Why I Like Where Food Comes From (Forbes.com Interview)

“What about Where Food Comes From initially caught your attention as a value investor?

Where Food Comes From checks several of my favorite investment boxes: small, founder-led, high insider ownership, zero debt, profitable, and growing. I love industries that have long runways of growth ahead of them. Where Food Comes From benefits from several major trends in food—organic, non-GMO, gluten-free, animal welfare, and more generally, consumers demanding transparency in the food chain and wanting to know where the food they eat comes from. I like large industry tailwinds because it makes business much easier. In a fast growing market, competitors are less likely to engage in price wars or other detrimental practices. This is because most participants are growing revenue, even if they’re losing market share. Growth is harder to come by in mature markets so there’s more likely to be competitive practices that are harmful to all participants.”

The above is an excerpt from an interview I did recently about Where Food Comes From. The rest of the interview can be seen at The Business (And Stock) Behind Where Food Comes From.

As of this writing, Wiedower Capital owns shares in WFCF. This is subject to change.

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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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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Shut Up About Creating Shareholder Value

You know that feeling you get when a crappy salesman is trying too hard to sell you something? That stereotypical used car salesman? Ugh, I can’t stand it. That’s how I feel when a CEO goes on and on about creating shareholder value. I was recently reading through some Bob Evans Farms (BOBE) conference call transcripts and I wanted to throw up.

When talking about strategic alternatives the company is considering, the CEO Saed Mohseni said “All options of Bob Evans are under consideration by our board of directors. And I believe that ultimately the board will make a decision that is in the best interest of our shareholders and create value for our shareholders.” Next, an analyst asked about a timeline for the strategic alternatives and his answer nauseated me: “I think the best timeline is when we feel that truly enhances shareholder’s value.” My bullshit-meter could not have gone off any louder—what the fuck does that even mean? He obviously wanted to avoid the question, but it’s like he thinks that as long as he throws “shareholder value” into the answer that shareholders will be happy. The ironic thing is that he owns very few shares (all of which were gifted to him) so I highly doubt he cares about shareholder value as much as he talks about it. And if shareholder value is such a huge focus of his, he should probably be gobbling up shares in the open market in preparation for all the value he’s about to create.
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Going Through 1,500 OTC Stocks

Throughout 2016 I’ve been going through a list of over-the-counter stocks I screened for at the beginning of the year. I started with an Excel spreadsheet of all OTC stocks listed in America (9,855) and then narrowed it down via the following criteria:

  1. Only these exchanges: OTCQX, OTCQB, Pink Current (only wanted companies that were up-to-date with their filings)
  2. Companies based in first world countries
  3. Removed banks, biotech, pharma, minerals, and oil and gas
  4. Removed stocks selling for less than $0.05 and companies larger than $500M market cap

This left me with a list of 1,437 stocks that had a total market cap of just $80.6 billion. This is the third time I’ve gone through a similar list of OTC stocks. The first time was 2011 and the second was 2014. Not surprisingly, the 2016 trip through the list has been by far the least fruitful. The first time I went through in 2011 I found quite a few profitable net-nets, and even in 2014 I found a couple. While I didn’t uncover any interesting cigar butt-type investments this year, I did discover a few high quality companies.
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