MLI - AVUV: Now May Be A Good Time To Add

2023-11-07 02:17:09 ET

Summary

• Avantis US Small Cap Value ETF is an actively managed fund that focuses on investing in small-cap value stocks in the US.
• AVUV has shown strong performance since its inception, with a compound annual growth rate of over 11%.
• The Fund offers diversification with well-diversified holdings across various sectors and has outperformed its benchmark, the Russell 2000 Value Index.

Investment Thesis

Avantis U.S. Small Cap Value ETF ( AVUV ) is an actively managed exchange-traded fund that focuses on investing in small-cap companies in the United States, which it identifies as underrated value stocks. According to its prospectus, AVUV takes a long-term investment approach and allocates at least 80% of its assets in small-cap stocks, using traditional metrics such as price-to-book-ratio in its investment decisions.

AVUV was incepted in September 2019 and has shown strong performance, with approximately 56% up since inception, which translates to a compound annual growth rate ('CAGR') of over 11%.

This is a commendable result, but I think AVUV has the potential for even better results in the future, especially considering the current economic environment that could favor value stocks. Additionally, the management of AVUV has a track record of outperformance, when compared to its benchmark, the Russell 2000 Value Index.

Value Vs. Growth

I don't know if you prefer investing in value or growth, or if you reallocate between these two approaches occasionally. For me, it's mostly a question of personal preferences, although one should always bear in mind some of the key differences between these two styles.

Historically, value investing has outperformed growth investing in most of the years since 1927 . However, recent data over the past 40 years suggests similar total returns in the Russell 1000 for both value and growth stocks.

And narrowing the time frame even more, growth stocks have outperformed value stocks in the last decade .

Historically, value investing has shown strength in periods of high inflation and during and after recessions. Given the current economic landscape, AVUV may perform very well in the coming months.

In my opinion, whether you prefer value or growth stocks, AVUV offers an opportunity to diversify your stock portfolio and maybe a very good choice at the moment, consisting predominantly of small-cap stocks and with a net expense ratio of 0.25%, which is very low for an actively managed ETF.

Composition of AVUV

Sectors

As of the end of September, AVUV had assets under management ('AUM') of $6.8B, translating to a net asset value of $73.80 per share.

The holdings are well-diversified across various sectors, with Financials, Energy, and Consumer Discretionary being the most significant at 26%, 19%, and 19% respectively. Communication Services (2%), Health Care (2%) and Real estate (1%) are the sectors with the lowest allocations.

Top holdings

The top holdings are also very well diversified. As of 10/27/23 , the top ten holdings account for 8.24% of AUM, the top 50 holdings represent 31.56% of AUM, and the largest 100 holdings aggregate to 51.30% of AUM. This means no single constitutes more than 1% of AUM, with only 46 of the 732 holdings weighing 0.5% or more.

Even though there is no big difference between the top holdings if we just compare the weight in AVUVs portfolio, I think it might be of value for some readers to have a closer look at the top 20 holdings. All the data that can't be found on the fact sheet of AVUV is taken from Seeking Alpha.

To give you an impression of the kind of companies, AVUV invests in, let's have a look at the top five holdings:

Ryder

Ryder offers logistics and transportation solutions with a fleet of over 250,000 vehicles . Last year it achieved $12.0B of total revenue in mainly three segments (Fleet management solutions, supply chain solutions and dedicated transportation solutions) and with diversified customers.

Ryder has a 5-year revenue CAGR of nearly 8% and a 5-year EPS CAGR of 15.06%. The TTM P/E of 9.89 is substantially cheaper than the sector median of 19.73.

Mueller Industries Inc

Mueller Industries manufactures and distributes various products worldwide, primarily related to piping systems , industrial metals, and climate products. With approximately two-thirds of the revenue, the biggest segment is piping systems, the majority of net sales (85%) is associated with building construction activities. MLI has been profitable in every one of the last 30 years, even during the coronavirus pandemic and the GFC. MLI has a QUANT rating of strong buy with a forward P/E of 8.35.

Boise Cascade

Boise Cascade derives three-quarters of its trailing twelve months sales from the distribution of building materials and one-quarter from wood products. BCC has benefited from high prices in recent years, resulting in significant deleveraging and improved liquidity.

Goodyear Tire & Rubber

Goodyear manufactures and sells tires worldwide, with a history of 125 years. Recent results appear to be mediocre in my view, but the Q3 results are looming around the corner (11/06/23) and the latest outlook is positive. In the latest earning presentation, GY anticipates financial headwinds (interest expenses and depreciation & amortization), but also lower costs for raw materials in the future.

Air Lease

Air Lease acquires aircraft and leases them to airlines globally. According to Cirium Fleets Analyzer (August 2023), approximately half of the aircraft at the moment are leased. With growing passenger numbers since the coronavirus pandemic lows, AL sees a strong demand for aircraft.

The price-to-book ratio of AL is just 0.60 with a low P/E ((FWD)) of 8.59.

Evaluation

AVUV holds a Morningstar 5-star rating, indicating that it ranks among the top 10% performing funds in its category (small value).

The risk-return analysis shows that the higher returns relative to its category are also associated with a higher risk.

The standard deviation is higher because AVUV has a higher exposure to cyclical sectors like energy and consumer discretionary. But compared to its benchmark AVUV it has a higher return and a better performance across various time intervals, including the last quarter, year-to-date, one year, and also three years.

Investor takeaway

AVUV is an actively managed ETF with strong diversification, targeting undervalued United States small-cap stocks. It has outperformed its benchmark, the Russel 2000, and has a low net expense ratio of 0.25%. In my view, AVUV offers a compelling choice for portfolio diversification and seeking alpha, especially for investors focused on value.

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