Greenhaven Road Capital is bullish on Envirostar Inc (NYSEAMERICAN:EVI), a $398-million market cap company that distributes commercial laundry, dry cleaning equipment, and industrial boilers. In its Q4 investor letter (you can download a copy here), Greenhaven, led by Scott Miller, discussed its investment thesis on Envirostar and other companies – we’ve already covered Fiat Chrysler Automobiles NV. In this article, we’re going to take a look at the fund’s comments on Envirostar.
Talking about Envirostar, which is the only publicly-traded distributor of commercial, industrial, vended laundry products and industrial boilers in the U.S. laundry industry, Miller said:
In the last letter, I discussed the shortcomings of a short report released on EnviroStar and postulated that we might one day thank the author of the report for creating a buying opportunity. That has in fact turned out to be the case thus far because the share price has recovered from below $25 to above $35. In December, I had the opportunity to go down to Florida to attend the EVI annual meeting, where I met the CEOs of companies EnviroStar has acquired. EnviroStar has been executing a “Buy and Build” strategy, buying successful operators in the commercial laundry distribution space and paying for the companies with a combination of cash and stock.
The CEOs typically stay on to run their companies as divisions of EnviroStar. This roll-up strategy does not rely on synergies through cuts or integration. Rather, the belief is that EnviroStar can help build these acquired companies. Quite frankly, if you can use stock trading at 15X+ to buy companies at 5X, the build part does not need to work for the financial model to work, but the returns and quality of the underlying company are much better if it does – and spending time with the underlying CEOs increased my conviction that it can. Each CEO is pursuing strategies that either were not viable for the previously smaller entity or are directly borrowed from another EnviroStar company. More important than these individual strategies was the quality of the executives themselves.
These were CEOs running growing and profitable businesses; they did not have to sell to EnviroStar. Each CEO had a slightly different rationale for selling, but the themes were: wanting to be part of something larger, expecting their business to prosper through the relationship, and believing that EVI is the future in their industry. Teams matter, culture matters, incentives matter. EnviroStar has a really interesting combination. Obviously, the annual meeting is a dog and pony show and only a small window into a company, so all of the data collected is taken with more than a grain of salt, but I continue to believe that Henry Nahmad has a real shot at continuing to buy and build his way to a substantial business.
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Envirostar Inc (NYSEAMERICAN:EVI) distributes commercial, industrial and vended laundry and dry cleaning equipment and steam and hot water boilers as well as provides installation and maintenance services to its customers. The company also designs laundry, dry cleaning and boiler systems for its customers, which include institutional, retail, industrial and commercial customers.
Shares of the company are down nearly 8% so far this year. However, 2017 was a good year for Envirostar as the stock gained a whopping 175% in the last calendar year. Over the past 12 months, EVI moved up more than 50%.
For the three months ended December 31, 2017, EnviroStar reported net income of $1.51 million, or $0.13 earnings per share, versus net income of $1.32 million, or $0.13 per share, for the same period of 2016. Revenue were $36.1 million for the quarter, versus $33.4 million for the same period in the year before.
In this piece, we will take a look at ten recent IPOs in micro cap stocks.
There are a variety of benefits and drawbacks to listing a firm’s equity for trading on the stock market. The single biggest benefit of the process called an IPO, is that it allows management to raise large amounts of funds and investors to potentially profit by seeing their existing stakes multiply in value. At the same time, the IPO process also brings in a variety of constraints. Publicly listed companies are subject to corporate financial reporting requirements of the jurisdictions in which their shares trade. At the same time, share prices can be a volatile affair, and while investors stand to gain significantly if their companies are well received by the market, they also risk equally massive losses should the opposite occur.
Warren Buffett never mentions this but he is one of the first hedge fund managers who unlocked the secrets of successful stock market investing. He launched his hedge fund in 1956 with $105,100 in seed capital. Back then they weren’t called hedge funds, they were called “partnerships”. Warren Buffett took 25% of all returns in excess of 6 percent.
For example S&P 500 Index returned 43.4% in 1958. If Warren Buffett’s hedge fund didn’t generate any outperformance (i.e. secretly invested like a closet index fund), Warren Buffett would have pocketed a quarter of the 37.4% excess return. That would have been 9.35% in hedge fund “fees”.
Actually Warren Buffett failed to beat the S&P 500 Index in 1958, returned only 40.9% and pocketed 8.7 percentage of it as “fees”. His investors didn’t mind that he underperformed the market in 1958 because he beat the market by a large margin in 1957. That year Buffett’s hedge fund returned 10.4% and Buffett took only 1.1 percentage points of that as “fees”. S&P 500 Index lost 10.8% in 1957, so Buffett’s investors actually thrilled to beat the market by 20.1 percentage points in 1957.
Between 1957 and 1966 Warren Buffett’s hedge fund returned 23.5% annually after deducting Warren Buffett’s 5.5 percentage point annual fees. S&P 500 Index generated an average annual compounded return of only 9.2% during the same 10-year period. An investor who invested $10,000 in Warren Buffett’s hedge fund at the beginning of 1957 saw his capital turn into $103,000 before fees and $64,100 after fees (this means Warren Buffett made more than $36,000 in fees from this investor).
As you can guess, Warren Buffett’s #1 wealth building strategy is to generate high returns in the 20% to 30% range.
We see several investors trying to strike it rich in options market by risking their entire savings. You can get rich by returning 20% per year and compounding that for several years. Warren Buffett has been investing and compounding for at least 65 years.
So, how did Warren Buffett manage to generate high returns and beat the market?
In a free sample issue of our monthly newsletter we analyzed Warren Buffett’s stock picks covering the 1999-2017 period and identified the best performing stocks in Warren Buffett’s portfolio. This is basically a recipe to generate better returns than Warren Buffett is achieving himself.
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