Page 12 of 12 – SEC Filing
We recognize that the stock market today is obsessed with large cap growth, as it was before peaking in the first quarter of 2000 . Similarly, a recent Strategas analysis of the 10 year average total return of Russell 2000 growth stocks versus Russell 2000 value stocks demonstrates that the market is valuing small cap growth relative to value at about two standard deviations above normal, a peak last hit 17 years ago. Moreover, the prices of copper and oil have been volatile and this hurricane season deadly. Fortunately, however, market trends don’t persist forever. But until the current trend breaks, what can HWCC do to build, and demonstrate, shareholder value?
In order of importance we have discussed with you these suggestions :
| 1. | DRIVE PROFITABLE REVENUE GROWTH – HWCC is well-positioned to participate in the cyclical recovery of both parts of its core business—-MRO and major project. We hope you will invest in internet commerce as a convenient, faster, and less costly way of doing business and utilize artificial intelligence as a customer service tool. While we don‘t have a good enough crystal ball to know how rapidly solar and wind energy will substitute for hydrocarbons, or electric cars for gasoline-powered vehicles, we hope you will grow Vertex rapidly, and your non-energy sales, to reduce over time HWCC’s reliance on energy . With solid opportunities to consolidate market share in the fragmented specialty fastener distribution business, with gross margins there approximately 40% higher than in copper wire and cable, and a renewed emphasis on growth, we see substantial upside potential at Vertex. |
| 2. | USE FREE CASH TO HALVE DEBT, THEN CONSIDER ACQUISITIONS, REPURCHASES, AND/OR DIVIDENDS – HWCC has been a responsible capital allocator. In the last downturn it halved debt, reduced share count 8%, and paid a dividend until it bought Vertex . Last quarter it resumed reducing debt . We hope you will use free cash to halve debt again, after funding digital and Vertex ‘ growth . Given the cyclicality of energy ,debt reduction is always prudent. |
| 3. | CONSIDER FURTHER EVOLUTIONARY CHANGES IN BOARD MEMBERSHIP – We are delighted with the last two board additions, Gary Yetman and Roy Haley, who bring considerable industrial distribution expertise. We hope you’ll add a digital native and a specialty fastener expert. |
| 4. | CONTINUE INSIDER BUYING – We are delighted that three directors, including Bill, recently bought a total of 25,000 HWCC shares. We hope for continued insider buying; not all outside directors bought stock; no senior manager bought stock; and aggregate insider purchased ownership remains low, despite the quality of HWCC and the bargain price of its shares. |
Thank you for your service to the stakeholders of HWCC and for considering our suggestions.
Sincerely yours,
David Nierenberg and Damon Benedict, General Partners The D3 Family Funds
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