CWS Market Review – June 21, 2021

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Raven Industries Soars 50% on Buyout Offer

In our newsletter from two weeks ago, I featured the company Raven Industries (RAVN). I’ve been a fan of Raven for many years. The company has been a remarkable performer for decades, yet it’s virtually ignored by Wall Street.

Well, that was very fortuitous timing. Today, CNH Industrials (CNHI) offered to buy out Raven for $58 per share. That’s a 50% premium from Friday’s closing price. Raven’s stock has shot up 49% in today’s trading.

CNH Industrial is the world’s second largest agricultural equipment maker. The deal values Raven at $2.1 billion. The company already has plans to spin off its truck, bus and engine business sometime next year.

The deal is going to be funded with cash on hand. They hope to finish the merger by the end of this year. From the press release: “The transaction is expected to generate approximately US$400 million of run-rate revenue synergies by calendar year 2025, resulting in US$150 million of incremental EBITDA.”

I tend to cringe whenever I hear about these “expected synergies” from companies. I’m sure they mean well, and they’re trying to justify a big-ticket purchase, but reality has a habit of prevailing over forecasts.

I’m very happy for Raven. Here’s some of what I said about Raven two weeks ago:

If I told you about a stock that’s up 750-fold over the last 40 years, you’d probably assume that it’s very well-known on Wall Street. Instead, Raven Industries (RAVN) is barely a speck on the canyons of Wall Street. The stock has been an amazing winner, yet it’s virtually ignored. Only a handful of Wall Street analysts bother covering it.

What do they do? Raven has picked up where the Montgolfier brothers left off. Raven specializes in balloons. Or to be more specific, as Dun & Bradstreet describes them, “a diversified technology company that caters to the industrial, agricultural, energy, construction, military, and aerospace sectors.”

The company has a few divisions, but what most gets my attention is Raven’s Aerostar division. This group sells high-altitude research balloons as well as parachutes and protective wear used by U.S. agencies. (See this video.)

Raven’s Engineered Films Division makes reinforced plastic sheeting for various applications. Their Applied Technology Division manufactures high-tech agricultural aids, from GPS-based steering devices and chemical spray equipment to field computers.

I said that if Raven were to fall to a decent valuation, then it would make an attractive addition to our Buy List. Apparently, CNH agreed! (Maybe they’re subscribers!)

This is a reminder that there are lots of great little companies out there that few people know about.

Why Value Isn’t Exactly Value

On Friday, the stock market fell for the fourth day in a row. The S&P 500 closed below its 50-day moving average for the first time since March.

The selling didn’t continue into today. In fact, today was a pretty strong day for the stock market. But what struck me was the strength in value stocks. The value stock index more than doubled the growth stock index. Typically, value underperforms on strong up days. Of course, anything typical on Wall Street has plenty of exceptions.

I think today’s action highlights a problem with these categories like growth and value. The problem is that the sectors are based on very mechanistic rules. The value portfolio is based on stocks with low price-to-book ratios. As a result, the value indexes are crowded with many bank and energy stocks.

Due to the particulars of those industries, it’s very likely that any stock operating in those fields will have an unusually low price-to-book ratio. That’s just part of the business.

Classically, when I think of a value stock, I think of a Ben Graham-type company that’s going for a decent price. Now, when I see there’s been a big move in value, I assume it’s been a good day for cyclicals. That’s what today was.

I’ll give you some eye-opening stats. The S&P 500 Value Index is 21.4% Financials and 5.6% Energy. Compare that with the S&P 500 Growth Index which is 2.8% Financials and 0.1% Energy. I think they need to rework these indices to get a better idea of how growth and value are behaving.

The twitter handle SentimenTrader had a fascinating observation. Despite the S&P 500 being close to a new high, many stocks are near their one-month low. By ST’s count, more than 40% of stocks in the S&P 500 are at their one-month low which is an all-time record when (importantly) the overall index is so high.

There are a few things that could be causing this. One is that this rally isn’t as broad as it appears. But I think the more likely scenario is that this rally has already been so broad and stable. As a result, dropping to a one-month low ain’t that big a deal.

Think of it this way. Imagine if the stock market were a single stock and that stock had been trading between $99 and $100 per share every day for a month. Then suddenly it dropped to $98. That’s basically what last week was. Sure, that’s a one-month low but only because the market had been so stable.

New High Today for Zoetis

We added Zoetis (ZTS) to our Buy List this year. I really like this animal-healthcare stock. Despite my optimism, the stock was an immediate flop.

In mid-February, the Q4 earnings report was pretty good. Zoetis beat by four cents per share. The company also said it expected full-year earnings between $4.36 and $4.46 per share. Wall Street had been expecting $4.26 per share.

Still, Wall Street didn’t seem to care. By early March, we were sitting on a 13% loss. Slowly, the stock started to turn around for us. A few weeks ago, Zoetis reported Q1 earnings of $1.26 per share. That was 23 cents more than expectations.

The company also lifted its full-year outlook. The new guidance is for $4.42 to $4.51 per share. Again, the stock took a short-term hit after the earnings report.

Here we are a few weeks later and Zoetis hit a new high today. The stock is up close to 30% from its March low. We didn’t do anything other than buy and then hold onto a good stock.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

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Posted by on June 21st, 2021 at 6:20 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.