Value stocks with supporting cash flow in rising oil price economy

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July 5, 2022

Florian Weidinger, CEO of Santa Lucia Asset Management (SLAM)

Finding value stocks with supporting cash flow can be a planetary search for portfolio managers.

Florian Weidinger is the CEO of Santa Lucia Asset Management (SLAM), a Singapore-based investment firm since 2021 and is a specialist in value stock discovery.

Previously, he was the founder of Hansabay in 2011, which merged its operations with SLAM in 2021. Prior to that, Mr. Weidinger was Vice Chairman of Lehman Brothers where he last worked for the administration of the insolvency, after several years with risk arbitration. , major investment and investment banking divisions.

He has held several directorships in different sectors. Mr. Weidinger holds a B.Sc. degree from City University London, an MBA from Stanford Graduate School of Business and an MSc in Environment and Resources from the School of Earth Sciences at Stanford University.

“We also like a bank in Papua New Guinea listed in Australia, Kina Securities (ASX:KSL), a rather interesting case. So it’s an Australian listed bank, but it’s the second largest foreign bank in Papua New Guinea.

Papua New Guinea is an economy of approximately $23 billion that is experiencing a significant increase in foreign direct investment due to rising commodity prices. The good thing about these types of money, foreign direct investment – unlike the speculative money of the investors behind the Bloomberg terminals – foreign direct investment is money that stays because it’s invested in fixed assets.

In fact, Papua New Guinea’s $23 billion economy is receiving more than $10 billion or even $15 billion in FDI in the coming years. So we have a significant influx of foreign investment into this country.

This should help improve the overall revenue opportunities of Kinawhich is a direct beneficiary of bringing foreigners into the country because they are – as the country’s number one foreign bank and number two overall – they are the first choice of many foreign businesses.

There’s also a very interesting dynamic going on here in this Westpac (OTCMKTS:WEBNF) from Australia has announced that he is leaving Papua New Guinea.

They are not only leaving Papua New Guinea, Westpac is leaving the entire Pacific, and this is part of a broader strategy shift from Westpac.

Therefore, Kina has a clear rush to pick up a few clients who will need to look for a new banking house in Papua New Guinea.

It’s arguably a more exotic title, but we think it’s a very appealing and enjoyable name. This company pays a 12% dividend yield, is listed in Australia and trades around once the book, and earnings are on a nice upward trajectory.

Katie Stockton, CMT, is founder and managing partner of Fairlead Strategies, which focuses on finding value

Katie Stockton, Founder and Managing Partner, Fairlead Strategies

Katie Stockton warns that current US equity values ​​are not supported by cash flow, so value stocks are not the portfolio backing investors want.

“…We have recommended reduced exposure to the US equity market for now with the intention of revisiting it when we believe a long-term bottom has been established.

Our indicators look at their worst since, unfortunately, 2008, and that doesn’t mean we’ll have that kind of downside in terms of magnitude, but it does increase the downside risk, more than we’ve seen for many years.

And with that, especially on the brink of retirement, it doesn’t make sense to have aggressive long exposure to equities right now.

That’s why we believe the TACK ETF is appropriate for people at this stage of their investing career and with their time horizon, as it allows them to take advantage of the rise in that stock market when the stock market is down. on the rise.

But it has this element of risk that helps them avoid the kind of power declines that we saw in 2008, and before that in 2000 through 2003. So for us, a conservative equity strategy with real attention to the risk management, a bit of hedged equity exposure, seems appropriate to us.

Joe Van Cavage, CFA, is vice president and portfolio manager of Intrepid Capital and focuses on small-cap value stocks

Joe Van Cavage, CFA, Vice President and Portfolio Manager, Intrepid Capital

Saudi Arabia is brimming with cash now that they or they pushed oil prices to unprecedented levels. Joe Van Cavage has found a valuable stock company that will profit.

let’s discuss Valvoline (NYSE: VVV). This company is over 150 years old. But it’s another company that we really like. Valvoline has two related but internally separate businesses. The first is a nationwide chain of automotive quick-lube stores that provide oil changes and ancillary services to customers.

The second is a manufacturing company that produces engine lubricants under the brand Valvoline brand and wholesale them to other car service shops, mass retailers and, of course, through its own chain of stores.

This company was born from Ashland Chemicals (NYSE: ASH) in 2016. And management immediately got to work fixing the company’s capital allocation, which meant taking cash flow from a mature manufacturing business and investing to grow new aggressively fast lubricating activity, which was ignored under Ashland.

This strategy has really paid off as the quick lube business is a gem.

He has several things to do. First, they have been able to manage a very fragmented industry, as customers need fewer and fewer oil changes and used cars can extend the period between them. Valvoline gained market share by focusing on an important niche: extreme convenience and quality products.

This means investing heavily in customer experience as well as branding to ensure customers are aware of by Valvoline quick turnarounds to get them on their way. Therefore, the average flow to Valvoline fast lube stores is much higher than the industry average and is steadily increasing every year.

Second, they have continually improved their training and upselling capabilities at the point of sale to couple additional services with the fast oil changes people are looking for.

Remember to replace wiper fluids, engine and cabin filters, etc. Attach rates continue to climb and increase the average ticket by a nice margin.

Finally, newer cars on the road require synthetic oil more often than conventional.

It costs the consumer about three times as much, but doesn’t cost much more to manufacture. And that has been another ticket and gross margin driver, albeit less driven by management efforts.

So you combine the market share gains with those ticket drivers, and you have a business that’s had 15 straight years of same-store sales increases, including 2020 when the country was shut down and no one wasn’t driving. It is therefore a very good franchise for the general public.

That said, we believe management has been smart in aggressively investing the company’s cash flow into its expansion. The company’s store count has more than doubled since the split and will continue to grow by double digits.

Margins in this segment are already high, but we believe they are undercompensated as the large new store base is slow to mature.

There’s just a lot to like about the setup considering the existing store base is heading into double digit pricing this year despite a huge rebound in 2021.

And then, manufacturing is also a decent business, but not quite on the same level with slower growth prospects and weaker pricing power.

It has suffered over the past year as its main input, which is oil, soars. And it takes them longer to convey that to retail customers like walmart (NYSE:WMT) than it does for the quick lube business to raise prices for a consumer who has just walked into the store.

But it’s something they will recover over a cycle and can probably be seen as a margin catalyst built into the idea.

Valvoline will separate these two trades. Now the separation of these companies can create a lot of value by allowing more appropriate shareholder bases for a stable cash flow source that can pay a large dividend on the manufacturing side versus a concept of growth in the commerce of high-margin retailer that invests most of cash flow in new quick lube stores.

However, this is a trickier separation than normal since the manufacturing company sells its products to the quick lube company at cost. Care must therefore be taken that this separation does not destroy the value. But management has communicated well that they are aware of this issue while structuring any deal to avoid something like this.

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