The Motley Fool Previous Page


One Stock's Warning Sign for Investors

http://www.fool.com/investing/general/2012/11/01/one-stocks-warning-sign-for-investors.aspx

Tim Hanson, Motley Fool Asset Management
November 1, 2012

The following commentary was originally posted on FoolFunds.com, the website of Motley Fool Asset Management, LLC, on Oct. 8. With permission, we're reproducing it here in an edited form.

Focus. It's one reason certain companies succeed beyond all expectations and others limp along, misallocating shareholder capital. After all, no one is good at everything, so in order to achieve above-average success, a company must determine where it has an advantage and then use that advantage relentlessly.

On the flip side, there are individuals and organizations that don't do much well, and therefore flail about trying to do everything. This is a warning sign for investors given the risk such a strategy runs -- at best, misallocation; at worst, the permanent loss of shareholder capital.

Focus on focused firms
At Motley Fool Asset Management, one reason we're comfortable with short periods of underperformance is because we try to invest only in companies that remain focused -- regardless of the economic climate -- on what they do best. Consider, for example, the restaurant sector. Due to a confluence of events, including weakening worldwide consumer sentiment, rising commodity input costs, and even wage inflation in some markets, it has generally not been a good time to own holdings such as Yum! Brands (NYSE: YUM), Chipotle Mexican Grill (NYSE: CMG), and Latin American McDonald's (NYSE: MCD) franchisee Arcos Dorados (NYSE: ARCO). In fact, Chipotle dropped sharply following claims by hedge fund manager David Einhorn that the stock is overvalued.

On the other hand, a restaurant stock that we sold not too long ago, Singapore's Breadtalk Group, has outperformed. But here's why we're happy with what we have: The aforementioned pressures on Yum! Brands, Chipotle, and Arcos Dorados will ultimately abate and their focus on opening and operating popular, profitable restaurants around the world will help them come through stronger on the other side.

Breadtalk, on the other hand, is rising likely because investors think it looks cheap, but management is showing itself to be dangerously unfocused -- the reason we sold it from our portfolio in the first place.

What diworsification looks like
Since Peter Lynch famously loathed companies that failed to master singular aspects of their business before moving on to other things, I suspect he would not have a favorable opinion of Breadtalk. This tiny organization, with just $330 million of sales, is trying to juggle seven different restaurant concepts (Breadtalk, Food Republic, Toast Box,