RickRolled by Tootsie Roll
I started talking to someone yesterday who asked me to look at Tootsie Roll Industries (NYSE: TR) as a potential undervalued opportunity. For those of you that don't know, rickrolling is an Internet meme. I think that after looking at the valuation of Tootsie Roll, the hypothesis of owning it as an undervalued opportunity gets blown out of the water without much effort. At first, I would have just thrown this opportunity into the garbage, but I feel that it is worth illustrating how a few people can rickroll the heck out of a bunch of people who don't do their own homework and believe in the disproven hypothesis that markets are efficient.
Not in my Lifetime
Would I ever pay 25x earnings for a 0 growth company? Not in my lifetime. Tootsie Roll Industries is trading at a P/E of over 25 for a company with 0 growth. That’s stupidity at its finest, or is it? Here’s why I think that understanding market dynamics is critical. For starters, would I ever pay 25x earnings for a 0 growth company? Not in my lifetime. The stock hasn't gone anywhere in years. It's not going anywhere soon. The only possible direction? Down. Far down to fair value. Will it go down? I can't say that it will. Hence the Rickroll.
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This is the best part. When you are in charge and you have money, you can elect to make dumb decisions. I'd define a dumb decision as something suboptimal for the public share holders. The Gordon family’s share ownership represents a majority of the combined voting power of all classes of the company’s common stock as of December 31, 2010. They are holding the price of Tootsie Roll at over 100% more than what it is worth.
Anyone who buys at this price is a downright fool. Anyone who owns it with the intention of making above average market returns is likewise, a fool. This is hilarity at its best. Tootsie Roll is not a short, but it's obviously overvalued by all metrics that I've ever seen. This is a fun case where something may continue to be overvalued in perpetuity due to inside stupidity.