I recently promised to update on my tentative rotation into beaten up cyclicals from my home territory of technology. To be clear, I’m not going to abandon tech - I’m basically a tech investor with a side hustle in a few other sectors. This is more a case of portfolio rebalancing after a strong run has left tech valuations rather full and some positions relatively outsized and vulnerable to a rotation. I see that eventuality as inevitable. Meanwhile I recognise plenty of value opportunities elsewhere, although I’m constrained by my rule of avoiding pure financials and oil and gas.
One of my favoured sectors is building materials, which is driven by ever advancing regulatory pressures around insulation, drainage, ventilation etc. Within the subsector I choose to subdivide into three categories of stock: highest quality at high prices, weak performers on low ratings, and resilient performance at reasonable valuations. I usually hold only the highest quality companies but my attention has turned to the third group of late. I’ve sold sizeable positions in the first, highest quality category, Kingspan (ISE:KRX)and Howden Joinery (LON:HWDN). These have run up to a full valuation in a flight to safety. And I’ve recycled the proceeds, and those from the sale of ANSYS (NSQ:ANSS), a software provider which is subject to a bid from Synopsys (NSQ:SNPS), into Alumasc (LON:ALU) Epwin (LON:EPWN) Sigmaroc(LON:SRC) and Topps Tiles (LON:TPT)
The first two are getting little credit for their operational outperformance relative to weaker names. According to quarterly surveys, their earnings momentum going into CY24 is (3.4)% and (9.3)% compared to Eurocell (LON:ECEL) and Marshalls (LON:MSLH) at (44)% and (34)%, yet valuations have suffered equally and therefore much more harshly. They won’t necessarily outperform in terms of returns, but the risk-adjusted reward is compelling.
Sigmaroc only makes sense if, as I believe to be probable, the recent equity raise to fund the purchase of lime assets from CRH is the last for a good while. But I’m excited at the prospects for a massive surge in free cashflow that should launch the next phase of the company’s development. The gulf in valuation against other providers of quarried materials is compelling. And I am buying a near monopoly on a fc earnings yield of 15 and a fc FCF yield of 20!
