Vertical Merger Landscape and ESRX

On March 8th, Cigna announced it will buy Express Scripts, giving ESRX shareholders a combination of cash and CI stock. The deal, expected to close before year-end, will represent the 10th buy-out of a Pawleys Growth Fund holding at a significant premium for our investors. This is a stunning accomplishment, given that we typically hold a concentrated portfolio of only 20-25 different stocks, and just launched in 2010. We have a systematic process which strives to identify stock of companies with little or no debt, good earnings growth, and rock-solid cash flow. We never take a position in the hopes that it will be bought-out, it just happens that our methodology has identified stocks that others deem to be very valuable. The initial Cigna offer represented a 31% premium for ESRX shareholders.
Recently there have been a few landmark anti-trust cases that have gone in favor of corporations merging with or acquiring other companies. For example, the U.S. District Court in Washington court approved without any provisions the AT&T buy-out of Time Warner. A vertical merger occurs when two companies within the same industry but at different places along the supply chain come together, meaning they do not compete with each other and thus would not create a monopoly. This is a positive sign that the pending buy-out of Express Scripts by Cigna will be completed, since they are both healthcare companies but perform different functions. On July 12th, CNBC reported that the Department of Justice will not challenge the planned merger of CVS and Aetna, yet another positive sign for the ESRX/CI deal. Since ESRX continues to trade at a discount to the offer, we feel the market believes the deal will not go through. The market may also be worried about competition created by AMZN’s announced acquisition of PillPack. We recognize these risks but continue to add to our position of ESRX because we believe the stock remains undervalued independent of the pending CI acquisition. We are confident in our methodology of buying stock of companies with little or no debt, good earnings growth and rock-solid cash-flow. The landscape is ripe for additional mergers and acquisitions to occur, so we may see more activity with the Pawleys Growth Fund holdings going forward.

© 2018 Pawleys Capital Management, LLC. All rights reserved.

Eight Premium Buy-Outs for Pawleys Growth Fund

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.



Five Buy-Outs in Five Years for Pawleys?

Last Monday, after an extended proxy fight, PartnerRe (PRE) announced that they would be bought by Exor for $140.50 per share.  This sweetened offer to a previous Exor bid represents a 24% gain to the January 1st share price.  The Pawleys Dividend and Pawleys Growth Fund use similar stock selection criteria: we seek to identify companies with low debt:equity ratios, strong earnings per share growth, and solid cash-flow.  The Pawleys Dividend Fund typically holds 10-12 long positions, while the Pawleys Growth Fund holds 20-25 long positions.  Why is this concentration of the portfolios important and how does it relate to PRE?

In each year from 2011-2014, the Pawleys Growth Fund has outpaced the S&P by an average annualized gross total return of 6.5%.  During that time, we have had four holdings bought out for significant premiums – Par Pharmaceutical and Mediware Information Systems during 2012, and Questcor Pharmaceutical and Sapient during 2014 (total returns to the portfolio for each holding of 54%, 73%, 120%, and 44% respectively).  If the PartnerRe/Exor deal closes, it will mark the 5th buy-out of a Pawleys Growth holding in 5 years.  Given that we typically hold 20-25 positions at any time, in my opinion this is a remarkable accomplishment, and speaks to the power of our stock selection process.  It gives me confidence that the criteria we use help identify companies that other entities find valuable.

There is much attention on the Pawleys Dividend Fund this year, as it is outpacing the Dow Jones Industrial Average by over 10% year-to-date (total return).  But don’t overlook the Pawleys Growth model – despite a lag to our benchmark this year, the long-term performance trend is strong.  We never count our chickens before they are hatched – but I believe five buy-outs in five years is a fantastic result.

© 2015 Pawleys Capital Management, LLC. All rights reserved.