Friday, Nov 5th 2021

Titan Opportunities Trade Update: We’ve bought AVTR, trimmed RDFN and FND

Investor Update

We’ve initiated a new position in Avantor (AVTR), a growing player in the life sciences tools industry, for clients in our Opportunities strategy. This was funded from a reduction in the size of our holdings in Redfin (RDFN) and Floor & Decor (FND).

With this change, we believe we’ve accomplished two important goals for our strategies:

  • Increased exposure to the healthcare industry; and
  • Reduced our exposure to the housing market.

Another Opportunities health check-up

Initiating a position in AVTR marks Titan’s second foray into the life sciences tools (LST) industry.

As a player in the LST industry, Avantor benefits from many of the same secular tailwinds as Thermo Fisher (TMO) — a holding in Titan’s Flagship strategy — including an increased appetite for R&D across the pharmaceutical industry post-COVID and an industry with limited cyclicality while growing at a “GDP Plus” pace.

Avantor went public in 2019, and today’s company is the combination of two businesses — legacy Avantor and VWR. VWR was the second-largest LST distributor behind TMO, while legacy Avantor was a specialty chemicals producer. AVTR’s current leadership successfully integrated these businesses, in our view, and has also begun to grow the business through acquisitions in biopharma, a fast-growing space we view favorably as highlighted in our TMO note.

Although the company has maintained its guidance for its through-cycle growth rate of 4-6%, our analysis suggests that this may be too conservative. Furthermore, we believe there is likely significant room for improvements in profitability as AVTR increases its mix of proprietary products sold from 50% of the company’s revenues to 60%.

Our work on AVTR suggests returns may average 15% net of fees over the next 3-5 years for clients as the company continues to execute its current plan.

Downsizing housing

To fund our purchase of AVTR, we’ve trimmed existing positions in Redfin (RDFN) and Floor & Decor (FND).

By reducing these positions, we trim our clients’ exposure to the housing market, which we believe is currently facing several headwinds.

For Redfin (RDFN), record-high home prices, rising interest rates, and low housing supply may challenge the housing market in the year ahead as COVID-related housing demand slows. After the covid-fueled real estate boom which sent US home sales and price appreciation to levels the industry hasn't seen in nearly two decades, we believe many companies will face challenges in adapting/adjusting to these changing market conditions as the industry begins to come off this record high. This dynamic is further demonstrated by Zillow’s (Z) announcement last week it would end its Zillow Offers program in which the company would purchase homes, renovate them, and seek to flip them for a profit after Zillow incurred substantial losses in this program. As such, we believe these challenges will continue and resulted in our decision to meaningfully reduce our position in Redfin before the company’s Q3 earnings results.

For Floor and Decor (FND), we believe the company is a high-quality business with a strong management team and compelling 15-20% unit expansion growth potential which should support +15-20% Revenue/EPS growth over the medium/long-term. However, in the near-term, FND is facing a number of increasing headwinds such as rising input costs, increasing supply chain constraints and potential decelerating demand within the home remodeling cycle. Given that FND has been one of TItan’s best-performing stocks this year (FND +50% YTD) we believe taking profits and reducing our exposure before the company’s Q3 earnings print was the prudent decision.

Given these dynamics, we believe the risk/reward for both FND and RDFN has become less attractive as the housing cycle turns.

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