Bob Evans Made Enough Bacon for This Investor, So I'm Out

 | Jun 28, 2017 | 11:00 AM EDT
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As a value investor, when I take a position, I tend to hold it for several years. To many, that's an eternity in today's fast-paced investment world. However, there are times when I will part ways with a name more quickly: 1) if it becomes evident that my reasons for taking the position are invalidated, or 2) if the situation plays out more quickly than anticipated.

The latter is what has happened with Bob Evans BOBE, a real-estate-rich restaurant name that had fallen off many investors' radar. The name also had evolved into a solid dividend payer over the years and was yielding close to 4% when I took a position last fall.

The thing that made the story even more interesting was the continuing push by an activist investor, Sandell Asset Management, to separate the company into two businesses -- restaurants and prepared foods. Sandell believed Bob Evans could be worth from $57 to $65 a share and spent several years agitating the company, an effort that included a proxy fight in 2014 in which it won four board seats. Finally, in January, Bob Evans sold the restaurant business for $565 million to Golden Gate Capital in order to focus on its growing prepared foods business.

The sale allowed Bob Evans to pay down debt, to initiate a $100 million stock repurchase plan and, perhaps most importantly to income-seeking investors, to pay a $7.50 special cash dividend. The company also purchased Pineland Farms Potato Company, which supports its growing side-dish business.

The markets applauded Bob Evans' move away from the ever-competitive restaurant business, and shares doubled between last October and late May of this year. The stock ran through Sandell's estimates of the company's value, hitting $75 on May 24. The next, day, a target date of sorts for me, the stock traded ex the $7.50 special dividend, then ran up another five points.

That was enough for me -- a better than 100% gain, including $8.52 in dividends per share over a nine-month holding period. At a certain point you need to question whether a story has been played out, and in this case, with BOBE trading at 28 times next year's earnings, I believe the easy money (though it's never easy) has been made.

I still like the company and direction it is taking, capturing major market share in the growing side-dish business. It just became too expensive for me, and it was time to take the gains. I will continue to follow the name and likely would consider re-entering it when and if the dust settles. Truth be told, it may not settle. Value investors are often first to arrive at the party, but also first to leave. I've left money on the table often exiting too early, but that comes with the territory.

When I took a position, Bob Evans was a sub-$40 stock, yielding around 4%, so I was getting paid fairly well to wait while the situation played out. It indeed played out better than I expected, and the stock now yields 1.9%. For me it was time to move on and try and identify the next special situation. Granted, they are not that easy to find.

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