Food for Thought

NEW YORK ( TheStreet) -- The quest for value can be both fun and profitable but the rewards from the identification and purchase of a stock that many investors have avoided go beyond monetary rewards.

That is, of course, if your thesis is correct. It is a thrill to go against the wisdom of the crowd, identify positive attributes that few others see, and ultimately be right. But the search for value does not always work out the way you hope it will.

There are times when you identify what you believe to be a compelling opportunity, do the research, get comfortable with the story (warts and all), take the position, wait for it to play out and ultimately throw in the towel.

Not every idea will come to fruition, and value investors tend to be very patient. Sometimes that patience pays off handsomely and sometimes it does not. Ultimately, the sell decision can be even more difficult than the buy decision. Falling in love with your stocks can certainly exacerbate the reluctance to close a position.

I recently reached the end of my rope with Wendy's ( WEN), a name that I'd owned the past three years. While this position was profitable, it was just marginally so, and I should have been out earlier.

What was a compelling story in 2009, the then-number 3 fast-food chain in the U.S. merging with Arby's, a deal led by the legendary Nelson Peltz, has not unfolded as I'd expected.

Arby's turned out to be a disaster and was badly hit during the recession. Same-store sales fell off of a cliff, and it became clear that the roast beef sandwich chain was an anchor around Wendy's neck. The company ultimately sold the chain last year for $430 million (retaining an 18.5% stake as part of the deal), and it seemed like a new beginning.

But overall performance since then has been marginal at best, and Wendy's has not been delivering the earnings numbers necessary to drive the stock higher. New lines of burgers and salads have not done the trick either; nor has the effort to reintroduce breakfast, at least at this writing.

I held on longer than I should have for a few reasons.

First, due to the leadership of the original merger architect and current chairman of the board Nelson Peltz, whose firm Trian Fund Management owns more than 21% of the company. I've owned other companies that Peltz has been associated with, and found him to be a brilliant activist investor.

Second, I viewed Wendy's vast real estate holdings, which include the land and buildings for 643 locations, and the building only for another 487 locations, as an opportunity for the company, and as a valuable asset.

Third, I believed that the company was just one brilliant ad campaign away from re-establishing the brand with consumers.

Unfortunately, the company has simply not delivered, and the stock has all but traded sideways for the past three years. In fact, Wendy's has been one of the worst performing restaurant stocks, in the midst of a great run for many restaurant names.

As for my original reasons for owning Wendy's, here's where I went wrong:
  • There's only so much that Nelson Peltz can do; he can't transform Wendy's into McDonald's (MCD).
  • While there's value in the real estate, it is not being recognized in this environment and there are currently no efforts that I'm aware of to monetize that value.
  • The days of Wendy's founder Dave Thomas stepping in to right the ship and appear as the company's spokesperson are unfortunately behind us (Thomas passed away in 2002). The likelihood of a successful ad campaign to the tune of the "Where's the Beef" ads of the 1980s seem unlikely. The company just can't seem to create a buzz among consumers the way it used to.
  • Admitting investment mistakes can be helpful -- if you learn from them, that is.

    I have been fortunate with some other restaurant turnaround stories the past few years, including Denny's ( DENN), but will save that for another day.

    At the time of publication the author had a position in WEN.

    This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

    Jonathan Heller, CFA, is president of KEJ Financial Advisors, his fee-only financial planning company. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

    Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.

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