In honor of Thanksgiving, I’ve decided to write about my biggest turkey, Aurora Foods. Aurora Foods was born of private equity cobbling together a bunch of orphan brands from major food manufacturers and loading them up with debt. Brands you probably have in your pantry: Duncan Hines, Lenders Bagels, Van De Kamp, Mrs. Paul’s, Celeste Pizza, Aunt Jemima Frozen Breakfasts, and several others. I first bought it when it was trading at a reasonable P/E and had shown good numbers.
My timing was impeccable. The very next day, the stock was halted and it was announced that earnings would be delayed. When the stock next traded, it was down 70%. So I bought more. It soon came out that management had committed a massive accounting fraud and they later went to prison. I kept holding though, and even buying more as it dropped further, believing that new management could revive these once-proud brands. I even got more shares and cash as part of a class-action settlement. I still have the worthless stock certificate I received as a reminder of my foolishness.
New management was indeed able to get the company back to profitability for one quarter. It was enough to get them their bonuses that year, and I was able to sell a little at a profit thanks to the runup. The company would never report a profit again and soon thereafter entered bankruptcy and my investment disappeared with it. The prepackaged bankruptcy merged Aurora into some castoff brands from Campbell to form Pinnacle Food Corporation.
I learned several valuable lessons. Big companies rarely sell brands that can easily be “fixed” unless forced to because of antitrust concerns. If Procter & Gamble’s marketing whizzes and ample capital can’t fix it, Joe’s Overleveraged House Of Dead Brands probably can’t either. If an IPO is happening and somebody other than the company is getting the bulk of the proceeds, stockholders will more than likely be left holding the bag. And what goes down doesn’t always go back up.
What was your biggest turkey? What did you learn from it?
My biggest turkey was an investment in a company called Allegiance Telecom during the height of the telecom winter in 2001-2002. I posted some of the gory details in a blog entry called Hedging Your WIMAX Bet.