Value stocks

Long term opportunities in GBX and WRK

Since the first issue of The cautious speculator was released in March 1977, the Small-Cap Value subset of stocks (as determined by portfolios constructed by Professors Eugene F. Fama and Kenneth R. French based on size and book-to-market ) beat the comparable growth indices, even if the horse race between Grande Valeur and Grand Croissance over the same period favored the latter by a neck.

Although 2022 has seen stocks across all categories take the chin, small-cap stock is once again experiencing relative outperformance. Through October 20, returns for the Russell 2000 Value Index exceeded those of its Growth peer by more than 1,000 basis points (-18.3% vs. -28.4%).

Red ink is nothing to cheer about, but losing less in bear markets and gaining more in bull markets illustrates why we believe there is opportunity in small caps. With that in mind, we have two more inexpensive small cap offerings.


Greenbrier is primarily a rail car manufacturer, even as its maintenance division has grown and the company has moved more into leasing over the past year.

One of many cyclical companies whose shares have been hit by recession fears, GBX is trading at a 52-week low, down 45% year-to-date and 50% below its high. Of March. The company receives little coverage from the analyst community, but 2023 should be a robust year as metal prices retreat and Greenbrier works on its order book to improve volumes.

Since the mid-1980s, when former CEO Bill Furman co-founded the current iteration of the company, Greenbrier has also grown to become one of the leading rail car manufacturers in South America and Europe, with operations in Brazil and Poland.

Following an appointment in March, former chairwoman Lorie Tekorius officially took the reins from Mr. Furman to become CEO. Ms. Tekorius recently toured the company’s operations in Central Europe, home to one of the world’s largest freight car factories in Caracal, Romania.

She said: “We want to build an internal community within Astra Rail that is much stronger and more active than it already is. We are already developing training programs for our employees to provide them with the best professional training and we are investing in the expansion of our activities in Romania.“

Europe remains a wildcard given the war in Ukraine, but raging gasoline prices should support rail transport versus trucking. On this front, Ms. Tekorius added: “We also want to prove to Romanian society that we are a responsible company that gets involved and supports the efforts of the European Union to support the reduction of carbon emissions. As the only player on the Romanian market for the production of locomotives and wagons, we want to develop the activity to be able to respond as well as possible to this effort, at European level.

The balance sheet is a little more leveraged than in the past, but the average maturity of four years with an average coupon of only 2.9% makes the load bearable.

The shares are trading at less than 9 times the greatly reduced 2023 EPS projection and offer a very generous dividend yield of 4.2%.

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One of North America’s paper giants, Westrock produces packaging for food, hardware, apparel and other consumer goods. The company’s product line includes recycled and bleached paperboard, containerboard, consumer and corrugated packaging and point-of-sale displays.

Consolidation within the containerboard industry in recent years should support rational production and pricing, as the top 5 producers account for over 75% of capacity, up from around 43% nearly two years ago. decades.

Westrock targets EBITDA (earnings before interest, tax, depreciation and amortization) margin growth of approximately 19% by 2025, driven by process optimization, innovation, efficiencies and improvement capital allocation decisions.

With fiber-based packaging solutions in 30 countries, Westrock stands to benefit from the long-term tailwinds of e-commerce (via shipping boxes).

While ongoing supply chain issues and an economic downturn in many parts of the world could be a short-term wet blanket on global demand, WRK makes important products that aren’t easily replaced.

After cutting its dividend at the start of the pandemic, a rebound in selling has allowed WRK to resume more generous payouts, with a current yield of 3.1%, while a 20% drop in the stock just since August makes it very cheap in our view, trading a forward single-digit P/E ratio.

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