This is the sight of disappointment and unmet expectations.

Many investors piled into this stock because it was growing revenue and profits at 50% year over year. Now that the business has encountered some temporary headwinds, investors throw in the towel.

This is one of the reasons why building conviction in the stocks you own is very important. 

The other day I was talking to Filipe – a new subscriber – and the conversation drifted to the (false) precision of price targets and the need for formulas to calculate the intrinsic value of a stock.

If you’ve been doing this for some time, you should know by now that investing isn’t an exact science like math or physics. Businesses don’t go up (or down) in a straight line. There’s a lot of stuff happening along the way.

That’s why it’s paramount that you build a strong conviction to hold the stocks that you own through the good and bad times. And believe me, there will be bad times. If you don’t have that conviction, you’ll probably sell at the worse time.

In the case of Mama Mancini’s, I have built that conviction. Although I would prefer better results, I know that the business is heading in the right direction and that the management knows what it’s doing. If I hadn’t yet bought 10% of the Portfolio worth of Mama Mancini’s, I would be loading up today.

Let me explain why:

First, the higher freight and protein costs, which were thought of as temporary, now seem like they’re here to stay (maybe the freight costs won’t stay this high, but still…). And although Mama Mancini’s hasn’t yet been able to pass them through to its customers, Carl (CEO) says that they’ll begin to do so in January.

He also mentions something interesting. Last year there was a surge in the price of beef. As the prices went up, the consumers didn’t accept those prices and food wasn’t sold. As we know today, consumers were “right”. The price of beef came down and consumers went back to the shelves to buy their food. 

But now consumers seem to be accepting the higher prices. As this happens, it signals all the producers (like Mama Mancini’s) and retailers that they can pass through the higher costs – hello inflation.

The gross margin is going through a tough period where the input costs are higher then the output prices, but that won’t last and gross margins will come back up again as the company raises its prices and the cost of freight lowers.

Now, we might not be seeing those higher gross margins in the next quarter, but we’ll probably be seeing them 2 or 3 quarters down the line.

 

WHAT ABOUT THE ACQUISITION?

On top of that there’s the acquisition that everyone’s so eager about. On yesterday’s earnings call, there was a private investor who made sure he showed Carl his dissatisfaction with the never happening acquisition. He was the voice of the market (mine included).

When confronted with such questions Carl said that “these things take time” and that “when you deal with a private company, you have to do more intensive due diligence”, and he also hinted to the deal being in the final stage of negotiations.

Carl also guides for $100M in revenue by the end of the next 18 months. Let me remind you that if you annualize this quarter’s revenue, the company is only making $44 million in revenue. $100 million would mean more than double the revenue. 

Some may say that this is just the management voicing their internal dreams and aspirations – and we all know how promotional managers can be – but I sincerely believe in Carl. He’s one of the best operators out there.

In a stable margins environment, every $10 million in additional sales adds $2 million in profits. If he can grow revenue by an additional $40 or $50 million, we could be talking about $8 to $10 million in additional profits. Yes, there will be some added interest costs from the acquisition, but what matters to me is the direction and not the accuracy of the estimate.

$8 million at a Price-to-Earnings of 15x, that’s an additional $120 million in market capitalization or $3.3 per share on top of the current $1.9.

In the end, it all comes down to the conviction that the opportunity to grow is there and that the management team is able to grab it. I believe in both. 

The company has recently increased production capacity to be able handle $10 to $12 million in incremental annualized sales and it keeps developing new products like the meatballs-in-a-cup and ready to eat meals. Carl is guiding for $11 to $12 million in revenue in the fourth quarter, but I believe we’ll be seeing much higher revenue than that in the following quarters as these new product lines get rolled out to existing and new customers.

To conclude, I believe that, at these prices, Mama Mancini’s represents a very compelling opportunity. That’s why I’ll be holding my shares of Mama Mancini’s, hopefully for many years to come.