Valuation Matters - A Glimpse At A Major Piece Of Our Investment ApproachSubmitted by William Allan Financial Services, LLC on July 31st, 2017
No matter what you invest in, discipline and patience are key attributes to success. They are critical to us as we seek to buy companies that we believe to be undervalued. The first benefit of buying undervalued stocks is these investments should produce terrific returns over the long run.
The second benefit (that gets lost many times) is the downside protection when you buy an undervalued company. If our valuation is correct and there is no reason to believe this company will not continue to operate in the future, there is a good chance we have purchased the stock at a low price. This doesn’t guarantee that we purchased at the lowest price, but we take comfort in knowing we bought it at below fair value. We know in a capitalist society there is a slight chance this company’s stock can go much lower; because if it does, another enterprising business will come in and buy it out.
We bring up this topic as we have seen this happen twice this year to companies we really wished we still owned. The first company was Mead Johnson. A global company with more than 50% of their sales abroad that was best known for their baby formula, Enfamil. This company checked many boxes for us, most notably:
Mead Johnson missed a few sales estimates and therefore saw a short-term blip in their stock price. A European company by the name of Reckitt Benckiser seized the opportunity and acquired the company for $90 a share. Prior to the takeover offer, Mead Johnson’s stock was trading at just above $70 a share. In this scenario, Mead Johnson was struggling operationally but no doubt had the superior product in this industry.
The other company that got acquired was the exact opposite of Mead Johnson. They were running on all cylinders, doing everything right. Their runway for growth was (and still is) tremendous making the stock undervalued from that standpoint. How can a company doing so well, with such a bright future trade for such a low price was the question. This company was Popeye’s Louisiana Kitchen.
We had owned Popeye’s for a few years and it was one of our best performing holdings (nearly 100% return within two years). Even though they were under the radar to most, they crushed it. Most notably, we liked:
Unfortunately for us as investors, Burger King’s parent company, Restaurant Brands, saw the same value in this company as we did and acquired them back in February for $79 a share, a premium of 21.5% above the prior day’s stock price. Obviously you never go broke taking gains on stocks, but this was one we wished we still owned. Both of these situations are proof that as long as we stay disciplined and are buying great companies at fair prices, we will eventually get our value one way or another in a capitalist society.