Investor Essentials Daily

Whether you bet for or against the supply chain, this name will always come out on top

July 26, 2022

The supply chain and the disaster that is such is a hot topic in the market. Everyone knows there are delays and everybody recognizes there is a problem. Many believe this will persist while another handful believe it could get better.

The fact of the matter is that companies who offer what both a boom or bust in the supply chain need are set to capitalize on this either way.

That is why ZIM showed up on our FA Alpha 50 screen as a strong company that fits this moat. Offering shipping solutions to satisfy a crippled or booming supply chain, they have strong returns and growth. Trading at a deeply discounted two times P/E they are a prime example of a company positioned to win.

That is why it showed up on our FA Alpha Screen. Its high profitability and attractive P/E make it an interesting name.

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There are two competing ideas related to globalization and the current outlook on the supply chain.

The first is that globalization is doomed. It is no secret that the global supply chain has been riddled with delays, shortages, and price hikes. This disjointed system has led to a situation where both the consumers and the suppliers suffer.

With all these headaches, the inefficient nature of the supply chain will lead to more global fragmentation and regionalization. That leads to a disconnect between supplier and consumer which ultimately leads to more shipments.

However, the second position is that globalization will triumph. Hallmarked as a resilient aspect of the global economy, the supply chain will prove its strength via the demand for goods.

If the supply chain is strengthened with this influx of demand, more goods will be shipped.

The common denominator in both equations is the increase in shipping goods. Whether it is because of fragmentation and headaches or because of increase in demand, the goods must be delivered.

And, more deliveries means more boxes. One name strategically positioned to benefit from either scenario is ZIM Integrated Shipping Services.

They help deal with those logistics nightmares for people – from handling shipping to providing shipping software solutions.

With this demand, ZIM has ample opportunity to grow. Both their Uniform and As-Reported Return on Assets (ROA) reflect this.

From just a 12% Uniform ROA in 2020, returns shot up to 51% in 2021 as the company helped to service the global supply chain.

ZIM’s asset growth in 2020 notched 85% on a Uniform basis and increased to 186% in 2021, with as-reported showing similar trends.

So, not only is this company on the trajectory for ample returns and growth, but both Uniform and as-reported P/E show this is an exceptionally cheap name.

With 2020 and 2021 Uniform P/E coming in at 2.1x and 1.8x, respectively, ZIM is trading cheap and positioned to capitalize on either the supply chain’s fumble or triumph. All those things mean it’s a compelling FA Alpha 50 name.

Throughout financial market history, many of the world’s most successful investors have been candid in their belief that Generally Accepted Accounting Principles (“GAAP”) distort economic reality.

Warren Buffett, for example, once said investors should “concentrate on the world of companies, not arcane accounting mathematics.”

Investors who neglect the very real issues with as-reported accounting can find themselves caught up investing with the crowd, blindly following hot “themes” without a thorough grasp of how to understand the businesses in question.

The only true way to focus on the “world of companies,” as Buffett suggests investors do, is to present a clear picture of how a business operates, something that can only be done by adjusting financial statements to reflect the arbitrary nature of certain accounting rules that leave much to discretion.

The world’s best investors understand the need to make these adjustments, which allows them to focus not on picking out the most popular companies, but rather on looking for great names in sleepy areas that the market isn’t paying much attention to. From there, the goal is to then identify quality companies with significant growth potential at reasonable prices.

That’s exactly what we’ve set out to do with the FA Alpha, our monthly list of 50 companies that rank at the top for quality, high growth, and low valuations.

This list has outperformed the market by 300 basis points per year for over 20 years now, effectively doubling the performance of the market by focusing on the real fundamentals and valuations of companies with our proprietary Uniform Accounting framework.

See for yourself below.

To see the other 49 names on the list, click here.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research

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