Scott Black (Trades, Portfolio), the founder and president of Delphi Management, recently disclosed his third-quarter 2019 portfolio updates.
Following the Graham-Dodd school of value investing, Black’s Boston-based firm focuses on taking long positions in companies that have a low absolute valuation. The firm also contacts and evaluates the management of a company before deciding whether to invest.
Out of Black’s seven new buys for the quarter, four match up to these criteria pretty well, but the other three are notable exceptions because their stock has been trading for less than five years. Without enough history with which to reliably calculate valuation ratings such as earnings power value, Peter Lynch fair value and Graham number, these newer company buys provide a change in pace from established companies that have more stable numbers.
Westlake Chemical Partners
Black bought 21,645 shares of Westlake Chemical Partners LP (WLKP, Financial) at an average price of $23.10 per share, which now forms 0.49% of the equity portfolio.
Westlake is a chemical company based in Lake Charles, Louisiana that primarily develops ethylene, a key building block for plastics commonly used in packaging and construction. Although the company was founded in 1991, it did not issue stock under the Westlake name until the second quarter of 2014, so as shown in the chart below, only the Graham number provides anything close to an accurate valuation. The Peter Lynch fair value was unable to be calculated, and the earnings power value is brief and extreme.
The company has a market cap of $814.26 million, a price-earnings ratio of 14.58, a price-sales ratio of 0.61 and a price-book ratio of 2.89. It has a GuruFocus financial strength rating of 5 and a profitability rating of 7. Morningstar analysts calculate its forward price-earnings ratio at 10.21. Although it is difficult to determine where the intrinsic value of this company lies, it is a manufacturing company with heavy sales to construction, which is cyclical. Its revenue decreased from 2012 to 2014 and has been increasing more slowly since then, as shown in the chart below.
Vectrus
Black bought 19,162 shares of Vectrus Inc. (VEC, Financial) during the quarter at an average price of $42.72 per share, which now forms 0.76% of the equity portfolio.
Vectrus is a core business services company headquartered in Colorado Springs, Colorado that provides services such as facilities, logistics, supply chain, security and energy management solutions. The company began issuing stock in the thirrd quarter of 2014 after its parent company, Exelis, split from the International Telephone & Telegraph conglomerate. This young stock was unable to produce a Graham number or Peter Lynch fair value, though it did produce a not-very-accurate earnings power value.
The company has a market cap of $484.76 million, a price-earnings ratio of 14.49, a price-sales ratio of 0.35 and a price-book ratio of 2.09. It has a GuruFocus financial strength rating of 7 and a profitability rating of 6. Morningstar analysts calculate its forward price-earnings ratio at 14.49, which is the same as its current price-earnings ratio. Similarly to Westlake, it experienced a revenue decline after splitting from its parent company, but is now increasing revenue year to year.
Fox
Black bought 43,320 shares of Fox Corp. (FOXA, Financial) at an average price of $31.32 per share, which now forms 1.32% of the equity portfolio. This marks his largest buy of the quarter in terms of number of shares and percentage of portfolio composition.
The famous television company, which operates 28 broadcast TV stations in the U.S., is only part of what it used to be. At the end of first-quarter 2019, Disney (DIS, Financial) acquired most of 21st Century Fox for $71.3 billion. The remaining stations, which consist of Fox News, Fox Sports and various local stations, are labelled “New Fox” or “Fox A shares.” The split caused a 26% drop in the new Fox A shares. As it is less than a year old, this stock was unable to produce an earnings power value or a Peter Lynch fair value, and the Graham number does not have much history to support it.
The company has a market cap of $18.94 billion, a price-earnings ratio of 12.5, a price-sales ratio of 1.71 and a price-book ratio of 1.97. It has a GuruFocus financial strength rating of 5.7 and a profitability rating of 5. Morningstar analysts calculate its forward price-earnings at 12.61. The company’s revenue has been steadily growing ever since the split, despite its decreasing stock price, which suggests that it may be undervalued.
Additional trades
During the quarter, Black also established positions in Huntington Ingalls Industries Inc. (HII, Financial), Kaiser Aluminum Corp. (KALU, Financial), Malibu Boats Inc. (MBUU, Financial) and Holly Energy Partners LP (HEP, Financial).Ă‚
Read more here:Ă‚
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