I read a fascinating line in The Wall Street Journal yesterday that really hit home for me and articulated what I’m trying to do with investments like Fiat Chrysler.
The article is titled “Don’t Waste a Good Automotive Crisis,” and it’s about how after recovering from major problems, some automakers’ stock prices have gone up.
The last paragraph is what really clicked with me:
As the auto industry gets much more difficult following years of healthy profits, investors seem likely to focus ever more closely on manufacturers’ turnaround potential. Picking the right moment—well after management change but before analysts get comfortable with a more optimistic narrative—will be key.
And specifically that last sentence, “Picking the right moment—well after management change but before analysts get comfortable with a more optimistic narrative—will be key,” had me saying that’s it!
To me, that’s where value exists. Management change, business change, industry change, whatever you want to call it, there has been a positive change in the situation. Some examples include:
New management came into Gulfport and is buying back a ton of shares and focused on capital allocation.
Fiat Chrysler changed its focus from cars to more-profitable Jeeps and Ram trucks.
Big banks have been allowed to and decided on increasing dividends and buybacks.
Apple’s iPhones get so good, and apps become so connected to one’s life, that it’s likely users will stick with iPhones and upgrade for years and years to come.
And sometimes it could simply just be that the stock price has fallen so low, for no good reason, that the business in its current state is just worth a lot more than the current price.
The point is that first, there has been a positive change in situation.
But if Mr. Market and as The Wall Street Journal article referred to it in this case, the analysts, realize that there has been a positive change in a company’s situation and push up the stock price to fully recognize the current value, then there is no value investing opportunity. Mr. Market beat us to the punch.
For example, suppose McDonald’s stock is selling at $94 and business is static at best and somewhat falling, and then a new CEO, who already performed a turnaround for McDonald’s in the UK comes onto the scene and simplifies the menu to offer customers what they love, improves food quality, and improves restaurant operations. And then the next day, analysts and Mr. Market realize what’s going on and the stock goes from $94 to $200 overnight, then there is no value opportunity to speak of. Mr. Market realized what was happening at the same time or before you did, he pushed the stock price up to recognize the value, and there is no opportunity for value investors like us.
But sometimes Mr. Market and the analysts are slow to fully appreciate the positive changes in a company’s situation (and again, including if all that happened was that the stock price fell below intrinsic value to a large extent for seemingly no reason, as sometimes stock prices just fall or stagnate for a time period for no noticeable reason).
The above McDonald’s situation is what happened to me over recent years, but unlike the hypothetical scenario above, in my case Mr. Market was slower to realize McDonald’s turnaround than I was.
And got lucky as well. I had bought McDonald’s for another reason, had been holding it for a few months or a year or something like that, and business results were not going that well and the company was not being run correctly. And then I got lucky because around that time Steve Easterbrook gets bumped up to CEO and he starts running the company like an absolute all star. He simplified the menu, focused on food that the customers wanted, improved ingredients, and improved restaurant operations. And since then, profits have gone up a lot, and the stock has more than doubled in under five years. Mr. Market could have recognized after a couple of quarters under Easterbrook’s leadership that he had a great plan in place and was the man to make it happen and the stock price could have gone up faster and earlier, but Mr. Market was late to the party. And those of us that had McDonald’s stock before Mr. Market realized what was going on benefited tremendously once Mr. Market woke up and pushed up the price of McDonald’s stock.
This example shows what we’re trying to do here. We’re trying to find and recognize positive situations before Mr. Market does. Then, as Mr. Market recognizes the positive situation and pushes up the price of the stock, we either sell for a gain or we continue to hold if the company is one of those rare, wonderful businesses that Buffett talks about.
It’s a simple concept and easy to understand. The difficult things of course are finding valuable situations before Mr. Market does, having the guts to bet big when we find them, and then having the courage and patience and temperament to hold on while Mr. Market catches up to us.