Companies, and their shareholders, can do everything right and still not be rewarded.
But not forever, according to Real Money Columnist Paul Price.
“Griffon (GFF) has done nothing wrong over the past nine years,” Price wrote recently on Real Money. Yet in spite of fine financial performance over that period, “continuous shareholders only made gains that represented a fraction of the true value created. By definition, that can only happen due to price-to-earnings compression.”
The good news is that “situations like that tend to reverse themselves over time, typically rewarding buyers near cheap entry point valuations with outsized gains.”
So, what’s going on here?
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Griffon is what’s known as conglomerate, or a holding company. This means that the Griffon corporation itself conducts little or no consumer-facing business. Instead it manages its network of subsidiary companies. These subsidiaries do the revenue-generating business, and the profits of Griffon reflect the strength of its overall network of businesses. In the case of Griffon, its subsidiaries work across industries ranging from home goods to telecommunications.
And Price sees a business that has done very, very well. Over the nine year period that he reviewed, earnings per share grew by 540% and dividends to shareholders more than tripled. Who wouldn’t want to hold that stock?
Apparently a surprising number of investors, because in that same period GFF’s stock price ticked up from $11.83 to $20.56 per share. Price considers this a significant under-valuation for the stock, one which he expects to resolve itself over time.
Shares have seen five notable selloffs in recent years. “The average decline averaged 42.7% from peak to trough. They took about 4.6-months to play out,” Price noted.
“The four recoveries lasted longer, at around 11.7-months, and ultimately delivered much more powerful gains averaging 138.3%. Clearly every previous major selloff in Griffon presented a great opportunity for buyers at the nadirs to capture more than triple the magnitude of the declines.”
And now, Price writes, we have entered another cycle in which Griffon is selling for much less than he thinks it’s worth.