We operate in an industry which craves activity and excitement. Many who work in the industry are paid based on trading volume, banking deals or short-term investment performance. I thought this would be a good chance to reflect on the benefits of taking a longer term view through a couple examples.
Sylogist (SYZ CN) was discussed in an earlier post “What we look for in a stock” as being a simple, boring business run by a smart and well aligned CEO. The business generates significant free cash flow and we trusted management to deploy it intelligently. After all, he is one of the largest shareholders. When we began buying shares, the valuation was highly compelling at around $2. All we needed to do was be patient and let the CEO run the business.
Fast forward a couple years, the company has grown organically, made some very intelligent deals and continues to raise its dividend. Sylogist has executed more quickly and at a higher level than was originally envisioned when the initial investment was made. Over time, we have steadily added to our position and despite the shares now trading at over $9, we remain excited about the long term future prospects. By taking a longer view, with good businesses run by smart and well aligned management teams, you tend to have positive surprises. While it can be less exciting than trying to make a quick buck here and there, it tends to be a lucrative strategy over the long-term, as long as you pay a reasonable price.
Now let’s look at a different example, Imvescor Restaurant Group (IRG CN). We have been shareholders in this company for some time. We are believers in the CEO and his ability to continue to drive improvement in the business. Imvescor has substantially delevered its balance sheet and worked to shed or fix underperforming locations across different brands including Baton Rouge, Mikes, and Pizza Delight. While at the same time, it has grown other parts of the business (i.e. sales of branded products). There is no question that the market has now picked up on some of the improvements. However, we believe the best course of action is to be patient and let the turnaround – which has a lot of runway left – continue.
Not everyone shares our view.
For example, recently a hedge fund issued a letter publicly pushing for a substantial dividend to be initiated. While it would likely provide a short term boost to the shares, we believe this is the wrong thing to do. Like many other hedge funds, when the quick buck is made they will be off to the next project and the company will be left to deal with the consequences. We would not be opposed to a modest dividend at the right time, but retaining additional cash for the time being remains a more prudent course of action. In doing so, they would have added financial flexibility to take advantage of merger and acquisition opportunities and high return internal projects. Also, it provides a buffer in the event of any short-term issues coming up since things certainly do not always go as planned.
While this may mean less multiple revaluation in the short-term, we like to take a longer term view and believe management teams appreciate these types of shareholders driving stronger relationships with key decision makers. We hope, as always, that the board does what is in the best interest of a company and longer term oriented shareholders.