Artko Capital recently released its Q2 2020 Investor Letter, a copy of which you can download here. The fund posted a return of -11.4% for the quarter, underperforming its benchmark, the S&P 500 Index which returned 20.5% in the same quarter. You should check out Artko Capital’s 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, Artko Capital highlighted a few stocks and Shyft Group Inc. (NASDAQ:SHYF) is one of them. Shyft Group Inc. (NASDAQ:SHYF) is a manufacturing company. Year-to-date, Shyft Group Inc. (NASDAQ:SHYF) stock gained 7.6% and on August 6th it had a closing price of $18.26. Here is what Artko Capital said:
“Shyft Group/formerly Spartan Motors (SHYF) – Our 10% Core Portfolio holding in the leader in the fleet vehicle manufacturing market has performed relatively well this year, down approximately 20% through the end of the 2nd quarter and relatively flat for the year as of the writing of this letter, despite being down over 50% in March. Despite the tumultuous economic environment the company has continued to perform well in the 1st quarter, grew its fleet vehicle segment (FVS) backlog 187% to over $300mm and made a number of value creating strategic M&A moves over the last year.
When we originally invested in Spartan, the company consisted of three segments: FVS, Specialty Vehicles, and Emergency Response. While the former two segments have been good performers, the ER segment, despite significant efforts by the management team, was a persistent drag on performance and continuously under earned its cost of capital, barely getting above breakeven in decent economic environment. In late 2019 the company purchased Royal Truck Body, a California based manufacturer of specialty truck bodies for a net, of tax benefits, purchase price of $80mm that immediately strengthened its SV segment with significantly beefed up geographic distribution and higher margin products. Additionally, the company continued to increase its market share in the Class A Diesel Luxury Coach Market to 28% (from 26%) despite the market being down 8% in 2019. On the other hand, the ER segment just could not catch any traction over the years since we have held this investment and in 1st quarter of 2020 the company sold the segment and the Spartan Motors brand for $55mm to Rev Group.
While the sale price tag was not amazing, the two transactions transformed the company profile to a strong double-digit growth and Cash Flow Return On Assets earner. Additionally, this made Shyft Group more of a pure play on the secular theme of the “last mile delivery” industry, one that has seen parcel delivery more than double in the last four years. The package volume is expected to continue to grow at or above its 19% CAGR trend for the foreseeable future as e-commerce enjoys both secular and Covid-related tailwinds and take more share from retail sales, still at a surprisingly low 16% today.
While there may be more near term logistical challenges, not unlike what we saw in the 2nd half of 2018, we believe the company is well on its way to over a $100mm in EBIT over the next few years, a good proxy for cash flow, from our estimate of ~$50mm this year, as the lower capital intensity and higher volume throughputshould translate into a significantly more powerful operating leverage flow through to the bottom line. While we added to the stock at the March 2020 lows, we had to reduce our position back down to 10% of the portfolio on our portfolio risk management process, though we still continue to believe the company can deliver triple digit returns from today’s price levels on growth in earnings and higher multiples reserved for growth companies.”
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Video: Top 5 Stocks Among Hedge Funds
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