Flowers Foods: The Suit Was Settled Will the “Dough” Keep Rising?
This article is presented as an update to an article I published on Flowers Foods (FLO) on September 22, 2016. Later in this article I will provide a direct link to the original. However, my primary purpose behind this updated article is to reflect on an important investment concept that my experience suggests that many investors tend to either overlook or improperly respond to. In the long run, a company’s stock price will be driven by the operating success that the business behind the stock generates. In contrast, in the shorter run, the company’s stock price can often be greatly affected by emotional responses often instigated by certain events.
The operating success of a business is easily measured by examining important fundamental metrics. These include, but are not limited to, earnings, cash flows, dividend payments, balance sheet items, etc. A careful review, examination and analysis of these important fundamental metrics speak volumes about the quality and success of the business being evaluated. In simple terms, analyzing fundamentals tells you how successful the business has been, how skilled its management team is - and has been, and whether or not it represents an enticing investment opportunity from a shareholder’s perspective.
Events, on the other hand, can often incite highly-emotionally charged reactions. As a result, events can often have a dramatic impact on short-term price action. But most importantly, events can have a significant impact on short-term stock prices even when they really do not have a significant impact on the long-term viability of a given business. The secret to dealing with events, and event risk, is to determine whether it represents a temporary interruption in the business, or a permanent impairment of the business’s future prospects.
When an event represents a temporary interruption, it can often lead to an extraordinary long-term opportunity for investors. More importantly, at least in my personal experience, most events turn out to be temporary in nature. However, panicked investors caught up in the hype and/or hysteria will often sell instead of purchase. Therefore, they frequently take unnecessary losses, and worse yet, turn away from extraordinary long-term opportunities. Some typical events that elicit this kind of behavior might be a product recall, a lawsuit, an industrial mishap such as a factory explosion - to name just a few of the many possibilities.
Flowers Foods, Inc.: Lawsuit an Event Risk
In my original article titled “Flowers Foods A High-Yield Risk Worth Taking” I suggested that the precipitous drop in Flowers Foods’ stock price since October 2015 could be attributed to two primary sources. The first, and in my opinion, most prominent issue was a significant slowdown in earnings and revenue growth that started with fiscal 2014 results. The second contributor to negative investor sentiment was the pending lawsuit which represents an example of an event risk as discussed above.
However, the lawsuit has been settled, which turned negative investor sentiment into positive investor sentiment - at least temporarily. Consequently, Flowers Foods’ stock price has surged approximately 30% since the end of September when I published my original article. But most importantly, is that my current assessment indicates that Flowers Foods has gone from being attractively undervalued in September, to being fairly valued currently. I present my current assessment on Flowers Foods’ current valuation and future opportunity in the following F.A.S.T. Graphs™ fundamental video analysis: