Is this what they mean?
When pundits talk of blood in the streets, is this what they mean?
The chart above is a Market Heat Map for the All Ordinaries. The brightest green is a move up of more than 6% on the day. Not many fit that bill today. The brightest red is a move down of more than 6%. The size of each box is related to market capitalisation. You can see the four big boxes in the lower middle of the heat map – thats the big four banks.
And if you are wondering what the little bright green stock is at the lower right of the Heat Map, that’s Industrea (ASX: IDL, Skaffold Quality Score A3). A year ago IDL was trading at $1.57 but its intrinsic value in Skaffold was just $1.13. Based on expected 2012 results Skaffold’s intrinsic value was just 83 cents and on May 9 this the share price fell to 80 cents. So it a took a year to get there but the price traded at a 4% discount to intrinsic value – admittedly not a very wide discount. And today IDL is bright green in a sea of red ink because it received a takeover offer from GE at $1.27.
Turning back to the Heat Map and the red appearing everywhere (it could all be very bright green tomorrow – we are not in the business of predicting prices) the fact is that it’s not common for us to look at prices with this much interest unless things are indeed getting interesting. We know the companies we’d like to own and the prices we’d like to pay – all that’s left to do is to turn the market on and see if anyone is prepared to do something silly today.
Today might just have been one of those days. Only time will tell and of course never bet the farm on one throw of the dice. So are we looking at a market on the precipice (the same precipice many of you have indicated you believe house prices are sitting on)? Or if you are reading this after the close, have you missed the boat? WHat are your advisers telling you?
There are some incredibly learned and articulate readers that regularly visit and I’d be delighted to hear your thoughts.
Posted by Roger Montgomery, Value.ableauthor, SkaffoldChairman and Fund Manager, 16 May 2012.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Luke
:
Roger, I agree with the points you have made in another post about the massive supply response for iron ore negatively affecting the price, as it won’t all be absorbed by demand.
Commodity booms never end at the same time for all commodities and price peaks are always staggered.
Are there any other commodities for which you can see that a huge supply response either now or in the next few years will be likely to affect the price negatively?
Roger Montgomery
:
Hi Luke,
Yes. We think there’s another industrial metal that we believe could come unstuck and quite dramatically, but we’d like to complete our analysis of all the data before putting our collective necks on the block (again!).
Luke
:
Market lows are usually retested in a downturn. I’m looking for the March 2009 lows to be hit again, with sovereign default(s) as the trigger, before I buy on a large scale.
The ASX since the end of 2007 is starting to look kind of like it did from the 87 crash onwards. The 87 low was hit again three years late in 1990, after two peaks.
I think the the secular bear market in the US which started in 1999 has at least 4 more years to run before it hits the magical 17 year mark.
I hope this doesn’t sound like techincal analysis, it isn’t meant to be.
Roger Montgomery
:
Thanks for your comments Luke. I am sure its adding a useful perspective to the blog’s readers.
Ann
:
Hi Roger,
I think the EU needs to send Greece a message and let them slip under, as a warning to others. They have had more than enough help and encouragement, no use dragging the rest under.
Roger Montgomery
:
The issue I believe ANne is that there are others perhaps in worse financial mires – how does one justify staying if there’s a Grexit?
Andrew
:
Anyone want to buy a part of a social network operator at a PE ratio at around 100x earnings?
The Facebook ipo went live and turned out to be a but of a fizzer, after rising around 10% early it closed up 1% wih rumors that the underwriters stepped in to support the price. To be fair there were also issues with the Nasdaq operating system so who knows if that played a part.
I think that the FB listing would be a good indicator as to how the retail investors are feeling, there was one trade rumored to be out in to buy at a maximum price of $4000. It will be interesting to see how it goes over the long term. I am not a fan of it as an attractive investment however a lot of people have the emotional attachment to the company and I thought that it would make an interesting open as frenzied FB fans dived in to buy them. The volumes were huge, I dare say a lot of the insiders were selling out rather than holding and this meant that the supply and demand ratio didn’t really move significantly.
Anyone got any thoughts on this high profile market moment? I always thought it was expensive and it seems to be interesting the retail base rather than the institutions.
Roger Montgomery
:
Thanks ANdrew,
If I may add the summary from Bloomberg:
May 18 (Bloomberg) — Facebook Inc. hovered near the initial public offering price in its trading debut, following a record IPO that made the social network more costly than almost every company in the Standard & Poor’s 500 Index.
The shares rose 23 cents above the IPO price of $38 as of 4 p.m. in New York. Facebook sold 421.2 million shares to raise $16 billion yesterday, giving the company a $104.2 billion market value.
Underwriters bought Facebook’s stock to keep it from falling below the IPO price, people with knowledge of the matter said today. The offering valued the company at 107 times trailing 12-month earnings, more than every S&P 500 member except Amazon.com Inc. and Equity Residential. The performance disappointed some investors who expected a first-day pop.
Brian
:
The older I get, the more I look for safer plays. When the market is down I like to look at the LICs. Their prices can sink to incredibly steep discounts to their NTAs, and seldom do you have to worry about them going bust. Indeed, in the lead up to the GFC, I remember one LIC fund manager pointing out in his monthly newsletter how the portfolio consisted of something like 70% cash, with the rest of the portfolio therefore priced less than 50% its market value. (I never really thanked you properly for that one, Roger!)
All the best! Brian.
Roger Montgomery
:
You have now Brian. Delighted to be of assistance and thank you. Stay tuned!
Alex
:
Roger. I’m really glad you put up the Skaffold chart of IDL. As you point out the low of .80 was only a very small fall below IV..yet in retrospect it was a standout buy at this price. This is one of the puzzles I find with your Investment philosophy…to *alway’s* buy at a deep discount to IV. Don’t get me wrong, I love the general VA philosophy..but “Always”? I’d love you to comment how you determine what discount’s to put on what stocks… Do A1’s demand a lesser of a discount to say B3’s…Does it depend on the sector, who the likely suitors (if any their might be), company debt, or some other factor like volume of trades? Or is it just a “gut” feeling? Cheers :)
Roger Montgomery
:
Hi Alex,
Great question. I do recall chatting about it earlier here. Looking at forecast IV’s is helpful and yes, a strategy of adjusting discounts based on quality is another option. The objective however is not to catch every opportunity rather only those with the most attractive risk reward characteristics. Quality and wide margins of safety knock out a few opportunities but also mitigate many risks.
Ian
:
Hi Roger,
After reading valuable I decided to stop listening to things my adviser was telling me, especially with their incredibly high valuations of companies like BHP, Rio and Woodside.
I have found that Valuable and Skaffold have been very helpful. My portfolio Month to date from the end of April to 18th of May is only 1.4% down compared to the market being more than 6% down.
If I still listened to the advisors I used to I am sure that my portfolio would have fallen in line with the market or perhaps even worse.
It sure highlights that fact that buying good quality companies with little or no debt, high ROE and good prospects at prices below their intrinsic value does work.
I don’t think that I have missed the boat and still sit with cash in hand if Mr Market makes me an offer that I just can’t refuse. I have had a few comanies on a watch list for a while and now might present an opportunity to buy something and start looking closley at a few more companies that have dropped in price.
Roger Montgomery
:
Great to hear Ian. I am delighted that you also still have some cash weighting to take advantage of further opportunities.
Doug
:
Matthew Kidman in his book said one of the great value buys in a time of panic is “Cash at a discount” Coal industry player White Energy { WEC ] had 43c per share in cash end March and today in the market is 31c.Even with cash burn of 1c per share each quarter thats a lot of discount.
Disclaimer; I hold WEC.
Roger Montgomery
:
Thanks Doug. Just had lunch with Matthew last week (lovely Greek food – to keep with the global theme) so delighted to see him mentioned here.
Simon
:
What about holding WHC it’s only a matter of months now before a takeover offer is made. Yes the wagons are startin’ to circle.
John C
:
Good call Doug. I have been looking for such stocks in the gold mining industry also. There are two that have accumulated gold that alone is worth more than double their share price (at $1,500/oz), so even if the gold price falls to below $1,000/oz, they would still be worth more than their share price based on their above-ground (already mined and processed) gold, without allowing a cent for their other assets (like their below-ground yet-to-be-mined gold). The biggest downside to these two stocks is very, very low liquidity. However, that hasn’t scared me off and I hold them both (and have mentioned them here before). One of them announced a $5m share buy-back after market close yesterday (Friday 18th May), so that may shake things up. There are a few other stocks that have been mentioned here in the past that also have very few buyers and sellers and often don’t trade for days. One of them is FFI, which has a large commercial land asset in metropolitan Perth which many believe has not been properly valued by the market. I don’t hold FFI, but they’re on my watchlist. Low liquidity stocks can get VERY cheap in a panicked market when people are stampeding out of it. That will present opportunities to pick up companies for less than their net tangible asset backing, whether those assets be cash, gold, property, or something else. Bad times can be very good, for value investing.
Michael Horn
:
Interesting to see FFI mentioned – I hold it, and I like it, in spite of it being illiquid. I would not recommend it for that reason (too illiquid and too small for many investors), and it may not give back a good return in a hurry. I treat it as a gamble that will pay off when, and if, FFI realises the value of the investment land, and in the meantime, my SMSF garners a reasonable dividend return – not great, but reasonable, so I can afford to wait. It is only about 2.5% of my total holdings (SMSF and personal), so it is not as though I have thrown the farm at it.
I imagine that if one valued FFI, it would seem ordinary – not worth a second look. However, if you think of it as two companies by hiving off the investment land, then the operational side of the business looks pretty good. That FFI has such a strong balance sheet (low debt) and is sitting on a $14M chunk of land too, suggests that somebody (Rodney Moon, I would say) has been running FFI very well for a long time. When I looked at it some time ago, the land value was $1.73 a share, nearly half the current SP.
FFI does not seem to need the cash, so if it sells the land and gives the proceeds back to shareholders, the rest of the company will come at a low price. I have not done the mathematics for a while, so you will have to work them out yourself.
High sugar and cocao prices can occasion minor problems for FFI, but as these apply to its competitors, it’s just a matter of riding out the problem. FFI;s annual reports are a pleasure to read – no pious puffery and noble intentions to balance its management team so that collectively the colour of their, hair, eyes and ankles matches the population at large.
On the matter of annual reports, TGAs interim annual report for YE 30/03/2012 is slated to be published on Tuesday, 22/05/2012, and it should surprise on the upside. I have been accumulating lately, and if I combined both my portfolios, I am fairly sure I would make the top-20 shareholders list. In effect, I have thrown the farm at it. I should look around for a few more stocks of equal or better value, so as to diversify.
Roger Montgomery
:
Thanks for posting Michael,
Don’t ever underestimate the importance of diversification.
John C
:
Good call on TGA Michael. I hold, but a much smaller parcel than you. I do like to read your comments on TGA because they aren’t covered as much (here or anywhere else it seems) as much as JBH, HVN etc. I certainly understand that TGA is a much different company than those others, with their finance business, but I still expected them to be hurt more than they were by the steep discounting and softer consumer spending that we have seen in consumer discretionary (and more specifically home entertainment & furniture). As a holder of TGA stock, I was pleasantly surprised to read their latest report. I appreciate you sharing your insights Michael. I can certainly understand you keeping such a close eye on the company when you’ve got a holding of that size! Thanks again for sharing.
Roger Montgomery
:
we’re interested in the implications of growth coming from furniture offsetting a decline in traditional products.
Andrew
:
Just some more thoughts, i think the share market is a balance of peoples perception and the reality of the business/economy. The gap between the perception and reality lies opportunity whether it be through bargains or premiums. This is especially true over a short period of time where the votes have greater influence.
At the moment peoples perceptions are that we in Australia are doing it really tough and it is only going to get tougher.
Whilst this sentiment exists and due to the noise being posted all over media/politics etc confirming this sentiment than i can’t see in the near term future that we are heading for a new bull market especially when you include variables like Europe.
I have no idea where the market is heading but i can’t see the sentiment changing over the next year and volatility to remain especially with the Australian and US election campaigns pretty much unofficially underway. There will be some highs and there will be some lows but a lot of this will be noise and be far detached from the reality of a lot of the great listed businesses.
Michael
:
In March 2009 sentiment was no better, if not worse than it is now. The stock market will always recover before sentiment picks up. Value investors create stock market bottoms, for the simple reason that they are the ones least effected by market sentiment. Having said that the declines will continue for at least a few months yet, with a few dead cat bounces to keep it interesting.
Roger Montgomery
:
You might be interested in this. One year to the day; http://rogermontgomery.com/where-to-next-2/
Ash Little
:
Hi All,
If you read the comments on this post you will find the community discussing Bigair (BGL) an A1 mircocap trading at around 20c at the time.
12 Months later it’s now trading at 35c (75% gain).
At the time of the post I owned BGL and it was a good stock for me.
I mention this only to reinforce that we are buying businesses not the index and some companies will still do well even if the world goes to hell in a handbasket and the index tanks.
I am very very bearish on the world at the moment, Lots of my friends call me Mr bear or Permi bear, or just depressing Ash,
But I still keep searching for those hidden gem, and sometimes I find one or two.
Cheers
Roger Montgomery
:
Spot on Ash. And there are indeed a few around.
John C
:
Speaking of hidden gems Ash. It looks like Mr Sprott has ceased to be significant shareholder of RED shares according to their investor presentation today. SAM are also seriously reducing their Ramelius holding, which might help explain the RMS share price dropping so much lately – plus the early closure of Wattle Dam next year, and the expected future cash costs moving up towards $900/oz. I still like their prospects, and their lack of debt, and the small but relatively high grade deposits they are buying up in WA, plus their exploration in Qld and Nevada – so I continue to accumulate RMS on price drops. I still hold RED too of course. I have also doubled my TBR holding, and increased my RND holding.
Pity about the SWL profit warning today. I almost bought some more at $1.01, but then decided against trying to catch a falling knife. In my recent experience, the first profit warning is rarely the last, but let’s hope SWL is an exception to that rule.
Cheers!
John C.
Ash Little
:
Hi John
Red looks good, Nothing has changed except the share price.
Cheers
Roger Montgomery
:
Seek and take personal professional advice.
John C
:
Agreed, and, of course, the substantial holders list has changed a little too. I would guess that Eric Sprott hasn’t gone bearish on gold – I would imagine that he moves his money around the globe and invests wherever he sees good undervalued gold assets that meet his investing criteria. I imagine he made a very nice profit on RED if he sold out when I think he did.
RED’s future cash costs look very good. Right down in the sub-$300/oz range along with fellow ASX-listed companies Medusa (MML, $218/oz) and Kingsrose (KRM, $214/oz). After those three, you’re up over $560/oz for the other 45 gold producers on the ASX.
RED will sort out their mining contractor plant availability issues shortly you would expect, and get their pit de-watering efficiency increased, and their planned further minor mods to their own processing plant sound pretty straight-forward. I still like and hold RED. Any other gold stocks you like lately?
I’d be guessing we’ll see a gold price recovery as soon as the money printing starts happening again…
Paul
:
Roger, do you have any respect for the Shiller PE ratio? Given its long term average of 15 and that it has yet to fall below 20, I don’t think things are gloomy enough yet for me to buy.
Things are cheapish now, but may be a whole lot cheaper next week.
Roger Montgomery
:
Run it against the index over the past and see 1) how many times to gave a buy signal that was right and 2) how many false signals it gave. Then you can have some confidence in it Paul. Whether its good or bad, averaging it won’t make a difference.
Martin
:
The current reading doesn’t tell you much about US stocks. But, hey, there have been times when the ratio raises a red flag for the cautious investor. If you go back and look at the ratio at the time of key events, then I suggest the ratio deserves some respect.
September 1929 32.6
December 1974 8.3
December 1999 44.2
June 2007 27.4
March 2009 13.3
In summary, there have been 4 occasions in my investing lifetime when knowing the ratio might have been helpful in forming a view about US stoks
For those not familiar with how to get the CAPE ratio, go to irrationalexuberance.com and download the statistics to excel. One spreadsheet has all the stats and another has a nice graph that shows the red flags very clearly.
Roger Montgomery
:
Thanks Martin!
Kent Bermingham
:
The fundamentals have not changed since 2008, just a lot of spin by financial analysts and people associated with the Finance Club to keep them getting their kickbacks..
TOOOOOO much greed
TOOOOOO much Debt
poorly run countries just not companies
Once the debt is repaid or foregone then the wise investors wil move in and buy great companies and houses at much much lower values than today.
It is important to keep powder dry for these once in a lifetime opportunitie as we clean up the mess of the past Finance gurus.
Valuations are only as good as the economic environment we live in and foresee for the next five years, so until the GLOBAL Ecoonomic environment is sorted out you would only have to be a speculator if you considered investing at the moment.
Chris
:
So by that last sentence, is Buffett a speculator ? I don’t think so.
To paraphrase, “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years”.
Once the debt is repaid or foregone, then everyone else will be moving back in and then you will see investing start to become ‘trendy’ again.
Who can really predict the next five years economically speaking when all of the “best” economists and business minds cannot even predict interest rates next month ?! (and even as a dartboard guess, you get a choice of three options – up, down or stay put). Do you think anyone really picked that the carbon tax would get introduced with any certainty, or that we will have another $900 splashcash and when ?
(I invested mine in the MSCI Emerging Markets index).
Roger Montgomery
:
Great contribution Chris. Thanks
Kent Bermingham
:
Chris thankyou for your constructive approach again, I am not a trader or speculator so our views will differ.
We can only project our views with the info we have at hand.
I believe that at some stage the piper must be repaid and the books be balanced and I think that is some time off.
I hope you time the market well and I will time the return to a sustainable, tradeable economic environment when we both enter with valuable compnies and countries
Good luck
Kent
Pete A
:
Hi Roger,
I agree some prices are getting interesting. Having said that, they may well get more interesting because there hasn’t been a great selloff yet, and who knows what the Greeks may do next.
I have more than 2/3rds of my SMSF in cash and am not in a tearing hurry to invest it just yet although I’m getting close to trickling some in.
If the market fell another 10% I’d be even more interested.
Roger Montgomery
:
Its interesting that the ‘market’ has fallen a few percent (depending on the benchmark index you look at) but some individual companies have fallen a great deal further…some are getting very close to compelling.
Pete A
:
Hi Roger,
Is Forge one of them? Notwithstanding your recent comments about mining services companies, I think they still have a reasonable story. I sold a good chunk of my holdings a couple of weeks ago at $6.73, but at $5, they are starting to look like reasonable value.
Roger Montgomery
:
I am putting together an interesting list for a post next week. Stay tuned.
Liz
:
I’m bearish simply because there are messes around the world that can’t be fixed quickly. AU is being impacted and its already rubbing off on the big miners who are reviewing costs and captial commitments which will eventually flow through to the service sector. In the non mining sector it’s generally about conserving capital and lowering costs as well. One of the ways of doing this in the mining sector is sourcing from lower cost countries and this doesn’t help our OEM manufacturers. Outside mining, I’m not hearing any joy from anyone in real estate or retail. Mostly its a lot of disquiet about government policies and fear it will take some time before things imporve sustainabley. My broker is still advising I sit on cash and I have agreed. I will buy back into the market but I’m not confident to do so yet nor am I confident that what appears to be value today will be value tomorrow. It’s excess value (if that makes sense) that is partially responsible for these messes around the world. Growth doesn’t come from contraction.
Maybe capitalism needs to start from a new base; but that’s a philosophical discussion and I’m no expert!
To answer your question. I think it could get worse and therefore I do not think I have missed the boat by staying away from the market right now.
Roger Montgomery
:
Thank you Liz for sharing those insights. Indeed, evidently Australians are the most bearish of the western economy consumers.
Liz
:
Thanks Roger.
I don’t think we’re negative by nature, but the consequences of the last election result, policy making and how that’s played out every day, has also had an impact on sentiment. That many of the decision makers will be retiring in the next 5 years and are worried about the value of their own assets is also a factor weighing on sentiment and risk taking.
We’re so interconnected around the globe now that decision making has become more complex.
Of the people I know, Business colleagues the US are not as bearish as they were, those in the UK say the road to recovery will be long and those in China are seeing the current conditions as an opportunity to co-operate with companies overseas (who want their cash and lower cost base) and expand their reach. It’s a deliberate strategy of learning from the west and taking the application of that learning back to China and then competing with those from whom they’ve learned.
Roger Montgomery
:
Great stuff Liz. Clear thinking.
Michael Horn
:
I read the summary of what Warren B and Charlie M had to say recently, and I recall something to the effect that a value investor should forget about the macro, and think micro. Whatever happens in China, the USA and Swaziland is not going to effect the number of burials and cremations handled by Invocare, the number of legal matters completed by Slater Gordon and the number of operating leases signed by Thorn Group. These are the types of stocks that interest me now (boring, non-U and isolated from macro-economic and political gyrations), although I may not buy them if their SPs are too high. I hold SGH and TGA, but not IVC. I would love to hold IVC on first principles (boring, non-U etc), but when I have looked at IVC in the past, it always seemed that others shared that sentiment, so it was too pricy, or in Roger-speak, the margin of safety was not there.
Roger Montgomery
:
Hi Michael,
You may also be interested in investigating companies with a high level of recurring earnings – 67-70% or more per year locked in. http://rogermontgomery.com/are-recurring-profits-worth-chasing/
You will see Thorn received a mention (mind you so did Reckon!)
Kelvin
:
Hi Roger, here’s my two cents:
– S&P500: may hold up until after the US elections in Nov, but 2013/ 2014 will be extremely difficult. The secular bear market that started in late 2007 is not over and will come back with a vengeance.
– Gold: will probably correct further, may be by $100-$300, but anywhere close to $1,200 is the buy of the decade (around $1,200 is the current marginal cost of production, including capital costs). The secular bull market in gold is not over.
– Oil: will probably correct to $65-$70, but around that level is a screaming buy (again that is the current marginal cost of production including capital costs). The secular bull market in oil is not over. The world is running out of oil (shale gas/ coal seam gas cannot replace oil in the next few years).
– Copper: I reckon we have seen the highs for copper, at around $4.50/ lb
But hey don’t take my word for it. On the US stock market, gold and oil, have a look at any of the recent interviews by the great Jim Rogers with Reuters, CNBC, and Steve Forbes – see:
http://jimrogers-investments.blogspot.com.au/
I hope I’m wrong.
Thanks.
Kelvin
William A
:
Hi all,
Im starting to see more and more values in some of the business I have been watching. In particular, DTL – Data #3.
Today 17/5/2012. share price is currently down 7.5%, I think someone is obviously disappointed of the updated business presentation to Goldman Sachs Conference yesterday?
My current valuation using 12% RR and assuming 40% ROE (average from the last 10years) gives me valuation of around 88 cents. Still not giving me margin of safety. What does everyone else think?
John C
:
Hi William. Here’s my 2 cents on DTL. I was one who sold out of DTL after reading the (16/5/12) GS presentation you refer to. I sold at $1.02 (Thursday morning, having locked the sell in on Wednesday night after reading the presentation). I noticed they dropped down to $0.95 Thursday but bounced 4 cents on Friday. I was looking to buy more of them recently (a few weeks ago), but was aware of concerns about their future growth, especially with government contracts, and the 4% “efficiency bonus” (read: “saving/cost reduction”) to be imposed on public service spending (announced in the federal budget). DTL’s GS presentation confirmed that times are tough and two of their businesses are struggling. One of the last slides, titled, “The Bottom Line” stated:
Market at best flat
2 businesses traveling well
1 business traveling ok
2 businesses finding it tough
Committed to higher cost structure to support investment.
That’s how Data 3 have just described their 5 business units. Since I already also held DWS, SMX & IRE (in the IT space), I considered DTL the weakest link and sold the stock. I am aware that things are tough all over, especially at Iress (IRE), but I consider the future of those other 3 IT businesses to be brighter than DTL. I may be wrong (I often am). I have also recently sold Platinum Asset Management (PTM) (overseas stockmarket concerns) and CWP (property development over-supply issues in Victoria, which is a pity because I think their developments in WA are right on the money). This was mainly to free up cash for stocks that I’ve wanted to own for some time but thought were too expensive.
For instance, I picked up some HSN (Hansen Technologies) on Friday for $0.88, before they rose again to close above $0.90. I got half of what I wanted, but it’s a start. They are another tech stock, although their recurring revenue from mainly services supply companies (power companies and telcos for instance) is less risky than some others. HSN have a low growth profile, but I think are lower risk, with excellent dividends. I’m happy to park some cash in HSN at prices below $0.90, but I’m not so comfortable with DTL at the moment.
William A
:
Thanks John.
Do you have any idea the proportion of earnings of DTL which is recurring?
I think maintaining 40% ROE over the long term will be tough for any business. Hence assuming a lower, sustainable ROE in the future results in a lower IV. Even after substantial fall in recent months , DTL still expensive.
John C
:
Hi William – no, I don’t have the answer to that question. I know that DTL do rely on government contracts enough that some people were wary enough to warn me about buying more DTL (when I was thinking about it last month) based on the (then) upcoming federal budget, and the government’s tunnel-vision push for a surplus, and what that might mean to companies that reply on government and public sector discretionary spending. I believe HSN have a high degree of recurring revenue because whenever I read (here or elsewhere) about recurring revenue, Hansen is always mentioned as an example of a stable (boring but predictable) company with a high percentage of recurring revenue. I have bought and sold shares in HSN twice previously because they seemed to have a reasonably predictable trading range and it was easy money made in a matter of weeks on both occasions. This time, I intend to hold for longer, and I am buying for yield and safety.
If the run on certain European banks picks up speed…, and it can, and due to the internet, you won’t see people queueing up at ATMs and banks; They will be withdrawing their cash from the comfort of their own homes; We will find out the banking system is stuffed over there when the Greek Banks close their doors and the contagion spreads across Europe. That is when the European pollies will be FORCED into action. Even Germany will be (reluctantly) cranking up the printing presses. To me, that seems like a matter of days or weeks away, not months, and I want to be holding some cash and reasonably safe Australian stocks when the end-game is upon us. What each of us considers “safe” will vary greatly. Low debt is good. No debt is better. High ROE is good. High ROE and a high percentage of recurring revenue is better. I don’t think we’ve bottomed yet, but we are close. I am looking for signs of capitulation, but I’m not trying to time the market. I’m over 80% invested, but holding some cash for the BIG drop that I believe is coming soon.
Cheers!
John C.
John C
:
It’s a pity I didn’t hold DTL until last Friday (15th June) – when they rose 16%. I definitely would have sold them if I had any left. I was surprised they went up to $1.16 on the day – on a profit downgrade. The buyers must have expected worse, or mis-read the announcement and thought it was un upgrade, or else that DTL were re-affirming previous guidance. The wording may have had something to do with that – “Data 3 projecting full year profit consistent with the long term trend” – but… when the mid-year presentation said they were well ahead of the long term trend – and now they are only in-line with it, AND when the $18.5m to $19.5m NPBT that they are NOW expecting is around 15% BELOW last years result, AND when even that result is “subject to a number of transactions to be finalised before 30 June”, AND when their most recent investor presentation said that they have two businesses travelling well, one doing OK, and two struggling, and this latest announcement says nothing that changes that scenario, I’m not at all surprised to see the SP which surged up 16% to $1.16 on Friday’s announcement drop back down towards $1 over the past couple of days.
I wish I’d sold at $1.16 on Friday instead of at $1.02 a couple of weeks earlier, but I don’t regret the decision to sell. I think it was the correct decision for me based on the information I had at my disposal. I could well be completely wrong about DTL, and they may just be suffering some short-term set-backs that will be forgotten in the years to come. If they can indeed maintain that “long term trend” in future years, I may well buy back in, but I’m still not convinced at the moment that they can.
Adam
:
I’m far from articulate and learned, but definitely in the “precipice” camp.
If Uncle Ben gets his printer fired up again, I’m sure Mr Market will rejoice, rolling around naked in the massive pile of cash. But when all is said and done, I still feel there is a reckoning on the way.
I could very well be wrong, but I’m unlikely to change my mind until someone can convince me that throwing debt at an already enormous pile of debt will achieve anything positive. Throwing dodgy Investment Bank executives in jail might help. At least it’d be a start.
Roger Montgomery
:
ANd you said you aren’t articulate? Thanks Adam…
Tony
:
Hi Roger,
I have been using Skaffold since it was released and find it a very useful tool, thankyou.
Roger Montgomery
:
Thanks Tony,
I have also sent you an email and Chris will be in touch presently.
Andrew
:
It is a very interesting time to be an investor. Volatility gets a bad wrap but it is volatility that allows us to take advantage of mispricings and opportunity and there is a lot of it around. The investor with the calm and rational demenour might be able to find some really attractive prospects during this time.
As you say roger the same map could be a see of green today as the “uncertainty” of Greece maybe needing new elections is replaced by “certainty” that they will conveniently forgetting that there is still lots of uncertainty as per the future of greece in the Euro Union, or the future of the Euro as a whole.
Even locally we are all over the place and this is causing volatility i think. You can speak to many different people and get many different opinions as to how we are going in Australia with everything from we are going broke and to hell, to being world leaders economically and everything in between. One thing I see is we are not spending as much as we used to and companies that need us to spend are getting hammered. Also, as expected the aussie dollar is coming back below parity with the US.
Have we missed the boat? i am not sure, i can’t see the volatility going away anytime soon. I do think people are still very caught up in the present and not looking towards the future.
The above has caused some companies to be unfairly sold off in my opinion and mispricings do exist.
As usual, the best approach is great companies at big discounts. its an investing approach which works regardless of the macro factors.
Chris
:
I think if anything, we are talking ourselves into a recession in this country, and doing a great job of it.
Everything is “wrong”, “this tax, that tax, this levy etc. is going to ruin everything”, everything is “bad” and stories in the news like the QLD public service cutting “free tea and coffee” and “lunch” (which is not everyday, BTW, only in things such as day long meetings) just tries to show everyone “how everything is so bad that we had to take the axe to that”.
What a load of cobblers. Things are not THAT bad, in Greece, UK, etc., unemployment is a lot higher. The recent ASX Investor Hour in Adelaide was very interesting and underlined some of the posts about iron.
Thomas
:
Roger,
the world is failing for you to succeed.
Roger Montgomery
:
Our job is a simple; To navigate the tempest in such a way that our client’s capital is protected and their purchasing power preserved. We aren’t shorting into it Thomas. No matter how much or how little we are given in terms of money, we must make wise financial decisions and do what we can with what we have.
Liz
:
That’s what happened in Argentina!
Liz
:
Sorry, above comment was in relation to Thomas comment “the world is failing for you to succeed.”
Greg Mc
:
Well of course, I’m neither learned nor articulate, but if the market wasn’t cheap yesterday, then it isn’t (as a whole) 24 hours and 2.5% later. I still think that there will be more panicky (and sillier) times than this ahead, so I’m just waiting patiently.
Roger Montgomery
:
Good points Greg. Thanks for contributing.
Simon
:
That’s an easy one
1. Buy RED 5
2. Buy MML
3. Buy WHC
4. Buy MCE
In that order I would have run out of finds after having already added to my holdings today in RED and MML riding the wave of a falling Gold price. WHC I believe is to be a clear takeover target this winter and today fall in price just makes M&A activity all the more likely. As for MCE I’m watching and waiting for $2.10 to be breeched.
William A
:
For MCE, are you just looking from Chart perspective?
I am staying out of this because they haven’t won major contract in FY12 and I suspect there is more capital raising coming.
MCE is company with huge potential but not generating profit at this stage and the fact that they have not won anything in FY12 shows that management is not as good as what market expected.
Roger Montgomery
:
Graham Mitchell has just said on my Facebook page that the MCE shares suspension has been extended to next week.
If that’s the case then I am taking a wild guess that Matrix (MCE) are about to announce a capital raising. Hypothetically, if the banks want their money bank, how long will the cash thats left last the company and how much pressure will there be on them to get some customers?
If they don’t win new contracts, it took a couple of decades for the family to build the business and just two years to…???
Alternatively, the company may announce a new contract win but typically that type of announcement would not take this long to make and the shares wouldn’t need to be suspended for such an extended period of time.
I am aware that another fund manager has been building a stake. Someone here reported they have moved to 10% of the register. I am guessing they’ll be hoping for the latter announcement (new contract win) but by not owning the stock we are on the side of a capital raising. It would have to be at a substantial discount to the market price in this kind of market too.
So once the announcement is made and if it is a capital raising ask yourself, how much cash is in the bank and how long will it last without announcing a customer win. Keep in mind, from the time a buoyancy contract is secured to to the company being paid can take 9 months.
Ian
:
The way that the MCE stock price fell sharply just before the trading halt does not bode well for it being a positive announcement.
perhaps a few people got wind of something and managed to sell out before the trading halt. Also the length of time to make any announcement does not suggest it is going to be positive.
So I also suspect it is more likely to be a negative announcement.
If it is a capital raiaing it will need to be at a good discount for people to want to participate. Right now I think there are better options than participating in any MCE capital raising for holders of MCE.
Tony
:
Interesting to think about days like this when there is blood in the street. I agree this may have more to go before Mr Market is finnished with the panic. The sell off will be driven by both rational and non rational reasons and who knows where it stops but with all the concerns in Europe and weakness in US and China I feel there is more pain to come.
The good thing is that we might get good A1’s & A2’sat significant discounts to intrinsic value. This is a time we get the luxury of getting really fussy on quality.
I’m watching, amoung others, COH, ANZ, ARB, CSL,SWL,FLT for a buying opportunity
Given the falls in resources and notwithstanding warnings on this are I’m still watching BHP given the size of recent pull back
Roger Montgomery
:
Thanks for sharing Tony.
John C
:
SWL down to $0.97 at one point already today Tony after their profit downgrade, so you got your buying opportunity. Brian Riggall has resigned, and Rob Leacock, who is the company secretary, Deputy CEO, and now it seems acting MD as well, appears to be clearing the decks. I’m hoping he’s getting all of the bad news out at once, and he can now start to re-build investor confidence. However, recent experience suggests that the first profit downgrade is often not the last. Seymour Whyte are a very different company to Leightons, and I continue to maintain my SWL holding, but I am not increasing it at this stage (although I certainly considered that option this morning)…
Roger Montgomery
:
My experience is that downgrades come in threes. We’ll have to wait and see. We have been out of engineers and contracting companies for some time.
John C
:
With regard to FLT Tony, I think their commission-based model is going to suffer in a world in which major airlines are either ceasing to pay commissions or are reducing them. They had a stouch with Singapore Airlines recently over this, and then the ACCC took court action against FLT in March (not yet resolved). More recently, Qantas have stopped paying commissions on domestic and New Zealand flights and have reduced commissions on their international flights (from 7% to 5%). FLT are going to be flying into some strong headwinds if that trend continues.