Palm Valley Capital recently released its Q3 2021 Investor Letter, a copy of which you can download here. The fund posted a return of -1.06% for the quarter, outperforming its benchmark, the S&P Small Cap 600 Index which returned -2.85% in the same quarter. You should check out Palm Valley Capital’s top 5 stock picks for investors to buy right now, which could be the biggest winners of 2021.
In the Q3 2021 Investor Letter, the fund highlighted a few stocks and TreeHouse Foods Inc. (NYSE:THS) is one of them. TreeHouse Foods Inc. (NYSE:THS) is a multinational food processing company specializing in producing private label packaged foods. In the last three months, TreeHouse Foods Inc. (NYSE:THS) stock lost 14%. Here is what the fund said:
“During the quarter, we purchased TreeHouse Foods (ticker: THS), the market leading provider of private label foods in the U.S. Since being spun out of Dean Foods in 2005, TreeHouse has been an aggressive acquirer, increasing its size tenfold from 2008 to 2016. Since 2017, the company shifted its strategy from acquiring to improving efficiency, service levels, and profitability. With investors expecting another year of growth and improvement, on August 5th, the company announced it was reducing its earnings guidance for 2021.
There were two items that dragged down expectations. First, the company suffered from an unexpected shift by consumers towards branded products and away from private label. As government stimulus dollars have boosted incomes, TreeHouse’s management has seen shoppers trade up to branded products. The second contributing factor harming results has become a common theme throughout the food industry—escalating commodity, freight, labor, and packaging costs. Management called the inflationary environment “extraordinary” and is in the process of raising prices. While they expect demand for private label foods to improve as government stimulus fades, it will not be in time to save 2021’s results. Earnings growth will likely not return until early next year.
Based on historical results and our normalized operating margin estimate, we believe TreeHouse can generate $300 million of annual free cash flow. In our opinion, this is attractive relative to the company’s $2.1 billion market cap. While TreeHouse’s $1.9 billion in debt is near our high-end threshold for financial leverage, we believe a portion of future cash flow will be used to pay down debt and repurchase shares, reducing the company’s financial risk and increasing its intrinsic value per share. TreeHouse Foods is a market leader in a stable and growing industry, and we view it as a high-quality small cap business. After being on our possible buy list for many years, we were happy to see its stock price fall abruptly to a level below our calculated valuation.”
In Q1 2021, the number of bullish hedge fund positions on TreeHouse Foods Inc. (NYSE:THS) stock increased by about 13% from the previous quarter (see the chart here), so a number of other hedge fund managers believe in THS’s growth potential. Our calculations showed that TreeHouse Foods Inc. (NYSE:THS) isn’t ranked among the 30 most popular stocks among hedge funds.
The top 10 stocks among hedge funds returned 231.2% between 2015 and 2020, and outperformed the S&P 500 Index ETFs by more than 126 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Here you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.
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