Big Profits in Little-Followed Companies: Tootsie Roll Industries

One of the mistakes a lot of new investors make is that they assume they need to invest in some revolutionary technology. They think they need to find some outfit that’s inventing the 18th dimension or planning to set up colonies on Pluto.

That’s not the case at all.

Those opportunities do exist like Apple and Google, but they’re very rare. Even Apple was dead money for years, and Google hasn’t done much over the past few years. Instead, investors ought to focus on companies that consistently churn out the profits. If you look around you realize that there’s money to be made everywhere. In fact, it is being made everywhere.

Just because a company seems dull doesn’t mean it’s not worth investors’ attention. Many times, the dull ones are the best. The key to business success is actually quite simple; keep your costs down, be wary of debt, take care of your customers. All the numbers and ratios I refer to are merely reflections of how well a company is keeping faithful to these basic concepts.

I was reminded of this as I read Ben Kesling’s profile of Tootsie Roll Industries ($TR) in the Wall Street Journal. Who would think that the little candy-maker has been enormously profitable? The company has raised its dividend every year since 1966, and the stock is up 100-fold since 1980.

But Tootsie Roll is in a rather unusual position right now. The firm is run by an elderly couple, Melvin and Ellen Gordon, and they’ve become incredibly secretive. Kelsing writes:

The 116-year-old company, run by one of America’s oldest CEOs, has become increasingly secretive over the years, severing nearly all of its connections to the outside world. Tootsie Roll shuns journalists, refuses to hold quarterly earnings calls, and issues crookedly-scanned PDFs for its earnings releases. The last securities industry analyst to maintain coverage of the company stopped last year because it was too hard to get information.

“I think the only way you can get a tour is by jumping over the fence and sneaking in,” said the last analyst to attempt the task, Elliott Schlang of Cleveland firm Great Lakes Review.

Tootsie’s profit margins have come under pressure over the past few years, and the company desperately needs a shake-up. Unfortunately, there’s no clear succession plan. In recent years, large confectioners have snapped up smaller ones, but Tootsie has insisted on remaining by itself.

There’s clearly a lot of untapped potential in Tootsie. My concern is that I have no idea if anyone can try to unleash that anytime soon.

Posted by on August 23rd, 2012 at 9:53 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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