Splashing Income

In this edition of the Smart Investor newsletter, we examine one of the world’s leading water solutions companies. But first, let us delve into the latest Portfolio news and updates.


State of the Market Update

❖ NVIDIA (NVDA) has suffered a technical correction, tumbling from its high last Tuesday when it briefly overtook Microsoft (MSFT) as the world’s largest company. The abrupt reversal in the AI chip leader’s stock direction has spurred investors to question the further viability of this year’s blistering rally in technology stocks, specifically in the semiconductor and hardware industries. As a result, stocks from these industries suffered a blow as investors took profits. Although the markets staged a rebound yesterday, strong declines still engulfed several Smart Investor portfolio stocks, such as Super Micro Computer (SMCI), Broadcom (AVGO), and Taiwan Semiconductor Manufacturing (TSM). While we closely follow market developments to perform the necessary Portfolio amendments, we view these developments as a healthy correction, allowing investors to gain or increase exposure to strong-conviction IT plays. However, at times like this, we cannot stress enough the importance of the Portfolio diversification, providing insulation from sector-specific stock drops.


Portfolio Stock Updates

❖ Broadcom (AVGO): Bank of America analysts have raised their price target on the stock to $2,150, implying an upside of over 35% from the current price. According to BofA, despite its vast market cap making it the eight-largest in the S&P 500, Broadcom is a growth stock. In addition, its “diverse growth drivers, highly regarded management team, and unique track-record of capital appreciation, dividend growth, and above-market dividend yield can justify a premium multiple.”

❖ Super Micro Computer (SMCI) and Dell Technologies (DELL) rose strongly last week, before reversing course under the weight of NVIDIA’s declines. The tech champions announced they will be building server infrastructure to power an “AI factory” for Elon Musk’s artificial intelligence startup xAI.

❖ Vertex Pharmaceuticals (VRTX): several Wall Street analysts have upgraded their price targets as Vertex reported very encouraging results from the clinical trial on its experimental diabetes treatment, where a significant percentage of patients have either reduced or eliminated the need for exogenous insulin.

❖ Adobe (ADBE) received a new “Buy” rating from Barclay’s with a price target assuming an upside of 24% in the next 12 months. Barclay’s analysts applauded Adobe’s latest earnings report, saying it reflected strong recurring revenue generation in the digital media segment. The firm expects that the positive impact of GenAI incorporation, coupled with ADBE’s improved SaaS economics and projected aggressive buybacks will support the stock going forward.


Portfolio Earnings and Dividend Calendar

❖ The Q1 2024 earnings season is over, with no Portfolio companies scheduled to report over the next week.

❖ The ex-dividend date for a special dividend to shareholders of Texas Pacific Land (TPL) is July 1st. The company’s Board has approved a special dividend of $10 per share due to very positive quarterly results and outlook. TPL continues to generate substantial free cash flow while maintaining a strong balance sheet, including a cash balance significantly above the management’s target, which allows it to deploy additional capital towards share repurchases and dividends.



New Buy: Pentair (PNR)

Pentair Plc provides water solutions for residential, commercial, industrial, infrastructure, and agriculture applications. PNR is a global leader in the water treatment industry, providing advanced and sustainable water solutions to customers in over 150 countries around the world.


The Making of the Water Leader

Founded in 1966 in the U.S. as a high-altitude balloon manufacturer, Pentair diversified quickly, venturing into industries ranging from plastic canoe manufacturing to computer software, leather footwear, and paper mills. Acting through internal effort and numerous acquisitions, PNR transformed from a paper company to a tool company and ultimately a water company, divesting from non-core businesses along the way. The transformation into a pure-play water company was completed in 2018, as Pentair’s Water and Electrical businesses were separated into two industry-leading public firms, with the Electrical business spun-off as nVent Electric and the Water business retaining the Pentair name and ticker symbol “PNR”.

Today, PNR operates through three segments: Flow (~38% of total sales), Water Solutions (~33%), and Pool (~29%). The Flow segment offers water supply and disposal, as well as water treatment solutions, to customers in various sectors, including Municipalities, Industrial, Agriculture, Waste Management, and others. The Water Solutions segment is responsible for residential water improvement solutions, food service water filtration systems, commercial ice solutions, comprehensive water and beverage equipment service, as well as water treatment for independent water professionals. The Pool segment offers residential pool & spa equipment, including pumps, control systems, lighting, filtration and cleaning, heating, and other systems and equipment.

Pentair is legally based in London but has its headquarters in Golden Valley, Minnesota. In addition, the company has offices in 25 locations across the U.S., Europe, Middle East, Asia, and Pacific. Despite the high level of geographical diversification, the company derives ~70% of its total revenues from the U.S. With a market capitalization of $13.3 billion and 2023 revenues of $4.1 billion, PNR is the world’s largest pure-play water management company.


Lean Cost Structure and Sticky Customer Base

Pentair has drawn increasing investor attention in recent quarters thanks to accelerating demand for water solutions. As a water solutions industry leader, PNR stands to strongly benefit from government initiatives aimed at improving access to clean water across the globe. For example, in February 2024, the U.S. government announced $5.8 billion in funding to improve ailing water infrastructure and improve the country’s drinking water quality, as well as improve wastewater and sanitation.

In addition to favorable global trends, Pentair benefits from its strong business model and large and sticky customer base. Thus, one of the factors behind PNR’s impressive earnings growth and margin expansion over the years is its cost strategy, aimed at lean manufacturing processes and increased efficiency throughout its supply chain and distribution channels.

The company’s innovative drive, including early adoption of advanced technologies such as IoT and others, has been another factor driving its strong customer retention ability. Over 75% of its annual sales are parts and systems replacement, which allows for increased revenue stability and visibility. Pentair also enjoys strong brand recognition, with several of its branded portfolio products seeing strong customer preference thanks to their reliability and performance.


Strong Financials, Robust Delivery

Pentair boasts robust financial health despite a somewhat elevated net debt-to-equity ratio (58%). Since the 2018 nVent spin-off, the company has been working to reduce its debt, which they succeeded in cutting in half over the past six years. PNR’s debt is well-covered by operating cash flow, while its interest payments are covered by EBIT many times over. Pentair’s debt carries an investment-grade rating of “BBB-“ at Standard & Poor’s. The company’s strong balance sheet supports its growth potential through M&A opportunities.

In terms of capital efficiency and profitability metrics, Pentair showcases stellar results. Its ROE, ROA, and ROIC are in the top 25% of its industry; this is also the case with its operating, net, and free cash flow (FCF) margins.

Over the past five years, PNR’s revenues have increased at a CAGR of 7%, while its earnings-per-share have risen at a CAGR of 17.5%. The company has surpassed analysts’ EPS estimates in all quarters for which these estimates were available.

This was also the case with Pentair’s Q1 2024 results, released in April. While sales were flat from the first quarter of 2023, EPS grew by 3%, surpassing expectations. Moreover, the operating margins expanded for the eighth straight quarter, reaching 21.4%. That came within striking distance of the management’s strategic target of 22%, which the company is expected to exceed this year.

Pentair’s first-quarter bottom line was supported by higher selling prices in the commercial business of the Water Solutions segment, sales volume increase in the commercial Flow business segment, and the completion of inventory destocking in the Pool segment. All segments showed solid growth compared to the previous quarter.

As a result, the company’s management reiterated its full-year outlook of adjusted EPS coming in at approximately $4.15 to $4.25, an increase of 11-13% compared to 2023. In addition, it introduced strong Q2 guidance reflecting solid execution across all three segments, penciling in an adjusted EPS of $1.15-1.17 (versus Q1’s $0.94).


Total Return in Focus

Pentair’s shares have had a strong run in the past year, delivering returns similar to that of the S&P 500 after accounting for two large declines: the first one back in April when it fell with most of the stock market, and the second one yesterday on the news of RBC Capital decreasing its stock price target. We believe that the latter one is an overreaction due to investor nervousness in the past several days, as the reduced RBC’s target still envisions an upside of more than 20% from PNR’s current price. Overall, Wall Street’s leading analysts rate Pentair a “Strong Buy” with an average price target implying an upside of over 25% in the next 12 months.

However, the recent stock decline has created an attractive entry opportunity for long-term investors, as Pentair’s valuation has fallen notably below the average for the Industrials sector. When compared to its peers in the industry, PNR sits at the bottom of the price range, despite carrying better financial and operating metrics than most of its competitors.

In addition to the stock price appreciation, Pentair compensates its shareholders through dividends and opportunistic buybacks. The company repurchases its shares based on its financial results, debt reduction progress, and the current share price. Thus, after generous 2022 buybacks, 2023 and Q1 2024 have seen only modest action on the buyback front as the share price climbed.

Before its split from nVent, the company was a Dividend Aristocrat; however, it lost its status as it had to adjust the payouts to its new market capitalization. However, the company resumed its steady annual dividend increases immediately after the separation, with the payouts growing at an annual rate of 5.4% over the past five years. While its current dividend yield of 1.1% is modest, it is expected to quickly catch up with the Industrials sector average of 1.6%.


Investing Takeaway

Pentair enjoys robust financial health, sound management, strong market position, stellar brand reputation, and innovative product offerings. It also boasts industry-beating profitability and expectations for further earnings growth. Considering these factors, along with its attractive valuation and alignment with shareholder interest, we believe that the stock can be a valuable addition to the Smart Investor portfolio.




TD SYNNEX Corp. is a leading global distributor and solutions aggregator for the information technology (IT) ecosystem, providing information technology products and business process services. SNX provides a broad range of product lines, logistic capabilities, and value-added services that enable technology manufacturers and resellers to deploy IT solutions.

The company released its fiscal Q2 2024 results on June 25th, reporting a considerable miss on analysts’ revenue estimates and a slight EPS miss. Total revenues declined year-over-year, weighed by lower sales in the Americas and Europe. This is despite the continued recovery in enterprise spending from its 2022-23 decline, specifically in the U.S.

SNX also provided an outlook for the ongoing fiscal quarter, guiding for significantly lower midpoints of the revenue and EPS ranges than those expected by Wall Street analysts. The stock tumbled after the report was published as disappointed investors sold off amid general market nervousness.

SNX is a robust and profitable business; however, its underperformance amid rebounding demand, coupled with a weak outlook, raises some concerns. Therefore, we believe it is prudent to sell the stock, locking in the gains.



Portfolio Stocks Under Review

❖ PayPal (PYPL) remains under review as we assess the potential impact of Apple’s introduction of new features simplifying money transfers and expanding BNPL options. Although we believe that PayPal’s new management is capable of dynamizing the payments giant once more—and we have welcomed the news regarding its AI-powered advertising business plans—we have yet to see a strategic turnaround that would help it increase FCFs and maintain (much less grow) its market share.

❖ Stellantis (STLA) remains under review following several unfortunate events that had some analysts (such as BofA) reduce their price targets on the stock. The company was forced to recall over one million vehicles due to problems with software connected to the rearview camera. The scale of the recall spooked investors as it comes just two weeks after a recall of 200,000 SUVs and trucks over a much more serious stability control malfunction. However, we positively view a recent speech by Stellantis’ CEO, Carlos Tavares, where he admitted to making “arrogant mistakes” that lead to bloated inventory and sales declines in the U.S.



Smart Investor’s Winners Club

*The 30% Winners Club includes stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.

The markets were on a rollercoaster in the past week, with particularly large volatility in technology stocks. As a result, the Winners’ ranks have shrunk again, losing three of its newest additions as ITT, TPL, and DELL fell back below the threshold.

The Winners Club now counts 12 stocks: SMCI, GE, AVGO, ANET, TSM, EME, AMAT, ORCL, APH, GD, VRTX, and MCK.

The “fallen angels” ITT and TPL are now the closest contenders for re-entry, with 29.5% and 28.4% gains, respectively, since their purchase dates. Will one of them close their minute gaps, or will someone else outrun them to the finish line?



Smart Investor Portfolio

 Portfolio 1Y Return
Portfolio Volatility (Beta) Portfolio Dividend Yield
30.75% 1.1 0.85%


New Portfolio Additions

Ticker Date Added Current Price
PNR Jun 26, 24 $74.31

New Portfolio Deletions

Ticker Date Added Current Price % Change
SNX Apr 3, 24 $116.96 +0.46%

Current Portfolio Holdings

Ticker Date Added Current Price % Change
SMCI Nov 8, 23 $843.12 +230.12%
GE Jul 27, 22 $159.73 +185.84%
AVGO Mar 22, 23 $1580.79 +150.55%
ANET Jun 21, 23 $334.53 +120.80%
TSM Aug 23, 23 $172.60 +84.03%
EME Nov 1, 23 $378.53 +83.42%
AMAT May 31, 23 $234.27 +75.75%
ORCL Dec 21, 22 $139.17 +70.76%
APH Aug 9, 23 $67.96 +53.69%
GD Dec 22, 21 $295.28 +44.92%
VRTX Aug 2, 23 $473.82 +36.26%
ITT Oct 18, 23 $128.57 +34.61%
MCK Dec 13, 23 $604.42 +30.79%
TPL Jun 5, 24 $750.22 +28.36%
PH Oct 11, 23 $505.30 +27.02%
CI Jul 12, 23 $338.80 +26.09%
DELL Mar 27, 24 $140.35 +22.42%
CHKP Jul 19, 23 $155.50 +22.13%
HWM Apr 10, 24 $78.20 +18.75%
CXT Oct 25, 23 $61.36 +18.55%
AIT Dec 6, 23 $191.56 +16.28%
REGN Feb 7, 24 $1071.19 +14.22%
STLA Sep 6, 23 $20.59 +13.38%
ADBE May 29, 24 $526.88 +10.13%
IBKR Jun 19, 24 $122.11 +1.98%
DOV May 8, 24 $180.06 -0.97%
AIG May 1, 24 $74.51 -1.06%
V May 15, 24 $273.53 -1.52%
KKR Jun 12, 24 $107.42 -2.53%
EMR May 22, 24 $107.87 -5.13%
PYPL Apr 17, 24 $59.33 -6.46%



What’s Next?

Our next commentary will come out on Wednesday, July 3rdUntil then – we wish you a world of investment success!

Access the full Smart Investor Archive, including all historical stock picks and original newsletters.





The information contained in this article represents the views and opinions of the writer only, and not the views or opinions of TipRanks or its affiliates and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy, or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices, or performance.