Why ‘Buying the Crash’ Beats Buying the Dip

On this episode of The Long View, Amit Wadhwaney, portfolio manager and co-founder at Moerus Capital Management, talks about survivability, risk, and how value investors can come out ahead.

Here are a few excerpts from our conversation with Wadhwaney.

The Value of ‘Extreme Cheapness’

Amy Arnott: One thing you’ve said in relation to finding cheap assets and cheap businesses is that trouble is opportunity. Can you expand on why you think that’s the case?

Amit Wadhwaney: Yes. Now, something causes cheapness. Mishaps at the level of a company, a good company slips on a banana peel. It happens. It really does happen. You wind up with companies that have amazing market positions and great businesses, and a bunch of things happen to them at one time. They converge, and of course, the stock crashes on you. It just crashes. So what we’re looking for is, I want to call it extreme cheapness. It’s not quite buying the dip. It’s a bit more like buying the crash. Trouble causes this stuff to happen. OK. It’s not always trouble, but it presents us with an opportunity. It can be long periods of neglect, disinterest, or operating in a business area that is kind of loathed by people. Companies can make mistakes, as I mentioned earlier. For example, Natura, a company beyond, which is an absolutely beloved company. It’s a fabulous company that makes beauty products in Brazil.

Brazil, like many other Latin American countries, has a very large beauty product spend. Let me expand upon that, where I would go if I were to comment about the spending in Brazil, but Latin America generally. Now, their business model historically used to be purchasing versus selling. And they proceeded to … They made lots of money. They were very, very successful for beloved premium-price products, and they were environmentally sensitive. They did a lot of things that appealed to people and had products, which, as I understand, are quite, quite good. They proceeded to expand, but with the money they had, they made a series of acquisitions. Most of them, ill-conceived and ill-fated, so the company’s balance sheet went out of kilter. Stock went down by almost 90% between 2022 and 2024. And that is trouble. I mean, within this trouble, we saw opportunity.

The opportunity that the company, if they came to their senses, would reconstruct themselves by basically divesting all these other flotsam and jetsam that they acquired along the way with … The ideas were squishy ideas. The reasoning was kind of squishy. They did not recognize the limitations of their own, that these are not businesses that they could manage. I mean, they were a Latin American company, person-to-person selling, and they were not going to manage chains of brick-and-mortar stores across the world; that was The Body Shop I’m referring to, which was a disaster. They bought Avon across the world, because they thought it was also person-to-person selling, but selling in different parts of the world, different products, managing different sales forces—this is a wildly labor-intensive business. You cannot let these people go and do their own thing.

You have to have some, I don’t use “control,” but some degree of management. It’s management-intensive in a way they couldn’t manage. Anyway, Natura basically got rid of all these things, and it’s sort of coming to. So bad things can happen to very good companies, but that’s not the only source of opportunity, just so you note that I’m not out there looking for disasters or trouble. But trouble, it does sort of make you sit up and look.

Realizing Value as Businesses ‘Emerge From Their Funk’

Ben Johnson: You’ve referred to value-accretive corporate activity. So asset sales, spinoffs, buybacks, et cetera. Is this purposefully, intentionally something that you’re looking for? Why has this been a recurring theme in your portfolio? Is it something that you can even do intentionally, or is it just kind of more emblematic of an artifact, almost an outcropping of your approach?

Wadhwaney: Really, the latter. What we try to do is buy a business cheap. Cheap in relation to what somebody in the industry would normally purchase in a cash transaction. The businesses usually have a number of characteristics, which are interesting to us and potentially to somebody else. One, they have businesses which, at the core, are actually good businesses, which may, at the point of time we acquired them, be underperforming or going through some sort of cyclical downturn. Something like that has depressed the performance and implication of the price. Often these businesses, and because they’re well capitalized, they’re usually a down sheet; they could have surplus assets. You can do lots with these businesses. When you buy them cheaply, as I measure, our approach to cheapness focuses on what you can sell. You can basically … It’s asset-based investing in terms of what can the businesses … What will they transact for in a sane, valued transaction that is assets A, B, and C, here and now, what could you sell these assets for?

You know, an arm’s-length transaction, not a distressed transaction, but an arm’s—I mean, you’re buying a distressed transaction, distressed valuation. So that is an attraction to us. If we have done our work correctly, this should be, I mean, catnip to an acquirer, you know, takeover bait. Now, ideally, and I say actually, because we’ve had some mishaps, we’ve had takeovers at prices I wish were much higher. Our good companies get taken over at prices I wish—we want more, obviously. You wind up buying these things, and we’re buying businesses cheaply. We like to own them for long periods of time, over which, as businesses emerge from their funk, they do better and better. As things normalize, they will do better and better and better, and we will do well alongside them. Obviously, we have to have sensible management. You have to have obviously the right sort of conditions, which may take time to emerge in the environment in which they operate.

It could take time to emerge. Usually, in the passage of time, things sort of normalize, so to speak, and we do OK. Companies that are overcapitalized may have excess assets, and they might wind up selling one or more of these assets. They may wind up either keeping the cash on the balance sheet for future acquisitions, buying those shares, or returning to us via dividends. I mean, obviously, relative tax efficiency, they stack different degrees of tax efficiency in these different transactions, but that is one of the ways in which value is realized, crystallized, maybe returned to us. It is a byproduct of what we do. Buying reasonable businesses, decent businesses, really cheaply, allows this to happen.

Compiled by Valentina Djeljosevic.

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