Our material long positions (>3% of the portfolio) at the end of January were as follows (in order of size): Trex Co. (TREX), Alliance Fiber Optic Products (AFOP), Caesarstone Sdot-Yam (CSTE), American Vanguard (AVD), Core Laboratories (CLB), Mesa Laboratories (MLAB), Colfax Corp. (CFX), Eagle Materials (EXP), Trimble Navigation (TRMB), Kirby Corp. (KEX), Primoris Services Corp. (PRIM), Masonite International (DOOR), Chart Industries (GTLS), Materion Corp. (MTRN), Valmont Industries (VMI), NOW Inc. (DNOW), Hudson Technologies (HDSN), and Geospace Technologies (GEOS).

There are several newly-material names on the list: Core Laboratories (CLB), Mesa Laboratories (MLAB), Colfax Corp. (CFX), Masonite International (DOOR), and Materion Corp. (MTRN). We have been long CLB and CFX for a couple months but recently upped our positions to material status. We reloaded MLAB after having trimmed the name at much higher levels a few months ago, and we revisited DOOR (also at much lower prices) after being completely out of the stock for several months. MTRN is an altogether-new long position, but long-time readers of our letters will know this is a name we have trafficked in frequently in the past.

As for a review/update on what these companies do and why we like them… Core Laboratories provides reservoir description/management services and production enhancement services primarily to the oil and gas industry. Needless to say, CLB’s has been hit hard by crude’s freefall; however, 1) CLB dominates its markets (and as a result, earns more than 20% operating margins in better times); 2) has no debt and a sizable cash position; and 3) is somewhat of a secular growth story because it helps maximize well output/efficiency.

Mesa Laboratories has two businesses: instrumentation and biological indicators. The instrumentation business includes a variety of highly-niche equipment, such as torque testers, calibrators for dialysis machines and continuous monitoring devices (for controlled environments such as cryogenic storage). Biological indicators look like litmus test strips and are used by manufacturers to ensure sterile production environments. Like CLB, MLAB dominates its niches and earns more than 20% operating margins and returns on capital. Besides just owning good businesses/products, MLAB benefits from increased process/quality control regulations. The management team also has a solid track record of consolidating peripheral niche companies/markets under one umbrella.

Colfax is a company we have had our eyes on for a few years now. Until recently though, we always thought investors’ expectations for the company were too high. The reason expectations have come down in the past year or so is that one half of CFX’s business revolves around selling equipment to downstream oil and gas, chemical and other process facilities, and the other half entails selling welding equipment and consumables to industrial end markets. In other words, CFX’s end-market environment has been pretty awful. That said, we think CFX is managing through the cyclical headwinds as best as possible, and longer-term, we expect the company’s largest shareholders (the Rales brothers) and management team to repeat the roll-up strategy they perfected at industrial dynamo Danaher (DHR).

Masonite, as mentioned, is a stock we owned in the past and made a nice return on, but investors’ expectations got too high, so we sold the position and waited for a better re-entry point. Thankfully, the stock has pulled back significantly in recent months (from about $70 in July 2015 to about $45 currently). In our view, what has haunted DOOR recently is the same thing that haunted another long of ours, Eagle Materials (EXP)— investor fears of a slowdown in residential construction and a loss of pricing power. In both cases, we think the residential construction backdrop remains very favorable (home starts are still well below historical norms), and while pricing may not be as strong as people once hoped, the trend is still upward and the operating leverage to be provided by that pricing remains attractive.

Last but not least on the new longs list is Materion. As mentioned, we have trafficked in MTRN shares many times in the past, and to be honest, it has usually been on the short side. While we still would not describe Materion as a high-quality business, we think the stock’s decline (from $40 to the low-$20s in the past 10 months) is overdone and ignores the fact that the company’s higher-margin markets are doing well and/or are getting better— e.g., telecom equipment, auto and defense.

The only material long in December to fall off our list was Graham Corp. (GHM). Although we don’t think GHM’s fundamentals will get much worse (they sell heavy-duty capital equipment mostly to refiners and chemical facilities), we already have plenty of indirect exposure to the oil and gas market. We also worry that GHM, due its dependence on a strong capital spending environment, will be one of the last to rebound with oil and gas prices.


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