What Are the "Big 3" We Look For?

Transcript

In the past, we have talked about the big three as it pertains to the Value Plus Fund (HNVIX, HRVIX). 

As a quick recap, capital allocation decisions and signals for management teams are vitally important to our analysis as portfolio managers and analysts. The big three that we choose to focus on for the Value Plus Fund specifically are active stock buybacks, dividend increases, and insider buying by management teams and or directors. Ideally, we want companies that we are investing in to be hitting at least two out of three of the big three and currently for the Value Plus Fund, about 67% of the portfolio does hit at least two out of the big three. 

So, I wanted to give a concrete example of how we apply the big three to our analysis in real time. 

I want to talk about Primo Brands (PRMB). This is one of our core holdings today. Primo Brands is a staple stock. It focuses on water and delivering water jugs to either your home directly or to big box, Home Depot, Lowe's type stores where you as a consumer can pick them up from the store. So, the stock is up about 50% this year. So, you might think that we are cherry picking a high performer to pat ourselves on the back. On the contrary, we were too early on this stock. We established a very small position in this stock about a year ago and saw the stock drop about 30% shortly after establishing our position due to some integration issues. So not a great situation. We found ourselves in a bit of a conundrum. 

Do we cut our losses and exit? Do we hold tight to our add to our position? So this is where our focus on the big three was very important and helped our decision-making process. 

So what happened? So soon after this sell-off, we saw insider buying, what we call cluster insider buying by the CEO, CFO, and a director. Good signs. 

Additionally, the company opted to increase its dividend. And simultaneously, The company also was very active on its stock buyback program. 

So why do we care? What is this telling us? It's telling us two very important things. One, insiders think the stock is undervalued. Thus the insider buying, thus the stock buyback program. They think they're buying the stock at a discount. Two, the management team and the board of directors is very confident in the future cash flows of the company. You would not increase the dividend unless you're confident in the future cash flows of the company. 

So, as we analyzed the fundamentals of the company, looked at valuation, and specifically focused on the big three, this gave us confidence to add to our small position, making it the core position it is today.