We recently compiled a list of the 8 Best Conglomerate Stocks to Buy Now. In this article, we are going to take a look at where Tejon Ranch Co. (NYSE:TRC) stands against the other conglomerate stocks.
What are conglomerate stocks? These stocks are the ones that have their ownerships in diverse businesses, spanning different sectors like finance, energy, technology, healthcare, etc. To be precise, a conglomerate is a business model where many companies are collected into a single large corporation that is owned by the parent company.
A conglomerate can consist of many businesses in the same industry or from different industries to diversify business and navigate risks. Some conglomerates tend to own a series of companies that make up the entire labor and supply chain for a single end product.
In a conglomerate, a parent company has the controlling stakes of all the smaller and unrelated businesses that operate independently. At times, conglomeration gets enacted by holding companies specializing in M&As. These companies are formed specifically to acquire smaller companies and collect business interests.
Investing in Conglomerate Stocks
There are several benefits of investing in conglomerates, some of which include diversification into several sectors, stability in revenues, synergistic opportunities, and many more. Conglomerates tend to provide greater stability and resilience at the time of market fluctuations as compared to pure-play companies.
Conglomerates have internal capital markets. This means that if one business of the conglomerate performs poorly, its loss can be offset by the other businesses performing relatively better. These businesses benefit by establishing synergies as the costs of operating a series of businesses can be reduced via consolidation. Conglomerates are capable of moving significant sums of money from businesses having limited opportunities for incremental investment to other areas possessing greater potential. These businesses have the potential to scale far larger in size as compared to the businesses constrained by the limited potential of that particular industry in which they are present.
Therefore, venturing into different industries can result in synergistic benefits, which can lead to significant cost savings along with improved cost efficiency. When a series of businesses in a conglomerate combine their resources, the conglomerate CEO can negotiate better deals with suppliers and manage procurement costs. This will ultimately lead to the optimization of production processes. Conglomerates can leverage a diverse portfolio of businesses, leading to cross-selling and cross-promotion opportunities. Through the promotion of complementary products, conglomerates can drive revenue growth.
2024 has been quite volatile for the broader market as a result of sticky inflation, high interest rates, and recession fears. Investing in conglomerates might help investors steer through these uncertain times. S&P 500 Industrial Conglomerates Sub-Industry Index saw a return of over ~35% over the past year, while the broader index (Dow Jones Industrial Average) went up by ~12%.
While investing in conglomerates has benefited investors most of the time, some may find these investments challenging. There can be a loss of efficiency, including a divergence from the core businesses. Moreover, the resources that get divided over numerous businesses might not be synergistic. There can be a lack of transparency in conglomerates, impacting their brand name and market share.
For investors, it is of utmost importance to know the company’s true picture. Only then will an investor be able to generate strong and stable returns. Conglomerate CEOs can sometimes resort to dubious accounting methods to show inflated EPS numbers. Warren Buffett exposed this trend in a letter and explained how conglomerate CEOs, in the late 1960s, used to drive their conglomerate’s stock to 20 times earnings only to issue shares at a higher price and then deploy the proceeds to buy out other cheaper companies. At some point, a conglomerate becomes a collection of poor underlying businesses, with little or no growth prospects.
Later on, through the application of different accounting methods, they show increased per-share earnings. This process ultimately led to the redistribution of wealth, rather than the creation of wealth.
Wealth creation comes from investing in stable and sound businesses, having efficient accounting practices, and strong management. Therefore, investors should be wary of bad management and financial shenanigans while investing in conglomerate businesses.
That being said, if the conglomerate form is used effectively and transparently, it can act as an ideal structure for creating generational wealth.
Our Methodology:
We screened for conglomerate stocks on the Finviz stock screener. We compiled an initial list of 15 large conglomerates by market cap and checked their average price targets. We then selected and ranked the 8 stocks that analysts saw the most upside to, as of 6th August 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Aerial photo of sprawling resort complex with a lake in the background.
Tejon Ranch Co. (NYSE:TRC)
Average Upside Potential: 36.48%
Tejon Ranch Co. (NYSE:TRC) is a diversified real estate development and agribusiness company committed to responsibly using its land and resources. The focus is to meet the housing, employment, and lifestyle needs of Californians and create value for the shareholders.
The company announced its 1Q24 financial results, with revenues and other income, including equity in earnings of unconsolidated joint ventures, coming at $9.5 million. This compares to $14.6 million for 1Q23. This decline was because of the mineral resources segment, whose revenue fell $4.4 million over the comparative period because lower water sales revenue was realized.
The company seems to be laying groundwork to help achieve desired growth. For example, in 2023, it closed a new $160 million unsecured revolving credit facility (RCF) with AgWest Farm Credit. The credit facility will be available to finance future real estate construction projects along with other operations. It seems that this new RCF should enhance the company’s financial flexibility to fund future growth.
During 1Q24, it continued its strategic focus on unlocking the value of the unique land assets. Therefore, it started construction of the first residential community, Terra Vista at Tejon. This will be a new multi-family apartment community and will have 228 residences in the first phase. First units are expected to be delivered in 2Q25. This will be another income producing asset for the company’s portfolio.
During the upcoming years, it expects that these income producing activities will generate revenue and cash flow to complement several other sources of funding to ramp up development projects.
As of the end of the first quarter of 2024, 8 hedge funds out of the 920 funds tracked by Insider Monkey had stakes in Tejon Ranch Co. (NYSE:TRC).
Overall TRC ranks 8th on our list of the best conglomerate stocks to buy. You can visit 8 Best Conglomerate Stocks to Buy Now to see the other conglomerate stocks that are on hedge funds’ radar. While we acknowledge the potential of TRC as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than TRC but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
