What you will learn in this post:
- A detailed value investing case study that shows you how to multiply your money in a short period of time
- Detailed analysis on how I made an easy 45.82% return on Papa John's stocks in just 6 months by applying our exclusive value investing system
- How my 23-year-old university student did even better than me and discovered a huge investment opportunity in this company’s stock
- How to easily automate your entire valuation process by using our intrinsic value calculator and value investing icorecard
Have you ever considered going down the value investing route to double your earnings? Not sure what company to invest in?
Investing in the right stocks is a major decision, one which can have dire consequences owing to the slightest misstep.
It’s completely normal to be unsure about where to invest or how much to invest in any given company.
After all, value investing is a complicated subject.
Many first-time investors find the entire value investing process confusing...
...and trust me, that’s okay!
Maybe you often don’t know how or where to start, but let me help you and put a stop to that with this post.
You can easily make good money off value investments if you know where to start. Get on the bandwagon now as you wouldn’t want to miss out on some of the benefits of value investing:
- Irrespective of your academic accomplishments or current income level, you can be really good at value investments (Remember, investing is a learnable skill!)
- Understand a company’s fundamental stock information and you can really make value investments work for you – it’s not exclusive to the rich!
- Through strategic value investing, you can earn your rite of passage to earning loads of money from the stock market
As a starting point, you need to work on mastering the art of value investing.
Do that and you can almost effortlessly increase your income level and enjoy a better lifestyle for yourself and your family.
You’re probably earning already from a day job or part-time work. Get into value investing now and you can quite easily make good money on the side.
The value investing case study I’ve outlined below will help you understand what a good starting point is and how you can start making money by mastering the art of value investing.
How I Bagged a 45.82% Return on Papa John’s Stocks in Just 6 Months!
You have likely heard of Domino’s Pizza, Inc. (DPZ) and Pizza Hut (YUM). Perhaps you ordered pizza from these two chains recently.
But do you know who the third largest pizza delivery company is?
As you might know, Papa John’s, founded in 1984, is an American pizzeria that operates the third-largest pizza take-out and delivery service in the world.
Papa John’s is known all over for consistently delivering superb-quality pizza backed by a stellar service.
Simply put, it’s a great company, which is why I chose to invest in it. So I bought stock at $60.03 a share in May 2016.
Would you believe it: 5 months later the stock soared to $87.93 a share?
I got myself a nice 45.82% return, bringing my earnings to over $27 a share.
Some of my friends actually sold the stock way too early and still managed to get away with making good profits.
I, on the other hand, however, believed the company’s value was only going to increase and decided not to sell my shares just yet.
My strategy was to hold on to the stock, right up to the point there is a downtrend signal.
Now don’t get me wrong – I’m a big fan of value investing which focuses more on fundamental analysis and I also understand the importance of technical analysis.
Case in point: If you want to be a successful investor, right off the bat, you need to learn how to effectively utilize both fundamental and technical analysis in making your investment decisions.
If you’re not sure what the latter is, technical analysis is a financial term which refers to a security analysis for predicting how prices might shift, based on volume, primary price and past market data.
What I need you to do is keep your eyes peeled and stay with me because we’re going to evaluate the company’s stock together.
This will give you insights into how you can make great returns from any healthy company after evaluating its stock properly.
Why Did I Pick This Stock?
I’m what you might call one of those conservative investors.
I never jump the gun and buy company shares just because everyone else is buying them or some hotshot investor tells me to.
Instead, what I like to do is take a step back and understand how the company works at the fundamental level.
Investing in Papa John’s stock was no exception.
Warren Buffett once said: "Risk comes from not knowing what you're doing."
If you really want to be successful investing in stocks, you need to do what I do:
...“play it safe”!
I bought the company’s stock because of its sound financial base more than anything else.
As I just mentioned in the start, I will never go by someone’s word when deciding what stock to buy (this is very important and you must also learn how to invest on your own).
So the bottom line is: do a little research, take the time to do your homework and once you understand that a company has a firm financial base and holds promising prospects, go for it!
Before I dive into the reasons why I bought this stock, it's worth having a look at this company's profile.
The number one rule of value investing is that you should only invest in businesses that you clearly understand.
Remember that, if you invest in a business that you don't understand, you are gambling, not investing!
Some people call themselves "investors" but they gamble and take no responsibility for protecting their money.
They have no idea about what's going on in the market, and that's why they lose money and will never be a real investor!
Below are what I found about this company.
Papa John's Company Profile
Papa John’s International is the third largest pizza delivery company in the world, based in Louisville, Kentucky.
Papa John’s International is the official pizza sponsor of both the National Football League and Major League Baseball.
The company’s relatively small market cap of $2.75 billion is less than half of its peers, which makes the pizza chain an attractive investment among investors.
Papa John’s International’s stock paid a cash dividend of $0.175 per common share to investors in the second quarter of 2016.
The company’s Board of Directors further approved a 15% increase in the dividend rate which was payable to investors on August 19, 2016.
Papa John’s International reported its fourth quarter and year ending results on February 23, 2016.
For the full fiscal year, Papa John’s International saw its revenue rise 2.5% from 2014 to $1.64 billion.
Net income for the full year rose to $75.7 million from $73.3 million in the same period a year ago while diluted earnings per share also rose to $1.89 from $1.75.
Most recently, Papa John’s International said that it earned $0.61 per share on revenue of $422.95 million in its second quarter report on August 2, 2016.
The company earned seven cents more than Wall Street analysts expected while revenue topped expectations by $8.18 million.
Comparable sales for the second quarter, that is the amount of revenue the company generated at locations that have been opened for at least a full year, rose 4.8% in North American stores and 5.3% in International stores.
Here is where you might find the story to be more compelling.
The company’s strong second quarter performance prompted Papa John’s International’s management team to increase its full year 2016 earnings per share guidance to a range of $2.35 to $2.45 from a prior range of $2.30 to $2.40.
In case you didn’t already know, Papa John’s International operates 4,935 restaurants as of the end of its fiscal second quarter.
By region, 3,390 of these restaurants are located in North America while the remaining 1,513 locations are within international markets.
As of June 26, 2016, the company has a total development pipeline of 200 new units which will be opened in the North American market and 1,100 units internationally.
Management expects the majority of these locations to be opened within the next six years.
Papa John’s International considers itself a leader in the food industry with its commitment to providing customers with better ingredients compared to its peers.
For instance, the company promises it will never serve chicken pizza toppings and poppers that were raised with human or animal antibiotics.
In fact, Papa John’s International is the first ever national pizza delivery chain that announced a complete removal of MSG, preservatives, cellulose and partially hydrogenated oils from its menu.
Papa John’s International’s partnerships with the National Football League and Major League Baseball gives it direct exposure to sports fans.
Think about it - when you are watching the big game and craving a pizza, you might be more tempted to order from a pizza chain that is sponsoring the big game.
Papa John’s International is also a leader in combining modern technology with pizza ordering.
The company boasts that it is the first pizza chain to claim that 55% of all pizza orders were made online.
I’m sure you know lots of lazy people that want to order pizza with the least amount of effort possible. You know who you are!
Looking forward, management will begin implementing new digital opportunities, including payment solutions, improvements to the way orders are handles.
What I Learned About This Company At First Glance
- Company industry: Food (non-cyclical sector)
- Market cap: over $2 billion (mid-cap company)
- This company pays dividend and increases its dividends
- There has been an increase in sales, revenues and net income
- There has been an increase in earnings per share (EPS)
- The management has strategic plans for expanding their business
- The company cares about its customers and consistently tries to improve its product quality
To better understand a company, you must try to describe it in your own words. If you can tell a story about that company to your friends, you are good to go!
Now you have a good understanding about Papa John's Inc. and why this company looked promising to be a worthwhile investment.
10 Reasons Why PZZA Is A Great Value Stock
Below are 10 reasons why I decided to invest in Papa John’s stock for my value investment journey:
1. Customers Love This Company’s Products & Services
Well, this is very important!
If a business doesn't have its own fans, then who is going to support it?
Papa John’s International is a favorite among pizza lovers as it has ranked number one in customer satisfaction among all pizza chains in the U.S. in the American Customer Satisfaction Index for 15 of the past 17 years.
Papa John's International, Inc. ranked #1 in customer satisfaction and product quality among QSR pizza chains in 2016 American Customer Satisfaction Index (ACSI). Source: Business Wire
In addition to being ranked the top overall pizza chain on an almost yearly basis, Papa John’s International was also ranked number one in product quality.
The prestigious accomplishment validates the Papa John’s International’s brand and reassures investors that despite its small size relative to some of its peers, a strategy of growth will be welcome by customers in new markets.
2. This Company Is Managed By Great People
Besides offering top quality ingredients, Papa John’s is led by a strong management team.
There are a lot of things to talk about this company's management but I'm just going to name a few key managers here.
John Schnatter founded the first restaurant in 1985 and continues to serve in the most senior leadership positions, including Chairman and Chief Executive Officer.
Steve Ritchie, Papa John’s International’s Chief Operating Officer, is a true veteran of the company and traces his roots to the company back to 1996.
Norborne Cole Jr., another key member of the management team, is a 32-year veteran with another name synonymous with pizza chains, Coca-Cola. He lends a helpful hand as a trusty member of the company’s Board of Directors.
To learn more about this company's management, you can do some research on your own.
3. Papa John’s Is A People-Oriented Business
Few companies can claim to be people oriented but Papa John’s International understands that its immediate, near and long-term success can only achieved through its people.
Papa John’s implements what it calls a “people-powered strategy” which it claims sparked a “passionate culture” throughout the entire brand from the most senior executives down to store level employees.
In addition, Papa John’s also demands all employees to have a “customer-obsessed culture”.
The company also understands that restaurant level team members of today will become the next-generation of leaders.
4. This Company Provides Stock-Based Compensations
For the six month period ending June 26, 2016, Papa John’s paid out nearly $5 million in stock-based compensation expenses to its employees.
How do you like to be motivated at work? Obviously, the best form of motivation is to provide a system in which everyone’s economic interests are aligned.
By providing key members of the restaurant’s team with stock compensation, all members have a greater financial incentive to continue performing at the highest level possible.
In order to counter some of the effect of providing stock based compensation, Papa John’s also repurchased $30 million of stock during its fiscal second quarter.
The company also plans on repurchasing a further $107 million in stock - this also serves as a positive sign and management’s belief that its stock price is attractive at its current level.
Stock buybacks offer a way for companies to return some wealth to their shareholders, while potentially boosting their stock prices.
Learning about share buyback is very important, I even wrote an article about this. You can learn more about share buybacks here.
5. I Love The Food Industry
The stock market is currently trading near historical all-time highs. Actually we don't know what will happen with the market tomorrow.
As I mentioned earlier, it's always better to "play it safe" with stocks.
At this time, maybe it's much safer to invest in non-cyclical stocks because the next downturn is coming soon.
While many investors are busy wondering if Apple Inc. (AAPL) and its iPhone sales have peaked, the food industry isn’t showing any signs of slowing down.
As you can see from the chart, Papa John’s stock has gained more than 50% since the start of 2016. By comparison, Apple’s stock is trading near flat over the same time period.
Now let's dive deeper into its financial performance.
6. Papa John's Is A Financially Strong Business
After doing some analyses, I found that Papa John's is a financially strong business. Below are some insights:
I got to work fast: I noticed that Papa John’s net income had been steadily increasing over the last 5 years.
In fact, I realized that the net income for 2016’s first quarter had increased by 17.7% to $26.2 million, compared to the previous year’s first quarter figure, $22.2 million.
As I delved deeper, I discovered that the company’s sales and revenues had also been nothing short of impressive.
This company's sales revenue has been consistently on the rise over the last 5 years.
Operating Cash Flow
Next, I determined the company’s operating cash flow which, as of 2015, was $160.31 million – this is a 30.73% increase from the previous year.
Even thought this year's operating cash flow slightly declined, it may not be a big deal. All indicators point to a healthy operating cash flow over the past 3 years.
Earnings Per Share (EPS)
After finding the company’s operating cash flow to be in good shape, I wasted little time in assessing their EPS performance.
Between the Fiscal Year March 2015 and March 2016, the company’s earnings per share were $0.55 and $0.69 respectively.
EPS Reported on March, 2016
EPS Reported on March, 2015
$0.69 per share
$0.55 per share
I said to myself, “that’s pretty impressive”. I mean, that’s 25% EPS increase between Mar. 2016 and the same quarter last year.
This indicated healthy financial performance and a significant increase in EPS.
Return on Equity (ROE)
It was looking good so far. All I had to do now was determine Papa John’s return on equity.
The company’s ROE had remained consistently high in the past 10 years – well over 20% for most of those years.
Papa John's Return on Equity (ROE)
Remember, it really pays to invest in a company with a high ROE ratio.
And here’s why:
- Stocks with a ROE ratio ranging from 12% to 15% are considered a fair investment
- Stocks with a ROE ratio higher than 15% are considered a great investment
- Stocks with a ROE ratio higher than 25% are considered an excellent investment
You see, Papa John's has the ROE ratio of over 130% in 2015, and this year this ratio has surged to nearly 800%!
So in the end, I was really pleased with these ROE ratios which gave me more confidence in the fact that Papa John’s was a great company from an investment perspective, one that had maintained consistently good financial fitness over the years.
7. Papa John's Is A Low Debt Company
One of the biggest reasons I invested in Papa John’s is due to it being a low debt company.
In fact, a little debt can be a good thing when it helps to provide the funding for business growth and expansion, since this type of activity tends to raise the overall value of a company.
But that doesn’t make it acceptable to invest in a business that’s carrying a large debt load, since it’s very easy for a company to get into trouble once it overextends itself financially and is no longer able to service or repay its loans.
In short, investing in a high debt company is more risky, and high debt simply means a large share of profits is spent on paying debt, decreasing shareholder’s share in profit.
High debt constraints businesses and is also an indication of high cost of capital, putting the company in risk of bankruptcy.
Since Papa John’s didn’t look that way, it was my first choice to invest in.
In simple words, low debt equals lower risk.
Upon doing some additional research, I learned that over the past 5 years, Papa John’s had maintained a current ratio of over 1.0 which makes it a low debt company.
So what I want you to make a note if is that a current ratio of 1:1 is considered healthy and Papa John’s certainly lived up to our requirement:
Papa John's Current Ratio
I should also point out that 3x of the company's Free Cash Flow was higher than the current long-term debt, which means the business is capable of easily settling its long-term debt by using 3 years of its Free Cash Flow.
8. This Company's Stock Is Undervalued
With me so far? Good!
The next step is considering this company's intrinsic value.
Only a few months ago, when I bought Papa John’s stocks at $60.03 per share, its estimated intrinsic value was around $137.
As you may know, intrinsic value is the real value of a business. So, if its stock is undervalued, this means it will sell at a lesser value than it’s actually worth.
I went right ahead and calculated the company’s intrinsic value by using our Intrinsic Value Calculator.
I believe this is a fantastic tool that many of my students and I have been conveniently using to get a fix on intrinsic value of a stock.
All you need to do is key-in a few numbers into the calculator, which I did, and instantly arrived upon an intrinsic value of $137.48:
Take a good look at the screenshot above; it shows the company’s stock was undervalued.
That got me thinking…“If I buy it now there’s a very good chance of making a profit.”
And yeah I was right!
Let’s take a closer look: after 5 months, stock price went up by $87.93 per share and I made a profit of more than $27.
That equals to a 45.82% gain...Not bad, eh? 😉
While we’re on the subject, I want to quickly let you know that the company still has its stock undervalued; it is still selling stocks at a price below the intrinsic value.
That’s code for: VERY PROMISING STOCK!
So what's next?
9. The company's stock is in a strong uptrend
Calculating the intrinsic value wasn’t all I did. I also performed a quick technical analysis and found out that this stock was in a strong uptrend.
I used a Simple Moving Average (SMA) Crossover strategy to analyze this stock's trend.
Here's the key strategy:
- Uptrend signal: SMA 60 crossed above SMA 180, and both lines slope upward
- Downtrend signal: SMA 60 crossed below SMA 180, and both lines slope downward
I added this company to my watch list by early March 2016, but there was no uptrend signal so I waited and didn't invest.
I bought this stock a bit early at $60.30 a share when the SMA 60 line was going to cross over the SMA 180 line.
I know…I should have waited until the SMA 60 crossed above SMA 180, and both lines sloped upward just to be safe, right?
BUT … I didn’t.
Because there’s a catch: the company looked very good from a fundamental and financial perspective.
So I went ahead and bought stocks a bit early than planned.
Besides, I’ve made it a regular practice to “stop-loss” when it comes to trading any stock. This pretty much eliminates unnecessary worrying from the equation.
So long story short, I bought the stock at the start of the uptrend and made some good profit off of it.
Take a look at these highly profitable chart patterns here:
If you have already taken our Technical Analysis program, you should have got familiar with these chart patterns.
These patterns all showed bullish signals that made me feel more confident in my investment decision.
The bottom line is, applying technical analysis in value investing is very important, and here are some reasons why learning technical analysis is a must if you are a value investor:
- By understanding and applying it correctly, technical analysis helped me determine one side of the stock market equation; the “effect” side of the cause and effect equation, to be precise.
- Technical analysis allowed me to determine what just happened, the effect it had, the market action that followed or what’s happening in real-time, and the price and trends.
- When combined with certain tools such as Intrinsic Value Calculator, for instance, technical analysis is the best formula to win at trading.
10. The stock achieves a value score of 105/120
Still with me? Very good! Now, for another catch.
Yes, there IS one more!
A drawback of value investing is that it requires a lot of hard work and entails many time consuming tasks.
You see, valuation involves a fair amount of repetition, which sometimes, gets the best of most investors.
After all, I did follow the very same valuation process over and over again to determine a company’s stock.
However, I discovered a way to get around this redundancy. I wanted to spend my time and energy strategically, so I automated a lot of processes.
In order to automate the valuation process, my team and I have developed a new tool we call the Value Investing Scorecard. Ta daa!
This tool helps us score stocks based on their financial performance by using our proven well-tested investment criteria.
In the screenshot below, you can see that Papa John's nailed a value score of 105/120:
So there’s no question about it...Papa John’s stock looked EXCELLENT from a fundamental and financial standpoint.
No doubt...it's a fundamentally strong company.
You too should use the Value Investing Scorecard simply because it will tell you exactly if a company is investment-worthy.
You get additional information which allows you to determine if now is a good time to buy that company's stock.
This tool will save you a huge amount of time and assist you in making your own investment decisions.
And you don’t have to worry about a thing, because the tool is super-easy to use...
You just need to follow our provided criteria to determine a company’s financial performance, and then sit back as the tool will automatically rank your stock and display a score for it.
Done! You can easily automate your entire valuation process.
And here's a quick note:
- Companies that rank as a “A” or achieve a value score of over 90 are the most investment-worthy ones
- Companies that rank as a “B” or higher are considered great investments
- And companies with a 70 or higher value score are great value stocks that are well worth your attention
With this tool you can make your investment decisions easy as cake!
In fact, I was very confident with my decision to invest in Papa John’s stock.
Well, using the methods and tools I’ve highlighted above, I very well knew that its value was only going to rise in the coming months.
You see, investing really is not difficult at all. You can easily make a great investment if you equip yourself with enough knowledge and of course with the right tools.
And here's the most exciting thing ... My student even did better than me!
How My Student Did a Great Job and Even Outdid Me!
Using the methods and steps highlighted above, you might be surprised to know that my student did even better than me.
Meet Jenny Lee, a 23-year-old university student!
She enjoys watching movies, hanging out with friends and shopping, just like most girls her age.
However, what sets her apart is that she’s also very ambitious, practices a good work ethic and has hopes of making it financially big one day.
Jenny decided to join our Value Investing program in early 2016.
She used all the strategies I taught to discover a huge opportunity in Papa John's Inc. (PZZA). She bought this stock at $65.18 a share.
And in just 3 months, its value had increased to $82.55 a share!
She profited $17 on each share – an amazing return of 28% in just three months!
Would you believe it? She mastered value investing in just a few months, while I on the other hand, took years, making countless mistakes and experiencing several setbacks along the way.
I'm so proud of her and that's why I love teaching. I want to share the knowledge and help more people learn investing and start growing their income safely through stock investments.
You too can change your life and find the same level of success my esteemed student did, perhaps even more.
I'm super excited to tell you that making great returns from value investments is no longer something that’s only exclusive to the rich.
You can do that too!
You just need to fine-tune your approach and be well aware of certain market circumstances at any given time.
You’ll never have to face the setbacks that I did while learning the ropes.
12 Lessons To Take Away From This Case Study
- 1. A GREAT business understands the importance of consistently improving its products or services and caring about its customers' experience.
- 2. A GREAT business knows how to treat their staff well and how to motivate them to achieve higher results.
- 3. A GREAT business should be managed by GREAT people.
- 4. A GREAT business offers stock-based compensations to their employees and management
- 5. A GREAT business often buys back their own stocks. However, in some cases, share buybacks may be a potential problem.
- 6. A GREAT business often shows a history of achieving great financial performance. Make sure you invest in a business that has its sales revenue, net income, and operating cash flow increasing over the past 3 years or longer.
- 7. A GREAT business offers an increase in its earnings per share (EPS) year after year.
- 8. A GREAT business should always maintain a high return on equity (ROE) ratio. The higher, the better!
- 9. A GREAT business should be a low debt company. Make sure you invest in a business with a current ratio of 1.0 or higher. The higher, the better!
- 10. A GREAT business is a worthwhile investment when it's deeply undervalued. Make sure you always apply a Margin of Safety. Use our premium Intrinsic Value Calculator to get intrinsic value of any business instantly.
- 11. A GREAT business is an investment-worthy when it's in an uptrend. Make sure you learn how to apply technical analysis in value investing.
- 12. A GREAT business achieves a value score of 70 or higher. The higher, the better! You can use our premium Value Investing Scorecard to instantly rank your stock and make better investment decisions.
The Bottom Line
I will reiterate this again: investing is a “learnable” skill and you need not be rich as heck to be a successful investor.
Some of the most successful investors of our times went from rags to riches due to sheer hard work and highly calculated investment decisions.
One thing I want to quickly touch on is your education.
Now, that being said, you don’t have to be an academic maestro to learn good stock trading.
However, getting a good education can dramatically boost your chances of success as a value investor.
Despite having so many examples around us of successful entrepreneurs dropping out of school or college to start their own ventures, I would not at all recommend taking your education lightly.
When it comes to investments, remember that a good education always pays off.
So focus on getting an education first, and then we can talk a bit more about investments!
Now let's tweet this as a promise to yourself that you will become a master investor!
Value investing is a learnable skill. I can master it and start letting my money work hard for me!
Feel free to share your thoughts in the comment section below. Let me know if you want to have more case studies like this one.
I'll try my best to help you become a better investor 🙂