On March 4, 2015, I sent the following email to one of our research analysts:

“Take a fast look at Korn/Ferry. High-end search firm. Just started a dividend. Has a massive cash balance. Ticker KFY”.

So our analyst prepared a research report on Korn/Ferry. Barry was very intrigued by Korn/Ferry’s inexpensive valuation and its leverage to a growing U.S. economy. The thesis was simple, as the economy grows, employment will increase and Korn/Ferry’s placement services will be in more demand. After reading the report and doing a lot more due diligence on the company, here’s what David Baskin had to say:

“ROE is very high if you strip out the excess cash. No idea why they have allowed this to accumulate. The balance sheet is pristine on the liability side but empty on the asset side. No plant, equipment or real estate. Looks like the market has never been in love with this name, but the institutional ownership is very strong. This company could be taken over given the lack of a dominant owner and the cash on the balance sheet. In the alternative, the company could buy a competitor. Very different to everything else we own, an interesting diversifier. On balance, I think this is quite an interesting idea, and a play on the growth of the US economy.”

So at the next scheduled meeting our Portfolio Management Committee agreed to start buying Korn/Ferry for clients in April of 2015, when it was about $31/share. It performed well for a few months and even hit an all-time high price of close to $38 by December of that year. Then the stock took a nasty turn.

The company decided to put its cash balance to work, as we had guessed, and acquired The Hay Group; the market was not happy about it. We thought this was a very sensible acquisition; Korn/Ferry’s main business is executive search, which can be a very volatile business during a recession, and this acquisition would allow the company to diversify into management consulting—in theory, providing a steadier and more predictable revenue stream. The market did not agree with us. Even though Korn/Ferry was producing respectable results, the stock began to stink. Much to the horror of our clients, Korn/Ferry’s stock fell to $18/share, less than half its high water mark, by June of 2016.

So what did we do? We did not sell – in fact, we bought more. Our thesis on this company had not changed. It would still benefit from a growing U.S. economy. It was still inexpensive on valuation (even more so now at $18!), and in time, we felt the market would become comfortable with the Hay Group purchase. And that’s exactly what happened. Korn/Ferry reported record results in 2017, and we expect further profit improvements in the coming years. As of today, Korn/Ferry’s stock is trading at a new high level, close to $40/share.

At Baskin Wealth Management, we don’t sell stocks because they drop in price. We don’t put stop losses on stock prices and let the market dictate when we sell a stock. We let business fundamentals be our guide and, if the fundamentals are set to improve, we are thrilled to buy more of a company, especially if its stock price has fallen


Barry Schwartz

October 16, 2017