Fiduciary Management, Inc recently released its Q3 2020 Investor Letter, a copy of which you can download here. The FMI Small Cap Equity Fund posted a return of 1.9% for the quarter, underperforming its benchmark, the Russell 2000 Index which returned 4.93% in the same quarter. You should check out Fiduciary Management’s top 5 stock picks for investors to buy right now, which could be the biggest winners of the stock market crash.
In the Q3 2020 Investor Letter, Fiduciary Management highlighted a few stocks and Plexus Corp (NASDAQ:PLXS) is one of them. Plexus Corp (NASDAQ:PLXS) engages in the provision of electronic manufacturing services. In the last one year, Plexus Corp (NASDAQ:PLXS) stock gained 10.95% and on January 8th it had a closing price of $85.09. Here is what Fiduciary Management said:
“Description
Plexus provides electronic manufacturing services (EMS). The firm partners with companies to transform concepts into branded products and delivers them to the market. It operates in four different market sectors: Healthcare and Life Sciences (39% of revenues), Industrial and Commercial (37%), Communications (8%), and Aerospace and Defense (16%). Plexus’ focus is on winning contracts in niche markets that involve high-complexity/low-volume products. The company operates mainly in Malaysia and the U.S., but also in China, Mexico, Scotland, Germany, and Romania.
Good Business
• We consider Plexus to be best-in-class due to its superior margins and returns relative to peers, which have been driven by shifting product mix from low-complexity/high-volume products to high-complexity/low-volume products.
• Plexus has differentiated itself from peers with its top-notch design team and regulatory expertise. Much of this differentiation is within the Healthcare/Life Sciences sector, where projects with high engineering involvement and regulatory barriers predominate.
• The company’s business model has a more defensive business mix relative to peers, which has been proven by its relative outperformance in the Great Financial Crisis and the current pandemic-related recession.
• Plexus is regarded as having higher service levels relative to peers, and has a net promoter score of 84%, which is high relative to the industry benchmark of ~56%.
• Management is organically focused and does not believe in mergers and acquisitions. We expect 9-12% annual revenue growth for the next five years now that management is largely finished with pruning its networking and communications portfolio.
• The company has a strong balance sheet with a net debt-to-EBITDA1 ratio of 0.4 times and $650 million of liquidity.
Valuation
• Plexus trades at a forward price-to-earnings multiple (P/E) of 16.2 times and a trailing P/E of 17.9 times, which are approximately 50% lower than the weighted average Russell 3000 P/E multiples.
• Despite performing much better fundamentally throughout the pandemic than the average U.S. business, the shares are still down ~20% from their pre-pandemic high, while the U.S. stock market in aggregate is almost on par with pre-pandemic highs.
Management
• Plexus’ management team is regarded as one of the best in the industry. The team takes a disciplined approach when selecting new projects, only taking on those that fit their strategy.
• CEO Todd Kelsey and COO Steven Frisch have been with the company for over 25 years and have held their positions since 2016. All other executives have held their positions for over five years.
• Management is well-aligned with shareholder interests and focused on growing return on invested capital (ROIC), which comprises 40% of incentive-based compensation. The other compensation is based on revenue growth (40%) and individual goals (20%). Notably, this compensation plan runs deep in the organization and includes all managers.
Investment Thesis
The EMS industry has historically been a tough one; it has been earmarked by little differentiation and low returns. However, Plexus has been an exception to this characterization due to its disciplined, niche strategy. Over the past decade, management has had an emphasis on shifting to a high-complexity/low-volume product mix. This has transitioned the company’s high-complexity product mix to 93% of the business from 47% in 2008. This change has brought superior design team capabilities, sticky relationships, advanced regulatory knowledge, lower cyclicality, and higher returns. We particularly like that roughly 40% of the business now comes from Healthcare/Life Sciences, given its defensiveness and long product lifecycles. The protective nature of the business mix has been demonstrated throughout the pandemic. We expect continued strong demand for Plexus’ services because recessions tend to drive manufacturing outsourcing, as many businesses lack the capital to manufacture in-house. We think the company will achieve strong growth over the long run, and it is an attractive relative value with a mid-teens earnings multiple.”
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In Q1 2020, the number of bullish hedge fund positions on Plexus Corp (NASDAQ:PLXS) stock decreased by about 33% from the previous quarter (see the chart here), so a number of other hedge fund managers don’t believe in PLXS’s growth potential. Our calculations showed that Plexus Corp (NASDAQ:PLXS) isn’t ranked among the 30 most popular stocks among hedge funds.
The top 10 stocks among hedge funds returned 216% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 121 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. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.
Video: Top 5 Stocks Among Hedge Funds
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Disclosure: None. This article is originally published at Insider Monkey.
