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You are attending an investment conference.
It is 10:50am.
Three companies are presenting in the 11am slot.
<img src="https://www.iftours.com/wp-content/uploads/2021/02/D-9P-elWsAA4wBs-2.jpeg" width="512" height="256" alt="companies">
Which company presentation do you attend?
[[Company A]]
[[Company B]]
[[Company C]]You walk into the room Company A's CEO will be presenting in.
The room is not completely full of investors.
[[Take A Seat]]
You walk into the room Company B's CEO will be presenting in.
The room is full. You can't find a seat and stand in the back.
[[Listen to B's CEO]]You walk towards the room Company C is presenting in.
The room is so full of investors that you can't even budge through the door. You stand outside the door and watch.
Company C's CEO gets up on stage.
[[Listen to CEO|Listen CEO C]]You take a seat amongst 30 or so individuals.
Company A's CEO gets on the stage.
The CEO begins by talking about the company's history. It was started 55 years ago by the CEO's father.
13 years ago Company A acquired a competitor.
Company A dominates its domestic market and one other foreign market.
[[Listen to the CEO]]
You listen as the CEO talks about Company A's Previous year's growth:
Revenues + 8%
Profits + 20%
Return on equity has averaged ~15%
The controlling families wanted to divest a modest 30% of the business. At the same time the family is planning to use cash for expansion.
[[Why the IPO?]]The controlling families wanted to divest a modest 30% of the business. At the same time the family is planning to use cash for expansion.
Company A is in a slow growing market. Overall, the market is growing ~5%.
The CEO states there is room to win market share. Company A plans to grow through acquisitions too.
The CEO finishes by inviting the audience to the company. Company A's factory is located nearby.
[[Go to factory]]
[[Pass on Company A]]Company A sounds interesting. You never pass up a chance to see how a company operates on the front lines.
After the presentation you and one other potential investor ask to take a tour of Company A's facilities. A's CEO gladly sets up a tour for the next day.
[[Skip day]]Company A just had its initial public offering (IPO). You don't invest in IPOs. And A is trading at a high price. 30 times trailing tweleve month earnings is high, especially for a company operating in a slow growing market.
What other company do you want to check out?
[[Look at Company B]]
[[Look at Company C]]
[[Invest in an index fund|Invest in an index]]
You decide not to go on the Company A tour.
As the group leaves breakfast, you talk to the investor who mentioned having an interest in Company B.
[[Ask about Company B]]
You walk towards the room Company C is presenting in.
The room is so full of investors that you can't even budge through the door. You stand outside the door and watch.
Company C's CEO gets up on stage.
[[Listen to CEO|Listen CEO C]]"What specifically about Company B do you like," you ask the investor.
"The CEO bootstrapped Company B from 0 to $70 million in 10 years. He has the industry 'Trifecta' - he has created demand for his products, develops those products and is very good at selling those products," says the investor.
And there is little competition in leading the market, because it is so fragmented."
[[Ask about Company B's financials]]"What do Company B's financials look like," you ask.
The investor hands you a sheet with Company B's financial metrics.
[[Look at the sheet]]
You quickly glance at the sheet.
<img src="https://www.iftours.com/wp-content/uploads/2021/02/D-zyriiXUAAOIoX.jpeg" width="763" height="726" alt="sheet">
"The company has $13 million in cash, no debt. 40% of last year's $43 million in revenues are derived from large partners," says the investor. "This sponsorship means that Company B's revenues can grow at double-digit levels in the future."
"Prudential Securities figures that B's revenues will reach $64 million this year. Next year they forecast B to generate $85 million in revenue and $1.27 per share in profits," chimes in another investor.
[[Meet the CEO one-on-one]]You schedule a one-on-one with Company B's CEO. A few hours pass and you meet the CEO.
"Our strategy is to grow, grow, grow," declares the CEO. "We have a quality distribution system. And we are laser focused on creating more products to generate more growth in our current and new international markets."
[[Look at the stock's share price since IPO]]You open your phone and check Company B's stock price since it's IPO.
<img src="https://www.iftours.com/wp-content/uploads/2021/02/D-zyAriXYAAi1Gj.jpeg" width="587" height="360" alt="Company B share price since IPO">
[[Listen more to the CEO]]"Our market is highly fragmented. There is little competition in leading the market," says the CEO. "We are certainly the market leader. That is why we are focusing on growth."
[[Who are your retail partners?]]
You ask who Company B's retail partners are.
"Company B has great relationships with vendors. It was 'Vendor of the Year' for retailers such as Wal-Mart. And Company B sold its merchandise to 3,700 retailers," says the CEO.
The CEO/founder didn't develop his executive team internally. Rather, he hired from other larger corporations. He tells the group "over qualified individuals allow me to grow faster." He adds "the company develops to the executive's level."
[[End the meeting.]]
"Thanks for your time," you tell the CEO.
Company B's share price is $26; that means it trades for 35 times earnings.
What are you going to do?
[[Buy Company B]]
[[Pass on Company B]]You pull out your phone. You open you trading app and purchase shares of Company B at $26 a share.
Company B's share price is high versus its fundamentals. If the company can sustain growth and returns, 35 times earnings is cheap.
[[Fast forward a few months]]A few things turned you off about Company B. You feel that Company B's product growth was too high. The company, you believe, might have lost its focus in the process. Many of Company B's products
What other company do you want to check out?
[[Look at recent IPO Company A|Skip day]]
[[Look at expensive Company C|Listen CEO C]]
[[Invest in an index]] Before you head to the factory, you eat breakfast with a group of investors. Many others are raving about Company C. It is relatively cheap and has huge growth potential. A few are highly interested in Company B, too, despite its higher valuation.
You ask whether anyone is interested in Company A.
"No growth," says one investor.
"Too expensive," says another.
"Recent IPO, I don't invest in IPOs," says the oldest and most successful member of the group.
You are embarrassed to share you are about to tour Company A's factory.
[[Go on tour]]
[[Pass on Company A]]You quietly left the group, meet up with the other investor going on the tour and go to Company A's factory.
A's CEO shows you the factory floor. It's clean, efficient and employees are smiling.
The CEO says he'll introduce you to other executives.
[[Meet Company A executives]]You meet a number of Company A executives. It is a mixture of members of the controlling family and non-family members.
Both you and the other investor loved the place. You loved the people, loved what they were doing.
Still, Company A trades at 30 times earnings, just went public and is in a slow growing market.
[[Buy Company A]]
[[Pass|Pass on A2]]You held your nose on the valuation.
Company A only holds ~20% of market share domestically. Company A needs only to execute to grow share. While the company is laser focused on this market, you think there is still huge potential to grow internationally.
You are a long-term investor so you give Company A 10 years.
[[Fast forward 10 years]]Over the next 10 years passing on Company A looks like a wise move.
Company A grew revenues more than expected:
Revenues +388% cumulative (10.7% compounded annually)
Yet profit growth was paltry:
Profits +40% cumulative (2.7% compounded annually)
A's shares trade at 16 times earnings now.
[[Pass on Company A again]]Eh, Company A isn't going anywhere.
Was your decision the right one?
Here are Company A's results for the next two years:
It looks like you are right.
Company A's CEO says:
"The concurrence of a number of strategic investments with a few disappointing results has meant that the financial year has closed with a loss."
[[Read Annual Report|A Annual Report1]]The company continues to focus on product quality and places "high demands in respect of a very competitive cost price."
Six years ago management told you they wanted to double revenues by this time. They did. In that time frame Company A acquired 7 companies. Yet the companies acquired have low margins.
Debt is at a relatively high level (2 times operating cash flow - EBITDA).
Company A's dividend is cut in half.
The stock price falls 43%.
But were you correct over the longer term? Hardly.
Company A posted the following results over the next 16 years:
The strategic investments turned out to be very successful over the long term.
Had you not passed on Company A the first time, you would have achieved a 6,000% return from its IPO. That isn't all. Had you invested the second time, ten years later, you still could have achieved a 3,500% return.
If you want to learn the name of Company A and what happened with it, you will need to hold onto the stock until the end.
**END**The CEO gives a brief overview of historical performance over the last four years:
<img src="https://www.iftours.com/wp-content/uploads/2021/02/D-1BN3fWkAEmZNq.jpeg" width="616" height="580" alt="Company C income statement">
<img src="https://www.iftours.com/wp-content/uploads/2021/02/D-1BmLtXYAUpKX6.jpeg" width="625" height="365" alt="Company C cash flow statement">
<img src="https://www.iftours.com/wp-content/uploads/2021/02/D-1B8THWkAEgD3i.jpeg" width="623" height="499" alt="Company C balance sheet">
Revenue $19 million - $89 million (47% compounded annual growth rate)
Profits $10 million - $26.7 million (27% compounded annual growth rate)
Both profits and revenues grew consistently. And returns on equity (ROE) - an indicator of how efficient a company generates profits - are stellar. ROE for each year was 25%, 32%, 34%, and 32%. Subtract cash and ROE was 100% each year.
Today Company C has $85 million in cash on their balance sheet.
Company C clearly has a great business model. Company C is drowning in cash. It needs almost zero cash to grow. And the company has a demonstrated track record of growth. It dominates its fast growth market.
[[Listen more|Listen more Company C]]
"In the last 13 months, we returned over $50 million to our shareowners. $35.5 million was spent on share repurchases. All of these shares came from one of our largest shareowners. We did so because we were capital rich. And we believed a large share repurchase was a good use of capital at this time. We approached the shareholder about buying back some of their shares... We look forward to the effect this transaction will have on our already strong return on equity in the coming year."
Company C has paid a dividend every year since it was public. You like the company's large share repurchases. This means executives are positive on Company C's future.
[[Listen more|Listen more company C 2]]C's CEO mentions the backlog of customers - for future orders - has grown to the greatest number in company history. "The backlog number accurately forecasts our revenues for the next year," says the CEO.
The CEO also says that he believes the company's share price is undervalued.
Company C is trading at 19 times earnings (minus cash).
The presentation finishes.
[[Talk to other investors|talk to other investors Company C]]After the presentation, you chat with two investors standing next to you.
One says, "A fund with a successful long-term track record is involved. They recently purchased 5.9% of Company C. This isn't just any fund. No. This fund is seeded by superinvestor Joel Greenblatt. Greenblatt's investment track record over 20 years was ~30% per year. That is one of the best investment track records ever."
"That is great," says the other investor. "The CEO and COO are married. They collectively own 4.2% of the company's shares, which is enough skin in the game for me."
"I heard that the chairman of the board of directors owns 4.4% of the company's shares and sold 1% of his position a few days ago," you chime in.
"Eh, selling can mean many things," says the first investor. "Buying, which the couple did a month or so ago, means more."
[[Buy Company C]]
[[Pass on Company C]]You buy a position in Company C. The downside seems limited.
You are a long-term investor so you wait a year.
Company C's results are the following:
Revenues up 28.8% to $114.5 million (inline with last year's growth)
Earnings per share up 24% (last year's growth was 19%)
[[Look at Company C's share price]]
[[Hold Company C]]A few things turned you off about Company C. The market C operated in - while growing now - could fall during a recession. You also didn't like that the husband and wife executive team was took home $3.2 million in compensation.
What other company do you want to check out?
[[Look at recent IPO Company A|Skip day]]
[[Look at expensive Company B]]
[[Invest in an index]]Company C is up 30% since you purchased.
Q1 earnings are approaching. You can wait and read those results before making your decision.
[[Sell for 30% gain]]
[[Hold Company C]] Revenues up 31%.
Earnings per share up 40%.
Great. Those results are exactly what you are looking for.
[[Listen to conference call|Company C concall1]]You sell Company C for a 30% gain.
Nice job!
The market index only grew 3%.
[[What happened to Company C?]]You sold Company C [Ambassadors Group Inc ticker: EPAX] at its absolute high in 2007.
EPAX sold travel packages to college students seeking cultural exchanges in foreign countires. As the great recession loomed fewer college students took the trips offered by the company.
The company did not recover. The CEO Jeffrey Thomas resigned in 2013. In 2014, the company reported $17.5 million in losses.
Below are the results of Ambassadors Group Inc:
In 2015, the company was dissolved leaving remaining shareholders with $1.75 a share vs. the all time high of $40 which you sold at.
Pat yourself on the back for dodging this bullet.
Try investing in Company A or B.
**END**You dial into Company C's conference call. The CEO mentions that the backlog for the next year is 30% below the current year's levels. Reasons are poor marketing and a hesitant consumer. More specifically the CEO states their marketing "bombed".
In the past 5 years the backlog has never decreased from the prior year.
And the CEO states something that you haven't heard him say before: "We had actually been concerned about some of these economic issues long before, which is why we've taken some proactive steps to adjust, including offering lowered price point programs in some areas, implementing a hiring freeze in planning for less growth than in previous years."
Never in any previous conference calls has management once mentioned potential economic issues.
Is this cause for concern?
The market thought so.
The company's shares had started to tank. Company C's shares are down 46%. Your shares are now down 30% from your initial purchase price.
Company C's price to earnings ratio is now 12.5 times. That means the shares are a bargain if this is only a temporary problem.
[[Sell Company C]]
[[Hold Company C|Hold company c 2]]You sell Company C for a 30% loss.
You did not like the way C's management had responded to the "economic issues". Since Company C was planning for less growth than in previous years, you were planning on not owning Company C during that time.
[[Did you make the right decision?]]The economy as a whole had worsened. You feel this is a temporary set back.
Company C's potential customers grows each year. And Company C is only capturing a small percentage of the population. Once the economy picks back up Company C will grow.
A few months go by. Company C announces an acquisition for $15 million. The acquisition provies C a complimentary revenue stream. This company was growing at double digit rates.
The CEO states, "This acquisition was made for the purpose of owning a business that attracts millions of similar customers and has experience and expertise in internet growth."
[[Wait until Year End results]]You did.
Company C, known as Ambassadors Group Inc. (ticker: EPAX), sold travel packages to college students seeking cultural exchanges in foreign countires. As the great recession loomed fewer college students took the trips offered by the company.
The problems were not temporary, they were systemic.
Below are the results of Ambassadors Group Inc:
By 2014, EPAX shareholders called to dissolve the company. Shares stopped trading at $1.75. You sold at $21.
You made a great decision, but you could do better.
**END**
Try a different path.
Revenues fell 14.5% to $97.93 million.
Net income fell 40.3% to $18.55 million.
Despite this Company C generated $19.7 million in free cash flow. $19 million was given back to shareholders via dividends and stock repurchases.
Management states, "In order to bring expenses into line with anticipated revenue for 2009, we have been taking a series of expense management actions. The most significant is reduction in force of approximately 16% of our workforce in January."
The share price is now 69% lower than your initial cost.
[[Sell Company C|Sell company c 2]]
[[Hold Company C|Hold Company c 3]]You sell Company C at a 69% loss.
Investing is hard.
But to make you feel better, let's hear what happened to Company C.
Company C spent $100 million on share repurchases. The acquisition turned out to not work. Value was destroyed. The company failed to grow. Costs rose as the company's revenues fell. Losses mounted until shareholders demanded the company be dissolved in 2015.
The company? Ambassadors Group Inc. (ticker: EPAX). Ambassadors was a high flying company with what looked to be a great business model. But the company rested on its laurels and failed to invest excess capital successfully.
Below are the results of Ambassadors Group Inc:
Investors eventually ended up with $1.75 a share vs. the all time high of $40 a share. You purchased at $30 a share.
Try investing in Company A or B.
**END**Company C was still strong. They just need to turn the corner and grow. The proposed reduction in staff would help them remain highly profitable during this difficult period.
Revenues did stabilize the next year. Profits did increase 8%. The share price was low and management continued to repurchase shares.
But the cost management tactic was only a temporary solution. Revenues continued to decline.
Company C spent $100 million on share repurchases. The acquisition turned out to not work. Value was destroyed. The company failed to grow. Costs rose as the company's revenues fell. Losses mounted until shareholders demanded the company be dissolved in 2015.
Below are the results of Ambassadors Group Inc (ticker: EPAX):
You end up with $1.75 a share vs. your initial purchase of $30. You lost 85% of your investment versus earning 234% investing in an index.
Investing is hard.
Try investing in Company A or B.
**END**
As the group leaves breakfast, you talk to the investor who mentioned having an interest in Company B.
"What specifically about Company B do you like," you ask the investor.
"The CEO bootstrapped Company B from 0 to $70 million in 10 years. He has the industry 'Trifecta' - he has created demand for his products, develops those products and is very good at selling those products," says the investor. "And there is little competition in leading the market, because it is so fragmented."
[[What are Company B's financials?|Ask about Company B's financials]]You decide that investing is too time consuming. And most investors fail to beat the market.
You invest in an index fund.
What happened to the companies you passed on vs the index over the same time frame?
One went down 46% vs. 316% in the index.
Another fell 85% vs. 234% in the index.
The last went up 6,000% vs. 800% in the index.
To find out which companies returned what, who they actually were, and what happened, you need to hold each of them until the end.
**END**Company A grew revenues more than expected:
Revenues +388% cumulative (10.7% compounded annually)
Yet profit growth was paltry:
Profits +40% cumulative (2.7% compounded annually)
[[What is their strategy?]]Company A grew its revenues more than the market by acquiring other like businesses.
The company remained profitable every year, however, profits did not grow as fast as anticipated.
[[Look at Company A's stock price]]Since the IPO Company A's shares climbed 200%. However, over the last 9 years the stock has not budged.
The market has done considerably better achieving 300% vs. Company A's 200% gain.
A's shares trade at 16 times earnings now.
What should you do?
[[Sell Company A|Sell A 1]]
[[Hold Company A|Hold A 1]]10 years is enough to show a company's track record, right?
While Company A is growing revenues, they have not grown profits fast enough.
You sell your position in Company A for a 200% gain.
[[Pass 6 years]]You hold onto Company A's shares another 2 years.
Financials look like this:
[[What is going wrong?]]Six years pass. You check Company A's share price.
You see the following.
Your 200% gain could have been 600%. Well, that's not bad. You would have done as well as the market.
Investing is hard.
[[What does the company look like now?]]Another 15 years fly by. You check Company A's share price.
Shares are now 7,000% higher than your initial purchase. The index grew 850%. In other words, you would have killed the market.
[[What happened to Company A?]]You sold your shares in the initial stages of their growth. They acquired a few key brands. Then spent time integrating them, laying the foundation.
Then around 2008, the company started to focus much of their attention on growing their international market. The strategy worked.
Maybe if you held onto Company A longer you could have learned the company's name.
**END**Company A's CEO says:
"The concurrence of a number of strategic investments with a few disappointing results has meant that the financial year has closed with a loss."
[[Read Annual Report|Read co a report 2]]The company continues to focus on product quality and places "high demands in respect of a very competitive cost price."
Six years ago management told you they wanted to double revenues by this time. They did. In that time frame Company A acquired 7 companies. Yet the companies acquired have low margins.
Debt is at a relatively high level (2 times operating cash flow - EBITDA).
Company A's dividend is cut in half.
[[Check A's share price]]You can exit Company A for a 120% gain over the past 13 years.
The market, on the other hand, is up more than 300% over the same time frame.
Should you admit defeat and move on?
[[Sell Company A|Sell A 2]]
[[Hold Company A|Hold A 2]]Company A is not executing as you prefer. You sell your shares for a 120% gain. That works out to 6.8% CAGR vs. 10% CAGR from the overall market.
You would have done better just investing in an index fund.
Investing is hard.
[[What are Company A's shares today?]]You had met with management a few more times and you truly believed in their strategy. Company A is not looking to acquire other companies now. They are looking to integrate the companies they have.
Company A is truly focused on win-wins with all stakeholders.
[[Talk with A's CEO]]
Company A's shares are up 7,000% since its IPO. Too bad you already sold.
Investing is really hard.
If you want to learn Company A's name and what happened, you should go back and hold onto the stock.
**END**The CEO tells you "we want to continue to grow in depth, not so much in width."
The VP says, "A great chef knows he can't cook a new dish until the last is cleaned."
You hold onto Company A for 5 more years.
[[Check 5 year results]]Revenues grew 31%, yet profits grew from -1 million to 11.4 million, the highest net profit in the company's history.
Management's investments are finally starting to pay off.
The dividend grew 44% per year for the past 5 years.
[[Read annual letter|read annual 3]]The CEO stated:
"Earnings were in line with expectations and demonstrate that our brand policy, is able to provide sufficient profitability to responsibly invest further in production, R&D and marketing."
The CEO added:
"10 years ago we established the principles for combining the benefits of a family-anchored company with committed management in a long-term perspective and for successfully handing over the running of the company to the following generation."
The following, however, did not sound good:
"Despite the strong starting position and concrete plans for continuing growth, next year will not be an easy year. Strongly rising prices for raw materials, packaging and energy, together with the considerable cost of new product launches, will be a challenge for profitability."
Company A trades at 15 times earnings.
The share price is up 900% since you purchased.
[[Sell Company A|Sell Company A 4]]
[[Hold Company A|Hold co A 4]]You worry Company A cannot raise its prices to exceed fast rising costs.
You sell your shares for a significant gain over 17 years. That works out to ~13.8% CAGR vs. 10.5% CAGR from the overall market index.
Investing is hard.
[[What are Company A's shares today?]] You are very brave.
Over the next few months, however, raw material prices rise ~100%. Company A has yet to report their latest financials. The share price falls 5%.
Sell now and you can still walk away with an 875% gain.
[[Sell Company A|Sell co a 5]]
[[Hold Company A|Hold co a 5]]You worry Company A cannot raise its prices to exceed fast rising costs.
You sell your shares for a significant gain over 17 years. That works out to ~13.8% CAGR vs. 10.5% CAGR from the overall market index.
Investing is hard.
[[What are Company A's shares today?]] Price increases should not have an effect on demand, at least in the mature markets. There, Company A's products are a low price point item. The product is engrained in the minds of customers. Still growth in those markets are slow. The real challenge is raising prices in new markets.
You wholely believe management will take the right approach to these new challenges.
You will give them a few years to prove they can handle the challenge.
[[Wait 2 years]]2 years pass. Company A reports the following results for those years:
Revenues rose 25% & 14% respectively.
Prices rose considerably, despite this volume grew 8.2%.
Company A is demonstrating significant brand value.
[[Read the shareholder letter|read co a shareholder letter]]The CEO gives the following update:
"Organizationally we took a number of major steps in the past year that are hugely important for the future of Company A. Country organization with corporate departments and corproate services was further defined."
The dividend rose 22% & 25% respectively.
[[Check the stock price|Check A's shareprice]]You continue to sit on a 900% stock gain. The stock recently fell 25% from its all-time high.
The market is looking grim. The overall market index has fallen 50%.
Company A's CEO stated in the annual letter:
"We will have to survive a very difficult economic context."
Company A's shares could fall exponentially more. The shares trade at 10 times earnings.
[[Sell Company A|Sell Co a 6]]
[[Hold Company A|Hold co a 6]]The overall market worries you.
You sell your shares for a significant 900% gain over 19 years. That works out to ~12.3% CAGR vs. 5.7% CAGR from the overall market index.
You could have sold out earlier for the same gain. Or you could have sold out at the all-time hight a few months ago.
Investing is hard.
[[What are Company A's shares today?]] Company A has a product that people can't live without. Demand increased when prices rose. That is a sure sign this company has something special.
You still communicate with the investor you met during your initial tour of Company A 19 years ago. Like you, that investor bought around the same time as you. That investor told you they held onto Company A shares until recently.
"A market downturn will definitely effect demand for Company A's products," wrote the investor in an email. "The stock will fall further. I sold out! That capital can be better used, or even better I can repurchase Company A at a better price."
"I'm holding," you typed back.
"You're crazy. I wish you the best," signed off the investor.
[[Pass time]]You call Company A's CEO to get an update on his thinking. You first want to know his thoughts on his family's ownership of the business.
He says:
"Putting the company first [is top priority]. Only then does the family [who owns Company A] come, not vice versa. Family is enriching for business, if you adhere to strict rules. Only then do you hve the advantage of memory, stability and a long-term vision."
Recently acquisitions have been a greater part of Company A's strategy. You are curious to their thoughts on further acquisitions.
The CEO says:
"For acquisitions, we look at companies that are leaders in their segment with their own strong brands. But it is not easy to find the perfect acquisition, we are picky. We are currently focused on integrating the acquisitions. The reasults are good. We want to build on that."
Lastly, since the CEO and his family control 70% of the business, you are curious about potential dilution to minority shareholders like yourself.
The CEO says:
"That situation has not yet occurred, and I do not see it happening quickly either. We prefer, of course, to have a majority. And I do not believe that we would need it today to do something, we have a sufficient resources. But as a family we never want to be an obstacle to the further development of the company."
Things continue to appear well at Company A.
[[Pass more time]]4 years pass. Company A reports the following results:
Company A went through the worst market virtually unscathed.
The dividend grew each year from 5.10 to 7.35.
Market share continued to grow in their home market and abroad.
[[Read annual report|read annual 4]]Company A has been investing significantly in their operations. A new plant and new lines were built costing $40 million. The company noted "all this we did, very importantly, without for one moment losing sight of quality."
They added, "To continue our success, we must continue to focus on our quality."
A new addition to the company's philosophy was:
"Care for our products, our environment, our partners, our employees and our consumers. This is part ouf our DNA. It's our way of ensuring that Company A can thrive today and enjoy a successful future too."
More than 20 years ago when you first visited Company A, you observed that philosophy in action. It took them more than 2 decades to finally verbalize the DNA.
[[Check A's shareprice|Check a share 2]]
Company A's win-win mentality, which you have known all along, has grown the share price 2,500%! Your patience and steadfastness has been rewarded.
The market index, on the other hand, is up only 500% over the same time frame.
Company A trades at 20 times earnings now.
Do you take your chips off the table?
Things could get worse.
[[Sell Company A|Sell co a 7]]
[[Hold Company A|Hold co a 7]]You sell your shares for a 2,500% gain over 23 years. That works out to ~15% CAGR vs. 7% CAGR from the overall market index.
Should you celebrate?
[[What are Company A's shares today?]] Management has told you that they are truly focused on gaining more penetration. Their products still have huge growth when looking at that metric, even in their mature domestic market.
You also like the companies new motto - "We believe that true greatness consists of being great in little things."
Results are the following over the next 4 years:
Who is the company????
Lotus Bakeries NV.
Lotus Bakeries is one of the top performing European stocks in the past 30 years. The company has dominated the Belgium carmelized biscuit market since 1932. It was founded by brothers Jan, Emiel and Henri Boone.
Lotus combined with Corona, another biscuit maker, in 1974. Karel Boone, son of Jan, became CEO in 1980.
Our story picked up in 1989 when Lotus went public. The year prior Lotus generated 1.42 billion Belgian Francs (~35.2 million Euro) up 8%. Profits that year were 1.73 million Euro up 20%.
Most people would have overlooked the company because it was a microcap. The company was worth a total 51.9 million Euros. It was expensive at 30 times trailing twelve month earnings. We spoke to a person who passed on investing in Lotus after the IPO and visiting the factory.
Even if one did buy Lotus in 1989, it would have been difficult to hold shares for the next ten years. Focused mainly on the Belgium market, which Lotus dominated, the company's growth was slow. Management changed course by acquiring similar snack/cookie products in neighboring markets. Despite high debt, Lotus successfully grew and dominated their markets.
Higher prices in 2007 & 2008 were a huge problem, however, because Lotus's products had significant mindshare, management was successful in raising prices. And during the great recession Lotus was barely effected.
Since you made it here, you successfully held a 7,000% or 70 bagger. The Belgium index, on the other hand, only rose 850%. Granted it would have been a lot harder to actually buy Lotus in 1989 and hold it all the way until today.
Investing is hard.Company B's share price has risen 11% since your initial purchase.
You have diligently kept tabs on Company B's list of products. The company's new product offerings has grown at a healthy rate.
The company recently announced an acquisition. Company B acquired its Canadian distributor, the largest distributor of juvenile products in Canada. This was a clear step in Company B's "commitment to broading [its] international presence."
Both mean that next quarter's results are likely to be good. The share price should continue its ascent.
[[Sell Company B|Sell B1]]
[[Hold Company B|Hold B1]]You sell shares in Company B for a 11% return.
A few months pass. Company B's full year results are as follows:
Company B acquired it's second international business. Things are going in the right direction.
Then you pull out a newspaper.
As you read the newspaper you read that Company B was forced to delay the release of some new items.
Company B's CEO stated:
"We thought we would have products sooner than we did: we just failed to take into account time to debug production of new products."
In other words, the CEO chalked up his company's troubles to "a case of growing pains."
B's shares that day fall from $25 to $16.75, a 33% decrease. That means Company B trades at ~16 times earnings. Company B's stock is now much cheaper.
You remember that Company B's CEO owns 46% of the company. He has demonstrated an ability to execute, albiet he made a mistake.
Should you invest in Company B again?
[[Buy Company B|Buy B again]]
[[Pass Company B again]]A number of months pass. Company B's results so far are similar to the prior year's.
You wait until the company releases its full year results. The 4th quarter, seasonally Company B's highest, should provide plenty of detail on the company's progress.
The stock has fallen slightly:
Then, you receive Company B's annual report.
You read:
Company B acquired it's second international business. Things are going in the right direction.
However, the CEO states that in December, the company experienced an inventory shortfall that cost $4.5 million.
"Our computer system had been unable to accurately keep track of its inventory, which caused the company to accept orders for products it could not ship," wrote the CEO.
That day the share price drops 21.4% to $8.
Overall, your stock position in Company B is down 50%.
[[Sell Company B|Sell B4]]
[[Hold Company B|Hold B4]]You repurchase your shares of Company B.
A number of months pass. Company B's results so far are similar to the prior year's.
You wait until the company releases its full year results. The 4th quarter, seasonally Company B's highest, should provide plenty of detail on the company's progress.
The stock has fallen slightly:
Then, you receive Company B's annual report.
You read:
Company B acquired it's second international business. Things are going in the right direction.
However, the CEO states that in December, the company experienced an inventory shortfall that cost $4.5 million.
"Our computer system had been unable to accurately keep track of its inventory, which caused the company to accept orders for products it could not ship," wrote the CEO.
That day the share price drops 21.4% to $8.
Overall, your stock position in Company B is down 50%.
[[Sell Company B|Sell B2]]
[[Hold Company B|Hold B2]]
You decide not to invest into Company B again. You were lucky to exit the company's shares at a profit.
Over the next four years, Company B, known as Safety 1st, produced the following results:
Safety 1st had to aggressively address many of its growth-related problems. The CEO, Michael Lerner, stated that his company had been "carried away by its early success." Safety 1st's product offerings had exceeded a manageble level. Many of the new items the company began marketing were outside of their circle of comptence. Safety 1st ran into stiff competition.
In other words, the continual expansion was a bit much for Safety 1st to handle. The operation got overly complex and expensive.
The CEO reacted by implementing a long and costly product realignment. Every one of the 600 products was evaluated. 350 products were cut.
The cost, mainly in inventory write-offs from discountinued products, was estimated to be $25 million.
The stock eventually fell to $2 a share. That would have been a 92% loss from your initial investment.
The turnaround did work. Michael Lerner was able to sell Safety 1st to Dorel Industries for $13.87 3 years later.
You missed a huge loser here. Congrats!
Can you do it in real life?
Try another path.
**END**You sell your shares in Company B for $8 or a 50% loss.
The market over the same time frame gained 47%.
You thought, when you find one cockroach, usually there are thousands more in hiding.
Are you correct?
The following year, Company B began aggressively addressing many of the growth-related problems it faced. The CEO stated that his company had been "carried away by its early success." B's product offerings had exceeded a manageble level. Many of the new items the company began marketing were outside of their circle of comptence. B ran into stiff competition.
In other words, the continual expansion was a bit much for the CEO and its executives to handle. The operation got overly complex and expensive.
The CEO reacted by implementing a long and costly product realignment. Every one of the 600 products was evaluated. 350 products were cut.
The cost, mainly in inventory write-offs from discountinued products, was estimated to be $25 million.
Despite growing the top line for the full year, Company B had a net loss of $44 million.
The CEO explained, "We're focusing on our core strenghts. I wish we had done this three or four years ago. We have learned a lot." The company now looked for more moderate growth of 15% per year from its 300 best-selling, highest-margin products.
B's shares have fallen to $2. Had you held you would be sitting on a 92% loss.
Eventually the company was acquired for $13.87 a share three years later. You would have still lost money had you held onto your shares.
If you would like to know the name of Company B, you'll have to go back and hold onto the company until the end.
**END**You decide to hold onto your shares in Company B despite its problems. You still believe that the CEO - who owns many shares of Company B - will turn the business around.
A year passes. Results were as follows:
Company B announces that it has been aggressively addressing many of its growth-related problems. The CEO stated that his company had been "carried away by its early success." B's product offerings had exceeded a manageble level. Many of the new items the company began marketing were outside of their circle of comptence. B ran into stiff competition.
In other words, the continual expansion was a bit much for the CEO and its executives to handle. The operation got overly complex and expensive.
The CEO reacted by implementing a long and costly product realignment. Every one of the 600 products was evaluated. 350 products were cut.
The cost, mainly in inventory write-offs from discountinued products, was estimated to be $25 million.
Despite growing the top line for the full year, Company B had a net loss of $44 million.
The CEO explained, "We're focusing on our core strenghts. I wish we had done this three or four years ago. We have learned a lot." The company now looked for more moderate growth of 15% per year from its 300 best-selling, highest-margin products.
B's shares have fallen to $2. You are sitting on a 92% loss.
The entire company trades at $14 million or 0.14 times revenues.
Should you sell or hold?
[[Sell Company B|Sell B3]]
[[Hold Company B|Hold B3]]
[[Buy More Company B]]You sell your shares in Company B for $2 or a 92% loss.
The market over the same time frame gained 48%.
It took time but the turnaround started to bear fruit.
More attention was given to experimenting with new business strategies. The most successful experimentation was licensing the Company's name to others. The strategy worked. Company B was able to maintain its revenues despite cutting half its product offering. Company B ended up being profitable too!
Here are the results for the year:
2 years later Company B, known as Safety 1st, was sold to Dorel Industries for $13.87 per share.
Overall, Michael Lerner, Safety 1st's CEO/Founder, grew the company's share price 38.7% from its 1994 IPO until April 22, 2000.
The market index grew 320% over the same time frame.
Investing is hard.
Try the other paths.
**END**You are loss averse. You decide to hold onto Company B shares.
Over the next year the newfound managed growth philosophy starts paying off for Company B.
Greater emphasis was placed on market research and cost analysis prior to new product line offerings. Less focus was placed on releasing more items. More attention was given to experimenting with new business strategies. The most successful experimentation was licensing the Company's name to others. The strategy worked. Company B was able to maintain its revenues despite cutting half its product offering. Company B ended up being profitable too!
Here are the results for the year:
2 years later Company B, known as Safety 1st, was sold to Dorel Industries for $13.87 per share.
Overall, Michael Lerner, Safety 1st's CEO/Founder, grew the company's share price 38.7% from its 1994 IPO until April 22, 2000.
You purchased at $16.75 so you lost 17%.
How did you fare against the overall market?
Well, the market index went up 280%.
Ouch. Investing is hard.
**END**You cannot find many other good investment opportunities. While Company B has been a huge loser for you so far, the company is now in deep value stock territory.
You back the truck up and buy more Company B. Your cost basis in Company B has fallen from $16.75 to $4.
Over the next year the newfound managed growth philosophy starts paying off for Company B.
Greater emphasis was placed on market research and cost analysis prior to new product line offerings. Less focus was placed on releasing more items. More attention was given to experimenting with new business strategies. The most successful experimentation was licensing the Company's name to others. The strategy worked. Company B was able to maintain its revenues despite cutting half its product offering. Company B ended up being profitable too!
Here are the results for the year:
2 years later Company B, known as Safety 1st, was sold to Dorel Industries for $13.87 per share.
Overall, Michael Lerner, Safety 1st's CEO/Founder, grew the company's share price 38.7% from its 1994 IPO until April 22, 2000.
You, on the other hand, turned lemons into lemonade. Your $4 per share investment grew 346%.
How did you fare against the overall market?
Well, the market index is up 280%. Congrats!
You might have been able to maneuver this time, can you do it in real life?
Investing is hard.
Try another path.
**END**You sell your shares in Company B for $8 or a 50% loss.
The market over the same time frame gained 47%.
You thought, when you find one cockroach, usually there are thousands more in hiding.
Are you correct?
The following year, Company B began aggressively addressing many of the growth-related problems it faced. The CEO stated that his company had been "carried away by its early success." B's product offerings had exceeded a manageble level. Many of the new items the company began marketing were outside of their circle of comptence. B ran into stiff competition.
In other words, the continual expansion was a bit much for the CEO and its executives to handle. The operation got overly complex and expensive.
The CEO reacted by implementing a long and costly product realignment. Every one of the 600 products was evaluated. 350 products were cut.
The cost, mainly in inventory write-offs from discountinued products, was estimated to be $25 million.
Despite growing the top line for the full year, Company B had a net loss of $44 million.
The CEO explained, "We're focusing on our core strenghts. I wish we had done this three or four years ago. We have learned a lot." The company now looked for more moderate growth of 15% per year from its 300 best-selling, highest-margin products.
B's shares have fallen to $2. Had you held you would be sitting on a 92% loss.
Eventually the company was acquired for $13.87 a share three years later. You would have still lost money had you held onto your shares.
If you would like to know the name of Company B, you'll have to go back and hold onto the company until the end.
Try another path.
**END**You decide to hold onto your shares in Company B despite its problems. You still believe that the CEO - who owns many shares of Company B - will turn the business around.
A year passes. Results were as follows:
Company B announces that it has been aggressively addressing many of its growth-related problems. The CEO stated that his company had been "carried away by its early success." B's product offerings had exceeded a manageble level. Many of the new items the company began marketing were outside of their circle of comptence. B ran into stiff competition.
In other words, the continual expansion was a bit much for the CEO and its executives to handle. The operation got overly complex and expensive.
The CEO reacted by implementing a long and costly product realignment. Every one of the 600 products was evaluated. 350 products were cut.
The cost, mainly in inventory write-offs from discountinued products, was estimated to be $25 million.
Despite growing the top line for the full year, Company B had a net loss of $44 million.
The CEO explained, "We're focusing on our core strenghts. I wish we had done this three or four years ago. We have learned a lot." The company now looked for more moderate growth of 15% per year from its 300 best-selling, highest-margin products.
B's shares have fallen to $2. You are sitting on a 92% loss.
The entire company trades at $14 million or 0.14 times revenues.
Should you sell or hold?
[[Sell Company B|Sell B5]]
[[Hold Company B|Hold B5]]
[[Buy More Company B|Buymore b]]You sell your shares in Company B for $2 or a 92% loss.
The market over the same time frame gained 48%.
It took time but the turnaround started to bear fruit.
More attention was given to experimenting with new business strategies. The most successful experimentation was licensing the Company's name to others. The strategy worked. Company B was able to maintain its revenues despite cutting half its product offering. Company B ended up being profitable too!
Here are the results for the year:
2 years later Company B, known as Safety 1st, was sold to Dorel Industries for $13.87 per share.
Overall, Michael Lerner, Safety 1st's CEO/Founder, grew the company's share price 38.7% from its 1994 IPO until April 22, 2000.
The market index grew 320% over the same time frame.
Investing is hard.
Try the other paths.
**END**You are loss averse. You decide to hold onto Company B shares.
Over the next year the newfound managed growth philosophy starts paying off for Company B.
Greater emphasis was placed on market research and cost analysis prior to new product line offerings. Less focus was placed on releasing more items. More attention was given to experimenting with new business strategies. The most successful experimentation was licensing the Company's name to others. The strategy worked. Company B was able to maintain its revenues despite cutting half its product offering. Company B ended up being profitable too!
Here are the results for the year:
2 years later Company B, known as Safety 1st, was sold to Dorel Industries for $13.87 per share.
Overall, Michael Lerner, Safety 1st's CEO/Founder, grew the company's share price 38.7% from its 1994 IPO until April 22, 2000.
You purchased at $16.75 so you lost 17%.
How did you fare against the overall market?
Well, the market index went up 280%.
Ouch. Investing is hard.
**END**You cannot find many other good investment opportunities. While Company B has been a huge loser for you so far, the company is now in deep value stock territory.
You back the truck up and buy more Company B. Your cost basis in Company B has fallen from $16.75 to $4.
Over the next year the newfound managed growth philosophy starts paying off for Company B.
Greater emphasis was placed on market research and cost analysis prior to new product line offerings. Less focus was placed on releasing more items. More attention was given to experimenting with new business strategies. The most successful experimentation was licensing the Company's name to others. The strategy worked. Company B was able to maintain its revenues despite cutting half its product offering. Company B ended up being profitable too!
Here are the results for the year:
2 years later Company B, known as Safety 1st, was sold to Dorel Industries for $13.87 per share.
Overall, Michael Lerner, Safety 1st's CEO/Founder, grew the company's share price 38.7% from its 1994 IPO until April 22, 2000.
You, on the other hand, turned lemons into lemonade. Your $4 per share investment grew 346%.
How did you fare against the overall market?
Well, the market index is up 280%. Congrats!
You might have been able to maneuver this time, can you do it in real life?
Investing is hard.
Try another path.
**END**The CEO starts by introducing the company. Company B dominates the child-safety product niche. Currently it sells 300 products.
He then talks about founding the business 10 years ago. He started with one product. The product achieved viral success. Then the company acquired other products to sell over time.
To give a sense with how fast Company B is growing, the CEO states "Company B's product line has grown 20 items in five years. That is a growth rate of 71% per year. Revenues increased 41% per year."
"Collectively our executives have plenty of skin in the game," says the CEO. "I personally own 46% of the company. Including other insiders we own 55%."
[["What's the strategy?"]]"Our strategy is to grow, grow, grow," declares the CEO. "We have a quality distribution system. And we are laser focused on creating more products to generate more growth in our current and new international markets."
Here are Company B's financials for the past three years:
Here is the stock chart since the company's IPO:
The $26 share price means that Company B trades at 35x earnings.
[[Q&A]]The CEO finishes his prepared remarks and asks the audience for questions.
"What does the competitive landscape look like?" asks an audience member.
"Our market is highly fragmented. There is little competition in leading the market," says the CEO. "We are certainly the market leader. That is why we are focusing on growth."
"Company B has great relationships with vendors. It was 'Vendor of the Year' for retailers such as Wal-Mart. And Company B sold its merchandise to 3,700 retailers," says the CEO.
The CEO/founder didn't develop his executive team internally. Rather, he hired from other larger corporations. He tells the group "over qualified individuals allow me to grow faster." He adds "the company develops to the executive's level."
[[Next Question]]"Company B has $13 million in cash and no debt. What do you plan on doing with that money," asks another audience member.
"We believe we have plenty of opportunity to grow by developing new products," states the CEO. "Second, we could use cash to buy another business. As I mentioned previously, our market is highly fragmented and there is no shortage of potential targets."
Another audience member asks, "Is Company B followed by any investment analysts?"
"Currently one," says the CEO. "I'm sure you can find that investment report easily found on the internet."
You quickly open your phone and search. There it is. Prudential Securities figures that Company B's current, full-year revenues will reach $64 million and $85 million next year. The Prudential analyst estimates that B will also earn $1.27 a share.
The presentation is adjurned.
As you walk out you consider:
[[Buying Company B|Buy Company B]]
[[Passing on Company B|Pass on Company B]]