Heartland Advisors, an investment management firm, published its “Heartland Mid Cap Value Fund” second-quarter 2021 investor letter – a copy of which can be downloaded here. In the letter, the fund mentioned that its stock selection was strong in several sectors, and the portfolio finished the first half of the year ahead of its Russell Midcap® Value benchmark. You can take a look at the fund’s top 5 holdings to have an idea about their top bets for 2021.
In the Q2 2021 investor letter of Heartland Advisors, the fund mentioned PPG Industries, Inc. (NYSE: PPG) and discussed its stance on the firm. PPG Industries, Inc. is a Pittsburgh, Pennsylvania-based chemical products producer with a $40.2 billion market capitalization. PPG delivered a 17.33% return since the beginning of the year, while its 12-month returns are up by 42.29%. The stock closed at $169.78 per share on August 13, 2021.
Here is what Heartland Advisors has to say about PPG Industries, Inc. in its Q2 2021 investor letter:
“The portfolio’s holdings in the space outperformed the benchmark average and contained a top contributor, PPG Industries Inc. (PPG).
PPG is the second-largest coatings supplier in the world and boasts the top market share in the industrial space, including auto, aerospace, and general industrial. The company is second only to Sherwin-Williams in the architectural coatings market.
Shares of PPG sold off in early 2020 as global economies fell into recession. Given the company’s economically sensitive client base, earnings were hit by a broad-based decline in sales of coatings. While PPG’s stock rallied throughout the middle part of 2020 as fears about the economy subsided, it lagged sector peers throughout the winter because investors began to fear margin pressure fueled by rapidly rising input costs. This weakness presented us with an opportunity to sell a more capital-intensive portfolio holding that lacked pricing power and upgrade the portfolio with PPG, which we view as a higher-quality business.
At the time of our initial investment, we were confident that any margin pressure caused by rising input costs would be offset over time by PPG’s pricing power. Our view was validated when PPG reported growing profit margins in its first-quarter earnings release for 2021.
The company is also uniquely positioned to benefit from the shift toward electric vehicles (EVs). PPG has a robust portfolio of protective coatings for EVs. Given PPG’s supply chain scale, we anticipate the company will see a material increase in content penetration due to the ongoing market adoption of electric vehicles, which should drive organic sales growth going forward.”
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Based on our calculations, PPG Industries, Inc. (NYSE: PPG) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. PPG was in 25 hedge fund portfolios at the end of the first quarter of 2021, compared to 34 funds in the fourth quarter of 2020. PPG Industries, Inc. (NYSE: PPG) delivered a -5.94% 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.
