Issue #32: A building materials supplier that institutions and analysts love, and a global leader in interactive fitness 🏃
Stanley Druckenmiller has been called “the greatest money-making machine in history”.
In over 40 years of investing, Druckenmiller has never lost money over the course of a year. His fund returned 11% in 2008, a year of carnage in the industry. In one stretch he gained over 30% a year for 30 straight years.
What does Stanley Druckenmiller have to teach us? Here’s a quote from a recent interview.
“I’ve looked at all the investors (that) have very large reputations — Warren Buffett, Carl Icahn, George Soros — they all only have one thing in common.
And it’s the exact opposite of what they teach in a business school. It is to make large concentrated bets where they have a lot of conviction. They’re not buying 35 or 40 names and diversifying...
...My favorite quote of all time is maybe Mark Twain: “Put all your eggs in one basket and watch the basket carefully.”
I tend to think that’s what great investors do.”
There’s still a strong argument for diversification, but when the conviction is there - and based on solid information - sometimes it pays to make that concentrated bet. As always, consider your own financial situation, objectives and appetite for risk before making a decision.
Let's get into this week’s report:
- A market leader in a “boring” niche posting very exciting growth figures.
- An innovative driver of a new fitness niche at a potential entry point after a temporary setback.
Builders FirstSource, Inc. ($BLDR)
$52.23 - Share price at the time of writing
- Builders FirstSource is one of America’s largest providers of materials and services to the US residential construction and repair business.
- $BLDR operates 550 sales outlets in 42 states across the US.
- The Company is bringing technological innovation to one of America’s least digitized industries, shortening construction cycles and reducing costs.
- $BLDR stock is almost entirely owned by institutions. Revenues and earnings are on dramatic uptrends and analyst sentiment is very positive.
What they do:
Builders FirstSource sells building materials, prefabricated components, and building services. The primary customers are building and remodeling professionals.
Builders FirstSource has an extremely diversified customer base. In 2020 their top 10 customers accounted for only 15.8% of sales, and no single customer provided over 6% of sales.
$BLDR has completed a series of strategic mergers and acquisitions in 2021.
- On Jan. 1 $BLDR concluded a merger with BMC Stock Holdings, a building supply firm with $3.8 billion in sales in the year before the merger. It was the largest merger in the history of the industry and expanded the Company’s geographical footprint and product range.
- On May 3 $BLDR acquired John’s Lumber, a building materials firm supplying Michigan’s largest housing markets.
- On June 29 the Company closed a deal to acquire WTS Paradigm, a supplier of software solutions and services to the building industry. The merger is a key piece of a plan to leverage technology to improve efficiency.
- On July 1 $BLDR closed the acquisition of Alliance Lumber, the largest independent supplier of building materials in Arizona, serving that state’s highest-growth areas.
There is only one US building material supplier with an equivalent scale: ABC Supply, with 2020 annual sales of $11.7 billion, compared to a combined $11.2 billion for $BLDR. ABC does not deliver lumber or provide residential framing services. Builders FirstSupply does.
Builders FirstSupply is one of the few building products suppliers with its own manufacturing capacity. That capacity allows the Company to deliver prefabricated components and assemblies constructed in carefully controlled conditions, cutting costs and improving quality.
What we learned from social media discussion:
Builders FirstSource is essentially invisible on Reddit and Twitter: it’s the ultimate under-the-radar stock.
On August 5 $BLDR announced 2Q results including a 186% increase in net sales, a 206% increase in gross profit, and a 257% increase in earnings per share. Not one Reddit user mentioned the stock on August 5 or 6.
It’s not entirely clear how retail investors have managed to overlook those results. This is not a particularly sexy stock. It doesn’t deliver cutting-edge tech and the CEO doesn’t send rockets into space. Most investors have probably never heard of the company.
It’s not surprising that $BLDR is owned almost entirely by institutions: institutional ownership stands at 99.71%.
💸 Signal: Ken Griffin of Citadel Advisors and Stanley Druckenmiller of Duquesne Family Office Holdings have acquired a million shares each of $BLDR in 2021.
Why $BLDR could be valuable:
Demand for residential homes continues to be extremely high. Sales are still constrained by the availability of materials and labor.
Both of these constraints actually benefit $BLDR. Shortages of labor in the field make the Company’s prefabricated components more appealing to builders who don’t have the workers to do fabrication work on-site.
Shortages of materials translate into higher prices and higher sales for $BLDR.
Both housing starts and building permit issuance are on a steady uptrend, with occasional spikes and troughs.
The remodeling industry, which also generates significant sales, is also on track for escalating demand.
Construction industry trade publications are underscoring the need for builders and their suppliers to embrace and exploit emerging technologies to build efficiency. Builders FirstSource has identified construction as the second-least digitized industry in the country, behind only agriculture.
Builders FirstSource is leading the movement toward better exploitation of technology. The acquisition of WTS Paradigm underscores the Company’s mission to bring construction into the digital age.
As mentioned earlier, $BLDR is posting the kind of growth figures you’d expect to see from a cutting-edge tech firm. Some of the growth is driven by the BMC acquisition and high materials pricing, but projections indicate that management sees the growth rate as sustainable.
The $BLDR trailing P/E ratio is only 10.4. The average trailing P/E ratio for companies in the S&P 500 is 23.8. This places $BLDR far below the valuation you expect to see in a stock with an average growth rate, let alone a high-growth stock.
The critical PEG (price/earnings growth) ratio for $BLDR is only .38, far below the S&P 500 average of 1.44. On the basis of earnings and growth, the stock is undervalued relative to the market as a whole.
10 analysts were covering $BLDR in August. Four rated it “Strong Buy”, Four rated it “Buy”, and two said “Hold”. The average analyst price target was $67.54, 27% above today’s level.
What the risks are:
Builders FirstSource supplies the residential housing industry. The residential housing industry is heavily tied to interest rates. If the Fed raises rates mortgage rates could rise with them, making houses harder to buy and reducing construction levels.
Rising prices of materials and labor have made residential housing less affordable. In the short term, this helps Builders FirstSource, but if rising prices reduce housing demand the industry could slow down.
Residential construction is also closely tied to overall economic conditions. A serious economic slowdown could dramatically reduce demand for the products and services that Builders FirstSource provides.
Bottom line: Builders FirstSource has posted stellar growth figures while flying under the radar of retail investors. The fundamentals are solid and there’s a strong base of institutional ownership. If the current economic expansion continues the stock will almost certainly draw attention and interest.
Peloton Interactive, Inc. ($PTON)
$104.34 - Share price at the time of writing
- Peloton Interactive is a global leader in “connected fitness”: the combination of fitness equipment, streaming classes, and interaction with other users.
- Peloton has over 5.9 million members, with 1.2 million of them added in FY2021.
- Peloton’s FY2021 revenue was up 120% over 2020 and 340% over 2019.
- $PTON stock is down 37% from its January 2021 peak, driven by safety-related product recalls and concerns over how it will handle a post-pandemic world.
What they do:
Peloton Interactive operates the largest connected fitness platform in the world. The platform combines exercise equipment, technology, and media.
Peloton hardware includes a range of high-end stationary bikes and treadmills, which integrate touchscreens, immersive and video, heart rate monitors, and other features.
Peloton supplements its hardware with subscriptions to a wide range of live and on-demand classes covering a wide spectrum of fitness activities. Subscribers are also able to interact, compete, and cooperate with other members, building a dedicated community.
The Company’s 12-month subscriber retention is 92%. Peloton’s Net Promoter Score, a key metric of customer satisfaction, is 76, the highest of any company measured.
$PTON is committed to expanding its product range by developing new interactive exercise hardware and classes.
Peloton’s priority on home-based fitness left the Company in an ideal position to benefit from the pandemic. As gyms closed and opportunities for out-of-home exercise dwindled, Peloton’s sales and subscriptions soared.
Why social media interest is spiking:
Reddit mentions of $PTON over the last 7 days spiked over 531% from the previous 7-day period.
The obvious trigger was Peloton’s August 27 release of Q4 and FY2021 results. The release was headlined by positive news. Revenues reached $4 billion, up from $1.8 billion in FY 2020, and management forecasted revenues of $5.4 billion in FY 2022.
Investors focused more on the dark cloud: greater than expected losses and slowing growth in Q4.
The increased losses were caused mainly by the recall of Peloton treadmills after several accidents. The products have since been released with new safety features, but the process was costly and the Company still faces several government investigations and lawsuits.
Some Reddit investors also believe that the relaxing of COVID restrictions will lead more people back into gyms and outdoor exercise and reduce the appeal of Peloton’s home-focused fitness experience. Peloton’s decision to reduce the price of its industry-leading stationary bikes, a major revenue generator, also drew criticism.
💸 Signal: Cathie Wood of ARK Invest Holdings has purchased almost 1.7 million shares of $PTON since October 2020. Tiger Global holds over 7 million shares.
Why $PTON could be valuable:
The health and fitness market is expected to grow at a CAGR of 7.21% through 2026. The US is expected to remain the largest market, but Asia-Pacific markets could lead to growth in the future.
Peloton dominates the interactive home fitness niche, which it effectively invented. The Company is still led by its founder and driven by its original vision of creating a connected fitness empire.
Peloton’s home fitness system is ideally suited to urban residents who have limited time and limited access to outdoor fitness activities.
The highly supportive social environment and huge variety of classes Peloton offers can appeal to individuals who want a fitness program but are turned off by the more competitive and elitist environment that prevails in many gyms and health clubs.
Peloton is aggressively targeting a global footprint and is spending to market its products and services in key markets around the world. That spending adds to operating losses, but if Peloton can establish itself in key markets ahead of its competition the expense will be worth it.
Out of 28 analysts covering $PTON 7 rate it a “Strong Buy”, 14 say “Buy”, and 5 say “Hold”. The consensus price target is $134.62, 29% above today’s level.
What the risks are:
Peloton products are relatively expensive, and the Company has a reputation for targeting affluent customers. If they are unable to introduce products and services that appeal to a wider market, growth potential may be constrained.
Peloton effectively invented the interactive fitness niche and has dominated that niche, but success breeds competition and some competitors may have pricing and novelty advantages. A surge of competing products could cut into Peloton’s growth.
Legal or regulatory action over perceived safety issues could have a significant impact on Peloton’s finances and reputation.
The relaxing of pandemic restrictions could lead fitness customers back to gyms and outdoor exercise, affecting Peloton’s growth rate.
Peloton’s valuation is only sustainable with continued rapid growth, so any reduction in the growth rate could have an immediate impact on the stock price.
Bottom line: If home-based interactive fitness continues as a long-term trend Peloton is well-positioned to benefit. Peloton's biggest challenge? Will it be able to maintain its growth when the fitness market returns to gyms as the pandemic winds down.