The market’s at an all-time high, so opportunities aren’t easy to find. But they’re out there. One area is technology. Now technology as defined is really really broad. So we’re playing in a number of different areas.
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One area would be components, very small components. There are components like capacitors and resistors and diodes that go into absolutely everything electronic. So we own a company that makes all those components. Business there has been pretty soft for a number of years, so the company worked hard to take costs out. Their competitors have done the same. No one's added capacity. But now demand has picked up, and there's no capacity and prices are going up. So that's kind of a really cool thing. The cloud is another area.
Now most of our tech is pretty low tech, so when you think about the cloud, you think about high multiple companies that don't make any money. When you have cloud, you have data centers. And when you have data centers, they have to be connected, and they're connected by optical components. We have a company that contract manufactures optical components. Their factories are completely full, because we're getting wired for the cloud.
We have some other contract manufacturing businesses that aren't totally cloud-based, but they do computers and telecom, but they're moving into more Internet of Things. So more medical manufacturing, more defense manufacturing, and more industrial manufacturing.
Now as we have more cloud and more cyber, most businesses aren't really equipped to figure that out. So we have some value added resellers who historically have sold desktop computers and printers and laptops and networking, and they still do that.
But now they're adding more consulting services, because their clients can't keep up with the changing landscape. So that adds more margin and more sales growth. So there are many ways in today's environment that a value investor can find some pretty interesting ideas in technology.
Investment bank boutiques
Another area where we're finding value is in investment banking boutiques. These are companies that are not Goldman Sachs, and they're not Morgan Stanley, and they're not Merrill Lynch. They're not the big named, bulge-bracket firms that everyone's heard of. They are smaller boutiques that specialize mostly in mergers and acquisition advisory business, and restructuring businesses.
For the last couple of years, the restructuring business has been going gangbusters. Think about oil prices going from 100 to 40 or 30. That caused a lot of distress in finance. Those are slowing down a little bit, but merger and acquisition activity has picked up quite a bit.
So some of our companies specialize in really small deals. Some do more mid-sized deals. Some do megadeals. Megadeals right now are a little bit slow. There's a lot of uncertainty in Washington, particularly around tax policy. So that's slowed some M&A activity. It's created some really interesting opportunities for us.
Residential and non-residential construction
I found some investments in construction, both residential construction and non-residential construction. On the residential side, since the great recession, America has really been under- building its housing stock. So we're trying to catch up. And as we do that, I found a really interesting kitchen cabinet maker. They make cabinets that go into new homes, and nice home remodels as well. They're running out of capacity, business is so good. So that's a very interesting idea today.
On the other side, if you think about non-residential construction, that was really hurt hard again in '08, '09 and the recession, and that's come back. It's come back pretty strong. We have a company that does glass and framing for the outside of commercial buildings.
That business is very strong, but it has very long lead times, and some of the architectural indices that measure how that business ought to be in a few years, are very strong. So we think there's a pretty good path and very long legs for some really strong business in non-residential construction.
Article by By Jay Kaplan, The Royce Funds