Willie Mays (who some regard as the greatest baseball player ever) commented on Williams saying, “Ted Williams was the best pure hitter I ever saw.” He proved this through the remainder of his career starting in the 1954 season when he hit .345, followed by .356 in 1955 and .345 in 1956. Maybe the greatest achievement of Williams’ career was in 1957, when, at the age of 39, he led the league with a .388 average (with 33 intentional walks).” A 39-year old man hitting .388 is unheard of, but was indicative of the great hitter that people came to know as he built his Hall of Fame body of work.
Where are the Great Pure Hitters in Stocks Today?
Thanks to the use and popularity of passive investments, many market participants are asking if it is possible to find pure hitters among individual stocks. The claims are that the volatility and the lack of consistency make it impossible for investors to stay with a ten-to-twenty year contract. At Smead Capital Management, our eight criteria guide us to seek out pure hitters in stocks among the shares of companies that have already exhibited greatness in their past, much like Ted Williams.
H&R Block (HRB)
H&R Block was started by brothers Henry and Richard Bloch in 1946 in Kansas City, MO. H&R Block is the largest and most widely recognized tax preparation company in the United States of America. The original H&R Block franchise was actually a creation of circumstance. Henry and Richard tried to sell their H&R Block tax preparation practice to new operators to move to New York City to expand the H&R Block clientele. The buyers weren’t able to pay the price, so the Blochs took a payment that included future royalties on their Kansas City-based practice. Born from this situation is a large franchise model for tax professionals to leverage the H&R Block brand.
Going back to the earliest data that we can get our hands on, H&R Block has produced an 88.33 fold increase in value versus a 42.92 fold increase in the S&P 500 Index from July 31st 1980 to March 31st 2016. This was a return of 13.41% compounded over the almost 36-year period. Today, H&R Block has a market cap of around $5 billion. The company is anticipated to produce $488 million in free cash flow in 2016. Below is a look at their return on equity from 2011 through their fiscal year-end April 30, 2015.1
Much like Williams hitting .388 at the age of 39, H&R Block could produce returns on equity, which are unheard of. It’s unlike almost anything we’ve ever seen in a company. It shows the investor how little capital is needed in the day-to-day operations of their business.
H&R Block hit an all-time high in December of last year at $37.53 before a lonely fall to a price around $24.15. The depressed price is the product of both political parties promoting simplified tax code ideas and fears of consumer adoption of do-it-yourself tax preparation. Harkening back to Giamatti, that kind of price movement “breaks your heart” leaving you to “face the fall alone.” Investing, much like baseball, does that regularly. This has brought the stock to trading at 11.56 times the next 12 month earnings estimates. You can hear the naysayers in the stadium crowd complaining over the sub-par plate appearances in the interim.
Baseball and investing have their similarities and the beginning of spring is a great time to think about both of them. At Smead Capital Management, we look for meritorious companies which have stumbled or are fighting off tough seasons with an injury. In baseball terms, we have little interest in guessing which years our companies will produce the highest batting average. We’d rather understand how long they can have strong plate appearances year after year. What matters is the totality of their work, not their volatility from season to season.
Warm Regards,
Cole Smead, CFA
1Source: Bloomberg
William Smead is CEO and chief investment officer at Smead Capital Management.