Independent Thinking at the Right Time
March 7, 2022
All investment managers say they offer independent thought. But do they? Do they have the conviction to go against conventional wisdom when it matters? Jensen Investment Management believes that it does, and an investment in Equifax offers an example. A slew of bad news and plunging share prices in early 2022 notwithstanding, this beaten-up stock grabbed the attention of the Jensen Quality Value investment team.
On the radar
Equifax (EFX), which is one of three companies selling consumer credit data to lenders, has long been a Jensen favorite. It first became a holding in Jensen’s Quality Growth Strategy in 19921 and the Quality Value investment team had followed it for years, too. But there was a problem: The stock price was too high for the Value Strategy.2
Managers and analysts have always favored Equifax’s core credit data business. The high barrier to entry provided the company with a competitive advantage that’s hard for others to duplicate. But between May and July 2017, Equifax suffered a high-profile data breach, which exposed 147 million U.S. consumers’ sensitive financial information. Within weeks, the stock lost more than a third of its value as investors worried about impending lawsuits and loss of business.
That’s when things began to look interesting for the Quality Value investment team. With Kurt Havnaer, CFA, heading up the coverage, the team initiated an investment in the company in May 2018 at $114 a share.
Research uncovers bright spots
In the short-term, there was no denying that things looked bad. Lawsuits were piling up and eventually Equifax would settle charges with the Federal Trade Commission for $575 million. The regulators insisted that the company shore up its cyber defenses to prevent a repeat attack.
Long term was a different story, the investment team believed. Through a collaborative research process, the team concluded that the core business was still strong. As one of only three companies in the industry, Equifax still had valuable troves of credit data and the data breach wouldn’t unbalance Equifax from its market leading position.
Meanwhile, Equifax’s other business lines, such as its workforce solutions practice and international services, gave the company additional long-term growth opportunities.
“We believe the breach made the stock cheap,” says Jensen Quality Value portfolio manager, Tyra Pratt, CFA. “But we considered the company to be a fundamentally strong business that would enjoy long term growth drivers.”
A favorable long-term view
While other value managers might ease out of a stock after a rebound, the Quality Value investment team is still committed to the Equifax story and the company currently represents the portfolio’s fourth largest holding as of September 30, 2022.
The Jensen Quality Value investment team believes that Equifax should continue to perform well thanks to fundamentals and accelerating long-term growth. The team believes its counter-cyclical business model can withstand most market conditions. And as a service business, the team believes that Equifax may be less exposed to today’s inflationary pressures than other companies.
In addition to the core credit data business, Equifax also operates a workforce solutions practice, which provides efficient automation for many HR functions. Currently, it’s the firm’s fastest growing and most profitable segment. In addition, Equifax is expanding internationally into maturing economies where increased lending activity requires reliable credit data.
At present, the investment team forecasts that Equifax’s long-term organic growth will continue through 2030.
Independent to the core
Market cycles come and go. Companies can experience rough patches or ride waves of optimism. But independent thinking cuts through the noise and distills what matters. Jensen’s investment team knows how to tell the difference.
1 EFX entered the Jensen Quality Growth portfolio in Q3 1992, was sold in Q3 2015 and re-entered in Q1 2020.
2 Prior to 2017, the Jensen Quality Value strategy was a quantitative strategy and owned small positions in EFX in 2010 and 2014. Since relaunching as a fundamental strategy in Jan 2017, EFX’s stock price was too high for the investment team until May 2018.
For a copy of each strategy’s current holdings, please click below.
Jensen Quality Growth Strategy
Jensen Quality Value Strategy
The company discussions in this article are solely intended to illustrate the application of our investment approach and are not to be considered a recommendation by Jensen. Our views expressed herein are subject to change and should not be construed as a recommendation or offer to buy or sell any security and are not designed or intended as a basis or determination for making any investment decision for any security. Our discussions should not be construed as an indication that an investment in a security has been or will be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of any security discussed herein.
Past performance is no guarantee of future results. The information contained herein represents management’s current expectation of how the Jensen Quality Value Strategy will continue to be operated in the near term; however, management’s plans and policies in this respect may change in the future. In particular, (i) policies and approaches to portfolio monitoring, risk management, and asset allocation may change in the future without notice and (ii) economic, market and other conditions could cause the strategy and accounts invested in the strategy to deviate from stated investment objectives, guidelines, and conclusions stated herein.
Certain information contained in this material represents or is based upon forward-looking statements, which can be identified by the use of terminology such as “may”, “will”, “should”, “expect”, “anticipate”, “target”, “project”, “estimate”, “intend”, “continue”, or “believe” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events or results or the actual performance of a client account may differ materially from those reflected or contemplated in such forward-looking statements.
This information is current as of the date of this material and is subject to change at any time, based on market and other conditions.
Jensen Investment Management, Inc., is an investment adviser registered under the Investment Advisers Act of 1940. Registration with the SEC does not imply any level of skill or training. Although taken from reliable sources, Jensen cannot guarantee the accuracy of the information received from third parties.
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