Today (April 20, 2015), we sold off our remaining position of Manhattan Associates (MANH, Financial). We first purchased the stock in May 2008 for $4.40/share. We are selling it today at $45.18/share. Since inception, the stock has produced a return of roughly 1,115%, or a 35.5% annual return compared to the S&P 500’s 8.8% annual return over the same period.
We are doing this solely because of the stock's valuation. Using a DCF model assuming a WACC of 9.5% and FCF average growth of 14% over the next 10 years (slightly less than the previous 10 years), we believe the stock is now roughly 45% over its estimated fair value. We believe these growth estimates are high - but doable - for MANH's management team. We estimate free cash flow to increase from $84M in 2015 to $275M in 2024.
With market valuations as they stand today, we don’t have a replacement for MANH in the portfolio. Our cash balance is now roughly 21% of AUM. This is perhaps the most difficult time to be a value investor. Faced with an extraordinary run up in prices, we have now parted with two companies we remain extremely positive about – FactSet Research (FDS, Financial) and Manhattan Associates (MANH, Financial). While pleased with our total returns, it will inevitably gnaw at us with that painful “what if?” feeling. More importantly, the pressure to reinvest these monies can be almost overwhelming.
As value investors we must be intensely focused on valuation and a margin of safety in our investment process. At its current trading price, it is simply not possible to see any path forward producing an adequate return with MANH. Regardless of how we feel (and let’s face it - this plays a role), it is simply good investing policy to follow the data wherever they may lead.
Accordingly, we will exit our entire position by end of day and place the stock on our watch list.
