Wandering Down the Value Path
It is time to stop making long lists and analyze some stocks. Can we find an idea good enough to find its way into the model portfolio?
The was one stock in the “bench” portfolio I had great hope for.
Perrigo - PRGO is a maker of generic over the counter drugs. The company has a wild history of acquisitions, divestitures, and tax disputes. The company has been restructuring since the 2018 arrival of Murray Kessler. Kessler has run Lorillard and US Tobacco before coming to untangle PRGO.
Things seem to be going well. PRGO has a decent chance to earn $3.00/share in 2023. The stock is only $37.
Even better, one of my favorite institutional investors, Barrow Hanley, owns a cool 7.7% of the company.
But even after adjusting for lots of one-time items, Debt/EBITDA is still over 6x because PRGO made a large acquisition at the end of 2021. They paid over 4x sales for a rather mundane looking business. The deal was high accretive, but seemed a little like a desperate attempt to cover up problems in the base business. I was further concerned the last conference call had little explanation of how PRGO would fix the balance sheet.
Maybe the next quarterly call will make me feel better about balance sheet. I all honesty the CEO Kessler is just a little too much of a salesman (which is his background). Someday I will write a long post on the importance of “feel” when evaluating management, but not tonight.
Thinking about PRGO led me to two other companies, PBH - Prestige Consumer Healthcare, and VTRS - Viatris (a combination of the old Upjohn and Mylan Labs). PBH deserves more work, VTRS is so complex I still have a headache, but it is cheap.
***** Always click on that “peers” tab on SA, you never know what you will find.
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Next up was Tenet Healthcare - THC.
The stock is cheap at only 11x. The company seems to be downsizing its hospital business, but they are in love with the ambulatory surgery center business. Yikes, I spent many years as a short-seller trying to untangle these partnership deals where the doctors are investors. Sorry, doctor joint ventures make me nervous. I also worry that 2022 might be kind of a “peak” year for folks that postponed elective surgeries.
The famous investor David Einhorn has just bought a small part of THC. Einhorn is not really a value guy, but let’s see what he is up to. His biggest position is the unique homebuilder Green Brick Partners. It is interesting he started a small Intel position this fall. The big surprise is that Einhorn has a decent size position in the strange IBM spin-off Kyndryl - KD.
THC is also a little over-leveraged, but they have a clear plan to address the issue. I wish PRGO had the same approach to its debt problems.
THC led me to the largest mental healthcare provider Acadia Healthcare - ACHC. This industry has a long and troubled history, but at the right price I would like to invest. ACHC led me to a neat little busted growth stock called Apollo Medical - AMEH. The story is great, but the valuation is an issue.
After looking at PRGO and THC, I actually have more work to do than when I started.
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Next I tried to figure out the mysterious Fresh Del Monte Produce - FDP. At only 73% of book this should be my stock. FDP is really a private company, pretending to be a public company. They make almost no attempt to disclose more than the bare minimum. Insiders own over 40% of the stock.
Management has done a decent job of stabilizing the business. Earnings fluctuate between $1 and $4/share. Let’s call the average $2, and hope we can get the stock closer to $20, not $28.
We all need our fruits and vegetables. Next time a hurricane hits Central America, I want to be ready to own this stock. Only value investors cheer for hurricanes.
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A random portfolio manager came on CNBC this afternoon, and said she was going to discuss the the M word again. After a commercial, she admitted that she owned Macy’s - M. She was so embarrassed, she almost apologized for owning the stock.
I liked Nordstrom - JWN better, but I need to look at M again. She said inventory was under control and that new designer brands would be added this year. The stock is only 6-8x, so maybe she is right.
I hate to admit that sometimes I get ideas from CNBC. Only 30 minutes later Cramer was discussing Fibonacci sequences, and I was throwing objects at my TV.
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The only thing worse than getting ideas from CNBC guests, is getting them from CNBC commercials. Someday I want to own LOVE - The Lovesac Company, a maker of beanbag chairs and other furniture. LOVE has a slick 60 page investor presentation, that is 58 pages longer than FDP’s.
At 1x sales, LOVE is too expensive right now, but beanbags could be in my future. Wasatch Advisors own 6% of the stock. They are pretty smart small cap investors.