EP96: Pool Party
Stock Ideas From Investment Professionals
Welcome, subscribers!
As the year winds down, we’re still finding great new stock pitches to share with our readers.
If you enjoy what we do, please consider forwarding to a friend or colleague who might also appreciate our work.
This week, we present 8 new ideas, including:
A niche leader in fiberglass pool manufacturing poised for significant earnings expansion as market conditions normalize.
A dominant standby power solutions manufacturer benefiting from increased demand for reliable backup energy sources and well-positioned for future clean energy adoption.
An industrial component maker with a top-tier replacement product portfolio, leveraging a self-help strategy to improve margins and productivity.
A staffing and consulting firm with a history of navigating downturns, holding a strong balance sheet, and returning capital to shareholders as the labor market evolves.
A medical device innovator implementing transformational self-help initiatives, enhancing productivity and competitiveness in key product categories.
A global insurer recognized for underwriting excellence, diversified earnings streams, and positioned to capitalize on international growth opportunities and rising interest rates.
Disclaimer: Nothing here constitutes professional and/or financial advice. You alone assume any risk with the use of any information contained herein. We may own positions in the securities listed. Please do your own due diligence.
To the investment managers who read this, you can send us your letters at elevatorpitches@substack.com or on Twitter (and Threads!) if you’d like to be included in a future issue.
Let’s get to it.
The Optimist Fund profiled one of their biggest positions, Latham Group (SWIM), a small cap manufacturer of fiberglass pools. Their 5 year price target of $50 is 7x SWIM’s current share price.
Latham Group
Latham Group is the leading manufacturer of fiberglass pools in the United States that we believe is set to increase earnings materially over the next 5 years.
There are three types of pools: concrete, vinyl and fiberglass. Today fiberglass pools make up ~22% of new U.S. pool starts which has steadily increased from ~16% in 2019 and ~4% in 2000. Fiberglass pool penetration continues to take share from concrete and vinyl due to lower maintenance costs (i.e. from concrete cracking, or vinyl tearing), faster installation (a week versus months for concrete and vinyl), and nicer design and finish than vinyl and on par with concrete.
Because of said benefits, over the next decade we believe U.S. fiberglass penetration will surpass 30% which has already been evidence in other countries where market adoption started earlier.
Latham has three revenue growth drivers. Industry new pool starts, fiberglass pool penetration, and growing their penetration of ancillary products (either owned today such as automatic pool covers or acquired in the future). Combining these growth levers equates to a long-term revenue growth rate of low double digits and 15-20% earnings per share growth due to the operating leverage that is typical in manufacturing businesses such as Latham.
Now what makes Latham especially interesting today is that the last two years have been a nightmare for the pool industry. As central banks raised interest rates from ~0% to ~5%, new pool starts collapsed 50%. Today the new pool market is near a multi decade low with expected new pool starts of ~60k for 2024. This is down from ~120k starts in 2021, ~80k in 2019, and comparable to the depths of the 2009 financial crisis where pool starts were ~53k.
Over this 2–3-year market downturn Latham’s trailing twelve month Adjusted EBITDA has declined a little over 50% and the share price went from a high of $30 to a low of $2 at the end of 2023.
We started buying shares at the beginning of the year in the $2.50 range and have an average cost of ~$3.25.
Over the next 5 years, we believe the new pool market will normalize, returning to at least pre covid levels, fiberglass pool penetration will continue to grow, and Latham will maintain their share in the fiberglass market.
Put together, we believe this will 4x their adjusted EBITDA and result in 2029 earnings per share of ~$2. Our 5-year price target is $50 equating to 25x 2029 earnings per share and a ~600% return from todays price of ~$7.
We believe Latham is an attractive, asymmetric investment.
We have 7 more ides for our paid subscribers.
Note: If you’re still on the fence about subscribing, consider asking your employer to fund the purchase.
We’ve provided a potential script below!
Hi [manager’s name],
I’d love to expense my subscription to Elevator Pitches! It’s a newsletter full of the best stock pitches curated from the letters of professional investors. Here are two examples (here and here) of the types of posts they deliver each week. The paid subscription will give me access to every stock write-up they surface.
Because the newsletter is an educational resource, I was hoping that it’s something that can be expensed to [insert company name]. It is $90 for the whole year, which is a steal considering all the insights and learnings I will get from it.
Thank you so much for considering