We were not quite able to post a positive return for the quarter, but were close enough to breakeven to declare a victory in a period when potential disasters seemed omnipresent.

The restructuring strategy, with our focus on risk reduction, performed as we would have hoped in a difficult market environment, doing better than all the major indices. Value investing continues its return to favor, with the Russell 2000® Value Index (-2.4%) performing substantially better than its growth counterpart (-12.6%), the S&P 500® (-4.6%), and the NASDAQ® (-9.1%).

There has been a change in the type of buyback announcement that attracts our attention as we progress in the post-pandemic environment. In addition to the companies with depressed earnings where management is signaling a recovery, we are increasingly seeing companies with record earnings selling at extremely low multiplies and making strong statements about undervaluation. To illustrate our decision process for these peak EPS equities, let’s set up a hypothetical battle between two companies named for mythological gods. We will contrast current holding Triton (god of the sea) to potential early 2022 addition Thor (god of thunder). Triton recently increased the pace of its repurchases, while Thor announced a new buyback authorization.

Triton International, a container leasing firm, started the year at $60 with projected EPS of ̴ $9.50, PE ratio 6.3x. Thor Industries, a manufacturer of recreational vehicles, started the year at $104 with projected EPS of ̴ $15, PE ratio 6.9x. Call the first round even. The next step is to evaluate capital allocation. Triton spent 2020 and 2021 adding massively to its container fleet with 13–15 year life-of-asset leases at extremely attractive rates. Thor made a large acquisition that lessened its dependence on new vehicle production. Second round edge to Triton.

The final and most critical fundamental step (before considering governance issues) is our evaluation of earnings sustainability. Triton is perhaps generating an excess $1-2 EPS from sale of used containers into an exceptionally hot spot shipping market. Given the company’s free cash flow, Triton can replace these per-share earnings through share buybacks at the current market price. While new container leases will undoubtedly be written at lower than current rates, they could still be above existing rates on maturing 5–7 year contracts. Thor is selling RVs at a record rate, as the pandemic has made these vehicles a preferred travel option. However, three factors are making the long-term outlook cloudier: 1) air travel is opening up again 2) RVs are close to the ultimate durable purchase; they are generally utilized sparingly and last for a long time – used RVs compete strongly with new vehicles in weak economic periods 3) rising interest rates will make it more difficult to finance new purchases. Conclusion – tidal wave of evidence for Triton. Thor is rejected; we hope the big guy doesn’t take it too hard.

We don’t know what plans the market gods have for the periods ahead. Undoubtably, there will be occasional storms and rough seas. We will maintain our disciplined approach as we attempt to navigate through these difficult times.

                                                                                                                                                Abbott J. Keller, CFA

                                                                                                                                            Chief Investment Officer