Gaineswood Investment Top Picks List Includes Sheetrock Supply Company GMS

May 18, 2021
Bill Baker, CFA, is Founder and Portfolio Manager at Gaineswood Investment Management

Bill Baker, CFA, Founder and Portfolio Manager, Gaineswood Investment Management

Bill Baker, CFA, is Founder and Portfolio Manager at Gaineswood Investment Management, Inc. He founded the predecessor firm, GARP Research Corporation, in late 1995 after gaining portfolio management experience by managing in excess of $100 million for nine years.

Mr. Baker has performed investment management and research for over 30 years. Mr. Baker was a portfolio management professional at Oppenheimer Mutual Funds for nearly five years, managing stock investing for several funds totaling over $500 million.

One of these funds, Oppenheimer Asset Allocation, was awarded Morningstar’s 5-Star mutual fund rating in November 1990 shortly before he left the firm.

Subsequently, he joined Reich & Tang as one of four portfolio investment managers until founding Gaineswood. He received an MBA from the Amos Tuck School at Dartmouth College and a degree in economics from the University of Pennsylvania.

He wrote “Endless Money: The Moral Hazards of Socialism” which John Wiley & Sons published in 2009.

In this 2,525 word interview, exclusively in the Wall Street Transcript, Mr. Baker builds his portfolio from his investing philosophy.

“Gaineswood Standard has been here since the inception of the firm. It’s had what I think are pretty good returns. It’s over 25-plus years. It’s compounded at 15.5% annualized, and that compares to less than 10% for the Russell 2000.

And the three-year and five-year, well, even the one-year, they’re all at least 10% above the Russell 2000 on an annualized basis.

And we had a particularly solid year in 2020 during COVID, when we were up over 50%. And I think that was because of this niche and theme investing.

When we talk about some of the holdings, you’ll see a pattern emerge. I looked at all of our top 10 names just recently and almost none of them really have this direct gearing to the economy.

They kind of have their own motion internally from some niche that they’re involved in. And I think that’s something that got valued at a premium last year.”

One interesting stock pick that is currently top of the list for Gaineswood Investment is sheetrock supply company GMS.

“We recently took a position in a company called GMS Inc. (NYSE:GMS). It’s a little different from our typical investment in that it’s a slower grower. And accordingly, it’s priced at about 12 times earnings, excluding amortization charges, which are pretty high.

But what we found when we were going through our research process on another name that we recently bought, was that this is an interesting roll-up of local yards that produce or that distribute gypsum wallboard and also acoustic ceiling tiles, as well as other things. Those are the probably the two most significant areas.

And we found that their return on tangible capital was over 30%. They really got a local competitive advantage and have strong relationships with some of the suppliers.

And there’s some discipline from management on how they expand. So I think they can be a reliable, low-teens kind of grower. And on top of that, I think, we’re at a very interesting place in the housing cycle. And I don’t like to play cycles in commodities, but if it’s closer to the low point than the high point,

I’m not afraid to get involved because I see a multi-year trend benefiting them.

 I just think it’s grinding out the improvement from COVID-19; some of the volume numbers dropped in 2020. And last year while the economy really took a whacking, the residential construction side was surprisingly resilient.

And for a cyclical area, I think that people should pick up and take notice of that — that there’s kind of repressed demand. I think you could have a strong year this year and next year on the residential side. The commercial side is probably slower in responding.

But there’s another company that we invested in, called Armstrong World (NYSE:AWI), which is how we discovered GMS during the due diligence. And on the commercial side, Armstrong is doing some very interesting things to basically double its available market, through specialty architectural ceiling and wall products. GMS is intertwined significantly, as the largest distributor of Armstrong products.”

Another Gaineswood Investment top pick is a glaucoma eye drop supplier.

“Our number-one largest holding is Aerie Pharmaceuticals (NASDAQ:AERI). It’s one we know extremely well. It has a market cap of less than $1 billion. By the way, our average or median market cap for the whole product — which has about 50 names — the median is $4 billion.

So, this one’s smaller and oftentimes we start out at the low end and then they appreciate to be far greater than the $4 billion median.

The stock is really depressed for a number of reasons. But probably the biggest one is that COVID-19 really did affect them. They make eye drops for glaucoma, and these kinds of patients didn’t want to see their doctors at all last year. But they also have this very robust research pipeline.

It’s very hard to analyze this company because there’s so many products they’re working on. But they’re all potentially very large payoffs, particularly in the retinal disease category where they’re developing competition for the market that typically requires frequent injections to the back of the eye.

These would be less frequent. So I see a lot of earnings potential down the road. And I think, we can hold this one for 10 years or 12 years and be very happy with it.”

Another recommended stock from Gaineswood Investment has been a 10 bagger for them so far.

“Our third largest position is something that we wouldn’t be buying right now. But it’s something that just provides an example of how we do things. It’s a company called Generac (NYSE:GNRC).

We got involved in Generac in late 2016, when the stock was a tenth of where it is today. And you look at what has happened to them. Their revenue and earnings really grew very significantly.

We certainly foresaw pretty significant growth. But it’s been interesting because their market has moved from just being an East Coast to Midwest a little bit. A new marketplace for them is California, being red hot, and basically, they make home standby generators. So with all of the fires and utilities having rolling blackouts, people are buying generators there, too.

I wouldn’t say they have a dominant share, but they’ve really got a terrific competitive advantage. It’s a little expensive. It’s done very well. Names like this are ones where we’ve peeled off.

We still like to maintain a core holding when we think things are good. And things are likely to continue to be good for this company for a number of years to come.”

Get all of Gaineswood Investment’s top picks and the details behind them by reading the entire 2,525 word interview, exclusively in the Wall Street Transcript.