Maximize Your Opportunities To ‘Bump Into’ Good Investments

During his recent interview with Tobias, Dan Ferris, editor of Extreme Value, discussed the importance of Maximizing Your Opportunities To ‘Bump Into’ Good Investments. Here’s an excerpt from the interview:

Tobias Carlisle:
How are you sourcing ideas? How do you come up with your ideas? Are you running screens? Are you just sort of a little bit more open to reading something that’s an interesting business? How does that happen?

Dan Ferris:
You know, I’m supposed to come up with some really cool answer here, but the truth is, I just like to maximize the opportunities for bumping into these things. I just want to take in … these days, I want to take in as much material as I can, so I will consciously, this is the systematic part I guess, I’ll consciously go to Wall Street Journal, Financial Times, every kind of publication or website that I can and I’ll always click on … there’s usually a Company tab, Companies or Businesses or something like that. I just want to see what’s around and I’ll look on … I found this one billboard recently, I can’t even remember what the heck it’s called, but it’s like hedge fund managers talking about stuff. I’ll read any kind of a newsletter just to see what the person says. I’ll read anything at least once. It’s just a matter of maximizing opportunity to bump into something new that you haven’t heard of, plus screening.

Dan Ferris:
I love screening. I like to screenings. I do Acquirers Multiple Screens.

Tobias Carlisle:
Appreciate that.

Dan Ferris:
Yeah.

Tobias Carlisle:
What about sort of a quality type screening? Are you just, “Show me all the stuff with the highest ROI, ROIC, ROE.” Is that one of the things you look at?

Dan Ferris:
Yeah, I just want to see what comes up, because no harm no foul, right? You run a screen and you get all this stuff you haven’t seen before and one of the things I like to do every now and then is mostly I screen for really good balance sheets. That’s a part of all my screens. Every now and then I think, “Hmm, maybe I am really missing something,” so I’ll take that out and just see what comes up. I can’t honestly say … it’s been a long time since I’ve found something. I think the last time I did away with that was when I found Prestige Brands Holdings, and it was right around the crisis, right around the bottom of the crisis in March or April 2009. It was like, “Wow,” and it was five times free cash flow, and this business doesn’t … they don’t do manufacturing or even distribution. They just own the brand. It was like a royalty-

Tobias Carlisle:
That’s great.

Dan Ferris:
Yeah. Back then it looked really cool. It doesn’t look as great to me now as it did then, but I thought, “Wow. Nobody wants this thing because it’s got $300 million of debt and the market cap is like $300 million,” and it came out of private equity and people feel funny about that sometimes.

Tobias Carlisle:
What does it own? What are the Prestige brands?

Dan Ferris:
It’s stuff like wart remover, like Compound W Wart Remover, and it’s changed over the years, but back then it was Compound W Wart Remover and Murine Eye Drops and Spic N Span cleanser and another type of a cleanser and some little products like that. They reported ACVs. I can’t even remember what ACV stands for, but the idea is that a 90% ACV means this brand is available in 90% of all the places where they sell this type of product, and their ACVs were 60 and higher on everything and some 80, 90. 99, I think one of them. I think Compound W was like 99 or something at the time. I thought, “Wow. It’s Microsoft Office. You can’t avoid the thing. And it’s gushing cash. It’s a low cap ex business model. I’m all in.” And we recommended the thing and got, I think it was close to a five bagger or so out of it. Yeah, it was 400 odd percent out of it, so it worked.

Tobias Carlisle:
So it’s things … you’re looking basically … for Prestige Brands, it was like if you think of tissue, nobody calls them tissues. Everybody calls them Kleenex. It’s like almost the thing … you don’t want wart remover, you’re looking for Compound W.

Dan Ferris:
Yup.

Tobias Carlisle:
It’s the thing that’s top of mind.

Dan Ferris:
Yeah, and it’s interesting that you named Kleenex, because that’s the classic example, but it doesn’t mean that you want to own the company that makes Kleenex, because people think anything that looks like that is a Kleenex.

Tobias Carlisle:
Right.

Dan Ferris:
So it’s got to be more like Office or even Coke. Coke is still … if you think sodas are a good idea, Coke is still one that a lot of people like to drink.

Tobias Carlisle:
Well, let’s talk about Coke. Do you have an opinion on Coke, because it looks expensive last time I looked at it.

Dan Ferris:
Yeah, you know, I’m not terribly wild about it because maybe it can’t grow so much anymore and maybe these things are fantastic ideas, can be fantastic ideas for decades and then they can become mediocre ideas. The one good thing I know about Coke is that if you have any kind of a drink product, you can’t get a better distribution network to be part of than Coke, so there is a chance there that if they can acquire something, if there’s a next hot type of a beverage that I’m not seeing and Coke acquires it and shoves it through that system … drinks cannot be … it’s not virtual. It has to be delivered to me and I have to put it in my hand, but for beverages, we kind of like things like Starbucks and Constellation Brands and stuff. They’re more addictive.

Tobias Carlisle:
You ever take a look at that chart for it? It’s Monster now, but it used to be Hansen’s Natural Beverages.

Dan Ferris:
Oh sure.

Tobias Carlisle:
It’s famous for it. My mother in law had the Hansen’s Natural Beverage way back in the day, always had them there, and I went and looked at the chart one day and the chart was up 50 thousand percent or something by the time I looked at it, and I was like, “Whoa. I missed the move in that one. I don’t know why.” And of course, it proceeded to go on and it’s gone up five times or something since then. Just unbelievable return on that thing.

Dan Ferris:
Yeah, those are interesting situations because I’m convinced that maybe there are people who can find them and know how to look for them, but they … I think I’m only going to luck my way into them. I lucked my way into multi-bagger on Constellation. I lucked my way into a multi-bagger on Prestige just because I was looking for some other characteristics and the brand name and stuff, I felt like I understood all of that, the franchise and the market domination. Constellation, same thing. My problem here is who the hell holds on for 50 thousand percent?

Tobias Carlisle:
Yeah, that’s the hard thing.

Dan Ferris:
It’s really hard. Who does that?

Tobias Carlisle:
They all have big draw downs, too, to get there. There’s a pretty famous chart, I think Morgan Hasler put together. If you held Amazon, to get the big returns in Amazon it was down 90% three or four or five times. Nobody can hold on through that.

Dan Ferris:
Yeah. Yeah. I thought … was he the one who did the, “If you bought it at the top of the dot com bubble-

Tobias Carlisle:
Yeah, that’s probably right.

Dan Ferris:
So I was like, “Yeah, that deal’s great for five years or ten years.” You’re going sideways or whatever. It’s really difficult to do that.

You can find out more about Tobias’ podcast here – The Acquirers Podcast. You can also listen to the podcast on your favorite podcast platforms here:

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