WE INVEST IN QUALITY ENDURING BUSINESSES
STRATEGICALLY POSITIONED IN ATTRACTIVE INDUSTRIES
RUN BY STRONG MANAGEMENT TEAMS.

Our company, Broadview Advisors LLC, is a 100% employee-owned SEC-registered investment advisor based in Milwaukee, Wisconsin.  Established in 2001, our seasoned investment team focuses on core growth strategies through bottom-up fundamental analysis.

We manage assets for domestic institutions and individual investors through our registered mutual fund, the Broadview Opportunity Fund (BVAOX), a private pooled vehicle, and separately managed accounts.

 
 


FIVE PILLAR ANALYSIS

We are opportunistic, special-situation investors.  We believe companies of all sizes and characteristics are periodically mispriced for a variety of reasons.  Repeatedly applying our time-tested investment process, along with a valuation sensitive sell discipline, yields the best opportunity for superior risk-adjusted returns over a market cycle.

  1. STRONG BUSINESS TRAITS

    High level of recurring revenue, return on investment capital, controllable destiny

  2. DEFENDABLE MARKET NICHE

    Strategic value, barriers to entry, difficult to duplicate

  3. ATTRACTIVE GROWTH POTENTIAL

    2-3 year time horizon, company owners not stock renters, across all industries

  4. CAPABLE MANAGEMENT

    History of successful strategic decisions, effective use of free cash flow, aligned with shareholders

  5. DISCOUNT TO PRIVATE MARKET VALUE (PMV)

    Substantial discount at purchase, risk control, requires patience and discipline

top of page
 
 
 

THE BROADVIEW TEAM

top of page
 
 

BROADVIEW STRATEGIES

We manage two strategies differentiated by capitalization boundaries.  Both adhere to the same investment philosophy.  Our investment team applies the same rigorous research process to all companies we include in our portfolios.

SMALL CAP STRATEGY

The Small Cap strategy is our hallmark strategy.  This strategy invests in companies with market capitalizations between $500 million and $3 billion at the time of purchase.  The Broadview Opportunity Fund (BVAOX) employs this strategy.  More>>

ALL CAP STRATEGY

The All Cap strategy invests in companies without respect to capitalization boundaries.  This allows us to employ our disciplined approach to investing no matter where we find opportunities.  More>>

top of page
 
 

THE BROADVIEW®

THE BROADVIEW:


Broad View of the Investment Environment
What's Wrong with the Russell 2000(r) Index?
Carlisle Companies, Inc. (CSL)
Premier, Inc. (PINC)
Technology Sector Review
Consumer Sector Review
Disclaimers

Broad View of the Investment Environment – Rick Lane, CFA

Economic growth has clearly accelerated throughout 2017 here in the United States as well as much of the rest of the world. Growth momentum looks likely to continue for the foreseeable future. U.S. tax reform finally seems possible, if not likely. Lower corporate taxes could add 6% to 7% to corporate earnings next year. We believe the economy is strong enough to handle a few more rounds of interest rate increases which the Fed seems destined to engineer. In our opinion, this is a fairly positive background for equity prices, again, for the near to intermediate-term time frame.

Eventually, the cycle will end. The U.S. is near full employment and equity prices are, generally speaking, rich. We will be watching for signs of excessive optimism, but for now we like the positioning of our portfolios and are finding opportunities to deploy cash. Indeed, following a very frustrating period, it appears that our holdings are starting to participate in the rally. This is very encouraging.

Bank stock investments are reporting strong earnings and the stock prices are moving accordingly. Our largest position, private mortgage insurer MGIC Investment Corporation (MTG), continues to report solid results. Notwithstanding MGIC’s stock appreciation of about 57% for the fiscal year ended September 30, 2017, in our opinion, its valuation is still quite inexpensive. On the bank side, we believe a merger and acquisition cycle is still in front of us. Merger and acquisition activity in the banking industry seemed to take a back seat under the previous administration. As a result, we believe there is substantial pent up ambition for consolidation. The improved regulatory background combined with higher stock prices should usher in an era of increased takeover activity.  In our opinion, there are a handful of attractive takeover candidates in our portfolios.

Elsewhere, housing related holdings, including building supplies manufacturers BMC Stock Holdings, Inc. (BMCH) and Masco Corp. (MAS), and mortgage brokerage Realogy Holdings Corp. (RLGY), continue to do well. We recently added roofing material manufacturer Carlisle Companies, Inc. (CSL) which Sam Koehler profiles later in the shareholder letter. We continue to be very enthusiastic about infrastructure spending, particularly on highways. Infrastructure holdings include highway equipment manufacturer Astec Industries, Inc. (ASTE), and construction materials manufacturers Summit Materials, Inc. (SUM), U.S. Concrete, Inc. (USCR) and Vulcan Materials Co. (VMC). Two noteworthy aspects to the infrastructure story are worth highlighting. First, funding has come through strongly at the state and local level supplemented by a five-year federal bill. Second, we believe the cycle is likely to last well beyond the current economic cycle per se. Infrastructure spending did not really pick up until 2013, four years after the overall economy picked up. California just doubled its four-year highway improvement program and its first project under the program is not scheduled to begin until next year. So, it appears there is a long way to go in this sector.

Broadview’s healthcare holdings have done well this year. We believe they are solid positions. Technology and manufacturing holdings have been a real mixed bag this year but many of the laggards are starting to pick up on improving business trends. This is encouraging following some disappointments last year and earlier this year.

A final note on the energy sector. We believe this area is a very attractive place for prospecting, no pun intended. Following the boom from 2011-2014 and the subsequent bust in 2015 and 2016, energy markets appear to be coming into balance. We are going very slow here as this balance is taking longer than originally thought and investors have little to no appetite for the group. The direction in the stocks continues flat to down. But as the old saying goes, “they don’t ring the bell at the bottom.” We believe there are tremendous values in the space but being too early can sometimes be indistinguishable from being wrong. We are excited about the potential but uncertain about the timing.

What's Wrong with the Russell 2000(r) Index? – Jim Wenzler, CFA

In the world of investment management, there are literally hundreds of indices that can be used to benchmark a manager over a market cycle.  The theory being, if a manager can use their expertise (i.e., fundamental analysis, quantitative analysis, macro analysis, etc.…) to gain an edge and still own companies that populate the index, then over time you are better off owning the active manager.  This seems easy enough and yet thousands of managers in all asset classes struggle to beat the index when measured “net of fees,” that is after the expenses of offering a product, and over a complete business cycle.  I’ll get to my thoughts on the Russell 2000® Index soon, but first let me emphasize the phrase from the prior sentence “over a complete economic cycle”.  Below is an academic rendering of what economic cycles look like.  

In theory, sectors of the economy come in and go out of favor throughout a complete economic cycle and managers invest accordingly.  This is where theory and practice collide because, if it is that simple, anyone could do it.  Cycles have varying ages, winners, mini-cycles, and more.  Looking at the S&P 500® Index as an example, Fortune  reported the following in March 2017, “At 96 months old, this bull market is not the oldest in modern history (post-World War II): That title goes to the bull market that lasted from the fall of 1990 to the early spring of 2000, or 113 months… That record dot-com bull market, which is also the best-performing, with a 417% gain, lasted just more than a year longer than the current bull market’s age… The average age of a bull market, meanwhile, is 57 months.” Updating the results through September 2017, the S&P 500® Index has achieved a total return of 311.2% over this 103-month-old bull market.

This leads me to my question at the beginning of this article, “what’s wrong with the Russell 2000® Index?”  To understand the make-up of the index, it is best done with a comparison. Constituents in the S&P 500® Index must pass four quality hurdles before being included: market capitalization, liquidity, profitability, and having a U.S. headquarters.  In the Russell 2000® Index there are no quality constraints other than size. The next comparison relates to balance sheets.  Small companies tend to have weaker balance sheets as their access to credit markets is limited relative to the large companies found in the S&P 500® Index.  As Neuberger Berman noted in a recent white paper , “The preponderance of investment grade-rated companies in the S&P 500 (roughly 91% by index weight) allows for broad access to 30-year debt. The comparable figure of investment grade-rated companies in the Russell 2000 is roughly 9%.”

Now add the switch by investors away from active managers to passive strategies and you begin to see what happens.  As more money flows into passive Russell 2000® Index strategies via index funds and exchange-traded funds (“ETFs”), there is a disproportionate effect to the “riskier” companies (i.e., lower quality, higher beta) compared to the investment grade-rated S&P 500® Index.  Effectively, the valuations of the companies underlying the Russell 2000® Index are not being determined by bottom-up, fundamental based analysis but instead by money flows into the index via these investment vehicles.  As long as new money outpaces departing money from the indexes like the Russell 2000® Index, the longer lower quality, higher beta names continue to outperform.   

Which brings me to my conclusion.  Since inception in December 1996, our bottom-up, fundamental process has outperformed the Russell 2000® Index. We have been through two full market cycles and are enduring the third, albeit not without a few bandages and rolled ankles. Having been tested in past cycles with the same, intact portfolio management team, we know that ultimately price discovery, not money flows, will dictate the valuation of companies.  In the end, its earnings that matter. 

1 Jen Wieczner, “Happy Birthday, Bull Market! It May Be Your Last,” Fortune  March 9, 2017, http://fortune.com/2017/03/09/stock-market-bull-market-longest/

2 Small Cap Team, “The Role of Central Bank Policies in Small-Cap Active Manager Performance Cycles,” Neuberger Berman May 31, 2017, https://www.nb.com/documents/public/en-us/central_bank_policies_in_small-cap_active_performance_cycles_may_2017.pdf

Carlisle Companies, Inc. (CSL) – Sam Koehler, CFA

Carlisle is a diversified manufacturing company that we recently added to Broadview’s portfolios.  It is comprised of five industrial segments with a shared emphasis on highly engineered products: construction materials, interconnect technologies, fluid technologies, brake and friction, and food service products.  In these segments, the company employs a "Carlisle Operating System" with Lean Six Sigma principles.  They have demonstrated an ability to reduce costs and enhance profitability, with over $200 million of accumulated savings since 2008.

Carlisle Construction Materials (CCM) is Carlisle’s largest segment and manufactures commercial roofing materials, insulation and ancillary products in which Carlisle is a leader in rubber, thermoplastic polyolefin, and polyvinyl chloride membrane roofing.  Almost all of Carlisle's roofing sales are focused in the commercial market and much of this business is for replacement roofing, a more stable market than new construction.  U.S. commercial roofing shipments have remained well below the peak in 2006, which, along with a long-term market shift from asphalt roofing, leads us to believe there is ample opportunity for long-term growth.  Carlisle recently announced the accretive acquisition of Accella Performance Materials to add to the construction materials segment.  Accella will bring specialty polyurethane spray foam and liquid roofing products to Carlisle.  This is consistent with management's desire to acquire a more complete building envelope product offering.

Carlisle Interconnect Technologies (CIT) manufactures wire, cable, and other connection equipment for power and data transfer with a focus in the aerospace, medical, defense, test and measurement and industrial markets.  This segment focuses on products that are integrated with customer specifications and often require certification, which drives customer entrenchment and higher profitability.  Carlisle has made recent acquisitions in the aerospace and medical industries and will likely look to these industries for acquisition opportunities because of the long-term growth and profitability.

Carlisle Fluid Technologies (CFT) was acquired in early 2015 and manufactures liquid and powder finishing equipment for diverse markets including automotive, automotive refinishing, aerospace, agriculture, construction, marine and rail.  Carlisle has undertaken significant restructuring initiatives since this acquisition which should result in improved financial performance in 2018 and beyond.  As a newer platform, we believe there is a great deal of value to unlock through rationalization, organic growth, and potential acquisitions in the fluid technologies space.  Carlisle FoodService Products (CFS) and Carlisle Brake & Friction (CBF) segments are both showing positive improvements but not considered core long-term holdings and management has expressed a willingness to divest if the right opportunity arises.

The opportunity to invest in Carlisle at what we believe is an attractive valuation came from two main investor concerns: construction materials margins and an interconnect technologies business transition.  Carlisle has substantially increased the construction materials margin profile and profitability over the past several years.  This was driven by internal improvements along with raw material price declines.  Investors are concerned that this segment may be at peak margins now that raw material prices have started to rise again.  While we agree that the very current margins may not be fully maintained, we believe the internal improvements over the past several years will limit margin degradation and allow the construction materials segment to still earn high levels of profitability.  The concerns in interconnect technologies have arisen from a revenue gap in aerospace sales due to a technology shift.  The aerospace market has seen lower demand for in-flight entertainment systems for which Carlisle has provided legacy cable-intensive systems.  Instead, the narrow-body plane market has shifted to satellite communications technology for in-flight connectivity.  While Carlisle is well positioned for the emerging “SatCom” opportunity, sales have been delayed due to longer customer configuration timelines and certification delays.  Additionally, the legacy in-flight entertainment products have declined more rapidly than anticipated because of slower wide-plane production and retro-fit opportunities, as well as pricing pressures.  We believe these interconnect technologies concerns are transitory, and the long-term outlook remains encouraging.  

Carlisle has continued to repurchase shares and still has plenty of capacity to make additional acquisitions with a manageable leverage position.  We believe the management team has proven to be both strong business operators of the current business platforms and astute capital allocators through acquisitions and divestitures.  Despite what we regard as transient concerns in the construction materials and interconnect technologies segments, we believe the discounted valuation, core profitability, and growth opportunities in defensible market niches makes this an attractive long-term holding.

Premier, Inc. (PINC) – Aaron Garcia, CFA

We would like to take this opportunity to highlight a recent investment in Premier, Inc. Founded in North Carolina, Premier offers purchasing and analytics services through its market leading Group Purchasing Organization (“GPO”) and software offerings. We believe that Premier’s services are very valuable to healthcare executives in the current regulatory environment.

Hospitals must contend with shrinking reimbursement from both government and private payers while also facing pressure to measure outcomes and improve their standard of care. Premier’s solutions help hospitals counter rising healthcare costs. Further, the company is on the leading edge of providing value based measurement tools. We are convinced that the healthcare industry needs to pivot to value-based care and reimbursement. The U.S. economy cannot continue to support the growth in healthcare spend.

The equity of the company has somewhat underperformed due to an uncertain hospital spending environment, and we feel this is an opportunistic time to invest in this company. Also, there is some worry that customer retention levels will fall. We have long admired the GPO business. In our opinion, the operating metrics are simply splendid: greater than 40% operating margins; highly recurring revenues; strong free cash flow; almost 100% customer retention; and a consolidated competitive landscape that is currently pricing rationally. The larger the GPO, the more leverage it has over the suppliers and the more value it can drive for its partners. Additionally, the management team is long tenured, and we believe very strong. The current valuation of Premier’s stock is at the lower end of the valuation range, at 9x forward earnings before interest, taxes, depreciation and amortization (“EBITDA”). The closest sized competitor, MedAssets, was purchased by private equity for 19x EBITDA. While we would not expect Premier’s stock to trade at that level in the public market, we believe that there is room for valuation appreciation as Premier continues to execute.

Technology Sector Review – Faraz Farzam, CFA

In aggregate, Broadview’s technology names performed poorly this quarter. Although software investments like Tableau Software, Inc. (DATA) and CommVault Systems, Inc. (CVLT) delivered strong performance, it was not enough to offset declines in two of our largest positions – Veeco Instruments Inc. (VECO) and Ciena Corp. (CIEN), on the back of disappointing short-term outlooks.

Going into the third quarter, both Veeco and Ciena were two of Broadview’s standout tech stocks, and although both delivered better than expected results in the second calendar quarter, their lukewarm outlooks sent both stocks downward during the third calendar quarter; unfairly, in our opinion.  Telecommunication gear maker Ciena has been a long-term holding, initially purchased in 2010. Since 2010, Ciena has grown revenues and profit margins far beyond what Wall Street had been expecting. We believe they have a dominant position globally in optical systems technology, critical infrastructure that drives the internet. Management has nearly tripled operating margins and taken share nearly every year from competitors. However, during the second calendar quarter the company tempered its short-term outlook due to a slowdown in government spending. Although federal government spending represents less than 20% of the business, the third calendar quarter is usually a strong quarter as budgets get flushed during the government's fiscal year end. With the arrival of the new administration, prior budgets are receiving greater scrutiny and delaying planned rollouts. In our opinion, the long-term outlook for Ciena remains bright. The company has penetrated three of India's largest telecom providers and believes that India is on the early stages of a long and sustained optical buildout. Both Verizon Communications Inc. (VZ) and AT&T Inc. (T) are top Ciena customers planning significant multi-year buildouts of their metro networks.

Veeco was another disappointing stock. Like Ciena, they posted strong results for the second calendar quarter, however their outlook was tempered due to delayed orders for their newly acquired advanced packaging technology from Taiwan Semiconductor Manufacturing Co., LTD. (Taiwan: 2330-TW). Although Veeco boasts 70% market share in advanced packaging for semiconductors - a critical technology that reduces size and power consumption in electronic devices, in the short-term Taiwan Semiconductor needs to eat through large capacity purchases made in the first half of 2017 in anticipation of the iPhone 8 and X launches. Although Veeco’s core business was much better than anticipated, the advanced packaging disappointment surprisingly overshadowed this aspect of the story. With the recent iPhone launches we believe that the advanced packaging business is poised to recover. Furthermore, we believe there will be continuing strength in Veeco’s core business.  We remain optimistic that both Veeco’s and Ciena’s stocks will rebound as their fundamentals recover from short-term speed bumps.

Consumer Sector Review – Faraz Farzam, CFA

Last quarter, our consumer discussion focused on the now cliché term “retail apocalypse.” Our discussion this quarter will focus on two topics. First, is there a future for traditional brick and mortar retail? And second, how do we profit from the so-called “Amazon Effect?”

The consensus view today is that retail is dead. Brick and mortar is in terminal decline and the only opportunities in retail are bad ones. If this were true, however, we wonder why Amazon.com Inc. (AMZN) just spent nearly $14 billion acquiring 400 Whole Foods stores? Further, the company has opened 11 physical bookstores. There is no question we are saturated with stores in this country, a fact we outlined in detail last quarter. There is also no question that many retailers will close or go bankrupt. However, as Amazon’s own actions indicate, there is indeed a future for retail.

The case study to point to as an “investment playbook” is Best Buy Co., Inc. (BBY). Coming out of the last downturn, Best Buy looked like it was in trouble. Even though Circuit City had gone bankrupt, positioning Best Buy to capture that business, the retailer was in peril. Large parts of their offerings were under attack from the first iteration of the “Amazon Effect.”

Physical media (DVDs, CDs and video games, etc.) were being increasingly downloaded and not purchased in stores. Accessories like cables and connectors were easily obtainable online. Consumers were “Showrooming;” going to Best Buy to see which TVs they liked but making their final purchases on Amazon at better prices. Best Buy was saddled with large boxes and long-term leases while sales seemed to inexorably be moving online. The stock reached an all-time low of $12 in 2012. Today, Best Buy’s stock is hitting new highs. How did Best Buy engineer this dramatic turnaround in the face of the Amazon juggernaut? The strategic plan involved 5 initiatives:

•    Stop growing stores and start rationalizing the base. – Best Buy has closed nearly 500 stores in over 3 years.
•    Redeploy capital to ecommerce. - Best Buy’s ecommerce as a percentage of sales is approaching 20%.
•    Match Amazon on price. - By matching Amazon’s price on TV's, Best Buy can still capitalize on high margin accessories.
•    Cut costs but reinvest savings in store labor. - Consumers still want a differentiated store experience where their questions can be answered by a knowledgeable staff.
•    Innovate. - Today innovations such as connected devices, drones, and wearable cameras are driving consumers in Best Buy stores to find out what's best for them.

In our last newsletter we made our case for troubled retailer Hibbett Sports, Inc. (HIBB). Although we will not reiterate our detailed analysis, we can say that Hibbett is deploying the same investment playbook as Best Buy.  A quick review of Hibbett:

•    They have stopped growing stores.
•    They just recently launched a modern ecommerce platform.
•    They are investing in store technology such as POS (point of sale) systems.
•    Nike, Inc. (NKE), their number one partner, is finally driving innovation in the category after two years of fashion dormancy.

We have also taken a page out of this playbook for Broadview’s portfolios in an attempt to profit from the Amazon Effect. As Hibbett redeployed capital away from physical stores, so have we. Two investments that we would like to discuss today, Freshpet Inc. (FRPT) and Boston Beer Company, Inc. (SAM); consumer staple companies in categories that are agnostic to the shift online.

Boston Beer Company, the manufacturer of Samuel Adams Beer, has a roughly 1% share of the U.S. beer market. We began purchasing Boston Beer Company stock last year as the company struggled with declining beer volumes in their core lager and seasonal categories. According to the U.S. Brewers Association, the number of craft brewers in this country is now well over 5,000. Five years ago, that number was only about 2,000. Last year alone, 800 craft breweries began production.

Beer production is a high fixed-cost capital-intensive endeavor and consequently, many are rightly asking if we are in the midst of a “craft bubble.” Although demand for craft beer has outpaced traditional session lagers, we believe the explosion of craft breweries is unsustainable. So, why is this good for Samuel Adams? During the ascent of the craft phenomenon, Samuel Adams lost considerable share at grocery stores and bars and restaurants as vendors gave shelf space and increased taps to the new and emerging craft brands. However, grocers have a finite amount of shelf space and bars have only a finite number of taps.

When the bubble inevitably bursts as the vast number of breweries close due to lack of volume to cover fixed costs, we believe an obvious beneficiary will be Samuel Adams. Over the years, Samuel Adams has built a formidable distribution network. The beer distributors that we have talked to have all expressed their tremendous affinity for Samuel Adams as an innovator and partner. Through programs such as “Freshest Beer,” Samuel Adams has cultivated true partnerships with distributors and grocers. The distributors in turn are educating restauranteurs and bar owners that their new craft taps are not generating as much volume as, say, a Samuel Adams.

The new craft brands are generally bigger, hoppier and more alcoholic. Consumers do not drink as much of them, and so the restaurants, by adding more and more craft taps, are losing volume and economics. When the craft shakeout comes, the biggest beneficiary could be Samuel Adams. We began buying Boston Beer Company around the $150 level. The stock currently is trading at an EBITDA multiple of 12x.  We believe the private market value may be north of $200 as beer assets tend to be acquired for EBITDA multiples in the 15 - 20x range.

Freshpet engages in the manufacture, marketing, and distribution of ultra-premium pet food and pet treats for dogs and cats. Freshpet’s differentiation is multifaceted. Not only do they use better, fresher ingredients versus dry kibbles, their product is cooked in what they call a “kitchen” and sold through their own refrigerators to keep the products consistently fresh. Freshpet places their refrigerators in grocery stores, pet specialty stores, and mass retailers like Costco Wholesale Corp. (COST) and Target Corp. (TGT). They currently have 17,000 refrigerators in the field and the company believes this number can double over time.

Freshpet’s research shows that currently only 30% of dog owners are familiar with the brand. When consumers try Freshpet products, the repeat rates are as high as 70%. New CEO Bill Cyr, who engineered a turnaround at Sunny Delight Beverages Co., has embarked on an aggressive and, so far, successful marketing program to increase awareness and trial for a brand that currently has a tiny share of a $26 billion industry. Their plan to spend over two million dollars in advertising has already delivered solid throughput in their existing refrigerators. Freshpet already has a solid presence in Whole Foods which was acquired by Amazon and, according to Instacart, the online ordering service, Freshpet is their #3 branded pet food in terms of revenues. Although Freshpet has been one of the our best consumer names this year we believe the outlook for the company and the stock continues to be robust.

Disclaimers – Broadview Advisors, LLC

Broadview Advisors, LLC is an SEC-registered investment adviser.  The information contained herein is for general informational purposes only and does not constitute a solicitation or an offer to sell investment advisory services in any jurisdiction.  The views and information discussed in this commentary are as of the date of publication, are subject to change due to shifting market conditions and other factors, and may not reflect the writers’ current views.  The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding particular investments, sectors or markets in general.  Specific securities discussed herein are intended to illustrate our investment style and do not represent all of the securities purchased, sold or recommended for client accounts.  Such information does not constitute, and should not be construed as, a recommendation to buy or sell specific securities.  Past performance does not guarantee future results and it should not be assumed that any investment will be profitable or will equal the performance of any securities or sectors mentioned herein.  Certain information contained herein may be derived from third-party sources and is believed to be reliable and accurate at the time of publication.

top of page