SSR Industrials & Materials Small-Mid Cap Rankings, April 2015

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SEE LAST PAGE OF THIS REPORT FOR IMPORTANT DISCLOSURES

Graham Copley / Nick Lipinski

203.901.1629/203.989.0412

gcopley@/nlipinski@ssrllc.com

April 23rd, 2015

SSR Industrials & Materials Small-Mid Cap Rankings, April 2015

  • We update our small-mid cap work from last month – the new rankings are shown in Exhibit 1 along with the change in positioning from last month.
  • The small-mid cap analysis contains many of the screens we use in our broader, larger cap coverage modified slightly for the shorter, noisier data sets in the small cap names. These individual metrics are then combined (using weightings derived from detailed correlation analysis with forward performance) to give a weighted score. Exhibit 1 lists the top 20 small-mid cap stocks on our framework.
  • We also parse the universe into small-cap (<$3 billion) and mid-cap ($3-10 billion)the top 10 names in each cohort are shown in Exhibits 2 and 3 on page 2.
  • In an annual performance back test these screens outperformed their remaining peers by 5.0-7.5%. The results are better with the more focused market cap groups than with the overall group, but the volatility is higher, in part because of the smaller sample size.
  • We provide these lists as possible fertile ground for those seeking ideas in the small-mid cap Industrials & Materials space. We will continue to refresh this analysis monthly and use it as a screening tool to identify specific names for further research.
  • At the sector level, Exhibit 7 shows the top 3 stocks in each sector for those looking for more sector granularity.

Source: Capital IQ, SSR Analysis

Overview

Our framework assesses sectors and stocks on four major dimensions – valuation, return on capital, capital allocation, and earnings estimates and optimism. We use that framework to identify anomalies which warrant further research that can hopefully lead to investible conclusions. In this report we focus that thought process on the small and mid cap area. The universe analyzed encompasses 159 names in the Industrials & Materials sector with market caps below $10 billion. We note that not all of these companies have full data sets and have necessarily been excluded from some elements of the analysis – we expect to have closer to the full sample size represented in these tables as we refresh them monthly moving forward. The ranking methodology has been backtested for the past three years, with reasonable performance results (see our original small cap report for the full charts).

Below we have the same analysis as shown in Exhibit 1, but restricted to the small (under $3 billion) and mid ($3-10 billion) cap groups.

Strictly Small Caps (market cap under $3 billion)

Source: Capital IQ, SSR Analysis

Mid Cap Group (market cap $3-10 billion)

Source: Capital IQ, SSR Analysis

Notes on Top Ranked Stocks

Landstar Systems (LSTR) sits atop both the overall and the small cap specific rankings. The company’s asset-light model is differentiated in the trucking industry from a simple brokerage model by its fixed margin contracts with its business capacity operators (BCO’s, basically a man with a semi) and broker carriers (typically small truck companies with 10-20 trucks). LSTR therefore benefits in a tight capacity environment as it gets a fixed percentage of a higher price. On our return on capital based models, LSTR screens as the cheapest of the major publicly traded trucking companies (JBHT, ODFL). The company scored notably well on the return on capital metric.

Exhibit 4

Source: Capital IQ, SSR Analysis

Of the holdovers from last month’s top 20, Crown Holdings (CCK) was the biggest faller in the overall rankings (and dropped out of the mid-cap rankings altogether) as the stock fell out of the first valuation quintile – Exhibit 5. It retains the top rank within Paper & Packaging. In our January piece on the can-makers, Crown showed superior fundamentals but a considerably lower multiple compared to its main competitor Ball Corporation (BLL). CCK shares traded higher on news of Ball’s acquisition of Rexam, the largest global player in an already concentrated market. The divestitures BLL will likely be required to make for the deal to gain regulatory approval have probable landing spots in CCK’s portfolio. Overall, the multiples for both stocks are elevated versus historical norms, but the improved market structure that will result from the Ball-Rexam merger should justify this premium. Crown actually benefits from its lack of dividend on our small-mid cap framework (which negatively weights a higher yield).

Exhibit 5

Source: Capital IQ, SSR Analysis

Sector Analysis

Exhibit 6 shows the composition of the universe of 159 small-mid cap stocks and Exhibit 7 lists the top three ranking names in each sector, based on the overall analysis in Exhibit 1. The overall composition is not dissimilar to our overall Industrials & Materials universe.

Exhibit 6

Source: Capital IQ, SSR Analysis

Exhibit 7

Source: Capital IQ, SSR Analysis


Appendix

Below we show a graphical representation of our analytical framework. The components are interconnected and include:

  • Valuation
    • The valuation work for our full universe of stocks is heavily based on a company’s long term return on capital. For these small cap names we often have insufficient data histories to utilize our ROC based models, so we here look at EV/EBITDA (forward) and Price/Book.
  • Return on Capital
    • We still consider return on capital but the data set is pulled from Capital IQ on a quarterly basis as opposed to the monthly, model generated, figures that we typically use. Please refer to our piece from January which reviews our methodology and models in greater detail.
  • Optimism & Earnings Revisions
    • We have done extensive work on corporate optimism, finding that companies with management teams that are consistently over-optimistic about their prospects underperform considerably and erode returns on capital in the long term – see our recent piece on the topic.
  • Capital Allocation
    • For the small cap companies here we look at two trailing metrics, 3 year average TSR and dividend yield. We assign a negative weight to the dividend yield, which has a negative correlation with forward performance for this group.

Weighted Score by Company (ranked best to worst):

©2015, SSR LLC, 1055 Washington Blvd, Stamford, CT 06901. All rights reserved. The information contained in this report has been obtained from sources believed to be reliable, and its accuracy and completeness is not guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein.  The views and other information provided are subject to change without notice.  This report is issued without regard to the specific investment objectives, financial situation or particular needs of any specific recipient and is not construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results.

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