CSX and 4 Other Investments Pros Say Will Benefit From Long-Term Trends

Jennifer Foster

Co-Chief Investment Officer, Equities, Chilton Trust
Pick: CSX (CSX)

The movement to bring supply chains closer to home, known as nearshoring, is benefiting U.S. rail companies. We believe CSX (ticker: CSX) will be a prime beneficiary. CSX is a high-quality operator with an attractive valuation that is geographically situated in many of the states that are experiencing renewed growth in manufacturing.

Yes, CSX is a rail, so it has some cyclical exposure, and we’re not yet through this macro slowdown. But much of that is discounted in the stock’s valuation. We believe this company will pay off nicely on a two-year-plus time horizon. It’s trading at about 15 and a half times earnings, and its 10-year average is about 17 times earnings.

The other attractive thing is the shareholder yield, which means both the dividend yield and average buybacks; it’s nearly 7%. We believe that yield will buffer some of the cyclical pressure that CSX may still experience in the short term.

But the most exciting thing is that the company is a strong operator. It was the first to embrace precision scheduled railroading. The idea is that you focus on service metrics, specifically on-time deliveries. Also, CSX disclosed on its last earnings call that it is seeing a robust pipeline of manufacturers setting up new plants along its rail lines for logistics and distribution benefits. If these plants are built alongside the CSX network, it is CSX’s business to lose, and then it becomes an execution game. We have a lot of confidence about this company’s ability to execute. Our current share-price target is $45 [45% higher than the recent price of about $31 per share—Ed.]

Ryan Dobratz

Portfolio Manager, Third Avenue Real Estate Value Fund
Pick: Jones Lang LaSalle (JLL)
Commercial real estate, the office sector especially, has been under a lot of pressure. Anything related to that space has underperformed over the past 12 to 18 months. That has created some interesting opportunities, particularly in real estate services firms like CBRE Group and Jones Lang LaSalle.

We gravitate toward businesses that have attractive prices when the near-term outlook isn’t great, provided that the company is well capitalized and can ultimately emerge stronger and more valuable.

We think that’s the case for JLL. It’s the second-largest real estate services firm globally and acts like a tollbooth on the commercial real estate industry, generating fees for selling businesses, financing assets, and managing properties. Today, a couple of lanes are closed. Most notably, real estate transactions have ground to a halt. And leasing, particularly on the office side, has really pulled back.

JLL’s stock price has declined considerably, and as a result, we established a meaningful position in it this year. Our view is that JLL is very well capitalized. We estimate the net debt-to-asset ratio is less than 20%. And most market participants are overlooking the fact that JLL has a lot more recurring revenue than it did when it went through a similar period 14 to 15 years ago. Almost 50% of its revenue now is from recurring streams—so it’s a much more defensive business than it used to be.

Historically, this business has traded at around 13 to 14 times earnings. That would imply a price above $200 a share. [JLL recently traded at about $142 a share.]

Brian Frank

Portfolio Manager, Frank Funds
Pick: Calumet Specialty Products Partners (CLMT)

Calumet, a hydrocarbon and fuel company, is the largest producer of sustainable aviation fuel in North America, through its Montana Renewables subsidiary. Everybody is making a big ESG [environmental, social, and governance] push, from the airlines to transport companies like FedEx , Amazon , and

UPS .

Unlike electric cars, electric-powered planes would be too heavy, at least with the current technology. The really interesting fix would be sustainable aviation fuel, which is made from nonedible portions of corn plants, used cooking oil and other things.

Sustainable fuels don’t freeze, which is obviously important if you’re in the stratosphere. It’s a breakthrough technology, but we don’t have nearly enough of it. If you were going to shift to 65% sustainable aviation fuel by 2050, you’d need 10 million barrels a day. Today, Calumet is producing less than 5,000 barrels a day. There is currently jet fuel demand of 6.9 million barrels per day. And the prediction is that by 2050, that demand is going to increase to 15 million barrels per day.

Calumet’s location gives it an advantage. Its refinery is in Montana, near feedstock production centers. It’s also close to Canada and to more-progressive states like Oregon and California that have mandates requiring companies to use sustainable aviation fuel.

Calumet said on its most recent conference call that it’s going to IPO the renewable business in about nine months. If you look at similar businesses, they tend to trade at around 10 times Ebitda [earnings before interest, taxes, depreciation, and amortization]. That would give Calumet [recently at $16.66] upside of well over 100%.

Jeremiah Riethmiller

Chief Investment Officer, 2/13 Strategic Partners at Hightower
Pick: SPDR S&P Kensho New Economies Composite (KOMP)

Picking the right innovative technology at the right time is really challenging. How do you get exposure to innovation when you can’t know what’s going to be the hot item in a given year? One way: You go with Invesco QQQ (QQQ), a technology-focused exchange-traded fund, which would be your broad, large-cap index approach to innovation. The top 10 names in QQQ are ones that a lot of people recognize. Another way: You can allocate to an investment like the ARK Innovation ETF (ARKK), which is a very active approach to innovation. That team is going to make changes based on themes and opportunities that they see in the market, and you’ve got to be ready for a relatively volatile ride.

Then, as we look across the innovation category, we land on a position like the SPDR S&P Kensho New Economies Composite

ETF. It uses artificial intelligence to look through company filings. Managers identify 20 to 25 sectors of innovation that they think will be the up-and-comers over the next five to 10 years and then, within those categories, they choose core positions in industries as well as some satellite ones.

The idea is to identify Apple (AAPL) before it makes the iPhone. So, when Apple starts talking about mobile in its filings, that’s when you want to start paying attention to it, not when they’ve actually made the product. You’re trying to be early in the innovation curve with each of these companies. KOMP is our best idea for investing in innovation because it uses innovative technology to build an index of innovative companies. I don’t think it’s unreasonable to expect a 10% return over the next 12 months.

Lorenzo Esparza

Chief Executive Officer, Manhattan West
Pick: PagSeguro (PAGS)
PagSeguro is a Brazil-based fintech company that provides an end-to-end payment system. It is capturing the microcommerce that’s happening in Brazil and other parts of Latin America.

Here in the U.S., we have a million choices when it comes to banking, but in developing or emerging economies, people often don’t have access to traditional banking. PAGS is basically democratizing the banking system, bringing their service to the unbanked through an easy-to-use system.

As of December 31, 2022, there were 14.8 million micromerchants and 3.8 million small and medium-size merchants in Brazil. Combine that with an estimated 18.6 million individuals who are self-employed in the informal economy, and there’s a total addressable market of 37.2 million formal and informal businesses. We’re bullish on the growth of their businesses. With inflation slowing down and its market growing, we think the stock is going to pop.

The price target is conservatively $40, but it could be $50. Shares are only trading at 12 times the company’s 2023 consensus earnings, but they should be trading at 25 or 30 times future earnings. [The stock recently traded at about $10.]

Competition can affirm that there’s a good market and business opportunity. There are a couple of small competitors to PAGS. One is StoneCo (STNE). Another is a Brazilian online bank called Nubank, which is part of Nu Holdings (NU). Berkshire Hathaway has a stake in both companies. So the fact that StoneCo and Nubank are down there affirms to me that this is a very robust market.

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