SkyTop Capital Management, an investment firm founded in 2010 with a focus on industries facing broad disruption, has honed in on the auto space, placing a bet on a widespread shift to autonomous cars over the next two decades. The Rutherford, N.J.-based firm’s Auto Transformation hedge fund has gained 10.7% since its founding 15 months ago, fueled by overlooked stocks that are likely to thrive on the electric car revolution. In an interview with Barron’s, managing partners Lisa Hess and Dan Sobol highlighted a handful of equities that they view as best positioned to outperform on this “massive disruption in transportation,” including Aumann, Constellium NV (CSTM), Sheritt International and Visteon Corp. (VC). (For more, see also: EVs: Ferrari Designer to Take on Tesla, Porsche.)
Riding the Electric Car Wave
|Aumann||Machinery and production lines|
|Sheriff International||Nickel and cobalt|
Source: SkyTop Capital; Barron’s
Among the companies that SkyTop recommends, many supply to global automakers who are rushing to make electric and autonomous vehicles, such as industry pioneer Tesla Inc. (TSLA) as well as traditional car maker General Motors Inc. (GM), BMW, and Daimler.
Hess told Barron’s that it’s just a matter of time before EVs go mainstream. “I’d say that 20 years from now, the idea that we were all driving around in massive chunks of steel using 150-year-old technology, belching hydrocarbons, is going to look ridiculous,” she stated.
SkyTop likes German electrification play Aumann, which makes equipment that will enable companies to mass-produce EV engines and supplies to Volkswagen, BMW and Mercedes-Benz. Sobol explained to Barron’s that the firm’s proprietary technology for winding copper wire inside an EV improves engine efficiency and improves range, making it critical for next-gen vehicles. The hedge fund expects Aumann’s compounded annual growth rate (CAGR) of 25% to 30% over the past four years “to continue for many years.”
As auto makers look to make lighter vehicles, aluminum serves as a high strength and lighter option. SkyTop highlighted producer Constellium as a company which is trading at a discount to its major rivals, based on enterprise value to Ebitda. Sobol expects the stock to more than double over the next 12 to 24 months to reach somewhere between the low to mid-$20s as it rolls back on capital expenditures and starts generating free cash flow from long-term contracts.
Canadian oil and gas and power generation company Sherritt, one of Cuba’s largest foreign investors, has also been highlighted by the hedge fund as a firm well positioned to gain on the rise of EVs due to its cobalt mining operations. The price of cobalt, a key ingredient for EV batteries, has surged near 250% over the past couple of years, Sobol told Barron’s. Issues in the Congo have made Sherritt’s Cuba mine one of the lowest cost nickel/cobalt mines in the world, he stated. (For more, see also: Tesla Now a “Real Car Company,” Says Musk After Key Production Goal Is Met.)
Visteon, which spun off of Ford Motor Co. (F) in 2000, provides auto makers consolidated cockpit electronic and infotainment in one offering. As the cars of the future digitalize everything, and move some of it to the windshield of the car, Sobol expects Visteon to be the supplier of not only higher-end cars, as it is currently, but will work its way into lower-end vehicles. “The company trades at a very reasonable multiple at less than 10 times projected 2018 Ebitda,” Sobol told Barron’s, while forecasting Ebitda margins to improve from about 11.6% to 14% over three years on more cost-cutting and a better mix.