In a recently published Greenhaven Road Capital‘s Q1 2019 Investor Letter (download here), the fund reported 16% net return for the quarter, while also sharing its opinion on several stocks it has invested in. Among those stocks was EVI Industries, Inc. (NYSE:EVI), for which Greenhaven Road Capital said the following:
“EnviroStar (EVI): This remains a controversial holding that comes in and out of the Top Five as short sellers intermittently attack and beatdown the shares. The company is executing a buy-and-build strategy, acquiring others in the commercial laundry distribution space using a combination of cash and stock to fund the transactions. With shares trading in excess of 15X EBITDA purchasing companies at 5X EBITDA, the numbers can get very attractive. There are two key questions for EVI. The first is: Will corporate costs moderate so that the growing site-level contributions translate into earnings growth and cash flow? It makes sense that they should, as public company costs and a strengthened central office are spread over a greater base of acquisitions. The second question is: Can EnviroStargenerate organic growth at the acquired businesses? The early indications are that they can. According to the company’s filings, site-level organic growth for companies owned over a year was in excess of 5%. EnviroStar has completed more than a dozen acquisitions on favorable terms and has recently lined up a $140M line of credit, which may portend a large acquisition within commercial laundry or an adjacent industry. The CEO, Henry Nahmad, spent eight years doing acquisitions in the HVAC space for the most successful buy-and-build company, Watsco. He also helped build a company in the chemicals space, which is to say that he is not limited to commercial laundry equipment distribution. With almost no debt, operating in a non-cyclical industry with little risk of obsolescence, short sellers are betting on multiple compression. We are betting on continued acquisitions and improving margins. Time will tell.”
Pixabay/Public Domain
EVI Industries, Inc., previously known as EnviroStar Inc, is a company that distributes dry cleaning and commercial laundry equipment and provides related technical services. Since the beginning of the year, its stock gained 4.76%, having a closing price on May 7th, of $37.00. The company has a market cap of $425.26 million, and it is trading at a P/E ratio of 118.97.
In its last financial report for the last quarter of 2018, Evi Industries reported record revenue of $61 million and diluted EPS of $0.10, compared to revenue of $36.14 million and diluted EPS of $0.13 in the same period of 2017. The company also disclosed gross profit up by 66% to a record $14 million for the three months ended December 31st 2018.
In February this year, EVI Industries complete its acquisition of PAC Industries, another company that offers professional laundry related products and services. This takeover is only one of the first steps EVI Industries is taking to broaden its businesses, focusing on the northeast region.
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.
You can enter your email below to get our FREE report. In the same report you can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12-24 months. We initially share this idea in October 2018 and the stock already returned more than 150%. We still like this investment.
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