Fiduciary Management Inc., an investment management firm, published its first quarter 2021 investor letter – a copy of which can be downloaded here. A return of 7.6% was reported by the FMI All Cap portfolios for the Q1 of 2021, outperforming both its Russell 3000 benchmark that delivered a 6.35% return, and the Russell 3000 Value Index that had an 11.89% gain in the same period. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.
Fiduciary Management Inc., in their Q1 2021 investor letter, mentioned Masco Corporation (NYSE: MAS) and shared their insights on the company. Masco Corporation is a Livonia, Michigan-based manufacturing company that currently has a $15.8 billion market capitalization. Since the beginning of the year, MAS delivered a 13.74% return, extending its 12-month gains to 59.84%. As of April 14, 2021, the stock closed at $62.48 per share.
Here is what Fiduciary Management Inc. has to say about Masco Corporation in their Q1 2021 investor letter:
“Masco Corporation, headquartered in Livonia, Michigan, is a global leader in the design, manufacture, and distribution of branded home improvement and building products. The company’s portfolio of well-recognized brands includes Behr paint, and Delta and Hansgrohe bath and shower fixtures. Operations are divided across two segments: Plumbing Products (58% sales, and 58% operating profit) and Decorative Architectural Products: (42%, and 42%). The company generated 2020 sales profit of $7.2 billion, and operating profit of $1.3 billion. Sales are split between North America (81%), Europe (12%), China (3%), UK (2%), and Other (2%).
Good Business
• Following several key portfolio actions in recent years (the 2015 spin-off of their installation business serving new construction, and the sale of their windows and cabinetry businesses in 2019 and 2020, respectively), the business has structurally increased its sustainable growth, margin, and return profile.
• Masco is now comprised mostly of low-ticket and high-impact home improvement products in growing categories (paints, stains, faucets, etc.), with a sector-leading 89% of sales from the less cyclical and higher-margin repair and remodel (R&R) market.
• The company generally holds number one or two positions in its major markets. Competitive advantages include its brand strength built over several decades, and close alignment with advantaged retail and distribution partners.
• Masco’s return on invested capital (ROIC) was 26% in 2020. The company’s ROIC has averaged around 20% over the last 3, 5, and 10-year periods.
• The company has been a terrific generator of free cash flow, is conservatively financed, and is easy to understand.Valuation
• The stock trades at a mid-teens forward earnings per share multiple (EPS), a discount to its 10-year average of 19.6 times.
• It also trades at about a 20% discount to the median of its peers on a forward enterprise value-to-EBITDA.
• Masco’s discount is particularly notable considering it leads its peer group in ROIC and long-term EPS growth, while also carrying well-below-average exposure to more cyclical new construction markets.Management
• Keith Allman has been with Masco since 1998 and has served as Chief Executive Officer since February 2014. Under his leadership, the company has focused the business on higher-margin and less cyclical markets where it has competitive advantage and emphasized innovation and capital discipline. He beneficially owns over 1.1 million shares of the company as of the latest proxy.
• Management demonstrates discipline in allocating free cash flow and has a clear understanding of ROIC (tied to compensation), steering clear of high-priced acquisitions, and accelerating share repurchase activity when the stock has traded below intrinsic value.Investment Thesis
Masco provides FMI exposure to the residential housing market through a best-in-class branded building products company with strong leverage to the attractive R&R segment. Although the stock has periodically reflected concerns over higher raw material costs, rising interest rates, and the outlook for new construction, we believe the company provides a good balance of offensive and defensive attributes. At a reasonable valuation, considering our expectation for mid-single-digit organic sales and double-digit EPS growth over the long term, we continue to believe in the long-term prospects.”
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Our calculations show that Masco Corporation (NYSE: MAS) does not belong in our list of the 30 Most Popular Stocks Among Hedge Funds. As of the end of the fourth quarter of 2020, Masco Corporation was in 40 hedge fund portfolios, compared to 46 funds in the third quarter. MAS delivered a 10.37% return in the past 3 months.
The top 10 stocks among hedge funds returned 231.2% between 2015 and 2020, and outperformed the S&P 500 Index ETFs by more than 126 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Here you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.
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Disclosure: None. This article is originally published at Insider Monkey.
