If DEOPX Were a Stock, We Would Be Buyers

November 2022

That said, we are more excited about the current setup for the Fund than we have been in years. In fact, this reminds us of the setup for the Fund following a bout of under-performance in 2015 and 2016, when macro forces gave us buying opportunities in some strong franchises that went on to outperform.

As most of you know, we have a focus on stories of compounding growth. Recent market weakness has dragged down a number of such stories and brought us depressed multiples in some very high-quality situations with attractive multiyear runways. We’ve held cash during market tumult and have recently used it to add to some existing names and establish a couple new positions. Let’s walk through some examples:

• American Tower Corp (AMT): AMT remains one of the highest return, most durable businesses we follow and should be able to grow at an outsized rate as it benefits from secular tailwinds in the wireless industry (namely the shift to 5G networks). All told, we believe the business is capable of compounding cash flows at an 8-10% clip with little risk while continuing to grow the dividend (yields ~2.8%) at a commensurate rate.

• Live Nation Entertainment Inc. (LYV): Despite nearly every operating metric being at an all-time high and a 2023 artist pipeline as large as the company has seen, the stock has retreated nearly 35% this year alongside consumer concerns and broader multiple compression for the market. Though an economic slowdown seems unavoidable, we think this is a compelling opportunity to add exposure to a near monopoly operating in an industry with extremely attractive secular growth drivers.

• Lamar Advertising Co (LAMR): We recently added to LAMR in the low $80’s and continue to think the stock is a good deal. Outdoor advertising demand remains very strong driven by new categories (e.g. sports betting) and the ongoing digitization of boards. The stock trades for only 12x adjusted funds from operations (AFFO) for next year and yields 5.2% (and the dividend is up 17% over 2021).

• Sherwin-Williams Co (SHW): We think SHW is in the early stages of outperformance as the company has finally caught up to the raw material/supply chain headwinds it has faced for the last 18 months. With improving volumes and several price increases, gross margins should return to historical norms in 2023, which would drive earnings per share (EPS) over $10. At 21x forward EPS, we think shares are attractively priced.

• Pool Corp (POOL): We initiated a position in this leading pool products distributor. POOL is a best-in-class growth story with a wide moat and long runway, pristine balance sheet, and strong cash flow. This, coupled with a valuation approaching levels last seen during the housing crash, and we think now is a good time to continue building a position in this high-quality compounder.

• PTC Inc. (PTC): The PTC software portfolio is poised to benefit from a number of secular growth themes including the digital transformation in industrial markets and domestic re-shoring of manufacturing capacity. We think PTC can deliver double-digit recurring revenue growth and drive operating leverage in the near-term that could support consistent free cash flow growth in the mid-20’s or better. With the stock trading under 25x out year free cash flow (FCF), we think the risk/reward is attractive.

• Watsco Inc. (WSO): We recently added amid weakness due to investor concerns around the sustainability of results amid the waning COVID-era benefits. We feel the stock’s current valuation fails to reflect recent structural improvements to profitability while also underestimating several long-term growth drivers that will aid revenues and margins for years to come. WSO has a net debt free balance sheet and pays a dividend yielding 4%.

In each of these cases, it seems investors are losing sight of longer-term opportunity for fear of near-terms trends. Only broad-based fears would give us such deals in these “compounding machines.” We don’t know when markets will definitively turn higher, but can say we are getting better values and feel the overall risk/reward profile for the Fund suggests an element of timeliness. Things could get worse before they get better, but if DEOPX were a stock we would be buyers.