Rhizome Partners recently released its Q2 2020 Investor Letter, a copy of which you can download here. The fund posted a return of 18.3% for the second quarter (net of fees), underperforming its benchmark, the S&P 500 Index which returned 20.6% in the same quarter. You should check out Rhizome Partners’ top 5 stock picks for investors to buy right now, which could be the biggest winners of the stock market crash.
In the said letter, Rhizome Partners highlighted a few stocks and Univar Solutions Inc. (NYSE:UNVR) is one of them. Univar Solutions Inc. (NYSE:UNVR) is one of the world’s leading distributors of industrial and specialty chemicals. Year-to-date, Univar Solutions Inc. (NYSE:UNVR) stock lost 24.7% and on August 24th it had a closing price of $18.25. Here is what Rhizome Partners said:
“Univar (3.7% Position Size) – We first bought a starter position in Univar following the selloff in late 2018. We sold a portion of the stock for a gain in 2019. In the first half of 2020, Univar share prices cratered from $24 to a low of $6.40. We added to our Univar position at prices from $8 up to $14 for an average cost of $12.54. Shares ended the quarter at $16.86 or up about 34%. In hindsight, we should have bought much more near the low. The reality is that the purchase window only lasted a few days and there was uncertainty regarding whether Univar’s facilities would be deemed essential or whether it would be forced to close. In hindsight, a chemical distribution company with a product line‐up that contains disinfectants and sanitizers among other industrial chemicals would certainly be considered essential. Hindsight is 20/20.
Our decision to buy Univar Solutions is a result of our cumulative experience of investing in Calumet Specialty Products, FRP Holding’s rock pits, and watching venture capitalists burn through billions investing in Uber, Lyft, Lime, and food delivery companies.
Through Calumet, we understood the importance of chemicals and the challenges of getting them to customers. Handling chemicals requires licenses and experience. It is much harder to start a company distributing corrosive sulfuric acids than starting a trucking company hauling generic freight. Univar Solutions also has a strong moat in the form of route density. Simply put, Univar Solutions has hundreds of warehouses all over the world. As a delivery truck goes out, it can service more customers than its mom and pop competitors within a certain radius. This lowers the unit cost of each delivery. This is precisely the end goal that the ride sharing, scooter rental and food delivery companies are fighting each other for. Unlike the startup businesses where they are fighting each other for market share, there exists an oligopoly of larger chemical distributors and shares tend to be stable over time. Univar Solutions also buys from a diverse set of manufacturers and sells to a diverse set of customers. This is the best type of distribution business because neither the customer nor the supplier can exert too much bargaining power and it is incredibly hard to dislodge. In addition, there is a trend towards manufacturers outsourcing their distribution. The reasoning is simple: route density makes it much more efficient for Univar Solutions to distribute a product versus a manufacturer building out hundreds of warehouses worldwide.
Companies with high route densities such as Sherwin Williams, and Pool Corporation have performed well historically and sport enviable P/FCF multiples in the 30s and 40s. Admittedly, these multiples are a little rich for us and we believe that a 15‐20x P/FCF multiple is more along our line of thinking. While Univar Solutions has roughly 3.7x EBITDA of net debt, we believe the company can quickly deleverage. Unlike Calumet, Univar has no significant debt maturity until 2024 and will likely reduce net debt by 2x EBITDA by then. The beauty of distribution companies is that free cashflow generation is counter‐cyclical. When revenues drop, working capital is converted into cash which can be used to pay down debt. We estimate that a 15‐20x P/FCF multiple after the company pays debt down to below 2x EBITDA will result in a price per share of $35 to $45 per share versus our new shares purchased at $12.54. This is an excellent upside range of 183% to 259% in roughly 3 years.”
In Q1 2020, the number of bullish hedge fund positions on Univar Solutions Inc. (NYSE:UNVR) stock decreased by about 26% from the previous quarter (see the chart here), so a number of other hedge fund managers don’t seem to agree with Univar Solutions’ growth potential. Our calculations showed that Univar Solutions Inc. (NYSE:UNVR) isn’t ranked among the 30 most popular stocks among hedge funds.
The top 10 stocks among hedge funds returned 185% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 109 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. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.
Video: Top 5 Stocks Among Hedge Funds
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Disclosure: None. This article is originally published at Insider Monkey.