Daniel O’Keefe, a portfolio manager at Artisan Partners, emphasizes the appeal of value stocks, especially during periods of slow growth. Fund managers Anand Vasagiri and Beini Zhou of Artisan Partners, along with James Hollier of Silver Beech Capital, recently shared their value stock picks for the fourth quarter of 2024. Artisan’s selection includes Despegar and Zuken, while Hollier prefers WillScot Holdings Corp and Flagship Communities. The Artisan team is particularly focused on non-U.S. small-cap companies that exhibit high quality and undervaluation, while Silver Beech Capital seeks to identify often-underappreciated North American businesses with sustainable competitive advantages.
Despegar, an online travel agency targeting the Latin American market, has gained traction as a value stock due to its significant market segmentation strategies and effective management. Historically, Despegar’s airline ticket sales have driven revenue, but the company is shifting focus toward selling travel packages, which promise higher margins. The Artisan team recognized a compelling entry point when the pandemic drastically affected the travel industry, causing Despegar’s valuation to drop. Their investment thesis centers on the platform’s ability to build value through strong management decisions, an advantageous market position, and ongoing operational improvements, despite facing execution risks amid rapid industry changes. With its stock price having doubled since their initial investment, management’s ability to maintain strategic growth is essential to unlock further upside potential.
Zuken, a software firm specializing in electronic design automation, stood out to the Artisan team for its stable business model and robust market positioning. With a focus on printed circuit board design and maintenance services, Zuken holds considerable market share amidst industry consolidation, bolstered by increasing demand for electrification and miniaturization. Artisan managers praise Zuken’s leadership for enhancing operational efficiency and maintaining a conservative capital structure that minimizes risk. The Artisan team views Zuken as undervalued based on its low valuation multiples compared to its peers, anticipating that market re-evaluation could trigger significant share price appreciation. Despite competitive threats from firms like Altium, the Artisan team maintains confidence in Zuken’s protective market barriers and long-term growth trajectory.
WillScot Holdings Corp, the North American leader in portable modular units, captured Hollier’s interest, particularly following a recent merger announcement. Hollier perceives WillScot as benefiting from a growth cycle tied to increasing construction expenditures and favorable rental dynamics. The firm’s significant market share positions it well amid competition, allowing for consistent revenue and profit growth. Hollier anticipates that WillScot can achieve a 7% compound annual growth rate (CAGR) for top-line revenues over the next five years. While WillScot’s cyclical nature concerns some investors, Hollier argues that its growth model is fundamentally sound, with potential upside in share prices driven by continued market demand and effective management.
Flagship Communities operates as a real estate investment trust managing manufactured housing communities. Hollier has a favorable view of Flagship, believing its growth strategy will yield significant returns based on a disciplined, occupancy-driven expansion plan. As the company improves its occupancy rate and executes its operational strategies, Hollier expects Flagship to achieve high single-digit cash flow yields and outperform peers trading at higher valuations despite lesser growth prospects. His confidence stems from the long-term increases in occupancy and cash generation potential as Flagship executes a playbook that has already seen considerable success since its initial public offering.
The overarching theme in discussions among these fund managers is the enduring merit of value investing. Historically, value stocks have outperformed growth stocks over extended periods, with a noted annual advantage of approximately 4.4% since 1927. This perspective underlines the importance of incorporating a select group of high-quality, undervalued stocks within investment portfolios, particularly utilizing buy-and-hold strategies to capitalize on long-term value creation. Managers like Hollier, Vasagiri, and Zhou emphasize thorough research and thoughtful stock picks to navigate shifting markets, suggesting that diligent investment approaches can yield considerable rewards in the realm of value stocks.