Insight Enterprises (NSIT)


Key Statistics

Enterprise Value = $2.135 billion

Operating Income = $243 million

EV/Operating Income = 8.78x

Earnings Yield = 9%

Price/Revenue = .27x

Debt/Equity = 45%

The Company

Insight Enterprises is an Arizona-based tech company founded in 1988. They operate globally, but their focus is on North America, where 76% of their sales originate. They provide tech solutions to business clients that run the gamut: supply chain optimization, connecting workforces, cloud and data centers, and the vague “digital innovation.”

Insight provides tech solutions for businesses, so they don’t have to do all of the work themselves. A company can pay Insight Enterprises, and procure their hardware, software, set up a secure cloud, set up remote work for their employees to collaborate, etc. If you’re running a large, complex, organization – it can be extremely costly to figure out how to complete all of this from scratch. It’s far more efficient to hire an expert like Insight to do it all for you.

Supply chain optimization is a service they offer to businesses to deploy hardware and software for the client. The procure and configure hardware and software for companies. Connected workforce translates to helping companies operate on the cloud, encourage employees to work on multiple platforms. Insight also provides security for these solutions. Businesses come to Insight with tech problems, and Insight offers solutions. For their cloud solutions, they provide robust security services and infrastructure management.

Digital innovation is a custom tech consulting service. Clients can go to Insight with a unique problem and see if Insight can develop a tech solution. For example, Insight can help if you’re running a hospital and need a system to predict how many nurses you need on staff in different specializations and at different times of the day. They’ve helped railroads use drones to inspect trains faster and with less staffing. Additionally, they have developed automated drilling platforms for oil & gas companies. They’re a creative and innovative firm that can deliver real value to their clients, providing solutions that they likely wouldn’t be able to develop on their own.

To stay on the cutting edge, Insight acquires smaller firms that offer value to their clients. Insight has grown immensely through acquisitions. A few recent acquisitions include Cardinal Solutions in 2018, Datalink in 2017, Blue Metal architects in 2015. Recently, they announced their intention to buy PCM for $35 a share, or $581 million. PCM generates over $2 billion of sales, so it doesn’t look insane.

The stock suffered over the summer due to its place in the small-cap value universe and a slightly disappointing earnings report which showed some temporary rising costs related to the Cardinal acquisition.

My Take

Insight is a fast-growing company in a hot industry with a strong financial position that trades for very cheap multiples.

Their 10k is replete with buzzwords that usually make roll my eyes: Big data! Software as a Service! Internet of things! Cloud computing! Artificial intelligence!

Insight is at the cutting edge, and the company is a departure from my typically un-cool focus on dull and trashy industries. Don’t worry. I haven’t sold out: selling for 27% of sales and 9x cash flow, this is in the bargain bin of the stock market, despite Insight’s position in a fast-growing hot industry.

Insight Enterprises has a long and profitable history. The company has been consistently profitable over a long period. Insight even recorded positive earnings in 2009, in the depths of the global financial crisis.

Meanwhile, they have been able to grow sales and earnings throughout the economic expansion. EPS increased from 67 cents per share in 2009 to $4.55 in 2018. Sales growth has been similarly strong, growing from $4.1 billion in 2009 to $7.08 billion today.

Insight has a higher degree of financial quality with a Piotroski F-Score of 6, an Altman Z-Score of 3.48 (low bankruptcy risk), and a Beneish M-Score of -2.14 (not a probable earnings manipulator). The debt/equity ratio is current 45%, which is also at a safe level. The share count is down over the last year, so they are not diluting shareholders.

Insight trades at a discount to its competitors and its history. On a price/earnings basis, the current P/E of 11 compares to a 5-year average of 14.4. The average for the industry is 22. On a price/sales basis, the current level of .27x compares to an industry average of 1.45x.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Bank OZK


Key Statistics

Price/Book = .91x

Earnings Yield = 11%

Dividend Yield = 3.4%

Debt/Equity = 12%

The Company

Bank OZK (formerly Bank of the Ozarks) is a regional bank headquartered in Little Rock, Arkansas with a substantial presence in the southern United States. The bank has grown significantly over the last 25 years, growing from 4 locations in 1994 to 251 today. Their business is focused mostly on real estate.

Growth has been both organic and through the acquisitions of smaller banks. Some of the banks acquired in the last five years include: First National Bank of Shelby (North Carolina), Bancshares Inc. (Houston), Arkadelphia (Arkansas), Intervest Bancshares Group (Florida). The bank is growing aggressively through acquisitions, but is largely maintaining their southern presence. I think this is a smart move, as this includes some of the fastest growing states in the country.

My Take

I discovered Bank OZK when I was looking for regional banks below book value that were well capitalized with easy to understand businesses (as opposed to the massive, global, banks – which I don’t even think the CEO’s completely comprehend).

Right now, the major macro worry about banks is that we might be on the brink of another recession. Everyone remembers how banks fared in the last recession, so investors are proceeding with massive amounts of caution. OZK has a concentration in real estate loans, and memories are also fresh of that debacle. OZK suffered a peak to trough decline of over 50% during the last crisis.

While Bank OZK suffered a significant stock decline during the financial crisis, the actual business weathered it well. In 2009 during the depths of the recession, OZK earned a profit of 55 cents per share. This was during a time when most banks were suffering massive losses. Meanwhile, the company is much better capitalized than it was going into the last recession. Debt/equity was over 250% going into the last recession and it is only 12% today.

Meanwhile, the stock is priced like a recession has already taken place. In 2009, in the depths of the financial crisis, Bank OZK traded at book value. Prior to the crisis, it peaked at nearly 4x book value. Now, the stock is below book value trading at 91%. We aren’t in a recession and this bank is profitable, but the market is treating this stock like we’re already in one.

This is also a company that is undergoing significant growth. Revenues are up 462% since 2009. Dividends are up 515%. Earnings are up 489%. Return on equity is also at a respectable level of 10.89%. Meanwhile, the bank doesn’t appear to be obtaining these results with higher amounts of risk taking, with a very low debt/equity ratio. I don’t see why they won’t be able to continue growing into the future and maintain their current returns on equity. The bank also sports a nice dividend yield of 3.4%.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Q2 2019 Performance



It wasn’t a bad quarter. I slightly underperformed the S&P 500, and I have a very slight edge YTD, leading the S&P total return by 1.02%.

This doesn’t sound like much of an accomplishment, but I’m pleased with it considering the way that small-cap value was absolutely crushed in Q2.

VBR, Vanguard’s small-cap value ETF, was up 17.83% on May 3rd for the year. It is now up only 13.96%.

VBR is the scaled-back softcore version of a small-cap value fund. It delivers the small cap value premium and outperforms, but it’s watered down so it is easier to stomach than the real thing. The median P/E for VBR is 14.4 across 847 stocks at an average market cap of $3.4 billion.

The more hardcore, concentrated, deep value funds were absolutely crushed in the 2nd quarter. QVAL, for instance, was up at the peak of 19.31% YTD in April. It is now up only 10.31% YTD.

Looking at the universe of stocks that trade at an EV/EBIT multiple less than 5, they were up over 20% in February. The rally then completely fell apart once the yield curve inverted and the trade war heated up. This universe of stocks is now up only 2.91%.

I’m happy I avoided the same fate.


I would have suffered the same fate, but I sold a significant number of stocks at the high. I sell for five reasons:

(1) The stocks are back up to their typical valuation ratios. If I bought a stock at a P/E of 10, hoping it would get up to 15, I’ll sell when it gets close to 15. I’m not buying stocks to hold onto them for decades of earnings growth. I am buying undervalued stocks and selling once they hit intrinsic value.

(2) The positions are over a year old, the story has changed, and I can find more appealing buys.

(3) The stocks have rallied back to their 52-week high.

(4) The fundamental results of the company are deteriorating and signaling that it is a value trap.

(5) A change in the news around the stock affects the entire reason I bought it.

Here are all of the stocks I sold this quarter:


It felt wrong to trade so much, but the market move was nothing normal, just like the move in December was not normal. The inversion of the yield curve also spooked me. I am a bit more trigger happy to sell, as I think we’re on the brink of a recession soon.

I think that the market is going to get crushed once we have a recession, and small-cap value won’t be a place to hide. After that, I think small-cap value is going to have a strong run of out-performance. I don’t feel that we’re in a place where I can buy value stocks and stop looking at it. This isn’t an environment where I can set and forget a portfolio, as I believe we’re on the brink of a big move to the downside. I might be wrong, but I think we’re at a dangerous juncture.

At one point this quarter, I was 50% cash. Regardless of how wrong it felt to sell a bunch of stocks after only holding them for a few months, it turned out to be the right move and helped me hang onto the gains I had accrued YTD.

With the cash, I slowly deployed it into many new cheap positions. Most of these stocks have been hammered over trade war anxiety. New positions and links to the write-ups are below:

1. Hooker Furniture

2. Flanigan’s

3. Hurco

4. Miller Industries

5. Schnitzer Steel

6. Twin Disc

7. ArcBest

8. Preformed Line Products

9. Werner Enterprises

10. Weyco Group

Trade War

Nearly all of the stocks that I bought this quarter are cheap because of two main concerns: (1) They’re in economically sensitive industries, and the markets are concerned about a recession, (2) They’re vulnerable to the trade war.

I actually agree with the market’s concerns about a recession, which has me concerned. Whenever I agree with the consensus, I second guess my opinion.

As for the trade war, I think it has been a ridiculous overreaction. According to the US Census Bureau, the US exported $120 billion worth of goods and services to China in 2018. We imported $539 billion. Those are big numbers, but they aren’t really a big deal in the grand scheme of things. US GDP is $19.39 trillion. Imports from China represent about 3% of our GDP. How much will that decline as a result of the trade war? Let’s say it’s 20%, which seems extreme. That amounts to .6% of our GDP. And we’re not going to lose .6% of our GDP. The slack will likely be picked up elsewhere.

I’m a free trader and think trade is good for our country and the world. It saddens me that the Republican party, which used to the champion of free trade, is now abandoning that position. At the same time, I like the fact that a bunch of people who hated free trade now comprehend that tariffs are a tax just because Trump articulated a protectionist position. In terms of my own views on trade, I agree with every word of this.

While the rhetoric is bad and I disagree with it, I think the retreat from free trade will wind up being more rhetorical than anything that translates into actual policy. It’s all a bunch of posturing and bravado, like everything else in our political system.

This creates an opportunity for value investors who are willing to buy into this uncertainty. One way or another, this trade war is going to be resolved. It’s either going to result in the worst case scenario, or we’re going to reach some kind of deal. Either way, once the uncertainty is lifted, I think these stocks will do okay.

The ultimate worry for the market is something like the Hawley-Smoot tariff. Years ago, I read in Jude Wanniski’s The Way the World Works, that nearly all of the market moves during the 1929 stock market crash were tied to headlines about the trade war. The specter of this tariff hangs over the market, but I don’t think we’re facing anything of that severity today.

(Ben Stein covered the Hawley Smoot tarriff better than anyone in Ferris Bueller’s Day Off.)

Regardless of how much the Trump administration tries to put the genie of globalization back in the bottle, it’s a fool errand. We’re too dependent on trade, and the long-term trajectory of the human race is to trade with each other. Think about it. It’s a natural evolution. The entire trajectory of human civilization has been towards more integration, more trade, more specialization.

We all started off as a bunch of naked hunter-gatherers in little clans struggling to survive to 30. We had to do everything on our own. We would hunt our own meals. The outside world was dangerous. We went from these small clans to villages. People start to form specializations. With agriculture, this intensifies. Some people work in the fields, others hunt. Eventually, we raise our own livestock. We start to form larger communities of villages, then nations. With the advent of industrialization and mass communication, we become more integrated. With Moore’s law barrelling along and making communication nearly instantaneous throughout the world, we become more interconnected. People like Trump and Bernie Sanders can try hard to put this genie back in the bottle and try to embrace economic isolationism, but they’re fighting a losing battle against the long term trajectory of human civilization.

To put it in perspective, the Hawley Smoot tariff took the average tariff from around 5% to 20%. This, without a doubt, intensified the effects of the Great Depression. From that peak, it has plummeted ever since. That’s not going to stop. I don’t care how hard they try.

I’ve gone a little off track. To put it simply: I think the trade war is overblown and is an opportunity for investors.

As far as stocks that have been hammered over recession anxiety, I own them because they trade like the recession is already priced in. Forgetting about single digit P/E’s (P/E can be misleading at a cyclical peak), even on the basis of Price/Sales and Price/Book, they’re at some of their lowest levels in a decade. This suggests to me that a recession is already priced in, which is why I’m willing to take the risk and buy them.

Recession Watch

As stated before, I think we’re due for a recession, which is why I have been trigger happy to sell once stocks hit my target price. If the market enters a bear market, it’s going to occur because of real recessionary weakness in the economy, not Trump’s trade rhetoric.

It’s also a significant reason I’m holding a little cash ready to go. Right now, my cash balance is $10,898, which represents 20% of my portfolio. Some of this is CD’s, which mature throughout the year. A bunch of them also mature in December when I typically do a big rebalance, but I can get out of them if the market crashes and serves up a nice opportunity.

The Fed is signaling that they are cutting, but they are effectively tightening. They still haven’t cut rates, and the balance sheet is still shrinking. I don’t think it’s a coincidence that much of the volatility and trouble in the markets began in early 2018 when they started really reducing the balance sheet in earnest.


Meanwhile, the 3-month and 10-year bond yields have inverted, which is always an indication that a recession is occurring in the near term. Everyone is making excuses for why “this time is different,” but those are the most dangerous words in finance. There is always an explanation for why the yield curve doesn’t matter every time it inverts. In the late ’90s, for instance, the explanation was that the US budget surplus caused the inversion. In 2006, it was the “global savings glut.” There’s always an excuse, and it’s always wrong. We’ll just have to wait and see, as no one has a crystal ball, but my thinking is that we’re getting a recession.


I think this recession will create a significant opportunity for investors. Right now, the average investor allocation to equities is at 43%. This suggests a return over the next 10 years of 4-5% in US equities. That’s better than we can get in bonds, but it’s nothing particularly exciting. If stocks have another big rollover, I’m hoping for an opportunity to buy at much more attractive valuation.

Writing & Research

I was busy this quarter tinkering with some fun research of my own.

1. Is Diversification for idiots?

One of the biggest questions for value investors has been the correct number of stocks to own in a portfolio. Concentration is in vogue among value investors, but from a quantitative point of view, 20-30 stocks is ideal.

Each additional stock in the portfolio helps reduce volatility and cushion maximum drawdowns, but each additional stock in the portfolio has a declining marginal benefit in reducing volatility.

The volatility & drawdown reduction is maximized around 20-30 positions. Beyond that, adding more stocks is a waste of time and doesn’t do much to reduce risk. The ideal portfolio seems to fall somewhere in the 20-30 range. Ultra concentrated portfolios, while they offer the opportunity for substantial out-performance, run an equally high risk of a major blow up.

It sounds nice to say: “I concentrate in my best ideas.” How did that work out for Bill Ackman when he piled into Valeant or his Herbalife short? Are you smarter than Bill Ackman? I think Bill Ackman is a genius. I’m certainly not smarter than him.

Because I have strong doubts about the ability of anyone to predict the future, I think concentration is really dangerous, no matter how much homework you do or how much you think you know. Even the most stable, sure-thing investments can fall apart with a law, a new technology, an upstart competitor, a scandal. Concentration is Russian roulette for a portfolio.

At the same time, you don’t want to dilute the potential for outperformance too much. The difference in terms of volatility doesn’t change much between 30 stocks and 100 stocks in a portfolio. 20-30 seems to be the sweet spot.

I think survival is more important than outperformance, which is why I prefer a portfolio of 20-30 stocks. A portfolio of this size still offers an opportunity for outperformance, but greatly reduces the possibility of a blow up.

2. The Value Stock Geek Asset Allocation

The portfolio I track on the blog doesn’t represent all of my money. The rest of my money is held in more diversified asset allocations.

I’ve been on the hunt for an ideal asset allocation for a long time. Of the existing menu of choices, the one I like best is David Swensen’s, which I wrote about here.

As much as I like Swensen’s approach, I didn’t agree with it completely, so I set out to design my own strategy. My asset allocation strategy isn’t for everyone, but it works for me. It almost delivers an equity return, avoids lost decades, cushions against panics, and protects in inflationary environments.


Here is some ’80s ear candy.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Weyco Group (WEYS)


Key Statistics

Enterprise Value = $268.28 million

Operating Income = $27.04 million

EV/Operating Income = 9.92

Earnings Yield = 8%

Price/Revenue = .85x

Debt/Equity = 5%

The Company

Weyco is a footwear company. Weyco has several excellent brands, which include: Florsheim, Stacy Adams, Nunn Bush, and Bogs. Most of the footwear brands are reasonably priced dress shoes for men. Bogs specializes in boots. Their boots are known for being waterproof and sturdy.

The business is split up into two segments: wholesale and retail. It wholesales to stores throughout the United States and Canada. Each brand also has a web presence and sells shoes directly to consumers via the web from its site. Additionally, you can purchase their shoes directly on Amazon. Nearly all of their shoes are available for prime shipping, and some are including in Prime Wardrobe.

Most of these brands have a long history, which indicates they’re probably not likely to fall apart any time soon. Florsheim’s is a particularly iconic dress shoe brand and has been around since 1892. The CEO is currently Thomas Florsheim.

My Take

Weyco’s shoes receive positive reviews online. The Florsheim Oxford dress shoe, for instance, looks good and is reasonably priced at $103. One of the Bogs children’s boots, the “bogs kids classic high waterproof insulated rubber rain and winter snow boot” is a #1 best seller in boy’s snow boots on Amazon. This boot, along with many others, is included in prime wardrobe. It receives rave reviews with plenty of 5-star ratings.

While Weyco maintains nine retail stores, they’re not threatened by the retail carnage, as their products already have a prominent place on Amazon and it is sold through their own website.

While the company isn’t growing significantly, it is consistently profitable. They posted positive results in the depths of the recession in 2009. FY 2018 was one of their best on record when they earned $1.97 a share. Their recent quarter hasn’t been bad either, in which they earned 40 cents a share compared to 29 cents in the previous quarter a year ago.

They have a high degree of financial quality. Weyco’s debt/equity ratio is an ultra-conservative 5%, compared to an industry average of 98%. With little debt and continued profitability, Weyco should weather a recession well. They also have an Altman Z-Score of 4.63, which is a low bankruptcy risk. The Beneish M-Score is -2.76, meaning there is a low probability of earnings manipulation. Piotroski F-Score is a solid 6 out of 9.

If the company is so great, why is the stock down? The stock is down due to the usual suspects: recession jitters and tariffs. An increase to the 52-week high would be a 55% increase from current levels.

Weyco is affected by the tariff because they source many of their shoes from outside suppliers which are located in India (which isn’t a problem) and China. The tariffs will force Weyco to raise prices, which is challenging to pull off without affecting demand. It’s also possible that they won’t be able to pass on the cost and will have to eat the cost to maintain market share. Long story short, tariffs are the main reason that the stock is now available at a bargain price.

As with everything else I’ve bought that is affected by the tariffs this year, I’m purchasing the stock based on this uncertainty with the understanding that this is why I can buy at a bargain price. I believe that the worst case scenario has already been priced into the stock. Once the uncertainty subsides (and it will subside, one way or another), the stock can appreciate back up to a reasonable level.

In terms of the multiples, this trades at a P/E of 12.39. This compares to an industry average of 22. The P/E compares to Weyco’s five year average of 17.5, which seems right for a company that is consistently profitable with minimal debt. An increase in the P/E to 17.5 at current earnings would be a 41% increase from current levels. The EV/EBIT multiple of 9.9 compares to an average of 11.29, and Weyco’s valuation often goes as high as 13x. Weyco also supplies an excellent dividend yield of 3.72%. For over a decade, dividends have been consistent.

On a price/book and price/sales basis, it looks to me like a recession is already priced in. Price/sales is currently .85x, which is the lowest it has traded at in the last ten years, including the recession. The same is true on a price/book basis, currently at 1.25x, which is the cheapest it has traded at in the last decade.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Werner Enterprises (WERN)


Key Statistics

Enterprise Value = $2.16 billion

Operating Income = $220.44 million

EV/Operating Income = 9.79x

Earnings Yield = 8%

Price/Revenue = .85x

Debt/Equity = 10%

The Company

Werner Enterprises is a trucking and logistics company headquartered in Omaha. The company was founded in 1956 by C.L. Werner, who was also a trucker. Over the decades, the company has expanded into one of the biggest trucking companies in the country, posting $2.4 billion in sales in 2018 and operating over 7,000 trucks.

The stock has been on a steady upward trajectory for a long time, as the trucking freight gradually expands with the American economy.

Side note: There is a close relationship between truck tonnage and the performance of the Russell 3,000. It’s not a leading indicator, but truck tonnage gives you a real time pulse on the American economy.


My Take

Because trucking relates closely to the performance of the economy, markets have been conditioned to look at this as a cyclical industry subject to the volatility of fuel prices. Another element adding to the cyclicality of this business is shortages of truckers, which inflates wages and pushes up operating costs. It also creates challenges with retention because a big wage spike fuels job hopping.

The cyclicality is a concern, but not as much as it has been in the past. Companies like Werner have been diversifying their business into logistics services, rather than being purely a freight company.

Werner takes steps to reduce the cyclicality of the business. They have fuel surcharge programs with their customers. This practice lets them pass on most of the cost of a fuel increase to the customer, so they don’t have to eat those costs when fuel is volatile.

The logistics business represents 25% of revenue. This logistics segment helps reduce the volatility of earnings due to the cyclicality of the trucking segment. The logistics segment helps Werner connect their customers to shipping and freight services all of the world to accomplish their needs. They help their customers create a global supply chain, which is necessary regardless of what the macro economy is doing.

The extended operating performance of the company is excellent. They remained profitable throughout the financial crisis. Since then, their return on equity has remained in a healthy range of 9-15%. The consistency of the business is one of my main attractions to it.

The stock has declined recently due mainly to concerns about a recession and the trade war having an impact on freight. It is currently 25% off of its 52-week high. There is also anxiety because Amazon is threatening the freight business with its launch of Freight Waves, which will dig into the profitability of the freight industry. There are also concerns that the trade war will decrease trade volumes with Canada and Mexico, something else that is weighing on the stock.

Werner has a high degree of financial quality. The debt/equity ratio is only 10%, compared to an industry average of nearly 100%. They have an Altman Z-Score of 4.03, which means that the probability of bankruptcy is low. The Beneish M-Score is -2.7, which means the likelihood of earnings manipulation is low.

Werner trades at a discount to its average valuation. It currently has a P/E of 12, which compares to a 5-year average P/E of 18.8. An increase to this level would be a 56% increase in the stock price. A boost to the 52-week high would be a 43% increase. On an Enterprise Value/EBIT basis, they trade at 9.7. The 5-year average is 13.75. In 2017, they traded as high as 20x.

On a price/sales basis, they currently trade at .85x. This valuation isn’t quite at the depths that the stock traded at during the Great Recession, but it’s slightly below the levels it traded at in 2010, a time in which the US economy and freight industry were in a much weaker position. The current valuation implies that a bulk of the market’s worries are already priced in. It also eases my mind that the company weathered the last recession well and maintained profitability.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Twin Disc (TWIN)


Key Statistics

Enterprise Value = $227.52 million

Operating Income = $32.64 million

EV/Operating Income = 6.97x

Price/Revenue = .59x

Earnings Yield = 10%

Debt/Equity = 34%

The Company

Twin Disc is a manufacturing firm established in 1918. They have a diversified manufacturing business. A bulk of the business is related to the manufacture of transmissions for boats and heavy duty equipment. In addition to marine transmissions, they make propulsion systems, steering, gearboxes for boats. Basically, they specialize in all mechanical aspects of marine propulsion.

They also make transmissions and propulsion systems for heavy duty off-highway land vehicles. This equipment is used heavily in the oil & gas industry, as well.

The firm sells equipment throughout the world and in multiple markets. The marine business that focuses on boating hobbyists is very cyclical. Like RV’s, boats are a discretionary expense and it is an expense that will be cut when entering a recession. I believe the saying is that “a boat is a hole in the water that you pour money into.”

My Take

Fortunately, the pleasurecraft boating hobbyist segment of the business doesn’t represent the full business. They also manufacture the transmission and propulsion systems in police patrol boats, for instance. Thier products are also used in heavy machinery. A significant customer is Caterpillar, for example.

Twin Disc’s products are also used by natural resources companies, like frackers. The fracking side fueled a boom in the stock in the first half of the decade, which fueled a massive ascent in the stock price. The stock then collapsed with oil prices in 2015-16.

The stock has been punished in the last year over recession worries around the leisure boating segment. A return to the 52-week high would be a 100% increase from current levels. Steel is a major component of its products, and the market is concerned about steel prices, which is also weighing on the stock.

Oil has also struggled since the 2015-16 bust and hasn’t really recovered. The expectation is that a global recession will further reduce the price of oil by reducing demand. Oil stocks as a whole remain depressed, and Twin Disc has been affected by these worries due to its exposure to the fracking industry.

Twin Disc is also globally diversified, with 46% of sales occurring internationally. Much of the economic slowdown of late has been overseas. This slowdown, combined with anxiety about the trade war, also weigh on the stock.

Let’s recap: the market hates Twin Disc because oil is in a slump, everyone is worried about a recession, it is exposed globally, it is impacted by steel prices, and is a cyclical company.

Meanwhile, Twin Disc’s business is performing well. Sales in 2018 were $241 million compared to $168 million in 2017.

Mr. Market appears to be anxious and the company itself is still doing fine.

The market has overreacted to the company’s woes. I’m sure that at least one of the things Mr. Market is fretting over will be resolved. I think it’s unlikely that oil will remain depressed forever, for example.

As for the more cyclical elements of the business, the market has already priced in a recession for this company. It now trades below book value. The last time it was this cheap in 2009 during the Great Recession and during the depths of the oil price crash. Whenever this company trades around book value, it is an opportune time to buy.

From a valuation multiple standpoint, it currently trades at a P/E of 9.8 compared to an industry average of 19. It trades below book, and the 5-year average is 1.5x book. The current price/sales ratio also matches cyclical nadirs in the stock price. It currently trades at .59x. compared to a 5 year average of .97x. The EV/EBIT ratio of 6.97x also compares favorably to the company’s history.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

I am a value investor. My outlook is inspired by the ideas of Benjamin Graham. This site is a real time chronicle of my portfolio and an outlet to share my ideas. I hope you enjoy.