Below is a list of four companies we purchased in 2016 that gave us great returns and are of tremendous educational value.
Be aware, however, that just because we made investments in them in 2016 and they met our value screens, does not mean we would, or even could, invest in them today. We bought when the prices were right, economic fundamentals were strong, and their margins of safety were sufficient to qualify for investment.
Also keep in mind that for a few of these positons, the market was unjustifiably pessimistic about their future growth prospects – making them very hard to ignore.
Itron
Itron Inc. (ITRI, Financial) is the world’s largest provider of smart-metering systems for residential and commercial gas, electric and water usage. Itron supplies products such as basic manually read meters to networked devices with automatic real time data transmittal. Itron also sells a range of software platforms for utilities and building managers.
The need for metered energy and utility metering will only grow in the future, and Itron is one of the best positioned companies to take advantage of this growth. It is a growth business and, without question, a highly speculative firm as it has produced only modestly acceptable margins, returns, cash flows and a highly leveraged balance sheet.
At the start of 2016, Itron was trading at $36.43 per share against three-year average EPS of -$4.01. The company pays no dividends and repurchases only a minimal amount of shares per year. At year end, the stock traded at $62.85, leading to a superfast 73% rate of return.
MTY Food Group
MTY Food Group Inc. (ARCA:MTY, Financial) is the owner and franchiser of some of Canada’s best and most recognizable quick food service operators. Some of MTY’s top brands include Thai Express, Big Smoke Burger, ManchuWOK, Mr Souvlaki, SushiGo, Taco Time and many more. MTY’s restaurants can be found in food courts and shopping malls all around Canada, cinemas, strip-malls, amusement parks, hospitals, universities, airports and food-truck carts.
MTY’s strategy is to provide high quality food, treats and drinks at affordable prices. MTY is without question the most dominant fast-food retailer in the food court and shopping mall space in Canada controlling about 50% market share. MTY is a lucrative business with solid sales, margins, returns and cash flows, and it has a very healthy balance sheet.
At the beginning of 2016, MTY was trading at $33.20 per share against solid three-year average EPS of $1.34. The company has paid dividends every year since 2010 and has won consumers’ minds as one of the best places to eat fast foods. Near year end, MTY closed at $50.56, collecting 40 cents in dividends. This generated a 54% rate of return.
REX American Resources
REX American Resources Corp. (REX, Financial) is a holding company with equity investments in six ethanol production facilities, which in aggregate shipped approximately 655 million gallons of ethanol over the 12-month period ended July 31, 2016. REX's effective ownership of ethanol production shipped includes 243 million gallons. The supply of ethanol increased over the 2016 period compared to local U.S. demand, but the export market continued to offer opportunities for growth. As such, the company generated about $210 million in sales and almost $20 per share in earnings over the last three years – a phenomenal result for such a small firm. The company’s return on equity averaged 17% over the last three years and per share earnings grew at a rate of about 6.4% per year since 2007. Buying in at a reasonable price of $54.15, collecting no dividend and selling at $99.83 at year end generated a rate of return 84%.
Microchip Technology
Microchip Technology Inc. (MCHP, Financial) is a leading manufacturer and supplier of specialized semiconductor products primarily found in processors and controllers. Many of these products can be found in everyday consumer devices such as washing machines, refrigerators, vehicles, monitors, medical devices, safety and security devices and many more. Chances are Microchip’s technology is in one or two devices in your home right now. And one doesn’t have to think too hard to recognize the growing demand for “smart” technologies, including in our phones, appliances, cars, climate control systems, alarm systems, elevators, airplanes, airports, shopping malls, hospitals –Â you name it, it will likely somehow transform into a “smart” product eventually.
Microchip’s stock price has steadily increased over the last 10 years as it has always remained a fantastic company with a strong sustainable competitive position. Market analyst currently have a BUY rating on the stock. Microchip’s 2016 profits were $324 million on revenues of $2.173 billion. Buying at the start of the year at $44.15 per share against three-year average EPS of $1.65 equates to an initial “zero growth” rate of return of 3.7%. It also had a book value of $10.54 per share. By year end it was trading at $64.75 a share and had paid $1.43 in dividends, which equates to an annual rate of return of 49.9%.
Conclusion
Time will tell what 2017 has in store. A key lesson we learned last year was that we must stick to our guns and never deviate from our investment philosophy. The trick is to always invest in businesses with substantial competitive strength that sell at substantial discounts to intrinsic value.
Disclosure: We no longer hold any positions in the companies discussed in this article.
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