Alluvial Capital Management recently released its Q3 2020 Investor Letter, a copy of which you can download here. In the letter, among other things, the fund reported a return for its Alluvial Fund LP Net of 15.1% for Q3 2020. You should check out Alluvial Capital’s top 5 stock picks for investors to buy right now, which could be the biggest winners of this year.
In the said letter, Alluvial Capital highlighted a few stocks and Eaco Corp (NYSE:EACO) is one of them. Eaco Corp (NYSE:EACO) is a small but rapidly-growing distributor of fasteners and electronic components to a large variety of industries. Year-to-date, Eaco Corp (NYSE:EACO) stock lost 19.3% and on October 22nd it had a closing price of $19.20. Here is what Alluvial Capital said:
"The Alluvial Fund portfolio includes a few shining examples. One of my favorite little over-achievers is EACO Corporation. Via its subsidiary Bisco Industries, EACO is a distributor of fasteners and electrical components. Bisco distributes nearly 4 million different parts and components, operating from 49 locations in 33 states and 3 Canadian provinces. Bisco was founded by EACO CEO Glen Ceiley in 1973 and was the 20th largest US electronics distributor as of 2015.
Distributors perform a critical function, serving as middleman for components producers and end users and reducing search costs and inventory investment for each. Distributors earn low margins per dollar of revenue but turn over their assets multiple times yearly. A good distributor can earn a very healthy return on its equity capital, and EACO (again, through Bisco Industries) is a very, very good distributor.
From 2014 to 2019, EACO grew its revenues by 64%, its gross margin by 65%, and its operating income by 168%. The firm largely avoids debt and often has net balance sheet cash, but still routinely earns returns on equity of at least 20%. Despite its steady growth and strong balance sheet, EACO shares have nearly always been available for purchase at a single digit multiple of earnings. At $18, shares trade for 10x normalized fiscal 2019 earnings. The COVID-19 pandemic and the resulting industrial slowdown have caused EACO’s 2020 results to decline, but the firm is optimistic and reported stronger bookings and a sales backlog 16% higher than the previous year at May 31, 2020.
So why is a high-quality company like EACO with a history of profitable growth trading at 10x last year’s earnings? The biggest reason is the shockingly low number of shares available to investors. Of EACO’s 4,861,590 shares outstanding, Mr. Ceiley owns 4,704,864, leaving precisely 156,726 shares worth just $2.8 million for the public. That is scarcely enough to enable an informed two-sided market. I am happy to take advantage of this illiquidity discount and acquire shares whenever possible. EACO can easily double its revenues this decade and profits should grow at least as quickly. What’s more, EACO would make an excellent acquisition for any its competitors."
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Video: Top 5 Stocks Among Hedge Funds
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