JHVEPhoto/iStock Editorial via Getty Images
The following segment was excerpted from this fund letter.
In December, Freshii received an all-cash take-over offer of CAD 2.30 from Foodtastic, representing a ~ 130% premium to the prior closing price. More importantly, I believe that it’s a fair offer given the challenges that the company is going through. I sold our shares given the liquidity event and the fairly narrow spread to the offer price.
While we ended up making a small profit on our investment, this was clearly an unsuccessful investment for the partnership. The lack of success is due to 1) my mistakes in analyzing the situation and 2) the subsequent impact on the business due to COVID. Of the two, I believe the former to be the larger contributor.
When I initiated the investment, Freshii was already in turnaround mode. Its same-store sales were declining, despite a healthy economy. It had suffered from overly rapid expansion, poor quality of franchisees and poor logistics in the new markets into which it had expanded.
I had written before on the best way to invest in turnarounds – after the key operating indicators have turned, showing the turnaround is moving in the right direction. In this case, I had ignored my own advice. Why? A combination of a really cheap stock, a founder with a meaningful stake in the business, and a pristine balance sheet with a large cash cushion.
In the end, those factors proved insufficient. COVID certainly exacerbated the problems given that a good portion of the business was dependent on the urban lunch business driven by people who worked in downtown areas. However, it’s not clear that the business would have turned around even in the absence of the pandemic.
Cash, while a nice cushion, also began to decline in the most recent quarters. So the lesson for me is clear – listen to my own insights and don’t invest in turnarounds unless there are already indicators of a turn in key performance metrics.
All of that being said, to have a mistake result in a small gain is a pretty decent outcome. Obviously, not all mistakes will lead to gains – some will result in losses. In general, the partnership’s results will be driven by a combination of the percentage of investments that I get right and the asymmetry between the gains on the winners and the losses on the losers.
So the silver lining here is that our focus on margin of safety and valuation discipline did its job – a mistake didn’t lead to a loss of capital. That is the whole point of margin of safety – we want to have the cushion for things to go worse than we had expected and still avoid permanent capital loss.
IMPORTANT DISCLOSURE AND DISCLAIMERSThe information contained herein is confidential and is intended solely for the person to whom it has been delivered. It is not to be reproduced, used, distributed or disclosed, in whole or in part, to third parties without the prior written consent of Silver Ring Value Partners Limited Partnership (“SRVP”). The information contained herein is provided solely for informational and discussion purposes only and is not, and may not be relied on in any manner as legal, tax or investment advice or as an offer to sell or a solicitation of an offer to buy an interest in any fund or vehicle managed or advised by SRVP or its affiliates. The information contained herein is not investment advice or a recommendation to buy or sell any specific security. The views expressed herein are the opinions and projections of SRVP as of December 31st, 2022, and are subject to change based on market and other conditions. SRVP does not represent that any opinion or projection will be realized. The information presented herein, including, but not limited to, SRVP’s investment views, returns or performance, investment strategies, market opportunity, portfolio construction, expectations and positions may involve SRVP’s views, estimates, assumptions, facts and information from other sources that are believed to be accurate and reliable as of the date this information is presented—any of which may change without notice. SRVP has no obligation (express or implied) to update any or all of the information contained herein or to advise you of any changes; nor does SRVP make any express or implied warranties or representations as to the completeness or accuracy or accept responsibility for errors. The information presented is for illustrative purposes only and does not constitute an exhaustive explanation of the investment process, investment strategies or risk management. The analyses and conclusions of SRVP contained in this information include certain statements, assumptions, estimates and projections that reflect various assumptions by SRVP and anticipated results that are inherently subject to significant economic, competitive, and other uncertainties and contingencies and have been included solely for illustrative purposes. As with any investment strategy, there is potential for profit as well as the possibility of loss. SRVP does not guarantee any minimum level of investment performance or the success of any portfolio or investment strategy. All investments involve risk and investment recommendations will not always be profitable. Past performance is no guarantee of future results. Investment returns and principal values of an investment will fluctuate so that an investor’s investment may be worth more or less than its original value |
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
Be the first to comment