On March 31, 2014, we summarized our thoughts on Family Dollar (FDO) in a Quick Take posting with the following:
“Falling below the $55.07 support line suggests that FDO could decline to $47 in the near term. Investors interested in FDO could break their investment into at least two purchases, the first being 60% of the intended amount now and the second purchase of 40% at either of the two indicated support levels at $44.95 or $34.83.”
Like moths to a flame, we were encouraged by Value Line Investment Survey’s assessment that “…would-be investors to look else-where.” As we saw it, the fundamentals and technicals supported the idea that Family Dollar was worth investing in (at least 60% of funds committed as part of a balanced portfolio).
As luck and coincidence would have it, FDO was acquired by Dollar Tree six months later at a price of $74.50 while the stock price rose as much as +37%. At the time we posted the following chart with Dow Theory downside targets.
Our downside targets help us prepare for what is likely to come, our investment recommendations (one, two or three-part commitment of funds) suggests our confidence level in the stock based on fundamentals and technicals.
We’d like point out the disparity in the 2007 low in FDO’s stock price and the actual acquisition price. From our observation, acquisitions done by large corporations tend to occur long after the price of the stock has already moved considerably above fair value. Even Warren Buffett has had the habit of acquiring a company long after a majority of the runup has passed as highlighted in the Heinz (HNZ) purchase.
The consistency of corporate acquisitions well above fair value for a given stock suggests that in spite of an overvalued market there are still plenty of investment opportunities, provided the time horizon is for the long-term OR acceptance that the medium-term could experience a loss of –33% or more.