In this article, we will be taking a look at the top 10 stocks to buy according to Roger Ibbotson’s Zebra Capital.
Ibbotson’s top 10 stock picks lost 9.5% since the end of the first quarter and outperformed the S&P 500’s 12.1% loss by 2.6 percentage points. Russell 2000 Index also lost 10.4% during this period. So, Ibbotson’s quantitative approach to investing has been performing relatively well recently. You can check out Roger Ibbotson’s latest stock picks on this page.
Roger Ibbotson is the Director of Research and Chairman of Zebra Capital, in addition to being a member of the firm’s portfolio management team, a team he has been the part of since the firm was founded back in 2001. Roger Ibbotson is also currently a Professor in the Practice Emeritus of Finance at Yale School of Management, a position as prestigious as it sounds. Ibbotson is involved in the research of various financial topics which include mutual funds, investment returns, valuation, portfolio management and international markets. He has also written several books on multiple financial topics, receiving multiple awards and recognition for his work in the field of finance.
Photo by Adam Nowakowski on Unsplash
Zebra Capital, as mentioned earlier, was established back in 2001, and is an investment management firm. Owned and managed by Ibbotson, the firm primarily provides services towards pooled investment vehicles or separate accounts. Zebra Capital engages in multiple strategies depending on the risk appetite of the client, ranging from volatility controller strategies, to long only strategies and absolute return strategies. The firm’s current portfolio is worth $43.5 million, with services and technology sectors being dominant, though other sectors in which the firm has invested in include consumer goods, financial, basic materials, utilities, healthcare and industrial goods. The firm has investments in more than a hundred companies. Despite this, Zebra Capital has significantly changed its portfolio, having divested of dozens of companies in the latest quarter as many hedge funds reassess their holdings in a volatile economy.
In a first half where stocks have seen their worst year in more than half a century, Zebra Capital’s portfolio still delivered returns of 0.7%, with a contribution by the top 10 stocks to buy according to Roger Ibbotson’s Zebra Capital. Meanwhile, the Zebra Small Cap Equity Fund has delivered annualized returns of 14.99% from 2010 to 2016. Even though the portfolio is involved in significant investment in some technology companies, it has still avoided some of the biggest tech companies out there, which are often in the news for one reason or the other, including Amazon.com, Inc. (NASDAQ:AMZN), Meta Platforms, Inc. (NASDAQ:META), Microsoft Corporation (NASDAQ:MSFT) and Alphabet Inc. (NASDAQ:GOOG).
Methodology
We used Zebra Capital’s Q1 portfolio and picked the top 10 stocks for this analysis.
10. National Western Life Group, Inc. (NASDAQ:NWLI)
Zebra Capital’s Stake Value: $803,000
Number of Hedge Fund Holders: 14
While it has avoided companies such as Amazon.com, Inc., Meta Platforms, Inc., Microsoft Corporation and Alphabet Inc., Zebra Capital did invest in National Western Life Group, Inc. (NASDAQ:NWLI), an American life insurance company. In addition to its 275 employees, National Western Life Group, Inc. also has 25,200 independent agents contracted to the company, with operations being maintained in 49 states. Recently, National Western Life Group, Inc. announced an alliance with Achaean Financial Holdings, to develop a new product which would help improve income solutions.
According to Seeking Alpha, National Western Life Group, Inc. is “tremendously undervalued”, even as the company has suffered from a decline in share price in recent times. However, its profitability is on the rise, which means that there is significant potential for major gains.
9. ScanSource, Inc. (NASDAQ:SCSC)
Zebra Capital’s Stake Value: $821,000
Number of Hedge Fund Holders: 10
ScanSource, Inc. (NASDAQ:SCSC) describes itself as “a leading hybrid distributor connecting devices to the cloud and accelerating growth for partners across hardware, software, connectivity, and cloud.” Founded in 1992, ScanSource, Inc. has operations in not just the United States, but Canada, Brazil and UK as well.
Recently, the CEO of ScanSource, Inc. sold 1,800 shares of the company’s stock, at an average price of $38.74, even as the company announced a $100 million buyback program, intended to decrease the outstanding shares of the company while simultaneously rewarding current shareholders.
8. OPKO Health, Inc. (NASDAQ:OPK)
Zebra Capital’s Stake Value: $861,000
Number of Hedge Fund Holders: 19
OPKO Health, Inc. (NASDAQ:OPK) is a medical test and medication company, which has been in existence for more than two decades, employing close to 6,000 people. OPKO Health, Inc. recently missed its Q1 earnings and sales target, and according to Seeking Alpha, more volatility may be facing the stock price.
7. Beacon Roofing Supply, Inc. (NASDAQ:BECN)
Zebra Capital’s Stake Value: $866,000
Number of Hedge Fund Holders: 14
Beacon Roofing Supply, Inc. (NASDAQ:BECN) provides both residential and non-residential roofing products, and recorded revenues of $6.8 billion in the latest fiscal year. Despite results being above expectations, the share price of Beacon Roofing Supply, Inc. has taken a hit recently, because of the housing downturn that the marketing has taken.
Beacon Roofing Supply, Inc. was mentioned by Fiduciary Management in its Q3 investor letter. Here is what it said:
“Beacon is the largest publicly traded (#2 overall) distributor of roofing materials and complementary building products in the U.S. and Canada. Beacon serves greater than 90,000 customers and offers 140,000 SKUs from over 400 branches throughout all 50 states (97% of sales) and 6 Canadian provinces (3% of sales). Beacon makes 1.7 million annual deliveries (within a two-hour radius) using its fleet of specialized trucks. Since the sale of the non-core Interiors division (2021), their run-rate sales have been 53% Residential Roofing; 25% Commercial Roofing; and 22% Complementary Building Products (siding, windows, specialty exterior building products, insulation, and waterproofing systems).
Good Business
• Manufacturers and distributors operate in a rational and consolidated market, with the top three distributors accounting for 54% of a $28 billion industry (almost two times what they had ten years ago).
• The industry is led by ABC Supply Co. Inc. (24% share), Beacon Roofing (20% share), and SRS (10% share), with the remaining 46% held by 1,500 smaller distributors.
• It is estimated that roughly 80% of roofing sales are replacement, and that the U.S. housing stock is now over 40 years old on average. Ninety-four percent of U.S. re-roofing demand is thought to be non-discretionary.
• With management’s focus on organic growth and maintaining discipline, rising returns should follow.
• Aided by the Interiors divestiture, the fiscal third quarter 2021 net debt-to-EBITDA ratio dropped to 2.4 times, providing financial flexibility and likely the ability to buy back stock and issue dividends.
• Beacon is a simple scale business, and roofing distribution is unlikely to undergo major change.Valuation
• Despite newfound financial health and flexibility, and strong fundamentals, Beacon’s shares have receded from $60 in May to $50 in August (-17%), and the stock trades at a discount to its 10-year average for the next twelve months P/E (11 times), enterprise value-to-EBITDA (9 times), and enterprise value-to-sales (0.85 times). With steady execution, we think there is scope for Beacon to trade at a premium to 10-year averages and north of 1 times EV/Sales.
• If Beacon were to grow 4.5% and reach the low end of their EBITDA margin target by fiscal year 2026 (9%-11%) and were ascribed a 15 P/E ratio, the compound return would be approximately 15%.”
6. Emergent BioSolutions Inc. (NYSE:EBS)
Zebra Capital’s Stake Value: $908,000
Number of Hedge Fund Holders: 17
Among the top 10 stocks to buy according to Roger Ibbotson’s Zebra Capital is Emergent BioSolutions Inc. (NYSE:EBS), a biopharmaceutical company which creates vaccines as well as antibody therapeutics to fight off infectious diseases and is also engaged in finding ways to fight off opioid overdoses.
Emergent BioSolutions Inc. became sort of infamous during the last year as its high profile errors resulted in millions of doses for the Covid-19 vaccine being discarded, but recently notified Johnson & Johnson that it had to pay more than $400 million for breach of contract. Cowen recently decreased its target price of Emergent BioSolutions Inc. from $40 to $30, which is a blow to the company.
5. Otter Tail Corporation (NASDAQ:OTTR)
Zebra Capital’s Stake Value: $931,000
Number of Hedge Fund Holders:17
Otter Tail Corporation (NASDAQ:OTTR) is an energy company serving more than 400 towns and 14 municipal utilities, with a generating capacity of around 660 megawatts, serving nearly 130,000 customers in three states. In 2021, Otter Tail Corporation reported revenues of nearly $1.2 billion, which is an increase of 34.5% year on year, while the EPS has increased by nearly 81% to $4.23 per share.
Otter Tail Corporation is one of the few companies which has stayed consistent with regards to its price in 2022, which is one of the reasons why its among the top 10 stocks to buy according to Roger Ibbotson’s Zebra Capital.
4. Amkor Technology, Inc. (NASDAQ:AMKR)
Zebra Capital’s Stake Value: $957,000
Number of Hedge Fund Holders: 23
A semiconductor company, Amkor Technology, Inc. (NASDAQ:AMKR) recoded more than $6 billion in revenue in 2021, even while its share price has suffered in 2022, in line with other tech companies. With a share price drop of 41% YTD, many investor will be wary of holding on to their investment, but with a median target price of $25.75, it might be worth holding on to your shares for the time being.
According to Seeking Alpha, Amkor Technology, Inc. has posted a record quarter lately, which combined with its extremely low share price means it has one of the lowest multiples for a tech stock, which shows potential for explosive growth later.
3. Chesapeake Energy Corporation (NASDAQ:CHK)
Zebra Capital’s Stake Value: $1.123 million
Number of Hedge Fund Holders :59
Another one of the top 10 stocks to buy according to Roger Ibbotson’s Zebra Capital is Chesapeake Energy Corporation (NASDAQ:CHK), an energy company and engages in hydrocarbon exploration. Chesapeake Energy Corporation produces around 463,000 barrels of oil every day, with over 70% of it being natural gas, and has nearly 1,600 million barrels of oil reserves. These impressive stats have allowed it to record sales of nearly $5.8 billion in 2021.
Chesapeake Energy Corporation recently doubled its authorization for common stock and warrant repurchase from $1 billion to $2 billion, even as its top executives have bought up more stock in the company, and insiders purchasing shares is always a good indicator of the potential of the stock.
ClearBridge Investments mentioned Chesapeake Energy Corporation in its Q1 2022 investor letter. Here is what it said:
“In the early days of the invasion, we made two measured changes to the portfolio based on longer-term fallout we anticipate from Russia’s invasion of Ukraine. First, we initiated small positions in U.S. natural gas producers Chesapeake.
Given its superior environmental profile compared to other fossil fuels, we have long favored natural gas in our energy holdings. Combustion of natural gas releases 50% less CO2 than coal, 25% less CO2 than gasoline and dramatically less particulate and pollution, per the U.S. Energy Information Administration. With the advances in shale production this century, the U.S. has become a natural gas powerhouse with some of the lowest-cost and largest reserves in the world. But because natural gas is difficult to ship across the ocean (it must be liquefied, which requires expensive infrastructure on both ends of the voyage), America’s gas bounty has ironically proved a burden for U.S. producers.
The surplus of natural gas in North America has resulted in low prices and weak earnings for gas-focused producers. Exports, while growing, are restrained by the high cost of building export infrastructure. Europe, in a Faustian bargain, has relied on abundant, inexpensive Russian gas transported by pipeline.”
2. Ovintiv Inc. (NYSE:OVV)
Zebra Capital’s Stake Value: $1.169 million
Number of Hedge Fund Holders: 44
Exploration and energy companies are abundant among the top 10 stocks to buy according to Roger Ibbotson’s Zebra Capital, and Ovintiv Inc. is no exception. Initially founded in Canada, the company is now headquartered in Delaware, in the United States. With $8.7 billion in revenue in 2021, Ovintiv Inc. has a land position of more than 1.3 million net acres in Canada, and 929,000 acres in the United States.
Ovintiv Inc. is also one of the very few companies to have seen its share price increase in 2022, registering an increase of nearly 14%, and a double digit increase in 2022 is nothing to scoff at in this economy. J.P. Morgan upgraded its target price of Ovintiv Inc. to $64 from $56.
In their Q4 2021 investor letter, Miller Value Partners mentioned Ovintiv Inc.. Here is what it said:
“The outlook for high multiple favorites depends to a great degree on interest rates. Warren Buffett likened interest rates to the force of gravity for asset prices. At current low levels, high valuations on long-duration assets can be justified. If interest rates move up, the adjustment will be painful. Market action early in the new year, with the swift moves up in interest rates and down in the Nasdaq, offers a taste of the medicine.
We underwrite all our names to have sufficient upside even if risk-free rates move up to 3% (a scenario, not a forecast!). As we evaluate the opportunity set, we find more attractive prospects in the classic value names. We often hear that people think value investing is dead, which only strengthens our conviction. Our gross exposure to classic value has risen from 44% a year ago to 62% currently.
One new name that illustrates the potential we see is Ovintiv (OVV), an oil and gas producer. We’ve seen a huge shift in the industry away from growth towards returns on capital, cash generation, and capacity discipline. OVV exemplifies the change.”
1. Ryerson Holding Corporation (NYSE:RYI)
Zebra Capital’s Stake Value: $1.175 million
Number of Hedge Fund Holders: 16
Topping the list of the top 10 stocks to buy according to Roger Ibbotson’s Zebra Capital is Ryerson Holding Corporation (NYSE:RYI), which makes up nearly 2.7% of the fund’s portfolio. Ryerson Holding Corporation is a value-added processor and distributor of industrial metals, and maintains operations in various countries including the United States, Mexico, China and Canada.
Even though its share price has been decimated in 2022, Ryerson Holding Corporation has still recorded an increase of 41% over the past one year, and currently has a Zacks Rank rating of “Buy”. However, Zebra Capital has reduced its stake by 7% in the company in the latest quarter, a move which Ritholtz Wealth Management also undertook, decreasing its position in Ryerson Holding Corporation by 22.6%, while other funds have increased their position.
See also 10 Best Construction Materials Stocks To Buy Now and 10 Best Dividend Stocks for Passive Income
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