Why Fund Loaded Up On Stanley Black & Decker

Tool maker Stanley Black & Decker (SWK) hasn’t exactly wowed the investment world recently, having matched the 2011 market’s nothing gains and underperformed it considerably last year. But fund manager Charles Bobrinskoy apparently believes that slacker image is about to change.

SWK Chart

SWK data by YCharts

Bobrinskoy bought some shares of Black & Decker in the first quarter of 2013 but added on big in the second quarter. The company now ranks fourth on a list of 27 stocks in Ariel Focus fund, comprising about 5.4% of the $47.8 billion fund.

Stanley sells construction and industrial tools for professionals and consumers, so business is expected to improve as the U.S. housing market recovers. But it is also an international company that gets about a quarter of its revenues from selling security systems and the services to monitor them. Much of this business runs in the more depressed economies of Europe and has been a drag on overall earnings, but the company recently reported a growing backlog there and in North America. Last month, the company increased its dividend slightly and the dividend yield now stands at 2.3%.

The company has closed numerous acquisitions in the past few years, and its return on invested capital figures indicate that it’s getting better at pulling earnings from these purchase.

SWK Return on Invested Capital Chart

SWK Return on Invested Capital data by YCharts

Underlying growth, however, has been plodding at best. The 5% underlying revenue gain last quarter was considered strong, and a lot of industry analysts are skeptical that the pace of sales will pick up soon. KeyBanc expressed a popular opinion last week when it downgraded Stanley shares to hold from buy, saying it was optimistic about its long-term prospects but saw nothing to spark the stock at the moment. Close competitor Snap-on (SNA) trades at roughly the same forward price to earnings ratio, although Snap-on shares have produced far better returns than Stanley’s since January 2011.

SWK Chart

SWK data by YCharts

Bobrinskoy is a big believer in the power of the current economic recovery, both in the U.S. and in Europe. He said in interviews earlier this year that many experts were underestimating economic growth. If he’s right about that, perhaps the market also is underestimating just how quickly Stanley can rise.

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com. You can also request a demonstration of YCharts Platinum.

Read more articles about: Company Analysis  money managers   stocks that look cheap   

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