Value Play: Hamilton Beach Brands (HBB)

Hamilton Beach Brands (HBB) recently popped up on one of my deep value screens, so I decided to dig a little deeper. I screen for stocks with 

• modest debt 
• low PE 
• strong return on invested capital
• and a dividend yield of at least 2.5%.  

HBB meets these criteria.

Background

Based in Richmond, VA, HBB sells pretty much everything in a kitchen that plugs into the wall, here is a list of their categories:

Source:  Company website

Here are a few other items of note from my research:

• Each of the categories above has multiple products
• HBB spun out of NACCO Industries in 2017
• The company sells products primarily in the US, Canada, and Mexico
• 33% of sales are online
• They are good at developing and selling products under multiple brands
• They are expanding their presence in the fast growing home, health and wellness market
• HBB is developing partnerships with great brands; e.g. Clorox branded air purifiers
• Covid took the stock down with the rest of the market, followed by a strong rebound in the share price with the rest of the market
• Supply chain issues and inflation hurt Q2 and Q3 results some, driving down the stock price. The stock price peaked in May, and has been steadily declining to the present
• However, demand has remained strong and continues to grow at a double digit rate each quarter 
• HBB has increased prices to address inflation, and they are projecting that major supply chain issues will be resolved by mid-2022.
• Sales have increased nicely for four straight quarters, but impact on supply chain will be felt during the (Christmas 2021) current quarter, and perhaps into Q1 and Q2
• Gross margins are 21.2%, and should remain stable with price increases balancing inflation
• Sales of high margin premium products increased 35% this past quarter 
• Revenue increased 48% in the latest quarter
• Return on invested capital is around 17.4%
• Total debt is 36.8%
• In May of 2021 there was ~ $150k worth of insider buying at around $23 per share

Valuation

As of this writing, the price per share is trading around $14.  In the chart below, you can see that the PE ratio is at an historic low of around 7x forward earnings:

Source:  Finbox

The stock has only been trading publicly since 2017, and average PE since the IPO is 12.18x.  One might argue that given the 21% growth in earnings forecast for 2022, the current PE of 8.2x (note: FASTGraphs uses a blended PE which averages projected earnings with current earnings) should expand to at least its historical level of 12.18x, and possibly up to a more typical 15x for a company with earnings growth well above the 7% level implied by a PE 15.

Source:  FASTGraphs and author's annotations

Thesis

• I believe the market has baked the bad news of inflation and supply chain issues into the current low stock price - such that a weak quarter or two will not decrease the stock price too much further. 
• Given that the market tends to look ahead several quarters, HBB may be at a bottom, with lots of positive catalysts on the horizon:
• Price increases
• Continued strong demand
• Expanded high margin health and wellness products
• Continued new product introductions

So, from today's price of ~$14, I expect the stock appreciation to range from 80% to 125% (price by year end between $24 and $30) depending on the whether the stock returns to its historic PE, or a more appropriate expanded PE 15.

And as an aside, I really want to own one of their new and very popular products - The Bartesian Premium Cocktail Machine!

Best regards,

Chump

What I'm Doing During Corona

Mar. 24, 2020 9:24 PM ET

Summary

I prepared a little.

I hedged a little.

Now I'm buying a little.

I manage three personal accounts of interest, my Chump IRA, which I write about occasionally, a taxable account with the bulk of my savings, and a smaller taxable account where I make more speculative trades.

Back in January, I was thinking about the Corona virus.  I work with several Chinese scientists, and via We-Chat (Tencent TCEHY), they were telling me how bad things were getting for their families back in China, one group specifically in Wuhan.

I was struck by the extreme measures China was taking - shutting down industry completely, which wasn't matching the narrative coming out of China.  I feared this would end up being pretty serious.

So, as an investor, what to do?

1.  Trim your overpriced stocks;  using my preferred valuation tool, FASTGraphs, I took a look at all of my stocks, and started trimming the ones that were significantly overpriced, and there were several.  However, I made a few mistakes.  In my IRA, trimming is a non-taxable event, so I trimmed quite a bit and got to around 30% cash in my portfolio, but I hold quite a few REITs, and some were still "undervalued," so I left those alone.  This created a portfolio that became a bit REIT heavy, and as the market has dropped, the REITs have been crushed.  Ouch.

In my taxable account, trimming or selling winners sucks because it creates a taxable event, and here in California, you get to tack on another 10%!  So I try to avoid selling and trimming, which makes portfolio management difficult.  I thought I would be smart, and instead of trimming, sell a few so-so gainers, and use the cash to by some S&P puts to hedge my portfolio - smart heh?

Well, my bigger taxable account is at Vanguard, and until just a few weeks ago, I didn't realize that they don't let you trade options - crap, so much for my hedge.  Fortunately, I have a third account, my Schwab taxable account, and I had a pretty good cash position at Vanguard, so I moved that cash and some additional, into the Schwab account, where I could do a little hedging!

2. Hedge a little; in my Chump IRA (Fidelity), I bought some out of the money SPY S&P 500 Puts for mid-April, and I went long the VIX via UVXY.  In my Vanguard account I added to PPL - a safe utility, and bought VCSH, a Vanguard short term, high quality bond ETF, these seemed to be my best moves given my account limitations (I'll be transferring my assets out of this account in the future).  In my Schwab account, I bought a bunch of puts with the goal of hedging my many long positions in the Vanguard account - HTZ, MGM, AAL, AAPL, and S&P 500 were my mainstays.

In early March, I was ready, but my puts and the VIX went in wrong direction initially, and continued for a couple of weeks - which was very painful.  I nearly closed all my hedges on several occasions.

Then all heck broke loose mid-march, and the hedges really helped a lot.  On a day when my stocks were down 5%-6%, with the hedges, I would be down only 2%-3% overall, on several occasions wishing I had bought more hedges (greed).  There was always this nagging feeling that I should sell the puts before the market shot back up (fear). It wasn't long until UVXY in the Chump IRA became my largest holding by far - which got scary given how volatile it tends to be.  At one point I sold my entire UVXY position, then after 10 minutes of stress, I bought it right back, second guessing my decision (more fear, stupidity)

On Friday, March 20, I took down all my hedges - I'd been hearing a lot about the effectiveness of the Malaria + antibiotic treatment, not to mention the massive government aid packages coming, and didn't want to be on the wrong side of a massive rally.  The rally today, March 24, would have been very painful had the hedges been in place.

But now what?  After selling the hedges, and sitting on the sidelines with some cash, is it time to buy?  Or is it too early?

3.  Buying a little; the hedges are stressful, and super tough to time.  At this point, I'm going to just keep making regular small investments across the accounts - on the worst of the down days, I started adding to my Chump IRA, mostly just buying more of what I already owned.  The Chump IRA is a dividend growth focus, so I buy quality names that have paid a growing dividend for years.  I also focus this account on a yield of at least 3.0%. Here are some of my recent buys: 

HON, AFL, GPC, EMR, PPL, MMM, CSCO, STOR, AAT, T, PFE, GD, LMT, CVS

In my taxable account, I focus on stocks with a bit more growth potential, smaller or no dividend, but still very high quality.  I've had a watch list in place for both accounts for years, but haven't bought many of these stocks due to extremely poor valuations.  Finally, some of these quality names are hitting really good buy points.  In addition, I'm trying to stick with companies that have low debt, excellent cash flow, and will be around even if things with the virus continue to get worse.  Here some buys I've made there, most of which are new holdings:

V, ADP, BRK.B, FB, GOOGL, TCEHY, WBA, ADBE

As the situation evolves, I hope to keep making small buys every week for the next month or so.  If things look dire, I'll slow down my buys, and stretch them out over months.  If a cure looks likely, I may speed up the buys a little.

How are you hedged, and what are you buying?

Chump

Stock Swap Today, Selling ALK, Buying AMAT

I'm selling Alaska Air in total.  I bought ALK back in 2013 at a price of $42.30 per share.  I'm selling the position today for around $67 and change.  Here are the approximate stats for the sale:



Around 11% annual return on the investment.  In addition, I sold a chunk in 2016 at $88/share, so the return is actual greater than shown.

My rationale for selling is twofold.  One, I'm not thrilled with the forecasted EPS shrinkage at ALK.  Their recent purchase of Virgin is questionable for me, and I think I can find a better value investment elsewhere,  which should give me a better return on my investment capital.

That better investment for me today is AMAT.  Here is the FASTGraph for AMAT:

AMAT has a lower/better valuation, better growth prospects, a similar dividend yield, better credit rating, and superior return on invested capital.  In short, I'm trading up, and getting a good quality stock at a very attractive price.  Trade war rhetoric and tariffs are baked into today's price, so I see some real upside in the event that negotiations with China turn more positive.  If not, current forecast holds.

I placed limit orders today to sell my entire ALK position, and buy a 1/2 position in AMAT, to which I will add in the coming month or two.

Neither stock is really a perfect dividend growth stock, but I like to own a few low dividend yielders, in exchange for a bit more growth potential.  This is the role of this stock - more growth, less yield.

Best,

Chump

Mid-Year Holdings Summary

Attached below is my Chump IRA Portfolio Mid-Year (July 20 actually).  I plan to start providing more regular updates going forward.  As a bonus, I'm also attaching my taxable account holdings for review. 

My IRA holdings tend to be all dividend growth focused, with yields above 2.5%.  My taxable account tends to contain lower yielding, higher growth stocks.

Both are focused on value, and when the prices get high enough, I trim or sell.

1st, The Chump IRA:

and below is my taxable account:

Great Article Regarding the Impact of the #MeToo Movement

From the folks at Hillsdale College

https://imprimis.hillsdale.edu/the-negative-impact-of-the-metoo-movement/?appeal_code=MK418EM15&utm_campaign=imprimis&utm_source=housefile&utm_medium=email&utm_content=april_2018_metoo&_hsenc=p2ANqtz-9wwHOC9FdZj4htFf1gjmDlqxAkPLYBoitIMis3nJlK_wZZvpbVESR8m7ugCRLSgIHLAYlTdjz8mN_ksu4WP4qAN96eHQ&_hsmi=62504284

What Looks Attractive after the Recent 8% Drop in the S&P? Added VTR, IRM

Keeping a watch list is really important to move quickly into great stocks when the market corrects.  I keep a list for the Chump IRA, mostly names with yields north of 3%, and a list for my taxable brokerage account with yields below 3%.  Here are some of the most attractive stocks from those lists as of Friday.

First, here are stocks I already own in the Chump IRA, and are now 4* rated by Morningstar (undervalued).  If I own a less than full position in any of these, I'm likely to add this week:

The list contains REITs, Utilities, and few others.  Next, is my watch list, which contains stocks I've read about, and done a little research on.  As they get close to my buy target prices, I do additional research, and if positive, I then add.  This can happen in an hour or two, so consider this list partially screened.  Also, I have to be careful not to get too overweight in a particular market sector.  The sectors tend to get undervalued as a group, so I try to only add a few from a specific sector like health care REIT for example, or REITs in general.

Recent adds to the Chump portfolio include Ventas (VTR), and Iron Mountain (IRM).

For my taxable account, I'm watching the following:

From this list AGN (Allergan) looks pretty compelling at recent prices, so I've started a position...

That's all for now,

Chump

Chump IRA Holdings for January, 2018

I've been a bit lazy the past few months, and haven't been too good about updates.  I'll catch up in the coming week or two.  In the mean time, I thought it was important that I document my current holdings.  Here they are below, sorted by % size in the portfolio....

The portfolio contains 39 stocks, and around 4% cash.  REITs were off last year a bit, and this was reflected in my overall performance for the year, and current red seen in the % gain since purchase column.  In general, the higher yielding stocks have suffered a bit in the current rising interest rate environment, coupled with the ongoing threat of Amazon to the retail REIT sector.

Some recent adds to the portfolio include:

• Ventas (VTR) - an attractively priced healthcare REIT
• PPL Corp (PPL) - an attractively priced electric utility
• Signet Jewelers (SIG) - a very attractively priced retail store

The rest of the holdings have been discussed previously.

Chump