I was basically neutral on Colfax (CFX) as an investment idea back in early January, largely on valuation concerns, and the shares have modestly underperformed the industrial sector since then (by about 2%) and underperformed the S&P 500 by about 15%, while Lincoln Electric (LECO) (a name I preferred) has modestly outperformed its industrial peers (while underperforming the S&P 500 by about 8%). COVID-19 has hit both the welding (FabTech) and MedTech businesses, but operationally both remain more or less on track.
I do believe Colfax is leveraged to a short-cycle industrial recovery, and may see the benefits a little ahead of customers as distributors restock on improving demand. I also believe the MedTech business is leveraged to a strong second-half recovery as elective reconstructive procedures resume. One potentially exciting outlier is the proposed acquisition of Stryker’s (SYK) STAR total ankle system – a deal that would add to debt (already a concern on the Street), but would give Colfax one of the best total ankles on the market and round out its extremities offerings. I still don’t love the valuation on Colfax, but the prospective returns have at least climbed to the high end of the mid-single digits.
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