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Trapeze: Hunting for Value In An Overbought Market

The latest newsletter titled ‘Turning Over Rocks’ from Herbert Abramson and Randall Abramson of Trapeze Asset Management is themed on the difficulty of finding value investment opportunities in markets that are fully valued and probably overbought.

“The equity markets have benefited from the huge inflows from low-yielding bond funds into U.S. equity funds. We don’t believe that a bear market is looming, merely that a healthy, overdue correction could be near. And that, from current levels, the upside is likely to be below average, particularly because the S&P 500 (INDEXSP:.INX) is already 7% above our Fair Value estimate,” say the authors.

So the authors went looking under rocks, not wishing to be drawn in by the market’s usually short-term “voting machine” behavior and waiting for it revert to its long-term “weighing machine” identity.

Sector view

The authors think Consumer Staples (current unofficial “proxy for bonds”) is highly overvalued.

However, as value is usually found in what is unpopular, sectors such as cyclicals, materials, energy and commodities are currently the most undervalued.

Trapeze’s recent portfolio additions

Agrium Inc.

Trapeze recently bought Agrium Inc. (NYSE:AGU) (TSE:AGU), a major retail supplier of agricultural products and services in North America, South America and Australia and a global wholesale producer and marketer of all three major agricultural nutrients (nitrogen, phosphate and potash).  It is also a premier supplier of specialty fertilizers in North America through its Advanced Technologies business unit.

The stock last traded at $90.07 giving the company a market cap of $13.05B. The company paid a dividend of $0.75, a yield of 3.33.

Trapeze entered the stock after it declined on the negative fallout from pricing turmoil in the potash sector. “Agrium Inc. (NYSE:AGU) (TSE:AGU)’s retail operations, including the recently closed Viterra acquisition, are expected to generate approximately $1.3 billion of EBITDA by 2015. Using reasonable multiples for the retail operations, we believe that at the time of purchase we were essentially paying nothing for a recovery in fertilizer pricing driven by the constant need to improve crop yields and feed the world’s growing population,” explain the fund managers.

On November 21, analysts at Raymond James commenced coverage on Agrium Inc. (USA)(NYSE:AGU) with an Outperform rating and a price target of $106.00.

Triumph Group Inc (NYSE:TGI)

Another recent acquisition is Triumph Group Inc (NYSE:TGI), which designs, engineers, manufactures, repairs and overhauls a broad portfolio of aero-structures, aircraft components, accessories, subassemblies and systems. The company serves a broad, worldwide spectrum of the aviation industry.

This stock closed at $73.94 last Friday and has a market cap of $3.85B. The company paid a dividend of $0.04 at a yield of 0.22%.

Trapeze spotted a buying opportunity when the stock sold off mid-September due to the company’s announcement that it could incur up to $68M in “additional program costs” related to a 747-8 production lot. Credit Suisse Group AG (ADR) (NYSE:CS) downgraded the stock from Outperform to Neutral and reduced the price target from $88 to $77 citing the aforementioned cost over-run.

According to Trapeze, Triumph Group Inc (NYSE:TGI) stands to benefit from the upturn in the commercial aerospace cycle and is closely tied to The Boeing Company (NYSE:BA) (about half its sales). “As Boeing and Airbus continue to report major program wins, particularly out of Asia and the Middle East, we expect the shares to return to historic valuation ranges based on the company’s unchanged mid-term earnings guidance.”

TAMI Q3 2013 Newsletter (1)

TAMI Q3 2013 Newsletter (1)