As we have previously discussed, following Private equity investors is a method that can lead to outsized returns.
Specifically when Private equity investors push a company to pay down its debt. This morning we saw a perfect example of this play out with residential and commercial security provider, ADT Inc. (ADT).
The company’s shares are up more than 60% after Alphabet Inc’s Google (GOOGL) announced it is purchasing a 6.6% stake in the firm. The deal is worth $450 million and now allows ADT’s technicians to sell and install Google’s Nest family of products.
ADT said the companies would work together to combine Google Nest products like cameras, thermostats, doorbells, and alarm systems with ADT’s installation, service, and professional monitoring network.
With ADT now trading over $14, I intend to take something of a victory lap…
I recommended this stock to my subscribers back in March of 2019 at only $6.44 a share. I pointed out then that this was a classic private equity play.
Private equity firm, Apollo Global (APO), owned (and still owns) most of ADT and was looking to get the stock price higher. ADT was a market-leading brand generating a ton of cash flow. And at the time, they started using that cash to pay down debt and buyback stock.
We all know that buybacks help move stock prices higher, but investors often forget that debt reduction strategies are just as powerful. Paying down debt creates equity and also lowers the company’s cost structure which should eventually increase free cash flow.
Buying shares of a leveraged company that is paying down debt is a strategy I often look for. It allows us mere individuals to create private equity-like returns without paying fees. In this case, we had a bonus of having a high performing private equity giant, Apollo, overseeing the paydown for us.
One of the essential considerations in a debt paydown story like this is the price you pay relative to the produced cash flows. In our initial purchase of ADT, we were paying less than 6.5 times the cash being generated by the company.
In March, we suggested doubling down on the stock as ADT fell to about $4 in the initial coronavirus sell-off.
And even in late April, I once again suggested adding to your stake in the company.
Those who just bought the initial recommendation have better than doubled their money. The brave souls who went along with my table banging double downs over the next year have almost tripled their money.
Stories like this are why I pay such close attention to public companies with private equity ownership.
Many of them are debt paydown stories similar to ADT with massive upside potential.
While everyone else is buying the same handful of stocks being championed by the media, I am digging into the portfolios of the greatest wealth creators in financial history to find ideas Wall Street will overlook.
– Tim
Links & Resources
- Related: Why PE Replication is so Powerful
- Read more content from Tim Melvin