Independent Thinking at the Right Time
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 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.”
It was the right call. As of the start of March 2022, Equifax shares traded much higher.3
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 second largest holding as of March 1, 2022.
The Jensen Quality Value investment team believes that Equifax should continue to perform well thanks to attractive fundamentals and accelerating long-term growth. The team believes its counter-cyclical business model can withstand most market conditions. And as a service business, 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 and has performed exceptionally well throughout the pandemic and the tight labor market. In addition, Equifax is expanding internationally into maturing economies where increased lending activity requires reliable credit data.
The investment team forecasts that Equifax’s long-term organic growth will average 6% to 8% through 2030 as it takes advantage of these faster growing opportunities.
Independent to the core
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.
3 As of March 1, 2022, EFX closed at $219 per share.
The company discussions in this article are solely intended to illustrate the application of our investment approach and is 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.
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