Adams Golf: A Hole in One

by JT McGee

A 1999 column in Golf Digest reported that a PGA Tour professional golfer has a 1 in 3,756 chance at hitting a hole in one on any given par three.

There are just over 5,000 publicly-traded companies listed on US stock exchanges. Most of these are bogies, a fair amount are worthy of a par, and a minority become eagles. Only a handful can reliably become a hole in one.

Hundreds of variables affect a golfer’s ability to put a ball downrange to fall just below the pin – the windspeed, the club, the ball, the grass on the green, and the player’s own luck. If you could quantify those variables, extract the “luck effect” and make a better model for predicting a player’s chance at hitting a hole in one, you would have a successful, multi-million dollar sweepstakes insurance business.

Wall Street is the same way. If you can dig through the companies that will never hit a hole in one, with the exception of luck and happenstance, to find the companies that can, you will win.

Adams Golf is a perfect example of my favorite kind of buyout play – it sold cheap, had quality products, decent (but overpaid) management, a catalyst in the wealth effect, and a growth story that sold for a value price. More importantly, it had strategic attributes that made it a perfect match for a larger golfing business.

Booya!

On Monday, the company announced a sale to Adidas’ TaylorMade for $10.80 per share, a 67% premium to the 2012 open and a 127% premium to the 2011 opening price. Investors who acted earlier to buy the firm for the price of the cash on hand during the downturn are left with a total return in excess of 400% in less than 3 years’ time.

This is a big winner for my portfolio, but it’s important to remember that the financial markets can burn you just as bad as they can fuel you. I’m going to sit on this cash for some time before finding a new company for my own portfolio. Wall Street is 23-24% more expensive today than it was in September, when I published a post about how stocks were cheap. It now feels like we’re fairly-valued at best, and while there will be hundreds of companies that beat the market by 10 or 20% over the next year, I think I’ve exhausted the most extreme value plays.

Patience is a virtue – whatever the hell that means. I’ll give it a few weeks before doing something stupid with the money given to me by the buyout gods. I don’t know if I’ll ever encounter another company that provides a similar return in a short amount of time. I do know they’re out there, but this trade bordered on the lines of perfection. Realistically, only two stocks of the five I expected to be bought out have since been bought out. Maybe two more will be bought out in the next 2-3 years.

There are very few opportunities where the stars align so obviously – increasing market share, larger institutional ownership, a growing number of 5% owners, and exploding cash on hand. I almost wish I could have held onto this a little longer.

Adios, Adams Golf. It was nice knowing you!

{ 5 comments… read them below or add one }

Financial Samurai March 20, 2012 at 04:09

This is awesome JT. Congrats on picking such a big winner!

Reply

JT McGee March 21, 2012 at 13:00

Thanks. I only wish every single buyout stock I find went so smoothly. I’m still selling to the market more often than I’m selling to a buyer, but hey – money is money, right?

And of course, as Buffett says, “If every shot you hit in golf was a hole-in-one, you’d lose interest. You gotta hit a few in the woods.”

I’m due to hit a few in the woods now.

Reply

PK March 20, 2012 at 10:15

Seems like you’re expectations for the future of the market ar elining up nicely with call buyers. Put buyers? Those guys are crazy…

Congrats!

Reply

JT McGee March 21, 2012 at 13:06

I think there’s still a ton of upside out there in individual firms. The broader market is getting pricey as the PE ratio hits historical average of 15. At 6.7% earnings yield, there’s a really tight spread between borrowing money and corporate earnings.

I pause to make predictions about the future based on where we are today. Calling the market cheap in September was easy – it was obvious. Now we’re in that difficult spot where we’re basically fairly valued, but that doesn’t mean upside is non-existent.

I would be happy to plow new cash back into my portfolio if Wall Street decides to give me a 20% discount. Right now, almost every stock I own is getting to the point where expected IRR is treading on boring territory at 10% or less.

Reply

cashflowmantra March 23, 2012 at 09:11

Congrats on the buyout. I have been seeing some of your earlier posts on Adams Golf. I am sure that you have been waiting for this announcement. Great return. It feels good when a company gets bought out.

Reply

Leave a Comment

*

Previous post:

Next post: