Most of us spend Thanksgiving eating good food, catching up to family, maybe watching a football game.
I’m not averse to those things.
But as it’s November, I’ll spend a fair bit of time talking about earnings to whoever will listen, too.
See, every February, May, August, and November, Wall Street has to open up its kimono and show the world what they have been up to in the most recent quarter. Forty-five days after a calendar quarter ends, all money managers, hedge funds, private equity firms, and venture capital funds must reveal all their holdings as of the end of the quarter.
No one is exempt. Everyone with over $100 in assets under management must file the form by the deadline.
By comparing what the firms hold at the end of the most recent quarter, we can quickly see what the smartest money in the world has been doing with their clients and their own cash.
I think of it as the world’s greatest free research department. And this Thanksgiving, they’ve produced some very interesting research for us indeed…
I have studied these filings for years and have drawn some interesting conclusions. One of the most useful is that the best-known managers and investors are rarely the top performers.
For example, if you cloned Warren Buffett since 2010 and owned the top ten holdings of Berkshire Hathaway Inc. (BRK-A), you would have underperformed the S&P 500.
If you had owned the top ten holdings of Leonard Green and Company, you would have crushed the S&P 500 by 50%, with annual returns approaching 20%.
Who is Leonard Green and Company? Unfortunately, most investors have no clue who they are or what they do.
Leonard Green and Company is a private equity firm based in Los Angeles. They have been around since 1989 and have over $70 billion in assets. They tend to invest in market-leading companies that generate lots of free cash. They rent to have a value-oriented approach to valuing their buyout candidates, and some of that approach spills over into their investments in the public securities portfolio.
Often their top ten holdings will include companies they bought out in years past and have taken public as part of a long-term exit strategy. Leonard Green still owns significant amounts of these companies and is working to generate the type of profits that moves the stock price a lot higher and allows them to lock in higher profits for their investors.
Keep in mind that because of the fee structure of private equity firms, 20% of any additional gains go right into the firm’s pockets. They have an enormous incentive to improve earnings, pay down debt, and get the stock price higher.
This quarter Leonard Green was not very active at all. Their lack of buying activity reinforces my view that markets are not done going down, and interest rate increases are not yet priced into the markets.
Leonard Green has been active in the markets for 43 years and has a fantastic track record as a private equity firm and public market investor. If they are not buying with both hands to take advantage of all the underpriced companies, the time to be an aggressive buyer is not yet here.
One company they were buying in the third quarter was WESCO International Inc. (WCC). WESCO International was founded back in 1922 as the distribution arm of Westinghouse Electric. Today they sell a wide range of electrical equipment, lighting cables, computer and communication networking supplies, and supplies and equipment for large utility companies, wireless companies, broadband operators, and contractors serving these industries.
Although selling cables, meters, switches, and other electrical equipment sounds pretty boring initially, the reality is that it is anything but boring.
WESCO will play a role in some of the most significant developments in the world. They already play a role in the continued roll-out of 5G in the United States. Customers will be buying supplies to continue hooking the nation up to broadband so that underserved communities can access high-speed internet.
To increase the use of renewable energy and transition to electric vehicles, the electrical grid is going to have to be repaired, expanded, secured, and improved. WESCO products and services will play an enormous role in this transition.
Automation will be massive in many industries, and WESCO will play an enormous role in making the industry more efficient, productive, and safer.
The Internet of Things devices will triple from 8.74 billion in 2020 to more than 25.4 billion worldwide by 2030. WESCO products will be a considerable part of the growth in IoT.
We need an additional 4 million homes to meet demand here in the United States, and products and services from WESCO will play a big part in getting all these homes wired for electrical power and broadband.
WESCO International just reported a record quarter. The backlog of orders is also at record levels, so management expects continued strong growth.
The market is ignoring this boring old industrial company, and the shares are trading at 8.7 times earnings. When institutions realize that this boring company is making products that drive some of the hottest trends in the world, the valuation of the shares should skyrocket.
Leonard Green added more than 700,000 shares of the stake in WESCO in the quarter and now owns more than 12% of the company.
This is a company worth accumulating for the patient, aggressive investors. They will generate enormous profits in the years ahead by providing the products and services that provide the infrastructure for the world to change.
