GCP Applied Technologies Inc. (GCP) | Daily Alert July 24
GCP Applied Technologies is a global construction materials company. Its largest segment, Specialty Construction Chemicals (about 57% of revenues), produces additives for concrete and cement that improve their performance. The Specialty Building Materials segment (about 43% of revenues) produces waterproofing membranes, roofing under-layments and a range of other materials for new construction and renovations that protect buildings from water, vapor, fire, and other types of damage.
About half of GCP’s revenues are generated from outside of the United States. Based in Cambridge, Massachusetts, GCP was formed within W. R. Grace & Company in 2015 and spun off to shareholders in February 2016. The company’s stock price rose steadily after the spin-off, more than doubling to over $33 by March 2018, due to GCP’s bright prospects, undervaluation, and potential for a breakup. Reflecting this sentiment, when GCP agreed to sell its Darex Packaging Technologies business to German company Henkel for $1.1 billion in March 2017, the shares jumped 25%.
However, the company’s remaining operations went on to produce disappointing results, with quarterly revenues and earnings regularly missing analysts’ estimates. At this point, GCP appears to be poorly managed: revenue growth has lagged the industry, expenses remain bloated, a steady stream of restructuring plans have produced no lasting improvements, and the board of directors has been plagued by problematic interlocking relationships that curbed its accountability and led to excessive compensation and other governance issues.
One indication of investor frustration: GCP shares jumped 13% in early 2019 when the company announced a strategic review along with respected and successful activist investor Starboard Value’s initial plans to nominate board members, only to fall sharply when the company later announced that the review would not result in a sale. GCP shares now trade at $17.96, not much higher than the roughly $16 price at the 2016 spinoff.
The GCP situation has the ingredients of an impressive turnaround. First, it has stable revenues in a relevant industry. Its organic sales growth has been flat since 2017, while its products (at least previously) held the #1 or #2 market shares in critical segments within the growing and steadily relevant global construction industry. Second, it has a capable new board of directors with a credible strategy to improve the company’s operations. Starboard Value, which holds a 9% stake, led a successful proxy campaign in which shareholders elected its slate of well-qualified directors to replace eight of GCP’s ten directors earlier in June. GCP has a relatively new CEO (Randy Dearth) who joined as president in July 2019. We anticipate that he will either become more effective or be replaced.
The company’s plan going forward includes detailed steps to boost organic revenue growth, expand margins by up to six percentage points, and rebuild product innovation effectiveness. Another possible outcome is a breakup and sale of the company. We note that industrial firm Standard Industries holds a 17% stake; perhaps because it would like to acquire the membranes business to add to its line.
Additionally, although the company is operating well below par, it remains profitable and generates free cash flow. The balance sheet has only a modest $348 million in debt, almost fully offset by $320 million in cash. Lastly, GCP shares are significantly undervalued. In a turnaround or sale, we believe the company is worth at least $28, providing investors with an attractive potential return.
We recommend the purchase of GCP Applied Technologies (GCP) shares with a $28 price target.
George Putnam III, The Turnaround Letter, turnaroundletter.com, 617-573-9550, July 2020
Chegg, Inc. (CHGG) | Daily Alert July 29
While the Nasdaq returned close to its highs from last Monday, many stocks we own or are watching didn’t. And then today happened, with growth stocks (and most others) getting dented across the board. (We know there were reasons behind today’s selloff, like some antitrust action against Apple, but we’re more interested in the what than the why.)
None of this evidence is super bearish when looking out a few months; indeed, our key market timing indicators (Cabot Trend Lines, Cabot Tides, etc.) are still bullish, and next to no leading growth stocks have cracked their intermediate-term uptrends as of yet. Moreover, some sort of hesitation was going to come eventually, and as we wrote in last week’s issue, the current time frame (we had 16 weeks up with very strong performance) fits with prior instances where the sellers finally put up a fight.
But shorter-term, we’re not in the mood to chase stuff, as many stocks are wobbling, and a ton have earnings reports coming during the next two or three weeks. Long story short, having trimmed last week, we’re content to stand pat tonight with a cash position right around 20% while holding onto our strong, profitable positions.
From here, we’re willing to move in either direction (buy or sell) depending on what comes, but right now we feel giving our names a chance to build new launching pads is the best course.
The debate over school reopening’s is raging across the country, but more and more seem to at least be starting out with a part-virtual option (with some going fully virtual for at least the first few weeks). That’s likely helping perception of Chegg, which rebounded excellently from last week’s selloff, tagging new highs today before reversing (on light volume).
Anything is possible, of course, but the trend is up here for the business and the stock. We’ll stay on Buy, though dips toward the 25-day line (near 70 and rising) would mark better entry points. Earnings are likely out in early August. BUY.
Michael Cintolo, Cabot Growth Investor, cabotwealth.com, 978-745-5532, July 23, 2020
Central Garden & Pet Company (CENT) | Daily Alert August 10
Central Garden & Pet Company sells branded and private- label products for gardening (42% of 2019 sales) and pet care (58%). The coronavirus outbreak coincided with peak gardening season, which could weigh on June-quarter results. Still, Americans’ willingness to spend on their dogs and cats bodes well for growth.
Decent organic growth and acquisitions should help lift sales and earnings. Central Garden has acquired more than 50 companies over the past 25 years.
Central Garden shares have returned 18% so far in 2020, exceeding the slight gain for the S&P 1500 Index. Yet the stock seems reasonably priced, particularly given the company’s operating momentum. Shares trade at 23 estimated full-year earnings, an 11% discount to its industry group. Analyst estimates expect Central Garden will grow per-share profits by 1% in fiscal 2020 ending September and 9% next year.
The stock is being initiated as a Buy.
Richard J. Moroney, CFA, Upside, www.upsidestocks.com, 800-233-5922, September 2020
*Berry Global Group, Inc. (BERY)
Berry Global Group is in a relatively enviable position in the packaging group. Nearly 65% of its products are in end markets that are either neutral to or benefiting from consumption trends driven by COVID-19. The plastic products maker is among the minority providing 2020 guidance. It expects free cash flow to exceed $800 million in 2020 with volume growing high single-digits in its Health Hygiene segment. Berry shares suit growth-at-areasonable-price investors. They trade at a forward P/E of 9.5 versus prospects of 28% EPS growth in the next 12 months.
Sam Subramanian, PhD, AlphaProfit Sector Investors’ Newsletter, alphaprofit.com, 281-565-6963, July 2020
Trex Company, Inc. (TREX) | Daily Alert August 26
TREX Company was one of the original manufacturers of the composite decking that has become the popular alternative to wood for outdoor decks and railings. Its decking is made primarily from recycled plastics and makes so much sense as concern for the environment becomes more and more widespread. The stock is not a bargain, with a PE ratio in the 40’s, and the company does not pay a dividend, definitely not to my liking. However, with earnings growing at over 30%/year over the last five years, it’s understandable why the PE is where it is, and the good news is TREX is quite profitable with great returns on investment, equity, and assets. The company has no long-term debt indicating a super conservative approach to business that should reward us over the next few years.
Neil Macneale, 2 for 1 Stock Split Newsletter, 2-for-1.com, 408-210-6881, August 2020