David Green’s Long Thesis On The ‘Undiscovered’ Masonite International

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David Green, the co-manager of Hotchkis & Wiley’s Small Cap and Value Opportunities portfolios with nearly $3 billion in AUM, has an incredibly broad mandate. He can invest in any sector, any region, and at any cap size. He’s on the lookout for fixed income, risk arbitrage, convertible arbitrage and other special situations, he can even sit on cash if he feels that’s the right move. But for all the concern about the US stock market being overvalued, Green says that “the vast majority of the portfolio today is in equities,” in an interview with Value Investor Insight. The key is to find stocks that have escaped the market’s notice.

David Green is long on Masonite for the eventual housing recovery

David Green says that interior door manufacturer Masonite International Corp (NYSE:DOOR) and its chief rival Jeld-Wen, owned by Canadian PE firm Onex, have been buying up smaller firms over the last five years and that the market is now close to a duopoly. Even in today’s weak housing market Masonite managed to raise its selling prices 6% year on year, showing just how strong its position is.

For now there’s probably a limit to how much Masonite International Corp (NYSE:DOOR) can continue to push, but Green doesn’t think the current housing market can last forever. He points out that there were an average 1.46 million annual housing starts in the US going back to 1959, but an average of just under 700,000 for the last five years. Eventually, he thinks the market will have to make up the difference and that Masonite will be one of the big winners when that happens.

Given population growth and the state of the existing housing stock, we’re going to need more houses. There are only so many people who can move in with their parents,” says Green.

Masonite passed on the IPO circus

The reason Masonite International Corp (NYSE:DOOR) hasn’t gotten widespread attention (though it has been one of Howard Marks’ Oaktree Capital Management’s core holdings for a while now) is that it was taken off the market by private equity firm KKR & Co. L.P. (NYSE:KKR) in 2005 and then re-listed with little fanfare last year. Neither the company nor major shareholders were interested in selling a lot of stock so Masonite passed on the IPO. The lack of an IPO means there was no road show, no IB sponsors, and minimal coverage.

“The stock is still only followed by three analysts, none of which is at a bulge-bracket firm,” says Green.

When so many IPOs seem like overhyped companies taking advantage of the bull market, spotting shareholders who would rather go on owning seems like a tactic worth remembering.

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