How Jensen’s Collaborative Process Found Tractor Supply, an Underappreciated Home Improvement Gem
Star managers can give a company an exciting public face. But what happens if that person leaves, or worse?
Jensen Investment Management takes a different tactic, preferring instead a collaborative effort, relying on the brain power of a whole team to bring the best ideas forward. At Jensen, all investment decisions are made by consensus. After lengthy research, which culminates in the writing of a 30- to 40-page analyst report, managers and analysts talk through their picks to get other team members’ buy-in. The process is rigorous and meant to challenge assumptions. By doing this, Jensen avoids any inherent bias that could come from spending so much time researching a single stock.
“With our team approach other people are able to see the stock from a fresh perspective and point out potential problems,” explains Adam Calamar, portfolio manager with the Jensen Quality Growth and Quality Value Strategies.
A consensus on a home improvement retailer
It was this process that led the Jensen investment team to set its sights on Tractor Supply (TSCO), in 2017, at about $55 a share. While rivals like Home Depot (HD) and Lowe’s (LOW) were profiting from the hot real estate market at the time, Tractor Supply was one of the few companies serving the needs of recreational farmers in exurbs and rural communities. With a smaller footprint than Home Depot or Lowe’s, Tractor Supply could enter smaller markets without incurring as much cost. The retailer also has a scale advantage over mom-and-pop hardware stores, allowing it to offer better pricing and product assortment in the same locations.
“These markets were being overlooked by big box competitors,” says Tyra Pratt, a manager on the Jensen Quality Value team and the stock’s lead analyst from 2017 to 2021. “Tractor Supply occupied a unique niche that seemed underappreciated given the growth potential,” she says.
The stock was cheap because of the threat coming from online retailers, but the Jensen investment team believed that Tractor Supply could hold its own due to its niche market and superior in-person shopping experience that its customers have come to love. The Jensen team was impressed by Tractor Supply’s strategy of hiring ranchers, farmers, welders and horse owners to provide customers with knowledgeable advice. The strategy seemingly paid off. By 2019, the retailer was in expansion mode, opening 88 new stores that year alone. Tractor Supply now operates over 2,100 stores in 49 states.
In the right place at the right time
In 2020 when Covid-19 hit and Americans found themselves social distancing at home, many found solace in new pastimes. Some began checking off renovation tasks on the to-do list, but many turned to other home-based projects like beekeeping and gardening to help pass the time. Deemed an essential retailer, Tractor Supply never had to close its stores and benefited from the Covid-induced DIY boom.
“They’ve seen a big change in their customer base since the pandemic and it’s skewing younger now,” says Pratt.
Consumers have switched heavily to online purchases as a result of the pandemic, but Tractor Supply can compete against behemoths like Amazon because it’s also able to immediately fulfill farmers’ non-discretionary needs such as feed or fertilizer, and therefore has some downside protection in challenging market environments, Pratt says. Furthermore, under the leadership of a new CEO, Tractor Supply has adopted several new growth initiatives including plans to convert a number of side lots into higher margin garden centers.
Taking a pause on price
And the story isn’t finished. Tractor Supply has plenty of runway left, Pratt says. The company was slower to adopt omnichannel selling than its competitors. Ordinarily that might be a red flag, but in this case it’s a benefit. Tractor Supply has been making up for lost time with investment in a new mobile app and the deployment of artificial intelligence and machine learning to identify shopping trends and product fulfillment.
“They’ve been behind the curve on digital, but they’ve been able to get away with it because of their unique customer base, which they’ve nurtured,” Pratt says. “We expect they are going to get the kind of growth from e-commerce that some companies had five or ten years ago.”
Collaborative to the core
While it’s clear that Tractor Supply is well-loved, the stock’s recent run-up has given the investment team pause. In late January 2022, the stock traded at $209 a share and sold at a price-to-earnings ratio of 29 for the trailing 12 months. For that reason, the team has not added to its position recently.
For Jensen, collaboration and discipline means selling a stock, even when it hurts.
“Our approach ensures that we’re not just holding on to a stock because one person loves the company and has covered it for five years,” Calamar says.
The company discussion in this article is solely intended to illustrate the application of our investment approach and is not to be considered a recommendation by Jensen. The specific security identified is taken from a representative account of the Jensen Quality Value Composite and does not represent all of the securities purchased and sold for the Strategy. 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. Performance results shown reflect the reinvestment of dividends and other earnings. Individual account characteristics and performance returns may differ from those of the representative account due to the size of the portfolio, client-specific constraints, tax considerations or other factors.
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