A few people have emailed me asking for my thoughts about Armanino Foods of Distinction (AMNF). I don’t have any right now. But Whopper Investments does:
I think Armanino is undervalued at today’s prices. It’s growing pretty fast and creating tons of value from that growth, so that value gap should (hopefully) grow over time. And, as an added kicker, there’s the potential for a merger at a huge premium, which would be easily supported by the synergy potential, and/or a big special dividend to lever the company up.
I lied. I do have one thought. At one point, Whopper says:
I tend to think that their frozen products fall more into the “commodity” segment than the “branded” segment, but their returns on capital actually suggest other wise. Pre-tax returns on capital are well over 50% and gross margins are in the 35% range. Those tend returns tend to indicate some form of brand strength or competitive advantage.
That’s true. However, it is imperative that when you find empirical evidence of a competitive advantage you back it up with a rational explanation for that competitive advantage.
You always want to combine abstract reason with concrete evidence to prove something’s practical existence.
If you fail to do this, you will end up taking the magic formula approach. Many companies earn excess returns. Some have durable moats. Others do not. It may work out on average to simply assume moats based on high returns on capital. In fact, the historical data Greenblatt used says that the approach did work in the past.
But you must never beg the question. You must never argue that this company has a moat because only a company with a moat could earn the returns this company is now earning.
Instead we must look for both a rational theory and empirical data that are reasonable when considered separately and agree when put together.