Sprouts: A 50% Win in Just Five Months
That return from our "Super 10" stock is like 187% annualized ...
In our SPC Premium paid-up service, all our Model Portfolio companies have holding periods of years — even up to a decade — because that’s the Wealth Builder way.
According to author Morgan Housel, the optimal time horizon is “probably around 10 years or more.”
You can look at the flip side but will still essentially reach the same conclusion: The shorter the holding period, the more likely you are to record a loss.
So when you make any investment, you want to go in with the idea that you’ll be holding it for at least a decade.
There are exceptions, of course: And one of the biggest is “special-situation investing,” which includes breakups, spinoffs, M&A, buybacks, activist investing, misunderstood business models, and more.
This area of investing can offer outsized returns in a compressed timeframe.
But the caveat is you’re still investing in quality companies you understand and are comfortable owning even if what Chief Stock Picker Bill Patalon calls a “trigger” isn’t pulled.
In other words, if something like a takeover doesn’t happen or a spinoff gets cancelled … you still like the company you own.
One of those companies in our “Super 10” Special-Situation Model Portfolio was Sprouts Farmers Market Inc. (SFM).
While the grocery market isn’t particularly exciting, we did like that Sprouts’ gross profit margin demolishes its competitors and its distribution set up.
In terms of special-situation triggers, Sprouts has two: It approved a $600 million share buyback in March and could be an eventual takeover target.
We recently told our SPC Premium members who followed along to cash out of Sprouts when shares were up around 50% from where we added it to the portfolio.
We didn’t hold onto the shares long enough to see either of those special-situation kickers fully play out. But with all the uncertainty swirling around the economy and financial markets, we decided to take what the market gave us — a gain of nearly 50% in under five months (an annualized return of 187%).
As one of Bill’s mentors used to tell him: “You never lose when you’re making money.”
And that’s the lesson to focus on that anyone can follow and implement into their own investing strategy: Our portfolios have a purpose, and we have a plan and execute on it.
We make time our ally with holding periods of years and let the ebbs and flows of the market play out for our Model Portfolio, knowing that stocks usually march higher over the long run. With the Special-Situation Portfolio, we aren’t afraid to take gains off the table when they’re handed to us. That’s because we know that portfolio is designed for those potential outsized returns in the short-term. Like with any portfolio, not all positions are current winners, but in the Special-Situation Portfolio’s short existence since September, with the previous winner Dutch Bros Inc. (BRO) and now Sprouts, the average return of our “sold” positions is 53%.
We try to keep things simple, and investing doesn’t need to be overly complicated.
Just to highlight how we put that practice into action, here’s the original Sprouts research we sent to SPC Premium members in September.
Product: Sprouts sells groceries through 415 stores in 23 states, with a focus on healthy and organic products.
Why We’re Watching It: Sprouts’ mantra is healthy products at affordable products. It keeps items fresh with 80% of stores within a 250-mile range of its distribution centers. It bolstered its online shopping experience with an UberEats deal. The gross profit margin of 37.38% trounces both Walmart Inc. (WMT) and Kroger Co. (KR). In March, Sprouts also approved a $600 million share buyback.
Special-Situation Kickers: Sprouts has two kickers: Share buybacks and a possible takeover. The buybacks reduce the “float” — the supply of shares. And the takeover could make it a “bolt-on” target for a company like Walmart, America’s top grocer. Sprouts CEO Jack Sinclair previously worked at Walmart as its executive vice president of the entire U.S. grocery division, which gives him an interesting insight into both companies. But as we’ve seen with Kroger trying to merge with Albertsons Companies Inc. (ACI), there are obstacles. Kroger and Albertsons have reportedly spent $800 million in lawyer, banker, and advisor fees to try to finalize the merger.
Risks: Similar to Dutch Bros, a lot of Sprouts’ upside is predicated on growth. The company has already scaled back its store-opening plans for the year from 40 to 34 — which is “anti-growth.” It’s also regional — not national — with stores in just 23 states. The five-year earnings growth rate is low at about 9%.
That’s it for this morning.
Take care,
