Widely followed investor Bob Olstein appeared on Fox Business last week to celebrate the rise this year of his undervalued stocks that languished last year, leading his all-cap value fund to a 16% gain and his small-cap fund to a 25% rise. Olstein, a quintessential value investor, also intervenes at usually smaller companies where he thinks management could unlock more value. This year, in a 10-year retrospective, he named some of them.
“While each investment is at a different strategic stage, we believe the actions that have been proposed or implemented should improve future free cash flow which is currently not being valued by the market, leading to the potential for above-average price appreciation,” the letter said.
Olstein listed roughly 17 companies where he had activist investments as of Sept. 30. The largest were Legg Mason Inc. (LM, Financial), Vitamin Shoppe Inc. (VSI, Financial) and Owens-Illinois Inc. (OI, Financial).
Legg Mason, a global money management firm, also happens to be Olstein’s largest position at 2.49% of his equity portfolio of 106 stocks. Investment managers such as Royce & Associates and Western Asset Management operate as its affiliates.
Legg Mason has a $3.26 billion market cap and $707 billion in assets under management as of Nov. 30 but has seen a steady outflow over the past quarter, dropping each month from $732.9 million in September. Assets remain higher than their $671 billion level in December last year.
The market price for shares of Legg Mason dropped roughly 19% year to date, to $32.34 per share Monday afternoon. Free cash flow, which Olstein said his activist efforts target to raise, has been positive for the past decade, already growing at a steady 11.6% average annual rate for the past five years. As long as Olstein has invested in the company, since 2010, its shares have advanced 12%.
Legg Mason used cash flows provided by financing activities to repurchased 6.2 million shares for $201.7 million and pay $44.1 million in dividends in the six months ended Sept. 30. In the third quarter, their average repurchase price was $33.36 per share. Legg Mason also trades for less than book value, with a price-book ratio of 0.75.
Olstein also holds 587,745 shares of Vitamin Shoppe Inc. (VSI, Financial), a roughly 2.47% stake, and bought it in the second quarter 2013. Its share price year to date dropped roughly 23%, prolonging a 32% five-year slump. The small retailer has a $600.2 million market cap and sells vitamins, minerals, herbs and other wellness products, competing with companies like GNC Holdings (GNC, Financial) and Nutraceutical International (NUTR, Financial).
Vitamin Shoppe has had difficulty generating robust free cash flow, leading it to drop at an annual rate of 8.5% over the past five years, as revenue grew at a rate of 10.6% and EBITDA at a rate of 9.8% over the same time.
The company in 2015 sold $143.8 million in convertible notes to repurchase common shares. In the first nine months of 2016, it expended $56 million of its $300 million share repurchase program to buy back 1,919,132 shares at an average price of $29.19. The repurchase was partially funded by a $23 billion increase in financing activities.
Vitamin Shoppe investors can expect vast growth through its international expansion. The company launched its first franchise stores in Paraguay in December, bringing its number of international franchise stores to 16 in four countries.
Third, Olstein owns roughly half a percent of Owens-Illinois Inc. (OI, Financial)’s shares. The company, which has a $2.93 billion market cap, manufactures glass containers used in food and beverage sectors for products like beer, wine and pharmaceuticals. Year to date, Owens-Illinois share price has risen roughly 4% but remains down about 10% over five years, closing at $18.10 Monday. Olstein started his position at the end of 2014.
The company has produced free cash flow every year since 2007, with a 16.8% five-year annual growth rate, and it is expecting $300 million for 2016. For the full year, Owens-Illinois has forecast double-digit growth in earnings and plans to use the free cash flow to pay down debt, with no dividends paid.
The company has several indicators of undervaluation, including a price-earnings ratio at 10.3, near a five-year low, and a share price below the Peter Lynch earnings line.
See Bob Olstein's portfolio here.
