Enterprising Investor at a Glance
Later this week I will be out in Omaha for the Berkshire annual meeting, which will I’m sure I will have a great time hanging out with fellow value investors. Since investing is not my day job, I don’t get much practice pitching my stock ideas or investing strategy to people. I thought I better put together some talking points to be better prepared, and figured I would turn it into a little Substack post. The added benefit is that I have recently gained a decent amount of subscribers, so this post could be helpful for the newbies to get up to speed on some of my investing thoughts.
Investment style in brief: I invest in out of favor companies trading below their fair value. I focus on small companies, however I do own a couple larger market cap stocks like Dollar General and British American Tobacco. In general I’m trying to replicate Buffett’s partnership years.
YTD return: 1.75%
Number of holdings: 11 major, 6 minor/special situations
Top 5 largest holdings current market value: DG, GTX, BTI, TLF, NLOP
Top 5 largest holdings by cost: TLF, GTX, NLOP, DG, JCTC
Current top 3 largest gains: HIFS 39%, MPAA 79%, DG 25%,
Recent big winners: COF 190%, SPG 130%, SENEA 80%, MPAA 79%
Five Year Track Record
Current Holdings
Notable Positions
Garrett Motion (GTX)
Story
Messy balance sheet from Honeywell spinoff, bankruptcy to get rid of legacy Honeywell asbestos liabilities, post-bankruptcy recapitalization
Fears of combustion engines being obsolete
Recession fears
High free cash flow generation
I’m not pessimistic about EVs making turbochargers obsolete
New capital allocation strategy
Key Metrics
Market cap: $1.87B
Sales decline, look for rebound: previous quarters sales down 10% YoY
Gross margins holding up: hovering around 20%, last quarter was 21.6%
FCF: $317M in 2024
New Shareholder return plan: $50M dividend, up to $250M in buybacks, 75% of FCF returned
Current gain: 4%
Valuation
NOPAT $341M, 6.75% cost of capital, $3.675B equity, $16 a share fair value
Dollar General (DG)
Story
Was a growth stock, growth slowing, saturated markets could limit new store openings
Decline in margins due to shrink, increased labor, distribution, store opening costs
Low income consumer more heavily impacted by inflation, focusing on lower margin consumables instead of higher margin products
Current valuation seems attactive even if growth is mediocre
Inflation pressures will eventually subside so margins should revert closer to historical levels
Key Metrics
Recovery in gross and operating margins: assume operating margins get back to 7%
Same store sale growth: hopefully better than 0.5% from a recent quarter
Shareholder returns: $518M in dividends, about 20% of operating cash flow, used to do buybacks when stock was high but did none in 2024
Current gain: 25%
Valuation
NOPAT $2.22B, 6.7% cost of capital, $27.3B equity, $124 a share fair value
Motorcar Parts of America (MPAA)
Story
Car parts suppliers out of favor, cyclical, obsolete from EVs
Earnings sensitive to exchange rates, increased interest expense from receivables financing plus new preferred stock
Replacement altenators are not tied to new vehicle sales, and can not be a delayed purchase by customers
Expanding product offering with brake parts
Auto parts retailers have been expanding their merchandise to increasingly include MPAA products
Net income should improve if interest rates decrease or company reduces revievables financing balances
Key Metrics
Market cap $179M
Look for interest expense to decrease
Revenue up 8%, gross margins up 6.5%, need to flow down to net income
LTM FCF $24.8M
Could be doing up to $16M in buybacks
Current gain: 79%
Valuation
Fair value is around book value, which is $13
