to shareholders.”

8. Beacon Roofing Supply, Inc. (NASDAQ:BECN)

Value of Skylands Capital‘s 13F Position: $17.6 million

Number of Hedge Fund Shareholders: 14

Beacon Roofing Supply, Inc. (NASDAQ:BECN) represents one of Skylands Capital’s oldest holdings, dating all the way back to the third quarter of 2004, when the company first went public through an IPO. BECN shares have gained 465% in the 18 years since. While Skylands Capital remains a stalwart shareholder of the company, overall hedge fund ownership of BECN has fallen to an 8-year low.

Beacon Roofing Supply, Inc. (NASDAQ:BECN) delivered record results on both its top and bottom lines during Q2, despite missing consensus earnings estimates by nearly 10%. Revenue came in at $2.36 billion during the quarter, while EPS was $2.12. The company also achieved record margins during quarter and grew its adjusted EBITDA for the 10^th straight quarter on a year-over-year basis.

While the residential housing market is showing weakness, demand for roofing remains steady and is being augmented by rapidly rising prices due to a supply/demand mismatch. Beacon Roofing Supply, Inc. (NASDAQ:BECN) isn’t the only company in the field to be achieving record margins, as commercial roofing margins are reportedly at an all-time high according to William Blair analyst Ryan Merkel. He nonetheless downgraded BECN to ‘Market Perform’ from ‘Outperform’ in July, believing its gross margins have peaked and that the housing market slowdown will intensify into 2023.

7. Owens Corning (NYSE:OC)

Value of Skylands Capital‘s 13F Position: $21.6 million

Number of Hedge Fund Shareholders: 26

Owens Corning (NYSE:OC) has been in Skylands Capital’s 13F portfolio since Q2 of 2009. The firm raised its stake in the fiber glass manufacturer by 4% during Q2, lifting it to 291,300 shares. OC shares have gained 659% since the middle of 2009.

Owens Corning (NYSE:OC)’s revenue hit $2.60 billion in Q2, slightly topping estimates, while its $3.83 in adjusted EPS beat estimates by 15%. The company expects the residential housing and commercial and industrial markets to remain positive in the current quarter, which may be overly bullish given the already observed weakness in residential housing, which was off by 1.6% in June.

Barclays analyst Matthew Bouley also seems unconvinced, lowering his price target on Owens Corning (NYSE:OC) to $91 from $100 in mid-July and stating that the current earnings season would likely herald an inevitable cycle of downward estimate revisions for companies operating in the building products space. He expects those downward revisions to intensify into 2023 and has an ‘Equal Weight’ rating on OC shares.

6. FMC Corporation (NYSE:FMC)

Value of Skylands Capital‘s 13F Position: $21.8 million

Number of Hedge Fund Shareholders: 26

Closing out the first part of the list is FMC Corporation (NYSE:FMC), which Skylands Capital has held in its portfolio since Q3 2008. FMC shares have gained 463% since October 2008. As with BECN, other hedge funds aren’t maintaining the same level of conviction in FMC as Skylands, as the stock has fallen to a 6-year low in hedge fund ownership.

FMC Corporation (NYSE:FMC) shares are now down slightly in 2022 after being up by as much as 27% in mid-April, partly due to fertilizer prices slumping over the last month. FMC’s revenue hit $1.45 billion in Q2, topping estimates by $120 million, while its adjusted EPS was $1.93, a $0.05 beat. Adjusted EBITDA was 3% higher year-over-year, with cost inflation partially offsetting price increases. However, KeyBanc analyst Aleksey Yefremov expected Q2 results for chemical companies to be strong, while warning that Q3 and Q4 results are likely to be tougher. He nonetheless has an ‘Overweight’ rating and $122 price target on FMC shares.

Aristotle Capital Management Global Equity likes FMC Corporation (NYSE:FMC)’s valuation and laid out some of the company’s positive traits in its Q1 2022 investor letter:

“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.”

In the second-half of this article we’ll take a look at Skylands long-term stakes in General Motors Company (NYSE:GM), Apple Inc. (NASDAQ:AAPL), and Crown Castle International Corp. (NYSE:CCI), among other stocks, and see how those stocks have performed during the fund’s ownership run.

5. General Motors Company (NYSE:GM)

Value of Skylands Capital‘s 13F Position: $27.9 million

Number of Hedge Fund Shareholders: 77

Charles Paquelet’s Skylands Capital has been a General Motors Company (NYSE:GM) shareholder since the final quarter of 2010, when the company emerged from bankruptcy protection. Despite transforming itself into one of the better run car companies in the U.S since its bankruptcy, GM shares have gained just 5% in the nearly 12 years since its re-emergence on the public markets.

Chip shortages have weighed on General Motors Company (NYSE:GM)’s ability to push out vehicles, particularly its high-end and high-margin trucks and SUVs. That’s particularly unfortunate for the carmaker given the pent-up demand for those vehicles, as dealers are averaging just 15 and 10 days of supply for the company’s pickups and SUVs respectively. The result was a 43% plunge in operating profit during Q2, to $2.3 billion.

The Diamond Hill Large Cap Fund owns over 11 million GM shares, but cautioned potential General Motors Company (NYSE:GM) investors in its Q1 2022 investor letter:

“General Motors—and the auto industry in general—continues to face headwinds related to supply chain disruptions and raw material cost inflation. In addition, uncertainty surrounding global energy markets due to inflation and the conflict in Ukraine has created a greater economic burden on consumers, which tends to slow automotive sales.”

4. Crown Castle International Corp. (NYSE:CCI)

Value of Skylands Capital‘s 13F Position: $43.7 million

Number of Hedge Fund Shareholders: 50

Crown Castle International Corp. (NYSE:CCI) has had a place in Skylands Capital’s portfolio since the second quarter of 2004, making it one of the firm’s three oldest holdings. CCI shares have gained 1,152% over the past 18 years. Hedge fund ownership of CCI hit a 6-year high in the first quarter, rising by 28% quarter-over-quarter.

Crown Castle International Corp. (NYSE:CCI) owns a network of more than 40,000 towers and 85,000 routes of fiber that it leases to wireless service providers. Its towers business continues to deliver impressive organic growth and requires minimal investment to maintain. On the other hand, its small cells division isn’t providing any value and is in fact dragging down the company’s return on invested capital, which currently sits at just 5.88%, while the company’s peers are generally above 10%.

The ClearBridge Investments Global Infrastructure Income Strategy noted that Crown Castle International Corp. (NYSE:CCI) was one of its biggest Q1 detractors, but remains bullish on the communications infrastructure sector, having this to say in its Q1 2022 investor letter:

“U.S. communications company Crown Castle International (NYSE:CCI) was the largest detractor from quarterly performance. Crown Castle is the leading independent owner and operator of wireless communications infrastructure in the U.S. with a portfolio of approximately 40,000 towers. The stock underperformed as, driven by rising interest rates, investors rotated away from defensive into more value-oriented sectors. Communications infrastructure remains attractive, however, as companies continue to deploy greater capital spend to support the strong tailwinds from 5G.”

3. Arch Resources, Inc. (NYSE:ARCH)

Value of Skylands Capital‘s 13F Position: $45.2 million

Number of Hedge Fund Shareholders: 45

Arch Resources, Inc. (NYSE:ARCH) is one of Skylands’ newer holdings in terms of the stocks on this list, dating back to Q4 2016, when the company first landed on the stock market. ARCH shares have gained 109% in the nearly six years since its public debut. Skylands cut its stake in ARCH by 14% during Q2, leaving the fund with 316,070 shares.

Arch Resources, Inc. (NYSE:ARCH) achieved record net income during Q2 on the strength of record coke realizations and margins. Revenue for the quarter hit $1.13 billion, while EPS was $19.30. The company is using its net income gains to strengthen its financial position and reward shareholders, paying down $136 million in debt during the quarter and raising its authorization for share repurchases to $500 million.

Nordstern Capital shared its bullish take on Arch Resources, Inc. (NYSE:ARCH) in the fund’s Q2 2022 investor letter:

“‘It’s atypical for a company with our cash-generating capabilities to have such modest cash requirements’ – Paul Lang, CEO Arch Resources Inc

This statement sounds like it came from a mature capital-light software giant. However, those are the words of the CEO of an American coal mine operator trading at 2-times free cashflow with a 25% forward dividend yield and a massive share buyback program. Not everything is rosy in coal investor land. ARCH struggles with persistent rail and shipping issues. In the first quarter ARCH only sold about 16% of the met coal tonnage that management expects to sell throughout 2022. The company received only 60% of the required train capacity. Management cited inadequate rail service as the single biggest challenge. However, ARCH delivered record quarterly net income regardless…” (Click here to see the full text)

2. Apple Inc. (NASDAQ:AAPL)

Value of Skylands Capital‘s 13F Position: $45.8 million

Number of Hedge Fund Shareholders: 132

Skylands Capital has been on the Apple Inc. (NASDAQ:AAPL) bandwagon since the second quarter of 2011 and the position has undoubtedly been one of its best investments, gaining 1,225% since the middle of 2011. Skylands trimmed its Apple stake by 3% to 334,760 shares during Q2.

Apple Inc. (NASDAQ:AAPL)’s fiscal Q3 data showed that the company is successfully converting more and more users over to its smartphones from other devices, achieving double-digit year-over-year growth on that front during the quarter. Those are important customers for Apple to wrangle, not only because they weaken the competition, but because they build up Apple’s installed base of users compared to a previous Apple user simply upgrading to a newer model phone. When coupled with the fact that user engagement across its services is also rising, bringing new users into the Apple ecosystem is even more rewarding.

Wedgewood Partners is bullish on Apple Inc. (NASDAQ:AAPL)’s ability to maintain its competitive advantage in the lucrative high-end tier of the smartphone market, having this to say about the company in its Q2 2022 investor letter:

“Apple grew revenues +9%, driven by +17% growth in the Services segment. While iPhone revenues grew a modest +5%, it was on an exceptional year ago comparison of +66%. iPhone continues to capture most industry smartphone profits by focusing on high-end price tiers. Apple is taking nearly two-thirds of the revenue share in the premium ($400 and above) smartphone segment. Further, most of the growth was driven by expansion in the “ultra-premium” price tier of $1000 or more per unit.^[1] As we have highlighted in the past, Apple’s relentless focus on the development and integration between hardware (especially integrated circuits) and software continues to add significant value for customers of its products and services. We expect this favorable competitive dynamic to continue for the foreseeable future.

1. Union Pacific Corporation (NYSE:UNP)

Value of Skylands Capital‘s 13F Position: $57.6 million

Number of Hedge Fund Shareholders: 90

Topping the list is Union Pacific Corporation (NYSE:UNP), which ranks as Skylands Capital’s top stock pick for the 8^thstraight quarter. The fund has owned shares of UNP since the final quarter of 2004, during which time they’ve gained 1,303%. Hedge fund ownership of UNP jumped by 48% during the first quarter, hitting an all-time high.

Union Pacific Corporation (NYSE:UNP)’s operating ratio landed at 60.2% during Q2, down by 510 basis points year-over-year. Operating income was up by just 1% to $2.5 billion, being impacted by rising costs and fuel prices. The company admitted that Q2 was a tough one, but believes better things lie ahead, projecting year-over-year operating ratio improvements in the second-half, along with improved volumes.

The Carillon Eagle Growth & Income Fund shared some of Union Pacific Corporation (NYSE:UNP)’s competitive advantages in its Q1 2022 investor letter:

“Union Pacific (NYSE:UNP) benefited from rising oil prices, which typically bring more demand for rail shipping as opposed to moving freight by truck. Rail transportation can be much more fuel-efficient than over-the-road trucking.”

For more of the latest stock picks worth considering for your portfolio, check out 10 Cybersecurity Stocks to Buy as US-China Tensions Mount and Cathie Wood’s Top 10 Buys in July.