The Power of Buying at a Low Valuation

At Hudson Square Investment Management, we believe that one of the cornerstones of successful investing lies in buying companies at a low valuation. While growth stories and momentum stocks often capture headlines, long-term returns are best secured when investments are made with a margin of safety. Buying at a low valuation reduces risk and amplifies upside potential, creating a powerful formula for wealth generation.

Why Valuation Matters

Investing is ultimately about probabilities. When a stock is purchased at a high valuation, investors require multiple favorable factors to materialize—continued revenue growth, margin expansion, and sustained market enthusiasm—to justify the price. On the other hand, investing at a low valuation provides a stronger foundation. It allows room for operational missteps, temporary industry headwinds, or sentiment shifts without the risk of a permanent loss of capital.

The best investments often come from misunderstood or overlooked companies that are not yet fully appreciated by the market. History has shown that companies with strong fundamentals trading at depressed valuations tend to outperform over time, as markets eventually recognize their true worth.

Market Overreactions and Opportunities

One of the key opportunities in buying at a low valuation is taking advantage of market overreactions. When a fundamentally strong company faces a temporary crisis or a shift in investor sentiment, its stock price can decline significantly, creating a buying opportunity for those who recognize the underlying strength of the business.

Case Study: Chipotle Mexican Grill

In late 2015, Chipotle Mexican Grill faced a series of foodborne illness outbreaks, including E. coli, norovirus, and salmonella incidents. These events led to widespread media coverage and a sharp decline in consumer confidence. As a result, Chipotle's stock price plummeted from approximately $750 in October 2015 to around $475 by February 2016, a drop of about 37%.

Despite the immediate challenges, Chipotle implemented comprehensive food safety measures and launched initiatives to rebuild its brand image. These efforts included overhauling food preparation protocols and transparent communication with the public. Investors who recognized the company's strong fundamentals and growth potential during this period had the opportunity to acquire shares at a significant discount, benefiting as the company's fortunes rebounded in subsequent years.

Case Study: Netflix

In early 2022, Netflix reported a net loss of 200,000 subscribers in the first quarter, its first subscriber decline in over a decade. This unexpected development, coupled with forecasts of further losses, led to a sharp decline in its stock price. Prominent investor Bill Ackman, who had acquired a $1.1 billion stake in Netflix in January 2022, sold his entire position by April 2022, incurring a loss of approximately $430 million. At the lows in 2022, Netflix shares traded below $180. Today Netflix shares are worth $966.

This instance underscores that even the great investors can face challenges in timing the market. However, for those with a long-term perspective, such periods of uncertainty can present opportunities to invest in companies with solid business models at more attractive valuations. Bill Ackman is an exceptional investor, and this episode highlights that even the best investors make mistakes sometimes—something every investor can learn from.

Combining Valuation with Growth

The best investment opportunities arise when low valuation meets strong growth. A stock trading at an attractive valuation provides downside protection, while a business compounding revenue and earnings creates long-term upside. The combination of these factors drives market-beating returns and reduces reliance on external factors such as Federal Reserve policy, investor sentiment cycles, or fleeting trends.

At Hudson Square Investment Management, our strategy revolves around identifying these asymmetric opportunities. We look for businesses where valuation is low, growth is sustainable, and the long-term thesis remains intact. By focusing on this principle, we aim to generate durable returns while mitigating downside risks.

Conclusion

A solid investment foundation starts with valuation. Buying at a low valuation is not just a defensive strategy—it is the ultimate offensive move in investing. By seeking out undervalued companies with strong growth potential, investors can position themselves for outsized returns while preserving capital.

At Hudson Square, we believe that disciplined investing, patience, and a keen eye for undervaluation create the conditions necessary for long-term wealth creation. That is why we continuously seek opportunities where great businesses are trading at prices disconnected from their true intrinsic value.

If you want to learn more about our investment philosophy and approach, reach out to us.

Disclaimer

This report is based on the views and opinions of Hudson Square Investment Management LLC, which are subject to change at any time without notice. The information contained in this report is intended for informational purposes only and is qualified in its entirety by the more detailed information contained in the offering memorandum of Hudson Square Investment Partners LP (the “Offering Memorandum”). This report is not an offer to sell or a solicitation of an offer to purchase any investment product, which can only be made by the Offering Memorandum.  An investment in the Partnership involves significant investment considerations and risks which are described in the Offering Memorandum. The material presented herein, which is provided for the exclusive use of the person who has been authorized to receive it, is for your private information and shall not be used by the recipient except in connection with its investment in the Partnership. Hudson Square Investment Management LLC is soliciting no action based upon it. It is based upon information that we consider reliable, but neither Hudson Square Investment Management LLC nor any of its managers or employees represents that it is accurate or complete, and it should not be relied upon as such. Performance information presented herein is historic and should not be taken as any indication of future performance. Among other things, growth of assets under management of Hudson Square Investment Partners, LP may adversely affect its investment performance. Also, future investments will be made under different economic conditions and may be made in different securities using different investment strategies. The comparison of the Partnership's performance to a single market index is imperfect because the Partnership's portfolio may include the use of margin trading and other leverage and is not as diversified as the Standard and Poor's 500 Index or other indices. Due to the differences between the Partnership's investment strategy and the methodology used to compute most indices, we caution potential investors that no indices are directly comparable to the results of the Partnership. Statements made herein that are not attributed to a third-party source reflect the views, beliefs and opinions of Hudson Square Investment Management LLC and should not be taken as factual statements. Furthermore, parts of this article were generated with the assistance of artificial intelligence to enhance clarity and structure. While AI-assisted content has been reviewed and edited for accuracy, readers should be aware that all investment decisions carry inherent risks, and past performance is not indicative of future results. Hudson Square Investment Management disclaims any liability for losses incurred from reliance on the information presented in this article.