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Monthly Report International Fund November 2021

30/11/2021

In November, the unit price of the Forager International Shares Fund increased 1.3% against a benchmark increase of 3.1%. 

Over the month, most of the smaller companies in the Fund reported quarterly or half-yearly results. Given some of last financial year’s best-performing stocks have been experiencing significant share price falls since June, the shareholder updates were more important than usual. The overarching theme was pleasing results in a challenging environment. 

The automobile industry was one of the first to suffer from a clogged up supply chain. In 2019, the world produced 97 million light vehicles. In 2020, with COVID shutdowns and reduced demand, production fell to 78 million. Since then, demand has well and truly bounced back. However, thanks to a shortage of computer chips essential to all modern automobiles, supply has not. Global vehicle production for 2021 is now expected to be well below normal, roughly flat with 2020, with most of the surprise volume losses coming in the second half of the year. 

That impacted Canadian auto supplier Linamar (TSX:LNR). But, once again, the company is managing the disruption admirably. Linamar’s agricultural and industrial divisions picked up some of the slack in its third financial quarter and highly flexible manufacturing facilities allowed it to maintain healthy profitability. The stock is cheap as it is, but we’re looking forward to seeing what the company can make if it ever gets a favourable environment for all three divisions. 

As good as they are, Linamar’s management can only dream of the margins generated by Open Lending (NASDAQ:LPRO). This company’s software links credit unions and other lenders with auto dealerships, allowing them to cherry-pick the best of America’s subprime borrowers. Open Lending takes a share of the revenue (and credit losses) and shareholders keep 50% of every dollar as profit. While its third-quarter results showed more rapid growth, guidance for next quarter suggests that not even it can escape the auto market turmoil. It’s going to be a cracking year either way, but there was more expectation built into Open Lending’s share price. It fell some 28% for the month, bringing it back to far more reasonable levels. We had been trimming its weight in the portfolio and used the pullback to top up our holdings once again.

While the auto industry suffered first, supply chain issues have been proliferating. Despite trouncing market expectations for revenue growth, storage facility supplier Janus International (NYSE:JBI) reported disappointing profit margins for its third quarter thanks to rising prices for steel and other key inputs. Installed Building Products (NYSE:IBP) and APi Group (NYSE:APG) reported great results despite difficulties in the housing construction market (selling them is easy finishing the building less so). Even construction software giant Autodesk (NASDAQ:ADSK) upset investors with a disruption-related downgrade.

A global economy built on “just-in-time” supply chains is not coping with a global surge in demand and induced inflation that has arisen as a result. While our auto industry meetings suggest supply starts should gradually recover, no-one thinks the mess can be untangled before the end of 2022. Will inflation be entrenched by then? Or will overstocked supply chains lead to a deflationary whipsaw? Your guess is as good as ours. However, our management teams are performing admirably. Turmoil is an opportunity to grow market share and entrench competitive advantage. 

Zebra Technologies (NASDAQ:ZBRA) shows that better than most. There aren’t many better businesses to be in at the moment than supply chain optimisation and Zebra is surpassing our most optimistic expectations. Revenue grew 27% for the third quarter, profit margins are significantly higher than in 2019, and that profit is turning into cash for shareholders. For a business priced like a sleepy, low-growth industrial company a few years back, it is delivering above and beyond.

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