Value Portfolio

As a maker of coatings, tapes, adhesives and sealants for industrial use, Chase Corp. (NYSE: CCF) may not be the world’s most glamorous company. But we’re very excited about its stock, up more than 20% since joining the small-cap momentum portfolio a year ago.

Chase finished its 2015 fiscal year in impressive fashion, with the latest earnings report showing gains of 6.4% and 16%, respectively, in fourth-quarter revenue and diluted earnings to $61 million and $0.87 per share. Adjusted EBITDA rose 16.8% to $16.0 million for the quarter.

In a press release, CEO Adam Chase identified a key growth driver:

We had a positive finish to our fiscal year driven primarily by the Construction Materials segment’s year-over-year performance. It was nice to see a fourth quarter recovery in seasonal demand for both domestic pipeline maintenance coatings and bridge and highway waterproofing products after a slow start.

For the whole year, Construction Materials grew revenue 13.2% to $61.5 million. The segment now accounts for 26% of Chase’s top line versus 24% in fiscal 2013.

The Industrial Materials segment, which mainly makes tapes and other protective coverings for the electronics and telecommunications industries, remains by far the largest revenue source, though. In fiscal 2015, the segment took in $176.6 million, or 74% of the full-year total. While slower-growing, it still expanded by a healthy 4.1%.

A convincing sign fiscal 2016 will be another good year for Chase: As of October 31, the firm had a robust order backlog of $12.7 million, not far off its average year-end backlog of $13.5 million over the past decade.

While the markets had an abysmal start to 2016, Chase’s stock price jumped from $38 dollars in mid-January to $48 by February 1^st. The more than 26% boost in share price came after first-quarter results were reported on January 7^th. Revenue of $57.5 million beat revenue of nearly $56 million in the same quarter over the previous year, an increase of 2.8%. Net income increased from $6.91 million in the first quarter of the previous year to $7.45 million. Earnings per share of $0.80 were up $0.06 year-over-year.

The company reported a gain on the sale of its RodPack wind energy business of about $1 million.

CEO Adam Chase cited strength in the Industrial Materials segment in Mexico and Eastern Europe as well as the Construction Materials segment in the Middle East. Chase also commented that preparations to demolish and start marketing the founding site in Randolph, MA were underway.

With a trailing P/E ratio of only 14.5, Chase is exceptionally affordable for a growth stock. Yield hounds will also appreciate its reliable dividend, which rose 30% in fiscal 2015 to the current $0.65 a share and more than tripled over the past five years.

Roadrunner value pick Exactech (Nasdaq: EXAC) has been cranking out new additions to its lineup of orthopedic devices used to rebuild deteriorated bones and joints. In the past few months alone, the firm announced initial surgical successes with implants that salvage failedknee and hip replacements. It introduced a shoulder reconstruction prosthesis andspinal restoration implant recently, too.

These innovations couldn’t have come at a better time, as Exactech is faced with softening global sales and stiff currency headwinds in foreign markets, which account for 28% of total revenue. CEO David Petty described the effects of these hurdles during the October 28th conference call.

For the first nine months of 2015, worldwide sales were down 3% to $179.1 million and were flat in constant currency. U.S. sales were $123.3 million, compared with $123.8 million for the first nine months of last year. For the first nine months, international sales were down 9% to $55.8 million but were up 1% in constant currency.

The good news is Petty expects recent launches to juice up business in 2016 and beyond as Exactech expands distribution channels, an area of heavy investment in recent quarters, especially in foreign markets. Within a couple years, the firm should also start seeing healthy revenue from a new ankle prosthesis, which Petty said would debut in operating rooms next year.

In the meantime, investors can take solace in Exactech’s strong financial position, which includes steadily rising cash balances, expanding stockholders’ equity and debt levels well below the medical device industry average.

Its price-to-earnings ratio of 16 is nearly a 30% discount to the historical average of 22 and almost 60% below the industry average P/E of 36. Since product innovations are clearly setting the stage for a strong rally, we’d call Exactech one of the deepest values around.

No pun intended, but it was a bang-up fourth quarter for automotive firm Gentex Corporation (Nasdaq: GNTX), a Roadrunner value portfolio for three years. Quarterly highlights included 25% increases in both net income and earnings to $88 million and $0.30 per share, respectively.

Profit growth was due mainly to strong demand for Gentex’s flagship products, so-called electrochromic rear- and side-view mirrors that dim automatically to minimize headlight glare. Unit shipments of such mirrors spiked 17% during the quarter, contributing to a 16% gain in total revenue to $406 million. The gross margin rose almost two percentage points to 40.2%, despite a substantial increase in the cost of goods sold, R&D and other operating expenses.

During the fourth-quarter conference call, Vice President of Engineering Neil Boehm put recent performance into broad context:

[Gentex] has continued to demonstrate solid growth at one of the fastest rates in company history. This growth is being driven by continued penetration of our core electrochromic technology on many vehicles that are new applications for our products.

Looking at the growth rate of inside and outside electrochromic mirrors, as measured in new vehicle launches, the company has continued a solid history of growth over the last three years. In 2013, the company had 37 new launches of inside and outside electrochromic mirrors. In 2014, there were 43 new launches of inside and outside electrochromic mirrors, and in 2015 the company had 63 new launches of inside and outside electrochromic mirrors.

Management expects robust performance again in 2016, including as much as an 11% gain in revenue to $1.7 billion. With demand for electrochromic mirrors so strong, Gentex remains plenty capable of such growth. The long-term looks good, too, as there are other potential uses for its technology in the automotive and aerospace industries, analysts say.

Yet Gentex is still widely overlooked: Its stock currently sells for only 10.5 times 2016 estimates. Plus, many investors are probably unaware the firm has been paying dividends for many years and currently yields a solid 2.5%.

The dark cloud of crashing energy prices continues to hang over value portfolio holding RPC Inc. (NYSE: RES), a provider of oilfield services and equipment mainly to domestic energy exploration, production and development companies. At about $12.25 a share, RPC’s stock is nearly 50% below its summer 2014 peak. And as oil and gas plummet further still, breaching lows many analysts never anticipated, we expect RPC’s stock to recover only slowly.

Third-quarter performance, reported October 28th, reflected the firm’s tribulations. Yet, results also illustrated underlying strength that should help nicely position RPC for an eventual energy- sector rebound.

First the bad news, as delivered by CFO Ben Palmer during the latest conference call:

For the third quarter, revenues decreased to $291.9 million compared to $620.7 million in the prior year. These lower revenues resulted from decreased activity levels and pricing in almost all of our service lines. EBITDA for the third quarter decreased by 90.6% to $15.4 million compared to $163.4 million for the same period last year. Operating loss for the quarter was $51.5 million compared to operating profit of $106.7 million in the prior year. Our diluted losses per share were $0.16 compared to earnings per share of $0.30 in the prior year.

However, several promising bright spots emerged in Q3. Sequentially, revenues were only down 1.9% and operating losses actually shrank slightly to $51.5 million. There were substantial declines in the cost of revenue and in selling, general and administrative expenses.

CEO Richard Hubbell offered an optimistic outlook:

We note that service intensity in our pressure pumping service line increased during third quarter, even in our declining operating environment, which offers a glimpse of an eventual recovery. I am pleased to report that as a result of our expense controls, working capital management and capital expenditure reduction initiatives, the balance on our syndicated credit facility declined to $19.5 million at the end of the third quarter, a decline of $35.4 million compared to the end of the second quarter. Our financial strength will allow us to endure throughout the remainder of this downturn and emerge as a stronger service provider when the industry eventually recovers.

Key insiders have been boosting their positions in California-based water utility SJW Corp. (NYSE: SJW), a holding in our own small-value portfolio for about nine months. In December, insiders bought 23,000 shares worth nearly $650,000 at the time of purchase. At year end, insider ownership totaled nearly 1.5 million shares with a market value of nearly $45 million.

Although insiders aren’t required to disclose the rationale for their trades, in the case of SJW they were likely taking advantage of a recent opportunity to buy on the dip. The firm’s stock headed south after the latest earnings release, which showed year-over-year decreases in third-quarter revenue and net income of 34% and 75%, respectively. Revenue and profits were down significantly over the prior nine months, too.

These declines weren’t SJW’s fault, though. As a regulated utility, its performance depends heavily on general rate case decisions, legal proceedings in which regulators determine how much the company can charge customers for water for the next three years. Third-quarter woes stemmed from SJW’s 2012 rate case decision, as the firm explained in its quarterly SEC filing:

The decrease in net income for the three and nine months ended September 30, 2015 was primarily due to a decrease in revenue as a result of the recognition of [$46.5 million] true-up revenue from the 2014 decision of the 2012 General Rate Case. On September 29, 2014, the [California Public Utility Commission] approved a surcharge to true-up the difference between interim rates and authorized rates…

During the third-quarter conference call, CEO Richard Roth added:

Despite the regulatory delay that has impacted earnings, the fundamental elements that drive our business and lead to sustained profitability remain strong. As evidence of SJW’s strong fundamentals…capital expenditure programs including the Montevina Water Treatment plant upgrade project are on track to add $108 million of capital improvements in 2015.

To help put SJW’s capital expenditure programs into perspective, please note that the company’s rate base has grown at a compound annual growth rate of over 8% since 2010.

Expansion efforts at value portfolio holding Stepan Company (NYSE: SCL) are moving along nicely, prompting optimism about the specialty chemical maker’s profit outlook. When Stepan reports fourth-quarter results on February 24, analysts see earnings jumping nearly 40% to $0.53 per share and full-year profits rising 29% to $3.26 a share.

Clearly, they saw promise in the latest earnings report, in which CEO F. Quinn Stepan, Jr. highlighted recent achievements and their effect on crucial functions, namely sulfonation and polyol production. Sulfonation is a process that yields Stepan’s flagship products, surfactants, which are chemicals found in household and industrial cleaners. Polyols are chemical components of polyurethane coatings, adhesives and sealants, among many other products that contain polymers (synthetic plastic).

Mr. Stepan remarked:

During the quarter, we made significant progress on a number of key strategic initiatives. Our long-term supply agreement with The Sun Products Corporation, announced on July 9, 2015, has significantly improved our North American sulfonation capacity utilization. We have successfully integrated our second-quarter purchase of a sulfonation plant in Bahia, Brazil. We have advanced projects to add polyol capacity in China, Poland and the United States.

The Sun Products Corporation Mr. Stepan mentioned is one of the top laundry detergent manufacturers in the U.S. Under the new deal between the two firms, Stepan Company will supply all the surfactant Sun Products needs to make its detergents.

Despite currency headwinds, recent initiatives propelled Stepan to an excellent Q3. Total sales volume increased 7%, while surfactant and polymer sales volumes rose 8% and 4%, respectively.

In terms of profit, there was an 84% gain in net income to $24.9 million. Surfactant operating income nearly doubled to $21.8 million and polymer operating income jumped 35% to a company record $24.6 million. Polymers had record quarter mainly because of volume and margin growth in rigid polyols, CFO Scott Beamer said.

It’s still rough going for RoadRunner small-value pick Vishay Precision Group (NYSE: VGP), an industrial equipment components maker that’s been a casualty of weak demand in struggling sectors like steel and energy. The third-quarter earnings release showed further declines in overall financial performance, and we wouldn’t be surprised if the fourth-quarter report due out later this month contained similar news.

But as promised in our October update on the firm, we’re watching closely to be sure Vishay keeps making headway on technologies that could pay off handsomely down the road. Especially promising is a burgeoning line of smart sensors that maximize the function of many types of equipment such as that used in transportation, agriculture and medicine, to name just a few.

Sales of these advanced sensors have exploded, more than doubling in 2014 and posting impressive gains last year, too. CEO Ziv Shoshani offered his take on third-quarter sales during the latest conference call:

An important part of our strategy is to grow by developing new product offerings and our advanced sensor continues to gain traction. This platform which is part of our [Foil Technology Products] segment in which we developed a few years ago is reporting revenue increase of 47.3% in Q3 of 2015 versus Q3 of 2014. I’m very pleased with the continued acceptance of this new sensor platform, as it offers enhanced performance to customers in conjunction with the competitive cost base.

Vishay is also making progress with acquisitions, significantly boosting its sensor business with a $20 million buyout of Stress-Tek in January. Stress-Tek is a leader in sensor and display systems for use in the trucking, timber, refuse and mining industries, among others.

To help trim expenses during the current downturn, Vishay launched a comprehensiverestructuring and cost-reduction program in November. Although this will trigger roughly a $4 million restructuring charge primarily affecting fourth-quarter results, the program is expected to save about $6 million annually beginning this year.

We love to see companies making smart investments like these despite tough times. In Vishay’s case, they should set the stage for a strong rebound once business conditions finally improve.

We’ll never get why only one Wall Street analyst bothers to follow Weyco Group (Nasdaq: WEYS), which has been in our small-cap value portfolio for nearly two years. Granted, the venerable footwear retailer isn’t grabbing headlines with soaring stock prices, but it’s a top-notch dividend payer and total returns are solid. Shares of Weyco delivered an annualized 7% with about 20% less volatility than the S&P 500 over the past three years.

Currently best known for BOGS brand footwear, the firm also markets under half a dozen other well-known names like Florsheim, Stacy Adams and Umi. A long history of brand success has led to decades of steady dividend hikes, and Weyco’s current payout of $0.80 a share translates into a hearty 3% yield. Dividends compounded at a sturdy 5% rate over the past five years.

Third-quarter results included record sales of $91.2 million, a solid 4% year-over-year gain. Company management highlighted areas of particular strength in a press release:

Net sales in the North American wholesale segment, which include North American wholesale sales and licensing revenues, were $74.6 million for the third quarter of 2015, up 10% as compared to $68.0 million in the third quarter of 2014.  Within the wholesale segment, net sales of our BOGS brand were up 20% for the quarter, due to strong sales of its core products as well as positive acceptance of its new leather footwear. Net sales of our Stacy Adams brand were up 10% for the quarter, driven by strong new product sales.

During the November 2nd conference call, CEO Tom Florsheim, Jr. was optimistic about plans for Weyco’s Florsheim business, which grew 4% in the third quarter:

In September, we came out with a new print and internet campaign via Sports Illustrated, highlighting Florsheim’s contemporary dress casual product. To help get the new look of Florsheim out to consumers, we’re investing more in marketing with Sports Illustrated being the main media vehicle in 2015.

Later this month, we will be launching a collaboration with George Esquivel, called Florsheim ex Esquivel. Esquivel is an award winning designer out of California who has its all men’s and women’s lines with the strong find in the high end artisan footwear market. An exciting aspect about this collaboration is that the footwear’s been manufactured at Esquivel’s studio factory outside of LA with all footwear components sourced in the USA.

Florsheim acknowledged that currency weakness in Canada, Australia and other foreign markets is putting a bit of a squeeze on margins. But we doubt that will hinder Weyco’s dividend growth anytime soon.

Property and casualty insurer W.R. Berkley (NYSE: WRB), up almost 30% since joining our small-value portfolio in March 2014, overcame significant challenges to deliver a solid third quarter. And we’re betting the firm’s fourth-quarter report due out February 2 will contain more good news.

The lowdown on Q3: Berkley improved net written premiums 3% to nearly $1.6 billion, despite weakness in noncore foreign and reinsurance markets. In core domestic P&C markets, net written premiums climbed a sturdy 6% to almost $1.3 billion.

We’re also liking Berkley’s combined ratio, a widely used measure of underwriting acumen. A combined ratio under 100% means an insurer collects more in premiums than it pays out in claims. The lower the ratio, the greater the underwriting profit.

Berkley’s third-quarter combined ratio of 92% signifies especially robust profitability. On an annual basis, its ratio ranged from 93.1% to 98.5% since 2008.

Better combined ratios are a welcome development, as they go a long way toward offsetting other headwinds Berkley is facing, such as underperformance of noncore markets, the dollar’s strong negative effect on foreign profits and smaller returns on invested premiums due to low interest rates. During Q3, these factors contributed to a 19% decline in earnings per share.

As usual, though, the quarter saw Berkley enjoy a longstanding competitive advantage—a highly decentralized corporate structure that minimizes the risk of large claims that could be financially catastrophic for the company. CFO Eugene Ballard summarized Berkley’s latest “cat” experience during the quarterly conference call:

Our cat losses were relatively light again this quarter at $6 million or 0.4 loss ratio points. That’s down from $15 million in the third quarter of 2014. And on a year-to-date basis, our cat losses were $46 million or one loss ratio point.

Is it any wonder we’re so optimistic about W.R. Berkley? We rank the stock a “buy” ahead of fourth-quarter earnings.

Momentum Portfolio

G-III Apparel Group (Nasdaq: GIII), beat earnings estimates for its third quarter, announcing earnings of $1.87 per share, which was better than $1.78 analysts were expecting. The company reported revenue of $909.9 million up 12% over a year ago but short of the company’s own projection of $920 million.

The company signed a multi-year licensing agreement with Tommy Hilfiger for G-III’s women’s clothing line. Under this agreement, Manhattan-based G-III Apparel will make and sell Tommy Hilfiger women’s sportswear, suits, and denim apparel in the United States and Canada. This is on top of G-III’s existing licensing deal with PVH Corp, which owns the Tommy Hilfiger brand. These deals present a more than billion dollar opportunity for G-III in the women apparel industry with the first offerings becoming available in the 2016 holiday season.

Globant SA (NYSE: GLOB), reported third-quarter earnings in November. Earnings per share of $0.26 beat expectations of $0.23 and revenue of $67.1 million beat expectations of $64.9 million.

In December the company unveiled its approach for measuring the level of friction that a product or service imposes upon a user. This commitment to evaluation and optimization of the user experience consistently places Globlant on the forefront of technology services companies that provide customer interaction software. This announcement follows success from Globlant’s partnership with the Trina Turk California lifestyle brand where Globlant helped increase Trina Turk’s revenue in the first half of 2015 by 40% by increasing Trina Turk’s online business by 30%.

Momentum pick Hill-Rom Holdings (NYSE: HRC) had a relatively slow 2015, rising “only” about 7% after jumping 47% in 2013 and 12% in 2014. But this year, we see it regaining double-digit growth potential.

Hill-Rom continues to expand steadily beyond its roots as a manufacturer of hospital beds and furniture made with patient safety in mind. The latest step in the firm’s evolution, a $2.1-billion buyout of medical device maker Welch Allyn in early September, quickly made it a force in several new product categories.

Among them: blood pressure cuffs and other patient monitoring devices, diagnostic tools like electrocardiographs and lighting designed specifically for medical procedures. Such offerings nicely broaden Hill-Rom’s product portfolio, which has also grown to include wound care systems, surgical equipment and devices that help clear the lungs.

Management didn’t see Welch Allyn adding much to Hill-Rom’s performance right off the bat, but its fourth-quarter earnings release showed an immediate contribution. Despite only being part of Hill-Rom the final few weeks of the fiscal year ended last September, Welch Allyn kicked in revenue of $50 million, almost 9% of the fourth-quarter total of $574 million. It also contributed to more than a 2% gain in the operating margin.

CEO John Greisch stressed Welch Allyn’s importance during the November 5th conference call:

Strategically, our acquisition of Welch Allyn is a significant step in our journey to build a stronger, more diverse portfolio with compelling solutions for our customers. It is early days, but the cultural integration and financial performance are both ahead of expectations. The Welch Allyn acquisition is a perfect example of what we need to do to execute the strategy we laid out at our Investor Conference—that is, establishing Hill-Rom as a premier partner to global healthcare systems by providing differentiated solutions to our customers and patients.       

Taro Pharmaceutical Industries (NYSE: TARO), released second-quarter financial results ending September 30, 2015. Net sales of $212.1 million decreased by 15.5% from the previous quarter, and gross profit decreased by $29.3 million from the previous quarter to $168.8 million.

CEO Kal Sundaram stated that Taro was experiencing pressure from strong competition and that customer consolidations were a major factor pushing down net sales. However, Sundaram stated that margins remain strong and highlighted optimism because of the Food and Drug Administration’s recent approval of Keveyis, a drug used for the treatment of primary hyperkalemic and hypokalemic periodic paralysis.