John E. Deysher, President, Bertolet Capital
Unifi (NYSE:UFI), Heartland Express (NASDAQ:HTLD), and Hurco (NASDAQ:HURC) are 3 top picks from John E. Deysher, CFA, President of Bertolet Capital.
John E. Deysher, CFA, is President of Bertolet Capital LLC, adviser to the Pinnacle Value Fund.
He is responsible for the fund’s daily investment activities and has more than 40 years of investment management experience.
From 1990 until 2002, Mr. Deysher was a Portfolio Manager, Senior Analyst with Royce & Associates, an investment firm specializing in the securities of small cap companies and adviser to the Pennsylvania Mutual Fund.
Mr. Deysher began his investment career with Kidder Peabody in 1983, where he managed equity and fixed income portfolios for individuals and small institutions.
He holds a bachelor’s degree from the Pennsylvania State University, and master’s degrees from both Indiana University, Bloomington (Business) and the University of California, Berkeley (Engineering). He is a CFA charterholder, and lives and works in New York City.
His three top picks are Unifi (NYSE:UFI), Heartland Express (NASDAQ:HTLD), and Hurco (NASDAQ:HURC).
“We’ve been buying three stocks recently. One is Unifi (NYSE:UFI), a Greensboro, North Carolina-based maker of texturized polyester and nylon yarns, used to make synthetic fabrics that go into apparel, home furnishings and automotive.
Roughly 30% of their yarns are made from recycled plastic so it’s an environmentally friendly company.
However, sales of apparel and home furnishings have been weak recently and they’ve had trouble passing through raw material cost increases.
Margins are under pressure, but the balance sheet is in good shape.
Once they return to normalized earnings, the stock price should go up.
They also have two activist shareholders, who own greater than 5% each, so perhaps they can make something happen.
Another name that we’ve been buying recently is Heartland Express (NASDAQ:HTLD), a Des Moines, IA based truckload carrier.
Post pandemic, the industry benefited from strong demand but now with demand returning to normal, margins and earnings are under pressure, hitting the share price.
They made two acquisitions that doubled their capacity which they’re in the process of integrating.
So there’s lots of room for improvement once the cycle turns and they’re paying down debt quickly.
We like companies like Heartland that increase capacity near the bottom of the cycle so they’re well positioned for the upturn.
The CEO has been buying shares, and the founding family owns 40%.
A third name we’ve been buying is Hurco (NASDAQ:HURC), an Indianapolis-maker of machine tool systems used to produce various types of capital goods.
The end markets are cyclical and sales and earnings have been trending down recently.
Hurco has been through down cycles before and their conservative balance sheet has always allowed them to emerge intact on the other side.
The yield is almost 3% and there’s no debt.
Hurco is also a net-net, a value investing concept pioneered by Ben Graham many years ago.
It involves selecting stocks having a market capitalization less than net current asset value calculated by subtracting total liabilities from current assets.
Hurco has a net asset value of $28/share — significantly above the current price of $21.
Finding quality firms like HURC trading at less than net asset value is extremely rare in today’s market.”
The process for identifying small cap stock picks like Unifi (NYSE:UFI), Heartland Express (NASDAQ:HTLD), and Hurco (NASDAQ:HURC) begins with an assessment of management.
“We look for a few things in management.
Are they hands on, honest, intelligent, energetic and opportunistic? Do they act as owners not caretakers?
Do they have a good grasp of strategic, operating and financial priorities?
That’s why the proxy is so important; it gives details on compensation, share ownership and prior experience.
We look closely at related party transactions which often indicate whether management is acting in the best interest of shareholders.
Assessing management is tricky.
Sometimes the management teams that we had high hopes for are disappointing and other teams we thought were average turn out to be exceptional.
Assessing management is just one element of our due diligence.
Viable business models, strong balance sheets and other elements are also very important.”
The fund has had difficulty in finding small cap value in recent months.
“…We are holding more cash simply because we’ve taken profits in a lot of names that we bought during the lows of the pandemic.
They’ve worked out well and now trade at or above our estimate of intrinsic value.
We’d like to put the cash to work and are looking diligently for opportunities.
Holding lots of cash is not a market timing move but a consequence of the absence of compelling opportunities.
We’d like to bring it down as soon as possible…
We have a few concerns.
While we can’t predict where the economy or interest rates go, we do think about the consequences for the stock market.
Whether the Fed can engineer a soft land remains to be seen.
Our $33 trillion national debt may have some serious consequences at some point.
We’re also concerned about the amount of financial leverage embedded in the system as a result of low interest rates.
Many firms have variable rate debt that ratchets higher with each uptick in interest rates.
Bankruptcies are at their highest level in a decade and we expect more to come.
We’re also challenged by the proliferation of competitors like private equity, venture capital and hedge funds.
Many have large pools of capital to put to work and are often willing to pay higher valuations for public companies than we are.
Our universe of investable public companies has declined dramatically over the years since many have been acquired by strategic or financial buyers.
It’s also increasingly difficult to get proprietary information that no one else has.
We work hard at this, but the internet has really levelled the playing field so it’s a challenge.
That’s why maintaining a strong relationship with management is so important.
The only silver lining is that with higher interest rates, many potential deals may not generate the returns necessary to justify an investment.
We also think prospective buyers — strategic and financial — are thinking carefully about how a potential slowdown might impact future earnings.
So going forward this might trigger a reset in valuations that allows us to accumulate positions at reasonable prices.
So, we’ll stay conservative and let valuations be our guide.
We have a universe of 100-plus companies we’ve done the work on and want to own at the right price.
At some point there will likely be a disruption of some type that will present opportunities to put our cash to work.
While we think about the economy, we try to focus on events that impact the stocks we own or would like to own.”
Unifi (NYSE:UFI), Heartland Express (NASDAQ:HTLD), and Hurco (NASDAQ:HURC) are three of many stock picks from John E. Deysher, President of Bertolet Capital.
Read about more in the complete interview, exclusively in the Wall Street Transcript.
John E. Deysher, CFA, President, Bertolet Capital LLC
www.pinnaclevaluefund.com
email: deysher@pinnaclevaluefund.com
