There are several ways to beat the market, and investing in small cap stocks has historically been one of them. We like to improve the odds of beating the market further by examining what famous hedge fund operators such as Carl Icahn and George Soros think. Those hedge fund operators make billions of dollars each year by hiring the best and the brightest to do research on stocks, including small cap stocks that big brokerage houses simply don’t cover. Because of Carl Icahn and other elite funds’ exemplary historical records, we pay attention to their small cap picks. In this article, we use hedge fund filing data to analyze C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW).
C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW) was in 28 hedge funds’ portfolios at the end of the third quarter of 2018. CHRW investors should pay attention to a decrease in hedge fund sentiment of late, as there were 30 smart money investors in our database long the stock at the end of the previous quarter. Aside from the fact that the company is slowly losing some of its second quarter holders, we should mention that it is also not one of the 30 stocks billionaires are crazy about: Insider Monkey billionaire stock index). So, what does that mean? That the stock is not worth buying? Absolutely not. This is not enough data for us to decide if the company is a good buy, which is why we’ll continue with our analysis further.
In the financial world there are many tools market participants can use to grade publicly traded companies. Some of the best tools are hedge fund and insider trading moves. We have shown that, historically, those who follow the best picks of the top investment managers can beat the broader indices by a significant amount (see the details here).
We were thoroughly collecting more data about the company, when we stumbled upon RiverPark – Wedgewood Fund’ third quarter 2018 report, in which RiverPark shares its opinion on it, being one of its new positions. We bring you that part from the report:
“We purchased an initial position in C.H. Robinson in the third quarter and made a small addition to our position soon afterward. C.H. Robinson is a transportation broker whose largest business is full truckload (TL) trucking, with smaller businesses in less-than-truckload (LTL) trucking, intermodal (generally truck trailers or ocean shipping containers carried on railcars), and other forms of transportation. Robinson does not transport goods itself but provides value by matching demand from shipping customers with supply from transportation providers, or “carriers.” In Robinson’s case, those are usually small truckers who do not run sophisticated operations of their own. We had been monitoring C.H. Robinson for a period of nearly two years, as we had foreseen a long-term imbalance developing between truckload supply and demand, and we have expected Robinson to benefit eventually.
Long-haul truckers have been experiencing difficulties in recruiting drivers for many years. There are multiple reasons for this, some of them due to the changing nature of the American workforce over time. Among the most relevant factors specific to the trucking industry, we would note the unattractive lifestyle endured by long-haul drivers, who spend long hours on the road and suffer extended periods of time away from their families and homes. Furthermore, a resurgence of heavy industry in the U.S., driven especially by the emergence of the domestic energy industry, has created competition for this pool of labor, and laws preventing young workers from getting their Commercial Drivers Licenses until 21 years of age, which in turn has siphoned off many potential truckers into other trades, as high school graduates consider employment options at 18.
Compounding these problems, successive regulations restricting drivers’ “hours of service” (HOS) over the past fifteen years have further reduced the driving capacity of each existing driver.
The watershed event which focused our attention upon C.H. Robinson, however, was the requirement for all trucking companies to deploy electronic logging devices (ELDs) to track drivers’ hours, which came into effect at the end of 2017. While most large truckers had been using ELDs for some time; a very significant portion of the industry, however – perhaps as much as 80% – was not. Furthermore, our research over time has revealed that trucking companies that switched from paper logging to electronic logging in the past have found that the vast majority of their truckers (in fact, we always were told “100% of them”) had been in violation of HOS rules. This effectively meant that although the HOS regulations had not changed, companies which went from self-reported paper logs to automatic electronic logs suffered an effective loss of capacity – i.e. less hours per driver – when HOS were tracked accurately with the electronic devices. Our research has suggested that this caused a significant reduction in effective U.S. truckload capacity industry-wide, basically overnight, with our best estimate being a reduction of perhaps 5%-8%. While this may not sound like much to the casual reader, we would point out that much lower reductions in capacity of 1%-2%, due to previous HOS adjustment – which, remember, were skirted by the vast majority of the industry using paper logs – had caused major disruptions as recently as 2014. We also note that trucking comprises over 80% of domestic freight volumes, meaning that any reduction in trucking capacity is a very meaningful change for the entire US economy.”
On the next page, you can read more RiverPark’s thoughts on the company, as well as the rest of our analysis.