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Investing in the consumer space means analyzing more than company balance sheets. Over the last four years, senior portfolio manager Susan Schmidt has scrutinized shopping and media consumption trends, and discussed TV ratings metrics with the company behind post-apocalyptic drama The Walking Dead.

Whether assessing the fate of appliances or the popularity of zombies, she and her firm’s analysts have found one persistent trend: the rise of e-commerce.

“We’re seeing so much disruption within consumer discretionary because, remember, [it] involves retail,” says Schmidt, senior vice-president at Westwood Holdings Group in Dallas, Texas. Due to the growth of online giants such as Amazon and Google, and of streaming services like Netflix in the media space, the consumer sector is evolving. “It’s not clear where it’ll settle,” she says.

Small and large companies are struggling with brand resilience and loyalty, so Westwood is also monitoring consumer-sector M&A activity. A 2017 KPMG report found 2016 was “a strong year” for deals in the consumer space compared to post-recession volumes, and forecasted that M&A appetite would grow.

With these factors in mind, Schmidt was “actually underweight consumer discretionary” on the cusp of 2017. (That’s still the case, she says, but in 2018 she will be looking for specific opportunities and potentially adjusting that weighting, “rather than committing to an overall sector approach.”)

In the consumer space, she’s dealt with the aftermath of acquisitions as well as businesses that seem like they’re on their last legs. Here’s how the purchases of two companies in the sector played out.

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AMC Networks (NASDAQ: AMCX)

The key to success for media companies is strong content—and that’s exactly what AMC Networks brought to the table in the fall of 2013, says Schmidt. Launched more than 30 years ago and originally called American Movie Classics, the company changed with the times. By 2002 , AMC was one of several networks to have tweaked its name and shifted its focus to younger viewers.

In 2013, says Schmidt, “Our analyst had upgraded it, and thought it was an interesting investment opportunity because of valuation and [because] it had more potential than the market was giving it credit for.” Network hit Breaking Bad had just ended, Mad Men was on a tear and The Walking Dead was three years in.

On top of that, AMC had “very differentiated content” across various platforms, including SundanceTV, the Independent Film Channel and WE tv. When content was popular, the company also used it “as the starting point to launch additional original programming,” says Schmidt, as with AMC’s launch of Fear the Walking Dead in August 2015.

Dissecting AMC’s earnings was part of her process, but Schmidt also looked at TV ratings, advertising trends, and whether cable operators were interested in the content.

She also tuned in to earnings conference calls to hear about consumer demand and upcoming programming. She liked what she heard, so she bought the stock in the US$65-to-$67 range in the fall of 2013.

Turning point

Schmidt’s position in AMCX fluctuated between 2013 and 2017. She bought more in May 2014 at US$60 and topped up again in October of that year at around US$55.

“We sold [some] as we started to get into the summer of 2015,” she says—on June 30, in the US$82-to-$84 range, and more between July 27 and 29, in the same range. The stock hit a five-year closing peak of more than US$86 in mid-July.

Schmidt continued to adjust her exposure until June 2016, when AMCX dipped back down to between US$55 and $65. “We always maintained a base position, but it had ups and downs,” she says. “We never saw the content cycle really work for them. Fear the Walking Dead did well for its first season but has petered out. The Walking Dead has passed its peak and is on the decline.”

Schmidt was also concerned “about the delivery of content” since consumers have so many options, including Netflix, Hulu and Amazon Prime Video. “As we moved further along in the timeline, the unknowns started to outweigh what we thought were the potential positives of the investment thesis,” she says.

Results

Schmidt and her team exited their position in spring 2017, while the stock still had legs. “We decided we weren’t going to wait until the death of The Walking Dead,” she quips.

While Schmidt trimmed her position in summer 2015, taking a profit of nearly $20 over her purchase price on the shares sold, her final sale was on Apr. 4, 2017, at US$58.62. “Our last chunk of sales were in the US$58-$60 range,” she says, meaning she took a loss of around US$7 on the remaining position.

Would she invest in the company again? If AMC Networks pulled out some showstoppers in the future and if “we still felt it represented an attractive valuation, we would probably go back and revisit it,” says Schmidt.

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Jarden Corp.(NYSE:JAH; no longer listed)

The consumer healthcare analysts at Schmidt’s firm identified Jarden as a good buy in 2015. It offered more than 100 “broad-based and well-known” brands that Schmidt also characterizes as “resilient”: outdoor company Coleman, appliance maker Oster, and Rawlings Sporting Goods among them.

On top of its product diversity, Jarden had “the ability to generate a lot of free cash flow,” along with a “very consistent growth profile,” she says. Even better, the management team—led by co-founder Martin E. Franklin—was prudent with cash flow. “They were either paying down debt, or they were looking for […] acquisitions to bring into their distribution,” says Schmidt, and they also bought back shares when needed.

Based on all of these factors and meetings with management, Schmidt found “there was a stability to the platform [that] made it attractive.” While the market was “penalizing [Jarden] for volatility in the sales trend, we were seeing long-term stability in the sales trend, and that they didn’t deserve to be trading at a discount to their peers,” she says.

She began buying the stock on Nov. 30, 2015, making all her purchases during that week in the US$46-to-$47 range. She also set an initial three-year price target of “close to US$90.” While her one-year target was in the US$70-to-$73 range, Schmidt expected steady growth based on the company’s core fundamentals and, she says, “cash flow is a big driver for us.”

Turning point

Less than a month later, Schmidt had to revisit her forecast for Jarden. On Dec. 14, Newell Rubbermaid (now Newell Brands) announced plans to snap up the company in a deal valued at US$15.4 billion.

In its release, Newell said it wanted to create a combined consumer goods company with US$16 billion in sales and a “portfolio of power brands.” (As of February 2016, Jarden Corp. said it had approximately 35,000 employees and was on the Fortune 500 list. Newell Rubbermaid, as of Jan. 31, 2016 , had 17,200 employees and was focusing on growth.)

The news surprised Schmidt. “I was a little disappointed because I felt like we’d just found this great company to invest in and it had all these great characteristics, and apparently someone else thought that as well,” she says. “We had perceived Jarden to be the acquirer,” based on its history of “picking up niche brands” (see timeline below).

She first checked whether the deal valuation made sense. It did, says Schmidt, based on her team’s three-year price target for the stock.

Jarden: a history of acquisitions

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Jarden: a history of acquisitions

Based on that view, she considered next steps. Typically, the prospect of an acquisition means trimming to mitigate the risk of the deal falling through, says Schmidt. With Jarden and Newell, however, she forecast the combination would enhance both businesses.

“As an owner of a stock, you also have to look at whether there’s a competing bidder,” says Schmidt, but that wasn’t the case here. Overall, Newell made “a lot of strategic sense,” considering the similar product lines of both companies and their management styles.

Results

Schmidt held Jarden until the end. The acquisition finished on April 15, 2016, after which Newell Rubbermaid became Newell Brands; JAH stopped trading as of April 18.

Says Schmidt: “We were so confident this [deal] was going to go through [that] we sold, basically, at the acquisition price.” That price was around US$60, meaning she banked a gain of nearly US$14 in April 2016.

Still, it wasn’t the ending Schmidt expected. “We thought we would own it for longer and that it would continue to appreciate.” Newell’s purchase meant “the market cap became too large for us to hold,” she adds. “It was in our small- to mid-cap portfolio, and it sized itself out.”

Katie Keir is Content Editor of Advisor's Edge. Email her at Katie.Keir@tc.tc.

Originally published in Advisor's Edge

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