Asset Class: US Stock (Sector: Materials / Industry: Chemicals)
Original Investment Thesis (7/2018): Cyclical Investing! More fun with cyclical companies! KRO makes/sells titanium dioxide. The top 6 competitors account for 66% of the market and KRO has 9% of the market. Their largest competitor has 18%. No customer has more than 10% of KRO’s sales (largest 10 are 34% of sales). The company is conservatively financed especially within the Materials sector (and Chemical industry) as these are capital intensive industries and most of their competitors have much more leverage. So, I think I’m buying a good operator that is prepared to weather any industry downturn that might arise. They make the stuff that goes in coatings…which is not going away…and is also a recurring business.
Current Thoughts (9/28/2019): Medium-term holding (will sell once the cycle/valuations transition). When I reassessed this stock with my upgraded tools, I determined that I probably would have never purchased it in the first place. The stock is still way too cheap for me to close out my position. Insiders have started to buy it however so perhaps that is a sign that the cycle is turning. I don’t think the company is bad it is just in an industry/sector that has been beaten up. I also happen to like what they do as it is never going away…we are always going to be painting/coating things. There is also a recurring element to these activities which is nice. This is a well-run operator so I’m not in a hurry to sell it below value as I think it is a good company and can just wait while people keep buying more titanium dioxide to coat all their stuff with white goodness! That said I’ve added analysis to my tools that will help me make sure I’m getting a good deal on cyclical companies based on their full cycle.
KRO (Kronos Worldwide Inc) – Annual Reassessment
I’ve owned this stock for about half a year and just completed my annual reassessment on it. I’ve attached a PDF that has my analysis in case anyone else might find it useful:
I purchased this stock back in July 2018 at $22.60. These are my thoughts after reviewing this when I completed my initial purchase in 2018:
- PRO #1 – Makes/sells titanium dioxide. Top 6 competitors account for 66%…they are 9% of the market. The largest has 18%. No customer has more than 10% of their sales (largest 10 are 34% of sales).
- PRO #2 – Only 3 analysts…so very underfollowed. Schwab gives it an A-B. S&P gives it at 4-5.
- PRO #3 – Trailing PE 5.6 / Forward PE 7.5. I run everything with conservative earnings estimates from 2017 ($1.95). 2018 and 2019 are expected to be much higher $3.00.
- PRO #4 – With the high institutional ownership there won’t be a bunch of trading…the ownership will maintain through thick or thin or exit (I’d imagine).
- CON #1 – Weird ownership interest (around 80%). I had researched NL which holds this and some other company (and decided why would I own it when I can just own this). On December 31, 2017, approximately 50% of our common stock was owned by Valhi, Inc. (NYSE: VHI) and approximately 30% was owned by a wholly-owned subsidiary of NL Industries, Inc. (NYSE: NL). Valhi also owns approximately 83% of NL Industries’ outstanding common stock. A wholly-owned subsidiary of Contran Corporation held approximately 93% of Valhi’s outstanding common stock. So basically Contran Corp owns KRO (as a subsidiary).
- CON #2 – Capital intensive industry so higher debt structure. My DB calculates it at 60%. Morningstar has it at 60%.
This stock has been hammered in the last half of 2018 and at one point was down to $10.51. It is trading back up a bit now but I’m basically down 50% at one point. Not my shining day! I’ve learned a lot about cyclical investing over the past few months (both in reading/research and the hard way by owning stocks like this). I’m not against owning cyclical stocks but when you own them you have to be ready for a huge drawdown like this when the cycle turns. Of course, it would be better to not have money tied up in a stock like this during that time. I’ve learned that a lot of value-oriented screens will kick out cyclical companies at a peak at low PEs. I invest in the conservative ones so that I’m sure they will be able to survive a downturn. I also am pretty diligent about using super-duper conservative estimates when running my estimates.
Now that is where I’m at sitting down 40% (from being down 50%). I’m not freaking out too much about that…is what it is. I think the price movement is drastic and that the stock is oversold at the moment. I’m running all the stocks I’ve bought over the past year+ through my upgraded toolset to ensure I really want to own them. Part of the reason I’ve upgraded my tools to analyze my stock investments is to analyze much more to increase my certainty and to keep me out of stocks where things are as erratic as they are with this company. If I had run this through this enhanced tool, I probably would not have purchased it originally. Live and learn! I’ve had good success with many investments using the tools I had. I have made some bad investments in companies as well. Over the past year+ I’ve learned a lot and have incorporated those learnings into the toolset. It is good to see the tool alerting me to things that I should have been paying attention to. So, my 40% loss in KRO will be chalked up to a learning experience (yet another one).
I was thinking that with the stock down this much that I’d add to the position. That was prior to running this analysis. I will not be adding to this position at all. There are too many things all pointing to uncertainty and the 69% certainty rating would prevent me from investing in something like this anyway. I am not going to sell it at this point but if/when I find something more compelling I likely will. I’ll hold on to it for now and collect the dividend (reinvesting those) and hope the price recovers from what I believe is oversold. If/when something pops up that seems better, I’ll sell and move one. I think this stock will still likely be better than owning the overall market but could easily drop back down and be a choppy ride. We’ll see. I’m getting through my existing holdings and will be looking for new ideas with fervor soon enough (so maybe I’ll sell this and take my medicine sooner rather than later).
I’m sharing my analysis here. If you have thoughts on it I’d love to hear them hit me up on Twitter @joeydean72