A Bloomberg article from early February about Vanguard stock picks caught my attention recently.
The article stated that Vanguard has quietly been using machine learning for several of its actively managed mutual funds. In fact, it’s got $13 billion in assets under management in these funds. Scott Rodemer, head of factor-based strategies at Vanguard, said:
“What we want to do here is represent the process that we believe in, which is a fundamentally driven quant process. With this kind of multitude of effects that could impact a stock, it lends itself quite naturally to a machine-learning process.”
The Vanguard Strategic Equity Fund (MUTF:VSEQX) is the largest of the four funds. It has $7.8 billion in net assets invested in 551 stocks. The top 10 holdings account for just 7% of the net assets. It invests in mid- and small-cap stocks. It turns the entire portfolio every 18 months.
Here are three Vanguard stock picks from VSEQX.
Builders FirstSource (BLDR)
Builders FirstSource (NYSE:BLDR) is the largest mutual fund holding, at $67.1 million. The Texas-based building materials manufacturer and supplier has had an impressive run over the last few years, thanks to the housing construction boom.
Its shares are up nearly 12% in 2024, 124% over the past year, and 1,254% over the past five years. Take your S&P 500 fund and stuff it. Seriously, though, it’s delivered for shareholders in a big way.
Its plan in the four years between 2022 and 2025 was to deploy between $7 billion and $10 billion in capital toward building the business and rewarding shareholders. Through Sept. 30, 2023, it had deployed $5.7 billion, $4.2 billion of which was to buy back shares.
In its first year as a public company (2006), it had 33.42 million shares outstanding and $2.34 billion in revenue. As of Sept. 30, it had 123.35 million shares outstanding and $12.95 billion in revenue over the first nine months of the fiscal year. That’s significant growth without over-diluting shareholders.
Its stock isn’t cheap — it trades at 9.2x cash flow and 14.56x its forward earnings — but the cream always rises to the top.
Owens Corning (OC)
Owens Corning (NYSE:OC) is the fourth-largest holding of VSEQX, with a market value of $56.9 million.
It’s best known for its insulation products in homes. However, it also sells laminate and strip asphalt roofing shingles and glass fiber materials for more than 40,000 end-use applications.
On Feb. 9, it announced it would acquire Masonite (NYSE:DOOR) for $3.9 billion. As Masonite’s stock symbol suggests, it specializes in interior and exterior doors and door systems. With this acquisition, it will compete more directly with Builders FirstSource.
However, given the size of the building and construction industry, there’s plenty of business for both companies in the U.S. alone.
The combination of Masonite with Owens Corning creates a firm with $12.6 billion in annual revenue and adjusted EBITDA of $2.9 billion, a healthy 23% margin.
Owens Corning reported 2023 results on Feb. 14 that included $9.7 billion in revenue, adjusted earnings per share of $14.42, and $1.2 billion in free cash flow.
Based on an enterprise value of $14.96 billion, it has a free cash flow yield of 8.0%. Anything 8% or higher is considered value territory.
MGIC Investment (MTG)
MGIC Investment (NYSE:MTG) is the 14th-largest holding of VSEQX, with a market value of $50.3 million.
In April 2023, I recommended MGIC and two other cheap stocks that could skyrocket in value. Through its subsidiary, Mortgage Guarantee Insurance Corporation, the company provides private mortgage insurance and other mortgage credit risk solutions.
Home buyers and loan providers have been protected through the company’s products for nearly seven decades. More importantly, it provides these products while generating healthy profits.
In 2023, despite net premiums written and revenues falling by 4.8% and 1.5%, respectively, to $915.0 million and $1.16 billion, its net income was $712.9 million, or 62% of revenue.
Of course, its net margin pales compared to 2022, when it was an impressive 86%. That was due to significantly lower delinquencies by homeowners. In addition, rising house prices over the past few years enabled some homeowners to solve their delinquency problems by selling their homes.
While premiums were down in 2023, thanks to higher interest rates, its net investment income was $214.7 million, 28.2% higher than in 2022.
It trades at just 7.2x its 2023 net earnings. That’s despite its shares appreciating by 36% since last April. It yields a healthy 2.4%.
— Will Ashworth
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Source: Investor Place