LA INTRODUCCIÓN
En uno de mis últimos artículos* en Rankia presente una historia rarita sobre un club de inversión* especializado en microcaps, unas sospechas de “Front Running”, y un sistema de inversión cuantitativo para pequeñas empresas. El lio era gordo. La emoción asegurada.
También quedo un tema pendiente en relación a una tesis de inversión que un servidor tenia que enviar al susodicho club a fin de valorar mi admisión como miembro.
Así que, ¿Sabes que vamos a ver hoy?
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Te mostraré la tesis de inversión.
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Veremos si me han aceptado o no en el Micro Cap Club.
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Descubriré al mundo una empresa que es un auténtico cohete untado en salsa pesto.
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Pegaremos un vistazo al comportamiento del sistema en medio de un “Market Turmoil”.
*https://www.rankia.com/blog/guts-glory-and-markets/4437419-small-caps-club-35-anualizado
LA TESIS
Las empresas que el sistema Small Caps Club encuentra no acababan de satisfacerme. Todas eran complejas, con múltiples líneas de negocio, no había una historia sencilla de explicar, ni fácil de entender. Así que al final diseñe un sistema, que caía en la bancarrota más absoluta al lanzar el backtest, pero que encontraba empresas fáciles de entender. Margenes crecientes, balances saneados, grandes retornos sobre el capital, en fin, todo lo que se le puede pedir a una empresa.
¿Por que el sistema se hundía? Pues no tengo ni idea, pero no me importaba, yo solo quería una pequeña empresa con unas características concretas. Y la encontré.
Llegué a una pequeña gran compañía. Solida como una piedra. Dirigida con cariño y experiencia por un octogenario. Familiar. Defensiva. Con unos margenes sorprendentes. Un crecimiento tremendo. Y que encima reparte dividendo.
La empresa solo tiene dos “pero”. El primero que durante los últimos 10 años ha subido bastante, un 600% aproximadamente, quitándole “upside potential”.
El segundo “pero” es que solo tiene dos clientes importantes, con lo que su dependencia de estos la deja en una situación de relativa fragilidad.
Armanino Foods of Distinction Inc.
Ticker: AMNF
Shares outstanding: 32 million
Market cap: $111.59 million
Cash: $8 million
Debt: $3 million
Enterprise value: $106.6 million
Armarino Foods is a small cap founded in 1978 and is based in Hayward, California. This company is in the Italian food business and produces Italian sauces, pasta and meatballs. Its pesto products have been in existence for almost half a century. Armanino offers its products under their own brand and markets frozen and refrigerated products through a network of food brokers, as well as selling to retail and food service distributors. Armarino Foods employs 42 people. Since August 2005 the company’s common stock has been quoted on the OTC Market and prior to August 2005 the company’s common stock was traded on NASDAQ.
The Board of Directors have 2,165,000 shares of common stocks, the CEO owns 445,000 shares, the Chairman of the Board owns 777,387 and the Director of Sales owns 626,975 shares.
In 2018 the company acquired a total of 3,102,135 shares of its common stock. The total number of shares repurchased represents approximately 9% of the company’s common shares outstanding before the stock repurchases.
The Board of Directors have authorised the company to repurchase up to $2,500,000 of the company’s stocks at market prices.
The last years that they acquired shares were in 2010, 2011 and 2012. I do not know if that behaviour will continue in the future, but certainly I like companies that repurchase their own stocks.
In 2019, the company issued 450,000 shares of phantom stock to their management with an exercise price of $3.33. They are allowed to do it again until 650,000 phantom shares. Those shares are non-dilutive to AMNF's common stock and excludes voting and dividend rights.
There is a lot of competition in AMNF's business and the entry barriers are only of scale. Their products are more expensive than just dried and packaged Italian food, but the focus AMNF keeps on natural ingredients and quality (they are Certified Organic by California Certified Organic Farmers) allows them to maintain higher prices than their competitors.
The original CEO and co-founder of the company, William J. Armanino, died in 2009 and longtime director and former COO, Edmond J. Pera, took over at that time and has been running it ever since. He began at the company in 2000. Mr Pera was the owner of a consulting firm specialising in start-ups and also held positions in big companies like Levi & Strauss and Advanced Communications, so I think he knows what to do in business and probably has learned a lot from other people's mistakes. He earns a very reasonable $400k salary.
Deborah Armanino is the Director of Sales. She has been at AMNF since 1988 and I like seeing a member of Armanino's family preserving their good name and reputation. She, like Mr Pera, owns a big stake of company shares. The only negative factor of Mr Pera is that he’s 77 years old. If something happens to him (retirement is a possibility) he could be replaced by a less efficient CEO.
The Return on Capital, 23.78% TTM, is far better than their sector median (3.81% TTM). The AMNF's five year median growth rates are about 7.7%, more than double the sector median (3.07%). Also their EPS median of the last five years is about 14.87%, again almost double that of the sector median (8.41%). The company’s annual income before taxes grew by 12% over last year. EPS growth the last seven years is at a median of 16%. Cash Flow growth the last seven years is at a median of 17%. The company has achieved 17 profitable years in a row, 65 quarters, which is no small feat.
(source: Portfolio123)
Since the company has more cash ($8 million) than total debt ($3 million) I do not foresee any financial risk ahead.
The only thing I do not like about AMNF is that they pay dividends: $0.12 each share in 2019. The pay out ratio as a percentage of net income is high, 50% TTM, and the dividend as a percentage of Free Cash Flow is around 45%. In my opinion a small cap must focus on growth not on dividends.
Only eight mutual funds and two institutions currently hold Armanino's shares. They hold 2,050,464 shares. The institutional presence increased significantly in 2018.
(source:Morningstar.com)
(source: GuruFocus.com)
The company has a full time Research & Development Department that continually explores the addition of sauces, sandwich spreads/dressings and stuffed pasta products to enhance the food service and retail lines of products in the future.
What about comparables? I have compared AMNF with the following companies that are in the same industry and have a similar size: SWSSF, PME, BRID, CSEAF, SENEA.
AMNF has the smallest P/E (16.25, as of writing), with the highest ROE (33%) and ROI (29%) of the whole group. The total debt to equity ratio is also the smallest of the group.
(source: Portfolio123)
I valued shares using a DCF model analysis. Using a 10% discount rate and 15% long-term growth rate (the AMNF's median growth rate for the last seven years) that gives me a fair value of 4.9, which is about 33% higher than what shares trade at today. So I think a substantial margin of safety is present.
If I valued shares using a 10% discount rate and a 10% long-term growth rate, that gives me a fair value of 3.49, which is just 7% higher than what shares trade at today.
Historically the business has been astonishingly profitable, but what about the possible catalysts ahead?
The trend in all factors for AMNF – double-digit growth, sales, margins and even dividends – makes me think that this trend will continue in the years to come and the stock price will follow. Companies this good are rarely cheap; AMNF is not cheap, but certainly not expensive either.
We must also consider that the food industry is at the beginning of a secular trend of consumers demanding products centred on natural and 'healthy-halo' ingredients. Organic food is a megatrend. As Whole Foods reports, "Organic products have grown on average more than 20% per year over the last 7-10 years, making it the fastest growing segment of agriculture". Besides this, Italian food is also a trend, in the USA and also the world.
For instance, if you compare Google searches over the past five years between the terms 'Italian food' and 'French food', the growing trend clearly favours Italian food.
AMNF can take advantage of these trends.
(source: GoogleTrends)
There is the possibility that AMNF will decide to focus their marketing campaigns on Asia as they already have one stake there (10% of their sales) and may try to grow their sales in the region. It's probably just a matter of investing more money in advertising and marketing. The future market and the potential growth for the company could be enormous.
Also, we should consider the possibility that a big food company could acquire Armanino and then see dividends come in.
And finally, as the market prefers companies with steady and constant growth rather than strong growth with a random component, AMNF has this factor which will continue to attract investors.
In addition to all the factors I have mentioned, in my opinion the market opportunity is in the recent downtrend the stock has initiated, probably due to their recent decrease in Asian sales, that we must remember only represents 10% of AMNF's sales.
(source: ProRealTime)
If that downtrend continues, probably in months ahead we will see a great buying opportunity, maybe around the $3 or $2.4 zone.
Meanwhile...
Wait and watch AMNF.
LA CONCLUSIÓN
Hace escasos dos días ha llegado este mensaje a mi correo electronico.
Thank you for applying. Unfortunately, your application didn't receive enough votes at this time to gain admission. We had 10 applications in February and only 2 gained approval. We think what hurt your application is the limited upside potential given your analysis. We think you should apply again with an idea that has more upside potential. You are obviously talented, so we hope that you apply again in another 90 days. We are always looking to add more passionate microcap investors to our community.
Si. Ya lo sabia. La única “pega” de mi tesis de inversión sobre Armanino Foods es que plantea una escenario de escasa revalorización a corto plazo. De hecho en mi tesis aventura una tendencia bajista, con posterior rebote por factores técnicos como la mejor posibilidad de obtener una buena revalorización. El escenario bajista se esta produciendo actualmente. En base al DFC y en su mejor planteamiento, solo preveía una revalorización de aproximadamente el 30%.
Los chicos del Micro Cap Club no se conforman con migajas. Ellos quieren pasta. Pasta gansa. Pasta gorda. Pasta de la buena, la que viene en billetes grandes.
De hecho, al invitarte a mandarles una tesis de inversión ya avisan:
We are looking for companies that can appreciate 100% or more over the next 12-24 months
¡¡Como si fuera tan fácil encontrar empresas que se revalorizen un 100% en un par de años!!
Y claro, mi “pobre” 30% de “upside potential” les ha sabido a poco.
¿Te ha gustado la tesis de inversión en AMNF?
¿Crees que le falta algo?
¿Crees que le sobra algo?
EL SISTEMA
Pero pero pero... Monday...
¡¡¿¿Como va tu sistema basado en Micro Caps al que alegremente pensaste en bautizar “The Killer”?!?
El sistema... RESISTE.
Ha tenido un comportamiento excelente, obteniendo un rendimiento superior al del S&P500, a pesar de su corto recorrido, y actualmente se encuentra unos 3 puntos por encima del S&P500, que no es poca cosa para un sistema que solo compra micro caps y en medio de semejante ¡¡MARKET TURMOIL!!
