In his 2015 Shareholder Letter, Constellation’s Mark Leonard provided a great illustration, using (JKHY) Jack Henry & Associates Inc, of why good companies are not always great stocks. Here’s an excerpt from the letter:
There’s one last lesson from JKHY that I’d like to share. It relates to you as shareholders. There was a ten year period during which JKHY’s shares both underperformed the S&P 500 (2000 until 2010) and didn’t make any money for shareholders. The underperformance vs the S&P 500 was minor… approximately 1%. JKHY’s revenues per share and ANI per share had compound average annual growth rates of 14% and 21%, respectively during that decade.
Why did stock results and operating results diverge so widely for such a long period? It had to do with shareholder expectations and market exuberance. The general mania which gripped the market in 2000, and the more specific enthusiasm for JKHY’s stock which then traded at well over 60 times ANI, left shareholders incredibly vulnerable.
When the market “corrected” the JKHY stock had no margin of safety.
When really good companies start trading at 5 and 6 times revenues, it’s time to start worrying. I hope our shareholders are never in that position.
You can read the entire letter here:
Constellation Software Shareholder Letter 2015
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