John Rogers: Doubling Down On Industrials by John Rogers, Forbes

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There are some businesses I might never really understand, which doesn’t bother me at all. Some companies seem too complicated or overly risky, or operate in industries where it is tough to get an edge. On the other hand, when I am interested in an area, I seek to know everything about it. Therefore, when I know an industry well, I feel confident when valuations get cheap. Moreover, my conviction actually goes up when familiar stocks go down–so long as their fundamentals look solid. When that happens, building bigger positions becomes easier, a wonderful formula for maximizing returns.

For instance, specialized industrial companies fall within my circle of competence, and plenty of them were hit in 2015 due to global concerns of an economic slowdown. Some, of course, went down more than others. Many industrials tangentially related to the energy sector have been crushed–as if the values of their businesses go down whenever oil prices drop. The market’s view toward some of them is just plain wrong.

As a value investor I care about the difference between price and value, not the difference between today’s price and one three months ago.

Take helicopter-services company Bristow (BRS, 20), which fell 60% in 2015. Bristow’s main business is transporting oil workers to offshore rigs. Given the oil and gas connection, some investors are quick to hit the sell button when oil prices fall. And yet most of the company’s operating income comes from a monthly “standing” charge–whereby helicopters must be at the ready in the event of trouble. Besides, at its current stock price, the company’s helicopter fleet is worth more than the value of the whole company. The shares have a forward P/E ratio of just eight.

U.S. Silica (SLCA, 16) produces and distributes silica–an industrial sand product used in hydraulic fracking and other operations. The company’s shares fell 30 % last year. Although its earnings will likely drop 80% this year, the company remains profitable and has conservative financing relative to its competition, which is leveraged and strapped for cash. Volumes are improving, and pricing pressure is stabilizing in its oil and gas segment; meanwhile, its industrial business is growing and overlooked. It’s a good value at its current price/cash flow ratio of nine.

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John Rogers