In May of 2016, a client asked us to review the choices within her 401(k), which included company stock. There was, at the time, a pending buy-out of the company, so when we reviewed the stock, we anticipated that it would be trading at parity with the buy-out price. The board of directors and shareholders of both companies had already approved the transaction.
Much to our surprise, the company stock of our client was trading at a 35% discount to the buy-out level. Clearly, the market did not believe the transaction would complete. The merger was being reviewed by the Department of Justice for anti-trust issues. Several high-profile mergers had fallen apart amidst government anti-trust concerns, including Office Depot & Staples, Sysco & U.S. Foods, and Halliburton & Baker Hughes. We classify a pending buy-out which may be blocked as a binary event. There are only 2 possible outcomes: either the companies will merge, or they will not. We liked the fundamental financials and the valuation of the stock, and recommend a long position to the client regardless of the outcome of the pending merger.
How does the story end? The merger fell apart. Both the Department of Justice and a U.S District Court judge ruled that the merger would have violated Section 7 of the Clayton Antitrust Act. This spring, the acquiring company announced it was backing away from the acquisition. But the trade worked out due to the solid fundamentals of the company. We entered the stock at $130/share, and it recently traded at $193, representing a 48% premium over 17 months.
© 2017 Pawleys Investment Advisors, LLC. All rights reserved.
Amazon’s proposed buy-out of Whole Foods has been publicized as a game-changer to the consumer space. For me, it is continued validation that the stock selection criteria for the Pawleys Growth Fund is solid, as it represents the 9th buy-out from the holdings since 2011. Typically, the fund holds 20-25 positions, reflecting my best high-conviction ideas, so the number of premium buy-outs is stunning, while humbling. Below is a summary of the premiums generated for investors in the Pawleys Growth Fund:
© 2017 Pawleys Capital Management, LLC. All rights reserved.
How is it that a boutique portfolio manager from the quiet, beautiful coast of South Carolina has crushed the S&P 500 by an average of +5.95% since 2011? The Pawleys Growth Fund seeks to identify companies with low debt:equity ratios, strong earnings per-share growth, and solid cash-flow. The Pawleys Growth Fund typically holds 20-25 long positions at any given time. Why is this concentration of the portfolio important and how does it relate to the stunning eight buy-outs?
We use a strict, systematic selection process to identify growth-oriented companies that are reasonably priced. This non-emotional approach to investing is designed to beat the averages by holding best-in-breed companies across different sectors, and taking high-conviction positions. Index mutual funds and exchange-traded funds are riddled with mediocre stocks. As of this writing, there are 300 companies in the S&P 500 with earnings growth below 15%, and only 45 that exceed 25%. Why would anyone invest in a company that has shrinking earnings and gradually fading relevance? Anyone who invests in a tracker fund unknowingly owns these poor performers. Let’s review the returns that we have achieved for our investors over the past few years with the buy-outs:
Does the average premium gain for our investors of 43% for these eight companies get your attention? It should. This is a remarkable accomplishment, and speaks to the power of our stock selection process. The Pawleys Growth Fund is for investors looking for a repetitive portfolio process that takes calculated risks. Join us in the pursuit of beating the averages with wickedly smart investing!
© 2017 Pawleys Capital Management, LLC. All rights reserved. Total return figures are gross of fees which vary. Earnings figures are trailing 5-year earnings per share growth rates. Source S&P.