Investment Alert: Buy CMC Under $45/share
Disclaimer: Investment Alerts have a medium to long-term time horizon. These do not constitute financial advice and you should contact a financial advisor before deciding whether it is appropriate for your individual circumstances.
The big names get trotted out on CNBC and Bloomberg. Buffett, Icahn, Druckenmiller. The usual who’s who of the investing world. But one little-known investor won the Fund Manager of the Decade award from Morningstar, and is sitting on a $107.6 million position on a single stock. His name is Bruce Berkowitz and the stock is Commercial Metals Company.
What does Bruce see in CMC that compelled him to bet 9.0% of his portfolio on it?
- Commercial Metals Company (CMC) has a strong track record of revenue and profit growth. In the last 5 years, revenues have almost doubled from $4.6 billion to $8.9 billion while operating income soared from $220 million to $1.3 billion over the same period.
- CMC is well-positioned to benefit from the secular trend towards renewable energy. The production of renewable energy requires a significant amount of steel and other metals, which is CMC’s core business.
- Bruce Berkowitz, the Fund Manager of the Decade, has bet 9% of his portfolio on CMC. Berkowitz is a renowned value investor with a proven track record of success. His investment in CMC is a strong vote of confidence in the company’s future.
Revenues & Profits Soaring
Commercial Metals Company has an enviable track record of delivering on the top and bottom lines. In the last five years, revenues have almost doubled from $4.6 billion to $8.9 billion while operating income soared from $220 million to $1.3 billion over the same period.
Revenues have grown north of 20% in each of the last five years, except for 2020 when they dipped 6%. Last year was the best of the five with revenues up 32.4%.
The bullish thesis for CMC stems from a secular trend towards renewable energy which is predicated on demand for enormous volumes of steel and other metals produced by the firm. As a top manufacturer and recycler, CMC is well positioned to benefit from strong demand.
Another tailwind for the firm is its 1.34% dividend yield and low payout ratio of just 6.83%, meaning management has ample room to hike the dividend without compromising the healthy balance sheet.
Fund Manager of The Decade Bets Big
In October 2021, the Board of Directors approved a share repurchase plan to the tune of $350 million. It coincided with a 17% increase in the quarterly dividend. Since then the share price is up by almost 100%.
On a valuation basis, we see the company is approaching fair value but still has a ways to go. And the consensus among 7 analysts supports our thesis. The fair value price target for CMC sits at $57.29 per share currently.
With over $1 billion in management, Bruce Berkowitz bet a full 9% of his portfolio on this stock and there is good reason to follow in his footsteps. He won the Fund Manager of the Decade award from Morningstar for delivering an annualized 13.2% return for his Fairholme Fund. He has a real knack for identifying undervalued stocks and taking a contrarian approach. Let’s see if he continues to be right on this huge bet.