Choice Equities Capital Management, an investment management firm, published its third-quarter 2021 investor letter – a copy of which can be downloaded here. A net return of -2.5% was recorded by the fund for the third quarter of 2021, bringing year-to-date gains to +33.8%. This compares to the Russell 2000’s -4.4% loss in the quarter and +12.4% year-to-date return. The S&P 500 produced gains of +0.6% for the quarter and +15.9% for the year. You can take a look at the fund’s top 5 holdings to have an idea about their best picks for 2021.
Choice Equities Capital Management, in its Q3 2021 investor letter, mentioned GMS Inc. (NYSE: GMS) and discussed its stance on the firm. GMS Inc. is a Tucker, Georgia-based building products distributor with a $2.4 billion market capitalization. GMS delivered an 89.30% return since the beginning of the year, while its 12-month returns are up by 103.89%. The stock closed at $59.87 per share on December 13, 2021.
Here is what Choice Equities Capital Management, has to say about GMS Inc. in its Q3 2021 investor letter:
“GMS – Investors who have been with us a number of years will likely recognize our recently reinitiated position in GMS, a company we had previously owned and held in high regard. As the largest distributor of wallboard in the US, there is a lot to like. The company has a strong entrepreneurial culture and a proven yet young new management team that has been in place since 2019. GMS enjoys an advantaged industry structure where the top three distributors serve about half the market, positioning them as leaders with a firm grip on the market, but with runway for growth through accretive bolt-on acquisitions. The net result is a well-managed market leader with strong returns on capital and ample reinvestment opportunities.
With those attributes, it’s not surprising to see that the company has generally been quite successful since coming public. Since its debut in 2016, GMS has grown earnings at a 25% CAGR. Despite this performance, its shares have underperformed its most relevant building product distributor peers substantially, resulting in valuation compression on both an absolute basis and versus peers. For those interested, I recently discussed the primary causes of this dynamic and elements that may be changing in a presentation for an investor event with BTIG this past month. That presentation was recently posted to our website and can be found here.
One factor at play in the underperformance has likely been wallboard pricing, which has generally been inconsistent over the years. This is primarily because the industry has been operating well below capacity ever since the Global Financial Crisis. But in recent years, demand has closed the gap with supply. And recent consolidation amongst the supplier base suggests the industry is likely to be more disciplined on pricing going forward. So rather than pricing being an unpredictable and potentially negative input on company results, strong and consistent pricing may become a reliable positive contributor going forward.
Additionally, I feel it is worth noting I’ve come to view company cash flows as being primarily influenced by four factors: wallboard pricing, residential volume growth, commercial volume growth and accretive acquisitions. Unfortunately for the company, it seems it has never had the benefit of having all four engines firing at the same time since going public. Until perhaps now. Trading at a double-digit free cash flow yield and just a single digit multiple of current year earnings, the company looks to have an intriguing opportunity to close the gap in shareholder performance with its peers in the years to come.”
Photo by Scott Blake on Unsplash
Based on our calculations, GMS Inc. (NYSE: GMS) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. GMS was in 20 hedge fund portfolios at the end of the third quarter of 2021, compared to 19 funds in the previous quarter. GMS Inc. (NYSE: GMS) delivered a 24.03% return in the past 3 months.
You can find more than 100 investor letters from hedge funds and prominent investors on our hedge fund investor letters 2021 Q3 page.
Disclosure: None. This article is originally published at Insider Monkey.
