Scenario 2: A Cyclically Depressed Story

In the mid-cap portfolio, we have four general investment categories that spread across the value and deep value buckets.



A great cyclically depressed story is National Oilwell Varco, ticker NOV.

This is example of buying a best-in-class company near the trough of the cycle.

The secret sauce to NOV's history of generating higher returns on capital is an asset light model that is more manufacturing oriented and less capex oriented, technological differentiation, and a good mix of capital equipment and consumables. You can think of NOV as a razor/razor blade model for the oilfield, with an integrated offering of products and services for completion, production, and drilling.

NOV generated $4.5 billion of EBITDA at its prior peak and has taken out $3 billion of operating costs during the deep oilfield downturn. Yet, we are only assuming $2.5 to $3 billion of normalized, mid-cycle EBITDA in this upcycle. And, putting a 7x multiple on that implies a valuation for NOV of $50 to $55 per share. If we were to apply a blue-sky scenario, where the stars truly aligned, NOV could get back closer to its prior peak EBITDA levels, and the implied stock price outcome would be closer to $80 a share. But to be clear, that would simply be gravy, and we only need our base case outcome to transpire for a good investment.

While offshore activity may never return to the levels it saw before 2014, NOV would benefit from any increase in offshore activity, which we do expect in more moderate form going forward.

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Heartland Advisors Value Investing Portfolio Manager Colin McWey

Colin McWey

McWey, CFA, is Vice President and Portfolio Manager of the Select Value and Mid Cap Value Funds and their corresponding separately managed account strategies. He has 16 years of industry experience, 9 at Heartland.

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Past performance does not guarantee future results.

The Mid Cap Value Strategy invests in mid–sized companies on a value basis. Mid-sized securities generally are more volatile and less liquid than those of larger companies.

Value investments are subject to the risk that their intrinsic value may not be recognized by the broad market.

The statements and opinions expressed in the articles or appearances are those of the presenter. Any discussion of investments and investment strategies represents the presenters' views as of the date created and are subject to change without notice. The opinions expressed are for general information only and are not intended to provide specific advice or recommendations for any individual. Any forecasts may not prove to be true.

As of 9/30/2018, Heartland Advisors on behalf of its clients held approximately <0.01% of the total shares outstanding of National Oilwell Varco, Inc. (NOV).

Portfolio holdings are subject to change without notice. Current and future portfolio holdings are subject to risk.

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