TreeHouse Foods (THS) — which operates in the private label food business — is my top speculative idea for the coming year, notes Bruce Kaser, editor of Cabot Turnaround Letter.
As a major contract producer of private label foods, TreeHouse has struggled with poor execution and elevated debt resulting from its acquisition-driven strategy. While the private label food industry has continued to grow, TreeHouse’s results have continued to sag.
Efforts starting in 2016 to improve its inefficient operations, including divestitures and the replacement of the original CEO in March 2018, have proven only modestly effective.
The shares are 60% below the 2016 peak, and now trade only modestly above the 2005 spin-off price. Nevertheless, the company remains profitable and generates reasonable free cash flow.
While third quarter results were dreary, as expected, demand for TreeHouse’s products is ahead of its production ability, and consumers appear to be incrementally shifting back to the lower-priced store brands that TreeHouse produces. Also, the margin squeeze from higher costs will increasingly be offset by better pricing.
Critical to our thesis, respected activist investor JANA Partners has steadily built a stake, now at 9.2%, and holds two board seats. Their standstill agreement expired on December 15, so it is likely that JANA will step-up its pressure to either sell the company or change its strategy and leadership. Trading at only 9.6x estimated 2022 EBITDA, the shares offer considerable upside.
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A Look Back at 2021's Top Performers
Bruce Kaser chose two excellent performers last year, including one that gained over 200%. Here, he offers updates on his Top Picks for 2021.
We first recommended Signet Jewelers Ltd. (SIG) in September 2019. Under Gina Drosos — who became CEO in August 2017 — the company not only adeptly navigated the pandemic, it has also moved into the vanguard of jewelry merchandising, retailing and e-commerce. The credit issues were fully resolved, the balance sheet is now “fortress-like” and Signet is generating strong free cash flow.
The stock — which we chose as our Top Pick for 2021 — gained 211% last year. We moved the shares to a Sell in early November of 2021 at just over $104 as the risk/return trade-off became unfavorable, for a 505% total return since the position’s inception.
If its fundamental strength continues, Signet could see its shares continue to surge. With its $4.6 billion market value and strong balance sheet, a private equity company could easily acquire Signet, likely at a high premium. As such, we suggested that shareholders consider keeping a stub position that could participate in any further price gains.
Wells Fargo & Company (WFC) — our conservative Top Pick for 2021 — rose 63% last year. In mid-2020, when we initially recommended WFC shares, investors were worried about potentially sharply higher credit losses due to the pandemic-driven economic shutdown. We were encouraged by the efforts of new CEO Charles Scharf to aggressively restructure the bank’s operations.
Through 2021, the bank’s credit losses remained remarkably low while CEO Scharf continued to execute on his turnaround strategy. Like all banks, Wells is struggling with low interest rates and limited loan growth as well as the regulator-imposed cap on its asset size. But the better financial results led to rising confidence in the bank’s future, driving the shares higher for the year.
