Company Culture and Passionate Employees

I went to a couple annual meetings recently that got me thinking a lot about how important company culture is. Specifically, what an advantage it is to have employees that are passionate about what the company is trying to accomplish.

Trupanion (TRUP) is a pet health insurance company that I’ve spent a lot of time on recently, including a ride-along with one of their territory partners and the annual meeting at their headquarters in Seattle. The first thing that’s obvious about the employees I met are how much they love that their work goes towards saving pet’s lives. I can’t blame them: saving pet’s lives is a pretty kick-ass corporate mission that a lot of people would love to be a part of. The employees are also nearly all pet owners themselves who get to bring their furry little friends into the office with them everyday.
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Calloway’s Nursery: Undervalued with Aligned Ownership

Calloway’s Nursery is undervalued on an earnings basis, owns valuable property in addition to that, and is run by a very successful investor. Calloway’s runs 19 nurseries and garden centers mostly in the Dallas-Ft. Worth area (with one in Houston). These nurseries are more specialized, have more variety, and are more expensive than the garden centers at Lowe’s or Home Depot.

I’ve followed Calloway’s (CLWY, $4.00) for years, but what pushed me to take a closer look last year was Peter Kamin taking control. Kamin co-founded ValueAct in 2000 with Jeffrey Ubben. ValueAct was immensely successfully while Kamin was there, but he stepped away and started 3K LP in 2012. 3K has no outside investors and they focus on micro-cap companies, both public and private. Kamin seems to be following a similar script at Calloway’s that he’s done at other public companies. That script includes: gradually build a position over several years, eventually take control, repurchase shares, pay down debt, and decrease public company expenses (by down-listing or de-listing). In the case of Abatix Corp (formerly ABIX), Kamin went through the aforementioned steps and eventually took them private at a 39% premium to the market price. Knowing Kamin has taken a controlled company private at a reasonably fair price gives me comfort in him being a majority shareholder at Calloway’s.

At Calloway’s, the game plan looks similar to the above.  3K started buying shares in 2012 and Kamin got a board seat in 2013 after a proxy fight. From 2013 to 2015 Calloway’s paid back roughly half their debt. In February 2016, 3K bought out two major shareholders (including the founder/former CEO). In the year since Kamin took over, operating margin increased from 6.5% in 2015 to 9.6% in 2016. Calloway’s also decreased shares outstanding by almost 25% in 2016. Finally, public company expenses have been decreased as they are now listed on the Pink Limited OTC marketplace and their quarterly releases consists of the three financial statements and nothing else.
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Why I Avoid Acquisitive Companies

When I first got into investing I didn’t care whether a company was acquisitive or not, but the longer I invest the less I like acquisitions. Any roll-up strategy is an instant pass for me. Two things have slowly changed my views over the years.

First, there’s a lot of evidence that acquisitions (especially large acquisitions) are a poor way to grow a company. According to a McKinsey study, the average acquisition has historically increased the value of the combined entities by 5.8%. The problem is, more often than not, all of this increased value is transferred to the shareholders of the acquired company via the premium paid (i.e. goodwill). The average public company acquisition is made at a 30% premium to its previous day close. Increasing an acquired company’s value by 30% just to break even on the price paid is a hard enough task as it is, let alone earning an adequate return on top of that. Another interesting note is that M&A activity peaked in 1999 and again in 2007. It seems managers are all too prone to make acquisitions when times are good and valuations are high.
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Podcast with Eric Schleien

Two weeks ago I was on Eric Schleien’s The Intelligent Investing Podcast. We spent most of the podcast talking about two of my favorite long-term compounders, Where Food Comes From (WFCF) and Interactive Brokers (IBKR). We also mention Franklin Covey (FC), Elbit Vision Systems (EVSNF), and a handful of other more general investing topics. Click below to give it a listen. Cheers.

Episode 9 – The Intelligent Investing Podcast

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Book Review: Sam Walton Made In America

“I still can’t believe it was news that I get my hair cut at the barbershop. Where else would I get it cut?”

To me, that quote sums up Sam Walton’s autobiography. He was referring to a Forbes article that came out after he was named the richest man in the world. Forbes asked to come to his hometown to follow him around for a few days. Even though he allowed them to, it was a decision he regretted the rest of his life. He was a small-town country boy who hated the attention and that friends and strangers made a big deal out of his wealth for the rest of his life. Truth is, Sam never felt as wealthy as his net worth would suggest. He lived off a modest salary and Wal-Mart dividends, drove a pickup truck his entire life, and yes, continued to get his hair cut at a barber, which the rest of the world was apparently amazed by.

I have a lot of respect for people who are incredibly successful, yet remain humble. I’m sure it’s easy to let it all go to your head. His entire career, Sam was infamous throughout the corporation for how often he visited stores. I don’t know how many CEOs of multi-billion dollar companies do things like that, but I bet it’s not many. Sam loved the store-level part of the business and that never changed, even as his role evolved from manager of the first store to CEO of a global behemoth. Even towards the end of his life in his 70s, he was still out visiting stores on a regular basis. His wife and kids joke that all their family vacations involved visiting Wal-Marts and their competitors. Sam claimed he went in more K-Marts than anyone in the world. Given he never worked at K-Mart, that’s pretty damn impressive (who knows if it’s totally factual though). In addition to money never changing him, there were a few other notable characteristics that really stood out to me.
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Management Intangibles I Look For

Even though talking to CEOs is helpful, I don’t think it’s required in order to get an idea of how shareholder friendly they are. Last year I added a section to my investment checklist called “Management intangibles” where I go through a number of things that give hints as to what type of CEO I’m looking at. I like asking myself these questions because the answers to all of them are public information and/or fact-based. When talking to a highly charismatic CEO who is a natural salesman, it’s easy for the halo effect to take over and to think higher of them than I should. The halo effect is when we take one attribute of someone (this CEO is knowledgeable and talks with confidence) and assign them other unrelated positive attributes because of it (this CEO is shareholder friendly and a good capital allocator). It’s a human bias that we’re all guilty of (most commonly with attractive women) so it’s a good idea to try and counteract it.

I think combining these list items with my impressions from talking to the CEO leads me to a less biased opinion that’s more rooted in facts. So below is a list of all the things I go through in my intangibles checklist. None of these are deal killers and virtually all CEOs have the “wrong” answer on a few of them, but looking at them as a whole can give a decent picture as to what the CEO is like.
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