Jensen Investment Management’s holdings update for the month of August 2018, discussing their liquidated position in The Coca-Cola Company.
H/T Dataroma
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Q2 hedge fund letters, conference, scoops etc
We recently liquidated our position in The Coca-Cola Company, a long time holding in the Jensen Quality Growth Fund, due solely to the rich valuation on the company’s stock.
Despite weakness in its core carbonated soft drink business over the past few years due to changing consumer preferences, we believe Coca-Cola remains a high quality company given its strong market positions, well-known brand names, solid balance sheet, economies of scale and ability to generate significant amounts of free cash flow. Importantly, the company’s stock has historically been less volatile than the overall market, providing investors meaningful downside protection during periods of market turbulence. As an example, Coca-Cola’s stock outperformed the S&P 500 index by a wide margin when the tech bubble burst in the early 2000s, posting an annualized return of positive 4.40% from the index’s peak on 3/24/00 to its trough on 8/9/02. The S&P 500’s annualized return for the same time period was -18.56%. Similarly, during the financial crisis a decade ago, Coca-Cola’s stock outperformed the S&P 500 on an annualized basis by 20.20% from the index’s high on 10/9/07 to its low on 3/9/09.
While it is never easy to sell a strong business, we believe investors must remain disciplined when it comes to the price at which they are willing to purchase and hold a company’s stock. Our goal is to always own shares in outstanding businesses, but only if those shares are attractively priced. Because Coca-Cola possesses many of the characteristics we look for in a high quality business, we will continue to monitor its fundamentals as well as the valuation of its stock. Jensen’s Investment Committee may consider adding the company back to the portfolio at some point in the future if those fundamentals remain strong and its stock once again trades below our estimates of intrinsic value.
