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Westlake Chemical (WLK) Has Risen 3% in Last One Year, Underperforms Market

If you are looking for the best ideas for your portfolio you may want to consider some of Maran Capital Management’s top stock picks. Maran Capital Management, an investment management firm, is bullish on Westlake Chemical Corp (NYSE:WLK) stock. In its Q2 2019 investor letter – you can download a copy here – the firm discussed its investment thesis on Westlake Chemical Corp (NYSE:WLK) stock. Westlake Chemical Corp (NYSE:WLK) is an international manufacturer and supplier of petrochemicals, polymers and fabricated building products.

On July 24, 2019, Maran Capital Management had released its Q2 2019 investor letter. The investment firm said Westlake Chemical Corp (NYSE:WLK) stock is one of the top five positions held in Q2 2019. Westlake Chemical Corp (NYSE:WLK) stock has posted a return of 2.4% in the trailing one year period, underperforming the S&P 500 Index which returned 13.7% in the same period. This suggests that the investment firm was wrong in its decision. On a year-to-date basis, Westlake Chemical Corp (NYSE:WLK) stock has fallen by 4.1%.

In Q2 2019 investor letter, Maran Capital Management said the fund posted a return of 2.8% in the second quarter of 2019, underperforming fund’s benchmark the S&P 500 Index which returned 4.3% in the same period. Let’s take a look at comments made by Maran Capital Management about Westlake Chemical Corp (NYSE:WLK) stock in the Q2 2019 investor letter.

“In his 1996 letter to shareholders, Warren Buffet wrote, referring to “gyrations in Berkshire’s earnings,” that he and Charlie Munger “would much rather earn a lumpy 15% over time than a smooth 12%.” Many investors seem, implicitly or explicitly, to prefer the reverse. Now more so than ever, investors are crowding into companies that offer smoother earnings streams. Valuations are high for what some call “bond proxies.” There is even an ETF of “low-vol” companies (ticker: USMV; average P/E ratio of holdings: 26x).

What if we could buy a great company, run by a fabulous owner-operator, with low leverage, high returns, and bright prospects, for roughly ~7x normalized earnings, but whose earnings stream is lumpier?

As I have discussed previously, the chairman of our largest position (Warren Kanders of Clarus), had previously overseen a 100x+ return in a public company, and I am thrilled for us to be partnered with him as a minority holder of the stock. Albert Chao, of Westlake Chemical, has similarly overseen a 100x+ return to date in Westlake (though the early part of this return occurred when the company was still private), and I am likewise thrilled to be partnered with him. Chao is a fantastic capital allocator, conservative, patient, and opportunistic. The Chao family still owns over 70% of Westlake (over $6bn worth). They are the consummate owner-operators and I believe interests are 100% aligned with those of minority shareholders.

Chao moved to the United States with his family in the mid-80s, and in 1986 they purchased a single chemical plant from Occidental Petroleum. It had well under 1bn pounds of production capacity, and did $66mm of sales in 1987. From this start, utilizing a “buy and build” philosophy grounded in extremely savvy capital allocation (including organic expansions, friendly deals, and a hostile deal), WLK has grown sales at a 17% CAGR and capacity at a 16.3% CAGR over the past 30+ years, to over 40b pounds of capacity and almost $9bn in revenues last year.

The company IPO’d in 2004. Since then, earnings per share have compounded at a 33% CAGR, and book value per share has grown at a 17% CAGR, from ~$5/sh at the IPO, to almost $50/sh at last check.

Yes, the company’s earnings stream has been lumpy – its ROE has ranged from -2% to 30%. But overall it has been very good: it has averaged in the high-teens for the last 15 years. Partly because of this lumpiness (and the fact that 2019 is a downward lump), I think the stock is as attractive as it has been perhaps only two other times in the last decade.

WLK is a low-cost producer of many of its products, and I think the business is well-positioned cyclically and from a capital-cycle viewpoint. Prices for one of its key products, caustic soda, are likely to increase over the coming quarters, as demand picks up (especially in Brazil and India, following specific issues in each country), and industry capacity additions lag forecasted demand growth. Westlake’s 2019 ROE is likely to be below its long-term average, but I believe that in the next few years it will be back to near its recent highs. Regardless, I believe there is a large margin of safety in paying ~7x mid-cycle earnings for a business with this track record, management team, and quality.”

Adam Gregor/Shutterstock.com

In Q1 2020, the number of bullish hedge fund positions on Westlake Chemical Corp (NYSE:WLK) stock decreased by about 9% from the previous quarter (see the chart here), so a number of other hedge fund managers don’t seem to agree with Westlake Chemical’s growth potential. Our calculations showed that Westlake Chemical Corp (NYSE:WLK) 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.