Upslope Capital Management, an investment management firm, published its third-quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly portfolio net return of -0.2% was recorded by the fund for the third quarter of 2021, compared to the S&P Midcap 400 ETF and the HFRX Equity Hedge Index that delivered -1.8% and +1.3% gains for the same period. You can take a look at the fund’s top 5 holdings to have an idea about their best picks for 2021.
Upslope Capital Management, in its Q3 2021 investor letter, mentioned BWX Technologies, Inc. (NYSE: BWXT) and discussed its stance on the firm. BWX Technologies, Inc. is a Lynchburg, Virginia-based nuclear components and fuel supplier with a $5.3 billion market capitalization. BWXT delivered a -3.12% return since the beginning of the year, while its 12-month returns are up by 8.12%. The stock closed at $56.55 per share on October 18, 2021.
Here is what Upslope Capital Management has to say about BWX Technologies, Inc. in its Q3 2021 investor letter:
“BWX Technologies designs and produces nuclear reactors, components and fuel, primarily for the U.S. Government and Navy (and, more recently, NASA). The company is the sole supplier for its Naval products (~75% of sales), which are used for the power and propulsion of all of the Navy’s aircraft carriers and submarines. With nuclear subs (aka “boomers”) forming the backbone of the “Sea” leg of the Nuclear Triad, BWX plays a vital and sensitive role supporting the national security of the United States. Of course, BWX is exceptionally well-positioned should the saber-rattling vis-à-vis China continue. The recent Aukus security pact, which may eventually benefit BWX, illustrates the urgent and strategic importance of maintaining a modern nuclear-powered sub fleet.
Even if relations with China stabilize (and hopefully they do), BWX shares seem poised to outperform. After four years of essentially going nowhere, the stock currently trades near the low-end of its historical valuation range – just over 13x EBITDA vs. typical range of 13-16x. With a literal monopoly position (albeit against a sole purchaser), BWX has historically generated modest top-line growth with attractive returns on capital (mid-20s). Given the stability of the business and its competitive position, as well as the current geopolitical backdrop, current valuation seems very reasonable.
Importantly, beginning in 2017 BWX embarked on an aggressive capex expansion program, eventually tripling capex as a percentage of sales. In addition to ramping capacity to support Navy growth, BWX spent heavily developing its medical/radioisotope business. While not yet concluded, there is light at the end of the tunnel that should bode well for shares. 2020 appears to have been the capex peak and BWX seems on track for more normalized capex by the end of 2022. This should lead to de-levering the balance sheet (from an already-reasonable 3x gross debt/EBITDA), a potential acceleration in capital returned to shareholders, and/or the prospect of increased M&A.
Lastly, while BWX’s core today is its Naval operations, there is long-term optionality from the other units (~25% of revenue), which are currently focused on Canadian nuclear power (fuel and components), medical, space (NASA) power, and microreactors. BWX faces little competition, if any, across many of these areas. A sizable portion (>50%) of the recent capex program was also invested in a new Mo-99/Tc99 radioisotope (essentially a cleaner, more cost efficient alternative to current products on market – used in cardiology, oncology, neurology, and diagnostics) production line that should lead to an acceleration in growth outside of Naval operations.
Major risk factors for BWX include the possibility of physical accidents, production defects and resulting liabilities, as well as cost pressures due to strained government budgets and/or rising input costs, some leverage (~2x net), and ESG flow headwinds (not fundamental, of course, but a reality).”
Based on our calculations, BWX Technologies, Inc. (NYSE: BWXT) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. BWXT was in 20 hedge fund portfolios at the end of the first half of 2021, compared to 16 funds in the previous quarter. BWX Technologies, Inc. (NYSE: BWXT) delivered a -2.62% return in the past 3 months.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
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Disclosure: None. This article is originally published at Insider Monkey.
