3 Long Ideas Poised To Outperform

Just as we did last year we’re starting 2021 by looking at the Long Ideas that performed poorly in 2020. Next week, we’ll review our best performers.

Allison Transmission Holdings Inc (ALSN: $42/share), Korn Ferry (KFY: $43/share), and Johnson & Johnson (JNJ: $158/share) are the Long Idea lowlights for 2020. Despite their underperformance, we remain bullish on these stocks, and they all remain open Long Ideas.

Long Ideas Outperformed in 2020

Figure 1 shows that the average return of Long Ideas outperformed the S&P 500 from the date of publication through December 31, 2020, by 5.7%. Not only did these ideas outperform as a long portfolio, only five had negative returns.

Our Long Ideas combine our proprietary fundamental data, proven superior in a paper forthcoming in The Journal of Financial Economics[1], with qualitative research to highlight firms whose stocks present excellent risk/reward. Long Ideas show investors how to use our research and display the transparency of our analytical processes.

Figure 1: Long Idea Performance: From Date of Publication Through 12/31/2020

Sources: New Constructs, LLC

Lowlight 1: Allison Transmission Holdings Inc (ALSN) – 2020 Performance: Down 11% vs. S&P 500 up 16%: Since Report Publication on June 15: Up 12% vs. S&P 500 up 21%

Allison Transmission was one of the firms featured in our “See Through the Dip” series of reports, where we make the case for a return to pre-pandemic profitability once COVID-19 is in the rearview mirror. Though the stock has rallied from lows of $27/share in late March 2020, the stock still offers plenty of upside in the recovery.

Reason for Underperformance: Pandemic-Related Problems Temporarily Lowered Allison’s Profitability: Overall weakness in the economy and customer shutdowns drove Allison’s revenue from $2.7 billion in 2019 to $2.2 billion over the trailing twelve months (TTM). The firm’s return on invested capital (ROIC) has also fallen from 17% to 10% over the same time.

Thesis: Strong Market Position and an Economic Recovery Will Help Improve Profitability: The deterioration of the firm’s fundamentals was expected given a slowdown in capital expenditures across the globe and represents the anticipated “dip” within our thesis. However, we believe these pandemic-related challenges are temporary, and a rebounding economy, along with fully operating customers, will drive the firm’s revenue and profitability higher.

More specifically, with over 60% of the market share of automatic transmissions for medium- and heavy-duty commercial vehicles, Allison is well-positioned to benefit from industry tailwinds. The heavy-duty commercial vehicle market is expected to grow by 5% compounded annually from 2020 to 2025. While the stock has underperformed, we remain bullish on the long-term outlook for the company and the stock.

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Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation to write about any specific stock, style, or theme.

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