Madison Funds, an investment management firm, published its “Madison Investors Fund” second-quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly portfolio return of 6.82% was recorded by the fund’s Class Y shares for the second quarter of 2021, compared to the S&P 500 Index gains of 8.55% for the same period. You can view the fund’s top 5 holdings to have an idea about their top bets for 2021.
In the Q2 2021 investor letter of Madison Funds, the fund mentioned PACCAR Inc (NASDAQ: PCAR) and discussed its stance on the firm. PACCAR Inc is a Bellevue, Washington-based truck manufacturing company with a $27.7 billion market capitalization. PCAR delivered a -7.38% return since the beginning of the year, while its 12-month returns are down by -8.34%. The stock closed at $79.90 per share on August 18, 2021.
Here is what Madison Funds has to say about PACCAR Inc in its Q2 2021 investor letter:
“Founded by the Pigott family in 1905 as the Seattle Car Manufacturing Company, the PACCAR of 2021 is a global manufacturer of medium and heavy-duty commercial trucks. PACCAR has one of the best profitability metrics amongst industrial companies: its return on invested capital is industry leading. The company has been gaining market share on four continents over the past 20 years, and we think that the company is poised to continue gaining share.
This year, PACCAR has one of its busiest years of new product launches ever. It has refreshed its medium and heavyduty Kenworth and Peterbilt products in North America for better aerodynamics in long-haul and to better meet the customer preferences in medium duty. It is also launching commercial, short-haul electric trucks in Europe and North America, its first commercial step in the company’s zero emission programs.
We’re also very impressed with PACCAR’s replacement parts strategy and execution. The Parts business has been a steady 6% revenue grower over the past 15 years, but this year we expect it to grow at around three times that rate. These replacement parts are the high-margin consumables for the installed base of PACCAR commercial trucks, and their profitability is well above the company average (the Parts business is approximately one-third of PACCAR’s total profits ). Management has worked over time to increase its propriety parts content on each truck, and there’s consequently more demand pull for replacement parts from the existing fleet now. Moreover, billions of dollars of invested capital in its independent dealer base and its parts distribution centers over the past decade have positioned the company to capitalize on this demand. Semiconductor shortages may be holding back new passenger car and commercial truck production, but parts demand for the existing fleet is running hot. We think the culmination of these past investments and the current environment position PACCAR to enjoy a beneficial step-up in a metric we track: net income per truck produced.
As a result of these factors, the stock looks attractively priced to us. Perhaps others are concerned about potential new entrant products from Tesla or Nikola, but our seasoned view is that PACCAR’s own technology advancements, service and distribution infrastructure, reputation, and low-cost manufacturing position will win with commercial fleet customers that care about uptime and total cost of ownership. The stock trades at less than 14x what we think earnings will average over the next couple years, which in turn, is just 60% of the earnings multiple of the S&P 500. We think that’s too cheap for this best-in-class, highly innovative industrial leader.”
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Based on our calculations, PACCAR Inc (NASDAQ: PCAR) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. PCAR was in 28 hedge fund portfolios at the end of the first half of 2021. PACCAR Inc (NASDAQ: PCAR) delivered a -11.97% return in the past 3 months.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
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Disclosure: None. This article is originally published at Insider Monkey.
