One is a contrarian play on U.S. housing, while the other is a New York manufacturer swinging for the fences
First Eagle fund manager Bill Hench is sidestepping artificial intelligence with a bet on the eventual recovery of the U.S. housing construction market.
Small-capitalization fund managers tend to hold a lot of stocks, which, according to Bill Hench of First Eagle Investments, greatly increases the odds of winning if the stocks are bought at good prices and sold at the right time.
New York-based Hench heads the small-cap team at First Eagle and co-manages the First Eagle Small Cap Opportunity Fund FESAX, which holds about 240 stocks, and the First Eagle Small Cap Equity exchange-traded fund FESC, which was established on July 1.
FESAX has returned 54.1% over the past five years, with dividends reinvested, well ahead of a 36.9% return for the Russell 2000 Index RUT and a 36.7% return for the S&P Small Cap 600 Index SML.
So far this year, FESAX is up 23.7%, while the Russell 2000 has returned 15.1% and the S&P Small Cap 600 is up 16.5%.
But the fund has pulled back a bit since June 30, when it was up 33% for the first half of the year. Hench said that at that moment, "eight of our top 10 names were, in some shape or more, data-center related. So we reduced them quite a lot."
Hench shared two very different stock picks with MarketWatch. The first is Boise Cascade $(BCC)$, which is a contrarian play on the eventual recovery of the U.S. housing construction market. This company provides wood products to home builders and runs 39 distribution centers. The stock has returned 2.5% over the past year, with dividends reinvested, but it is down 45.5% from two years ago. The company has remained profitable, despite the housing downturn, but margins have come under pressure.
Boise's second-quarter sales came in at $1.83 billion, up 5% from a year earlier, while its earnings per share were down a penny to $1.63. But this is a cheap stock. With a market cap of $2.63 billion, BCC trades at a forward price-to-sales ratio of 0.4, based on the consensus 12-month revenue estimates among analysts polled by FactSet. That compares with a weighted forward price-to-sales estimate of 1.1 for the S&P Small Cap 600. The stock's forward price-to-earnings ratio is 15.5, which is above the forward P/E valuation of 14 for the index. Then again, the company's earnings might be at their low ebb.
"They have an adult management team and are good stewards of capital," Hench said, adding that the stock "will do well immediately, once there is a sniff of the market getting better."
The other stock pick Hench shared was Graham $(GHM)$, a manufacturer in Batavia, New York, that produces a variety of heat transfer, liquid transfer, vacuum and related equipment used in the defense, energy and space industries.
Graham's stock has returned 59% over the past year and has nearly tripled over the past two years. The stock trades at a forward P-to-E of 46.8 and a forward price-to-sales ratio of 3.4. So this can be considered a rather expensive stock of a rapid grower. Sales for Graham's most recent fiscal quarter were up 29% year-over-year, although its net income declined to 33 cents a share from 42 cents, in part reflecting higher expenses connected with an acquisition made in January.
Hench called Graham "one of the few industrial names without the words 'AI' or 'data center' associated with that is doing really well."
Hench pointed to two newer business lines as having excellent prospects for long-term growth - cryogenic tanks used in spacecraft and equipment used in the nuclear-power generation. "We don't know how big those businesses will be, but this is an exciting company that is producing really good earnings," he said.
Based on estimates adjusted to match calendar years, analysts expect Graham's EPS to increase from $1.43 this year to $2.04 in 2027 and $2.59 in 2028. That would make for a compound annual growth rate of 34.4% for EPS, compared with a projected two-year EPS growth rate of 4.6% for the S&P Small Cap 600.
The markets
U.S. stock futures (ES00) (YM00) (NQ00) are dropping, as Brent oil (BRN00) jumps over 4% and the 10-year Treasury yield BX: TMUBMUSD10Y is on the rise, at 5.345%.
Key asset performance Last 5d 1m YTD 1y S&P 500 7801.77 1.96% 2.17% 13.97% 15.52% Nasdaq Composite 27,538.69 2.52% 4.90% 18.49% 19.51% 10-year Treasury 5.344 10.20 37.50 117.20 120.00 Gold 4147.2 -1.44% -4.85% -4.27% 3.91% Oil 91.67 -1.33% -11.80% 59.68% 49.01% Data: MarketWatch. Treasury yields change expressed in basis points
The buzz
Oil is climbing after a report said President Donald Trump may strike Iran before the midterms. A tanker off Qatar was also attacked.
Weekly jobless claims are coming at 8:30 a.m. Eastern, with the results of a $22 billion auction of 30-year bonds due at 1 p.m.
Speaking in Turkey, Federal Reserve governor Christopher Waller said more interest-rate hikes will be needed if economic data come in as expected, but he sees some flexibility on timing. St. Louis Fed President Alberto Musalem will speak at a Bloomberg event at 1:40 p.m.
Applied Digital (APLD) is up nearly 5% after the data-center developer delivered surging revenue amid the artificial-intelligence build-out.
Shares of Micron Technology (MU) and Sandisk (SNDK) are down after chip maker Samsung Electronics (KR: 005930) saw a disappointing reaction to strong revenue.
PepsiCo (PEP) cut its profit outlook.
TikTok quietly gutted its advertising rules. Scams have exploded ever since.
The chart
Retail investor appetite for technology sector ETFs has bounced back, the chart from JPMorgan strategists shows. A team led by Arun Jain said inflows into those ETFs last week climbed to their 73rd percentile, well up from fourth percentile four weeks ago. Inflows into Magnificent 7 stocks also remained resilient, with flows into tech excluding Mag 7 names firmer, led by the buying of Sandisk (SNDK) and Micron (MU). "Overall, retail investors were net buyers across tech-not only semis and hardware, but this time also favoring software," said Jain and the team. Investors were trimming positions in SpaceX (SPCX) after a 15% gain in those shares last week, they said.
Top tickers
These were the top-searched tickers on MarketWatch as of 6 a.m.:
Ticker Security name NVDA Nvidia TSLA Tesla MU Micron SPCX SpaceX GME GameStop AMD Advanced Micro Devices TSM Taiwan Semiconductor Manufacturing Co. AMZN Amazon AAPL Apple PLTR Palantir
-Philip van Doorn