Where to next?
You may have noticed my recent posts are not filled with stock ideas. Don’t worry. The drought will end, once the market resumes serving up mouthwatering opportunities
For many businesses, Australia may not seem like the ‘lucky country’ right now. A litany of evidence suggests the economy is cool. Recent bank results reveal credit growth is slowing, if not stalling. Significantly fewer homes are being put to auction and of those that are, clearance rates are not inspiring.
Australia’s savings rate has risen and thanks to rising fuel costs and utility bills, we haven’t got as much to spend as we used to. Then there’s the prospect of rising interest rates. I wonder, given all anecdotal evidence of weakness, whether an interest rate cut would be more justified?
Some of Australia’s ‘blue chips’ have reported weakness or downgrades. Seven West Media reported a softer advertising market, which has also affected Fairfax and APN. OneSteel cited a strong Aussie dollar, as did BlueScope. And you can almost guarantee food manufacturers are going to complain about higher commodity input prices.
Indeed higher input prices, combined with pressure on consumers to pay more for daily essentials – gas, electricity and petrol – means many companies have lost their ability to pass on rising costs. Naturally, this leads me to think that this is precisely the combination of influences that will reveal which companies have a true competitive advantage?
The Value.able community has spent a great of time exploring, discussing and naming competitive advantages – retailers, Apple, your insights. The current economic headwind will reveal who actually has one.
Take a look at the companies in your portfolio. Can they pass on rising costs in the form of higher prices, without a detrimental impact on unit sales? Can they grab market share from competitors whose margins are slimmer, by cutting prices? Is your portfolio overflowing with A1 businesses, or are there some C5s in there that may struggle through post-reporting season?
Now despite current pressures, which of course you must refrain from believing is permanent (and indeed cease focusing on), analysts haven’t brought down their earnings expectations.
Macquarie’s equity analysts are forecasting aggregate profit growth of 19 per cent and according to JP Morgan, non-resource companies are expected to grow profits by 13 per cent this year. These growth rates are a significant revision down from 6 months ago. Are more downgrades to come? Thirteen to nineteen per cent does seem more appropriate for a rosier economic environment…
Lower profits have a real impact on intrinsic values. For companies generating attractive rates of return on equity (at last count, 187 listed on the ASX generate a ROE greater than 20 per cent. Of those 103 are A1/A2), lower profits reduce the quantum of that return, as well as the amount of retained earnings and therefore the rate of growth in equity. All of those changes are negative. If Ben Graham was right and in the long run, price does follow value, that means either lower prices or prices that cannot justifiably rise much more. And this is where Value.able Graduates’ attention should be focused, not on the bailout of Greece or Portugal.
What does this all mean?
I don’t have a crystal ball, so I simply don’t know where the market is headed. Thankfully it isn’t a brake on market-beating returns.
What I do know, is that of approximately 1849 listed entities, 1175 made no money last year. Of the remainder, 56 are A1s and of those, just 13 are trading at a discount to our estimate of intrinsic value. Six are trading at a discount of more than 20 per cent and of those six, The Montgomery [Private] Fund owns two. We have been decidedly slothful in buying and, as a result, while the market has been falling, the Fund’s value hasn’t.
Steven wrote on my Facebook page yesterday “Who cares? this market is… only ugly!” It’s only natural to want to throw up your hands in dismay, but this is where the rubber hist the road – Keep Calm and Carry On Value.able graduates. Look for extraordinary businesses at prices far less than they’re worth.
Just under 11 per cent of The Montgomery [Private] Fund is invested in extraordinary businesses. Even with 89 per cent of the Fund in cash, we are outperforming the S&P ASX/200 Industrials Accumulation Index by 5.29 per cent since inception.
My team and I continue to be inspired by the 1939 poster in which England advised its citizens to “Keep Calm and Carry On”.
Low prices should not bring consternation, but salivation. As sure as the sun rises, low prices for A1 companies will not be permanent.
Beating the market does not mean positive performance every week, every month or even every year. I have no doubt that some investments I will make for myself and the clients we work for will not perform as expected. Not every A1 at a discount will prove spectacular. We can however mitigate some of the risks of course. Sticking to a diversified basket of the highest quality companies (A1s perhaps?) purchased at big discounts to intrinsic value, won’t prevent the market value of the portfolio declining in the short term, but it can help to generate an early, eventual and more satisfying recovery.
With a falling market (and falling prices for A1 companies too) the daggers will come out, so also be prepared for those of weak resolve. They may try to discredit our Value.able way of investing.
A contest isn’t won by watching the score board, looking in the rear view mirror or mimicking those with a demonstrated track record of success. You have to play. And play your own game. Over long periods of time, sticking to good quality A1 companies works. Given that returns are dependent on the price you pay, lower prices (and greater value) works even better!
The issue of course is not the reliability of the Value.able approach, but the patience required to execute it. Remember the ‘fat pitch’? Irrespective of the turmoil that impacts markets, we must Keep Calm and Carry On.
So what do you think? Where do you think the market is headed? What are the factors you are watching? Have you picked up something in your research that you’d like to share? Go for it!
Posted by Roger Montgomery, author and fund manager, 18 May 2011.
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.
Matthew R
:
Hands up if you have been excited by Mr Market’s recent depression!
Bruce Meiers
:
Roger,
I have tried to submit a blog on why I have used Put Options on the CBA but this site see’s it as being spammy.
Several times I have modified the entry to no avail. Is there another alternative email you have available to check my blog and post if all OK.
Roger Montgomery
:
Hi Bruce,
I have not heard of such a thing. Try getting rid of UPPERCASE and links.
Chris B
:
Hi Guys
Any thoughts on recent pullback in FGE?
I can’t see any news that would explain – in fact recent profit guidance would appear to exceed analyst consensus.
They appear to have a fair MOS at the moment, but interested in other’s thoughts in case I have missed something.
Cheers
Cjb
:
Hey Chris b… My name is also chris b… So from now on I’m gonna go by cjb… Anyway re fge, I called the company today and asked a few questions about the business and the recent share price action. I was told that they have ‘no bad news in train and cannot explain the irrational price action’. Also, ‘nothing fundamentally has changed about the budiness’ and the groups competitive advantage is that it can provide services to miners at all the various levels of project from planning to production.
I am not a holder but am now seriously considering given the mos and the fact that there doesn’t seem to be any bad news that could be the catalyst for the recent sell off.
It certainly is clear that the heat has come out of the mining services businesses lately – look at matrix, decmil, monadelphous, maca and most others. Perhaps this is because of the concern of chinas slowing GDP or increasing competition in this space. After all, if so many engineering businesses can acheive high ROE it only makes sense that others would wanna have a slice of the action.
At the end of the day though fge is an established company and is a one stop shop for many of it’s customers. This is certainly an advantage they have over many of the newer competitors who have to sub-contract parts of projects to other groups. It would also help attract new business given they cover all bases.
From a technical point of view, there is a lot of support at $5, on both a horizontal and diagonal trend line…but I won’t go on about this because I would like to help maintain the quality of this blog!
Another concern I have re fge is the order book. I am not suggesting it is light… Truth is I don’t know how much work they have on their books. Could be light or heavy??? That is my concern. What I do know however is that their clients are not really high quality clients. For example, compare forges clients with decmils and you’ll see what I mean.
Enough fro me.
Signing out now,
CJB :)
Roger Montgomery
:
Thank you for maintaining the quality of the blog!
Sin G
:
I am in total agreeance with Forges “One Stop Shop’ advantage. I used to work for Hatch Engineering some 10 years ago, and the synergies of having surveying, Mechanical, Electrical and Civil engineers in the one hub worked well as we fed off each other.
When large or small projects presented themselves it made designing and costing projects that much simpler as you didnt have to chase sub-contractors around for prices and then worry about the quality and time frame of their completed work. You had more control over the project in hand, which saved you time and money.
MattB
:
The correct answer to this is “who knows?”. Mr Market is always looking for an excuse to sell.
If I had to guess what influenced the emotions of the market over the last couple of days it would be the declining export figures for Australia and its impact on coal and other mineral companies:
http://www.theage.com.au/business/economy-hit-by-dive-in-exports-20110531-1feqy.html
It appears Treasury under estimated the impact of recent natural disasters.
Cheers
Rodger Brook
:
What is happening to Forge it is dropping like a rock but there seems to be no bad news. Has anyone got an idea about what is going on??
peter stoelting
:
Many Thanks Ron, Brent, Brad for your informed explanation regarding BGL’s IV. Best of Luck, Peter S.
peterstoelting
:
Thank you for your description and endorsement of Big Air Group Ltd (BGL). Using the anticipated employment of $15 million shareholders equity in 2012 and expected NPAT of $4-5 million,ROE 30% and EQPS of 16.66 cents. $15 million/aprx 90 million shareholders (88.509 million June 2010 FR). With RR say 12% no POR as no known dividends a 5.203 Multiplier is IV86.68 cents. This is appears ludicrous compared to your (2012) figure of 35-45 cents. Where have I blundered/
peter stoelting
:
Hi Ron, Thank you for your description and endorsement of Big Air Group Ltd (BGL). By using the anticipated employment of $15 million shareholders equity in 2012 and expected NPAT of $4-5million, ROE 30% and EQPS of 16.66 cents., $15million/aprx 90million shareholders (88.509million, June 2010 FR). With RR say 12% no POR as no known dividends a 5.203 Multiplier is IV86.68 cents. This seems ludicrous compared to your (2012) figures of 35cents to 45cents. Where have I blundered?
Ron shamgar
:
Use 150.5mil shares
Brent
:
My figures differ to yous Peter.
If you look at the investor presentation dated 28th February, you will see that they have restated the Balance sheet to include the share issue to Clever shareholders (page 7 of presentation). The restated Equity is 18.59 million as at 31st December 2010.
Therefore, I forecast they will begin 2012 FY with 20 million in equity, earn NPAT of approx $4.7 million, ending 2012 with approx $26 million. If we use avg Equity of $23 mil, the ROE for 2012 will be around 20%.
I have used a RR of 13%, POR of 20%, ROE of 20%, with Equity per share of ($26 mil divide 151 mil shares on issue) of 17.2 cents.
This gives us a 2012 value of 35.4 cents. From the current market price of 24 cents, this represents upside of 47.5%.
My 2011 value is 26.4 cents.
Pat Fitzgerald
:
Hi Brent
I have used similar numbers to you. It is a pity that we do not have quarterly reporting in Australia as that would be a great help in understanding changes to balance sheet data including equity. It would also allow investors to better track NPAT and cashflow performance against forecasts.
Pat Fitzgerald
:
Hi Brent
Also I use a RR of 15 and therefore I get a lower 2012 IV of 30 cents. I noticed that my RR is slightly below the WACC in the micro equities report which is 15.3. Changes in technology may mean that they do not have a sustainable competitive advantage but they appear to have may some good acquisitions.
Pat Fitzgerald
:
made a clever acquisition.
Ray H
:
Sorry Roger, but if you are going to insist on having a moderated blog, you are going to have to insist on eliminating posts that are clearly non-genuine.
It actually really annoys me that we cannot have real-time discussions here on some real value issues, so at least make that disadvantage worthwhile.
Roger Montgomery
:
Hi Ray,
I would be delighted if you would help me raise the standard. Are you able to point to specific examples that are troubling you?
Pat Fitzgerald
:
Hi Roger
It looks like it is me Ray H is calling non-genuine. Big Air has been in my spreadsheet since August 2010. I have updated data many times since then including for the latest acquisitions. Some updates for the last six months were: Clever pro-forma in Dec 2010 (I assumed the takeover would be successful), half-yearly results, $4m guidance for FY 2011, restated balance sheet in the investor presentation of Feb 2011, $5.2m guidance for FY 2011 and the Eureka report $10m guidance for FY 2012. They are the major ones that I can recall. My numbers may be incorrect but not because of lack of trying to keep up. I read the ASX news releases for about 150 businesses and I am looking forward to seeing if the A1 service you have mentioned is in my price bracket as it may save me some work. I hope there is a big discount to IV as you have taught us not to buy unless there is a big MOS.
Roger Montgomery
:
What are your thoughts on its potential value to you? Not the price. What could it be worth to you?
Pat Fitzgerald
:
Hi Roger
The data provider that I currently subscribe to mainly covers the ASX 200 and only uses broker reports to update forecasts which can sometimes come through many days/weeks after a company update. The free services are also slow to update in my opinion. Updating forecasts as soon as company guidance/updates are received is important as the market moves very quickly and having to wait one day or more can mean opportunities are missed. Therefore if your service provides very quick updates (for all businesses) from broker reports, company guidance/updates, capital raisings, buybacks, mergers, other changes to equity and shares on issue etc it will be an enormous benefit and will save me a lot of work. I have been thinking about writing some software and having a database and a more automated way of updating, but this would no longer be necessary. Also as you have been doing this for a while and have developed a way of handling different situations (unsustainable ROE, capital raisings, buybacks etc.) I will get the advantages of that. As I do not know what the service offers it is impossible for me to know all the benefits. But the functionality may also add some value for example if I can sort by a subset of businesses ie A1/A2 etc by the latest day/time updated,or by the biggest discount to IV, or by the largest increases in IV over time etc that will be an additional benefit. The ability to only display businesses in my portfolio would be a benefit. If I can also make temporary changes to the data to calculate my own valuations because I believe I have more update information that would be a benefit.
I look forward to receiving more information on the service.
Roger Montgomery
:
Stay tuned Pat…you will like it, a lot. Don’t go taking up an annual subscription to anywhere else. Don’t ‘take advantage of pre June 30 deals or ‘beat the tax man’ savings. Just as in investing, patience will be rewarded.
Brad J
:
Hi Peter,
I have shares on issue of 150,772,944 so if you use this number rather than the 88.509million you will get a IV closer to Ron’s.
Ann
:
Looks like GFC2 is here…..
Matt R
:
HI ROOM
could someone take a look at my updated figures re: FGE?
for 2011
EPS 45.6
DPS 9
No. shares 82.8M
forecast NPAT 37.7M
average equity 102.4M
ROE ~35%
RR12%
IV ~$7.52
Is this ballpark with other people’s IV? any concerns with my calcs?
Craig B
:
Yes. In the ballpark.
No. Your NPAT might be a touch conservative even.
All pretty similar to mine Matt.
Ray H
:
Hi Matt,
I was just updating my FGE figures this morning (I hold). The company had a NPAT for the first half around $21m and have just provided NPAT guidance for the second half between $25m and $27m. This means a total NPAT for the year of around $47m seems likely (that’s the figure that I have used).
It makes your NPAT and therefor EPS and ROE figures look fairly conservative (nothing wrong with that mind). I calculate a FY11 IV of over $10 using RR of 12% – and this makes the current share price look like very good value in my opinion. The thing to keep in mind with FGE is that while it may have some competitive advantages, I certainly haven’t been able to identify any particularly strong ones, so it may be that it is a good company rather than an extraordinary one.
Of course, not a recommendation – do your own research and get your own personal advice.
Ray H
:
Sorry Matt – I was just double checking my FGE figures and I have made a boo boo in my last comment. The second half guidance for $25m to $27m was profit BEFORE tax, not NPAT. Assuming the full 30% company tax rate applies, this would translate to a NPAT for the half of around $18m, which does affect the IR (and brings my figures much closer to yours).
For comparison, the corrected figures I am using for 2011FY:
NPAT $38.9m
Shares 82.9m
EPS 46.9
DPS 10
ROE 35.8%
RR 12%
IV ~$9.01
Geoff Cruickshank
:
FGE released guidance for the second half the other day of 25-27m before tax, so maybe $18m after tax? That would upgrade the figure for the year to 39m NPAT. My guess at average equity is $109 m but ROE comes up at 35% as yours does.This would be a value over $9 at 12%RR, or around $7.50 at 14%RR, which is what I have been using.
Roger Gibson
:
Matt, I believe that your IV is too low. I think you have used the average equity when calculating IV instead of the equity per share at 30/6/2011. My underatanding is that you only average equity when calculating the return on equity. Value-able P188 Step A and Step C. For a 20% PR I get about $9.
Andrew
:
How do you know when a company has a competitive advantage?
When management put out the following statement and have the results to back it up.
“Customers are certainly aware of rising commodity costs and we have not experienced any meaningful resistance to higher prices,”
This comes from Tiffany and Co who have released their 1Q results. Basically, Tiffany customers don’t really care about the price they pay for tiffanys they are willing to pay higher prices just because it is from tiffany’s. Here is a company with a strong castle.
This is what i am on the look out for with my companys that i wish to invest in. The competitive advantage element is a major factor to me and i think it will be interesting to see, that if profits have been downgraded, who and where this is going to happen. We might be able to see where these competitive advantages truly exist.
Nolesy
:
Morning all,
I’ll bring another company to the table for your insights: Vita Life Sciences (VSC).
My valuation is about five times higher than its current price of 27c. Can’t help but think I’ve gone wrong somewhere with my calculations. Nevertheless, I’d love to hear the thoughts of some of the ample minds getting around this site.
This company sells vitamins and supplements, and also develops medical diagnostic equipment. It appears it is steadily growing its distribution into parts of Asia, with the Australian market accounting for about half of its income at the moment.
Your thoughts?
Spin
:
Nolesy: Make sure you adjust the earnings for the one of 5m pan settlement. Page 3 of the Annual Report has the adjustments.
Parag
:
-Net Profit in 2009 was ($328,193) loss.
-Net Profit in 2010 was $4,459,519 – however $5m of this was from legal settlements and $954,499 from a liquidator. These are one off payments and you need to normalise the net profit by deducting these from the 2010 profit. If you do so you get a net loss and an IV of $0.
Nick
:
Vita Life Sciences (VSC):
– Negative Cashflows.
– Only has made a profit this year (negative back to 2007).
– 60% ROE with 0% Payout Ratio is not sustainable.
– Sales are lower now than they were in 2007.
– What’s their competitive advantage? what’s stopping other companies in the fast paced biotech industry from knocking them out?
Company fundamentals are equally/if not more as important as judging IV. Because they tell the story of how likely a company is able to grow/retain that IV in the future. Hope this helps.
Phil Crossan
:
Hi Nolesy,
Page 3 of the VSC Annual Report released on the 25th March indicates that $4.1M of it’s profit relates to the legal settlement of the Pan Case and is therefore one-off.
Phil
Brad
:
That’s right, Roger
There’s a big fusion reactor in the sky that rises every morning and sets every evening
It’s gonna run outa fuel though, in about 4 billion years!
Your a champion, keep fighting the good fight……..
Brad
:
Hi Matt R,
Re nano tech, that’s just amazing.
I was just saying to my wife last week after I picked up a bug from the kids and needed antibiotics that I probably would have been dead if it wasn’t for Florey and Fleming!
The human race has come along was in the past 7000 years – except in one area – financial markets, or, moreover the effect of money on human emotions.
I have a chart of tulip prices on the wall in my office, in that bubble 45% of men in Amsterdam traded not only tulips but tulip futures, puts, calls and tulip contracts that were almost identical to today’s CFD’s.
In 500 years, if we don’t blow ourselves up with nukes, we’ll probably have settled the moon, mars and be on our way to the stars, but if money still exists, crazy financial shenanigans will be as real than was they were in Amsterdam c. 1647.
Cheers
Brad
“the lower it goes, the more I like it…..”
Warren E Buffett, on the market
Matt R
:
Can anyone offer their thoughts on the latest EGM annouced by VOC?
Does the offer of share placement to IBN PTY LTD an example of further capital raising, or simply allocating existing shares?
ie if approved by shareholders, will the additional placement dilute existing shareholders equity?
i’m really not sure what this represents. any help would be appreciated, as the MOS is improving
thanks
Phil Crossan
:
Hi Matt,
No they are seeking shareholder approval for the issue of shares that have already happened. This is to refresh their ability to issue up to 15% of their shares on issue without further shareholder approval. Bottom line, no change of capital structure as a result of this EGM, more flexibility for the future.
Phil
Brad J
:
Hi Ron,
Can you tell me where you got EBITDA of $15m for VOC for 2012 on your post in relation to BGL. Can you tell me where you got this forecast and if you have a NPAT figure.
If I assume $10m NPAT I am getting an IV of over $3
Thanks for all your great insights too.
Ash Little
:
Hey Brad
No Npat will not be $10M
Brad J
:
Hi Ash,
What figures are you working on. For 2012 I had a guess of $7.5m and Roger has indicated forcasts in the range of $8.7m. I would love to find out where Ron is getting his numbers from as well as they seem to be much higher.
Ash Little
:
Hi Brad,
The only anaylst that cover this stock that I know of has $4.97M NPAT for this stock
Ash Little
:
I am refering to BGL BTW
Brad J
:
Sounds very low Ash and they probably haven’t updated their forecasts. If you have a look at their latest earnings guidance your will see that their numbers will be closer to what Ron has indicated. This was also pointed out in the Eureka report.
Ash Little
:
Hey Brad,
Funny you say this is low. A friend of mine who is much smarter than me thinks this may be bullish for BGL.
Hard to know but I like the story. In my view internet in the future will be about mobility and flexibity. .
Interesting contest coming in the future. Speed(NBN) v Flexibility(Wireless). I think wireless will win because this is what Gen Y is asking for.
NB they like speed as well but who on hear is gen y and posts via a phone.
My guess is most
Just my view
Pat Fitzgerald
:
Hi Ash
My understanding is that Big Air is wireless from the base station to radio transmitters on top of a building and then by copper network or cable into the building so I don’t think they get 1000Mbs for mobiles unless they are in the building and have wireless modems in the building. I think Telstra’s maximum for mobiles is about 24Mbs and thats only in the CBD. So if BGL were offering 1000Mbs for mobiles they would quickly dominate that space.
AndyC
:
I agree Pat. There’s a whitepaper on the BGL website that explains it all, and a video. The key advantages, from their perspective, is explained by the CEO on the video. E.g. how rapidly they can respond to build a network for a customer, building a network in a remote area, fast data transfer rates where upload = download speeds.
What about the challenges? How does their radio based technology get affected by rain (they try to address this, but it’s a good question), what happens when NBN rolls out much faster networks? etc, etc. For instance, their CEO made a valid point that when cloud computing becomes a more intrinsic part of businesses, they may seek to have a redundant connection to the internet in case their primary fibre-based link is down.
All these things are easy to discover with a bit of research, it’s important to understand the SWOTs of any business we put our money into.
In my view (and seek your own advice) BGL has some great potential and some great risks.
Brad J
:
Hi Ash,
You are talking about BGL and I am talking about VOC. Sorry for the confusion.
With regards to BGL we really can’t compare this to normal wireless as it is fixed wireless. You need to get it installed and it is more comparable to a ADSL line, but is easier to move. It offers much higher speeds compared to wireless but can’t be used everywhere and it isn’t mobile.
While I think BGL is under valued I also think VOC is a much better long term investment and feel they have a far better Moat.
Pat Fitzgerald
:
Hi
From Wikipedia:
A number of WiMAX Mobiles are expected to hit the US market in 2011.
ron shamgar
:
hi Brad,
i said for fy2011. NPAT will be around 8million. all these figures do not include the perth ix and dark fibre acquisition and their recent capital raising. im quite certain they will earn more than $10mil NPAT for fy12. i look froward to rogers insights from his meeting.
Brad, since you seem to enjoy ringing up companies, do you mind calling BGL and asking them to list all their fixed wireless competitors in Sydney, Melbourne etc.? from what i can see they don’t really have much competition in these cities (they do in Adelaide).
cheers.
Brad J
:
Hi Ron,
I left two messages for someone in the company to ring me back yesterday and have had no reply. I will try again later in the week. This is a first.
Ash Little
:
Hi Brad
try Email
you might get a response
Pat Fitzgerald
:
Hi Brad J
Because of the uncertainty of future earnings I apply a discount to future years IV’s, also analysts estimates are normally bullish.
I discount by the following:
where r = required eturn
2012: IV / (1+r)
2013: IV / (1+r)*(1+r)
Pat Fitzgerald
:
Hi bloggers
If you own shares in mining services businesses (as I do) ABARES latest bi-annual report detailing new projects in the minerals and energy sector has been released:
http://www.abares.gov.au/publications_remote_content/publication_series/minerals_and_energy_-_major_development_projects?sq_content_src=%2BdXJsPWh0dHAlM0ElMkYlMkYxNDMuMTg4LjE3LjIwJTJGYW5yZGwlMkZEQUZGU2VydmljZSUyRmRpc3BsYXkucGhwJTNGZmlkJTNEcGVfYWJhcmVzOTkwMTA1NDRfMTFhLnhtbCZhbGw9MQ%3D%3D
Brad
:
just on the renewable oil…
I worked out – 53mn hectares (thats double the size of VIC) to produce 83mn bbl of oil a day
we’ve got a bit of spare land in the middle of australia…….
Ilya
:
I love the old renewables! Whale oil is renewable but crude is not. Trees are renewable but coal is not. So far we have had examples of massive deforestation and at one stage we nearly run out of whales completely. Whales were only saved by the discovery of kerosene (renewable saved by non-renewable :-) ). We have not run out of any non-renewable resource yet and we won’t any time soon. The big problem with many renewables is their inability to grow as fast as we can consume them.
Roger Montgomery
:
Ilya, …with the exception of sun, waves and wind?
Ilya
:
Roger, I did say “many renewables”, not all :-) But further still, sun doesn’t shine at night, wind doesn’t always blow and locations for large scale wave installations are very limited. Nuclear is about the only current way we can have low emissions and maintain a 24/7 industrial economy.
Roger Montgomery
:
Hi Ilya,
I knew you would say that! You are correct. Baseload power is the challenge and there are few experts here at the blog who can help on this one…
Steve I
:
I looked at the figures for wind energy and I have no idea why anyone bothers! It is the worst by far and seems terribly inefficient. I’m not sure that it should continue to including in a future potential energy mix.
Personally, I think nuclear is out due to low probably high impact events. If anything, the saving grace could be thorium however I’m not sure how abundant it is.
Natural gas seems to be the stop gap until we can get our other technologies up to speed. Solar, hydro and geothermal all seem to have ongoing potential depending on the geology/weather.
AndyC
:
Geothermal (the best form of it which involves fracturing granite rocks and passing water through them) is an exceedingly hard technical challenge and has all but stumped all ventures around the world to-date.
Granted government funding hasn’t been nearly as much as it could have been, but although in an ideal world Geothermal is the answer, the engineering realities probably make this some ways off.
Personally, I am hoping the we can crack this one (sorry about the pun).
In my view there will be great strides made in the realms of energy efficiency (as opposed to energy production). The answers, I believe will be Black Swan like. I.e. very difficult to foresee, impacting and obvious in hindsight. Areas such as superconductors, materials engineering/nanotech, batteries, fuel cells, decentralized power generation etc will feature in the future of energy.
Trying to invest in all of this is akin to having known that the internet was going to succeed AND which companies were going to make all the money. If you pick the right company, you’ll make 100 times your money, if you don’t you lose it in the end. Is this investing?
Roger Gibson
:
The whole subject of global warming is fascinating and without doubt will continue to drive politicians to formulate policies that will have a huge impact on investment. There will be big winners and looses among companies and industries. Do we know where to look to find the winners?
The debate that never really took place on global warming seems to have ended. The western world has decided on a low, or at least lower carbon future irrespective of the fact that the world has been cooling since 2002, ice is increasing and polar bears are back to record high numbers. China, India, Brazil and Russia meanwhile, are unlikely to follow suit and are being paid by the west to pollute by buying their carbon credits. Australia looks forward to join this madness in the near future. But that’s politics and not the question for investors. We, like Al Gore just want our place in the sun with money in the bank.
There are probably an awful lot more wind turbines to be built and sold even though the energy that comes from them is likely to be blacker than the brown coal we currently use. Why? Well, as I understand it you get on average about 25% of the installed capacity from them due to the variability of the wind and then there are the times when the wind is not blowing at all. My simple mind concludes that to get a Giga-watt you would need to install 4GW of wind turbines plus 1GW of real power stations plus all the additional distribution lines, substations, etc. It takes a lot of energy (read carbon) to build all this from mining and processing the materials to all the extra line losses from getting the power from the remote locations you tend to put these eye-soars in. Do you ever get that energy back over the life of the turbines? Personally I doubt it and have yet to find a full energy audit study that even attempts to evaluate it. But one thing you can conclude from an increase in the use of wind power is the need for more power stations.
Though I accept that wind power will increase I believe that a point will be reached where the impracticality of its use, the cost and other technical problems will cause the technology to be abandoned. As the percentage of wind generated power increases on a grid then the more unstable the grid becomes due to large and sometimes rapid fluctuations.
Much of the politics which have pushed us towards a lower carbon future has come from green and environmental movements. Those of similar views to the anti-Vietnam war campaigners and ban-the-bombers. Those that were to become tree huggers and anti- nuclear power campaigners once the cold war finished. This side of politics has been in the ascendency and it is hard to imagine that they would ever embrace nuclear power stations. It therefore seems fair to assume that any future power stations will be coal or gas.
As far as I know then there are no commercial plants anywhere in the world that pump carbon dioxide exhaust underground, so called carbon sequestration. It has been talked of for a long time but never done. As an investor I wouldn’t consider any project or technology based on its use.
I haven’t heard of any new technologies on the horizon likely to displace coal, gas and nuclear as the major sources of power and Australia will stay with coal and gas while exporting coal, gas and uranium.
Companies that would do well would be those that can come up with ways to convert coal or gas to electricity more efficiently with less pollutants being discharged. Whether it could be achieved by redesign of the basic boiler-turbine or gas turbine equipment or by some chemical means to remove the CO2 from the gases I don’t know. Does anybody know of any companies undertaking research into significantly reducing the amount of CO2 discharged from power stations? My suggestion is pump the discharge into a few hectares of vegetable growing poly-tunnels. It is ironic, isn’t it that the gas we entirely depend upon to make our food grow we are trying so hard to get rid of.
Be careful what you wish for!
Brad
:
check out p6 of this weeks New Scientist, genetically engineered bacteria that when combined with water and sunlight form oil, “burning” co2 creating a carbon neutural fuel cycle
Along way off commercialising but – WOW
“We haven’t yet reached the limit of the human potential”
Warren E Buffett
Matthew R
:
That is an amazing concept
In my field there is (and has been for some time) a lot of excitement around the potential of nanorobotic surgery and stem cells for curing injury and disease. What is now just science fiction will in some form or another become a reality in the future, and a lot probably in this century.
Interesting that innovation in markets doesn’t seem to have quite the same beneficial outcomes
Garry
:
Hello Roger,
“Banishing Ron” for “build ups” i find his insights and “valuable”
discoverys a great service to this blog.Lets talk build ups, the secretive
gold stock you purchased was building bigger than krakatoa and you still
tease viewer”s on your money your call that you wont divulge the company.If
you have finished accummalating come clean Roger.Ron did.
Garry
Roger Montgomery
:
I genuinely have no intention of discussing the gold stock at all or ever. So no build up.
Lloyd
:
Agree and thankfully so. There are more interesting and productive things to discuss than speculation on gold price and liars standing beside their hole in the ground.
Andrew
:
I am perplexed as to why so many people want to know what gold stock Roger is buying. No disrespect to Roger, who cares? There are plenty out there and if you look hard i am sure people will find good ones, it doesn’t matter whether Roger is buying them or not.
Roger is under no obligation to let us know what companys he is buying and selling, with good reason too if you look at the effect him mentioning a company has. If i was him i would not mention a company publicly again, it would save him a lot of time and risk and be more profitable for his fund.
The recent crackdown on posts was needed, we were no longer discussing anything for starters. People just wanted to know what companys to buy or sell and then just ask Roger for an updated A1 list. We needed to get back to quality or else this place would have lost all purpose and identity.
Ben
:
I wholeheartedly agree Andrew. I have been a long-time reader of this blog (although I don’t post too often), and it seems like a few of the newbies are more interested in getting the next hot tip, rather than actually applying what they have learnt from Roger’s book and value investing more generally, as well as the insightful comments of many of the bloggers here.
There is a real sense of self-satisfaction I get at doing the research, coming up with an investment thesis, applying it and the market overtime showing the hard work was worth it.
I’m glad Roger has tidied up the posting requirements because I had started to notice a lot of the comments seemed to be suffering from short-termism.
Cheers
Ben
Andrew
:
Hi Ben,
I agree, my biggest discovery in value investing through my time reading Rogers Blog and book is that i have created my own style that i will follow and refine. This is very satisfying to me as it is my own and i will continue to use it for my investing life.
We should do all we can to keep and protect the level of individual thought on this blog, this is what sets it apart from others. Doesn’t matter what Roger, Ash, Ron, myself or anyone is saying, hyping or mentioning, it is what we (individually) think that is important and we need to form our own opinions. We need to make decisions based on our own and not others opinions.
Who knows, they could be wrong.
ken fraser
:
Garry, I`ll tell you what it is. It`s MML. Roger hope you don`t mind. I don`t really know at all. I thought the build up was ok. It created a lot of interest. I think the whole thing is quite funny. Roger you created this blog for which we are all grateful and you run it the way you want which is the way it should be. I don`t care how you run it as I know it will be run to benefit everyone and it will be run as best as it can possibly be. Roger you are the guru and I just sit back in amazement when I see you on TV, honestly. Roger I hope this post doesn`t embarras you and you can edit it or don`t post it if you prefer. Thanks a lot, Ken.
Roger Montgomery
:
Given all the aggressiveness I have been copping behind the scenes from people whose posts I simply don’t permit here anymore, I’ll take all the compliments I can get. Embarass away. Thank you!
Tim Phelps
:
Agree 100%.
“Keyboard rage” is what makes most internet forums a waste of time to follow, as they just degenerate into a war of words. And it’s usually by people who wouldn’t have the guts to say it to your face anyway, so I’m glad you’re not taking giving them the time of day.
Keep up the great quality of blog, Roger. We all appreciate it and look forward to the “new and improved” version as well!
ron shamgar
:
hi everyone,
i didn’t anticipate the kind of reaction my post on BGL has caused on the blog.
i tried to provide my full insights and research i have conducted into this company paying attention to the new posting criteria requested by Roger.
i also think i was being ethical by disclosing my recent purchasing of this company.
as i said i will try not to be as ‘mysterious’ before i post about a company the next time. BUT it is out of my control if some investors on this blog rush out and buy any company mentioned by me or anyone else here, without doing their own research.
thanks for your feedback.
cheers.
Brad Voigt
:
Ron, Thanks for the research and always insightful comments. Not sure how many different times yourself , Roger and others can say DO YOUR OWN RESEARCH. People need to take responsiblity for there own investment decisions Buying a stock simpy because it is mentioned on a blog is speculating at best. May as well go to the casino and put it on red or black.
ron shamgar
:
TGA MD interview:
http://www.abc.net.au/lateline/business/items/201105/s3226000.htm
Mark
:
I did an IV for TGA today and came up with 2.10 using an RR of 14percent.
I know Roger posted his IV at around 1.57 or 1.67 recently.
I have done my valuation but defer to Rogers as he may have factored in things or knowledge that I don’t have as I am using the data from Commsec.
Still a good company that if the price fell a bit would be worth considering.
Thomickers
:
hi Mark,
I am celebrating my 1st anniversary in being married to this stock. The price that I paid for gives myself a dividend yield of 7.7%.
As for IV i have been varying the IV between $2.00 and $2.50 depending on my optimism/pessimism.
As you know we are both far above from Roger’s IV, but one risky measures that I was concerned about was current ratio. below 1 in 09 & 10 but positive in 2011. There is now however higher long term debt to fund the last acquisition.
Ilya
:
TGA released their 2011 results and they have exceeded expectations, hence the higher IV. I get similar result to yours.
Ray H
:
Mark I calculated a FY12 IV of $2.09 for TGA this week, after estimating and incorporating the extent and price of the planned rights issue that management have flagged as planned for next FY. Of course, this is all speculative to a certain extent, because until the raising is complete we really don’t know. I was using a RR of 12%, so that will have an impact too.
ken fraser
:
TGA is a rental business so how does a debt collection business fit in? I don`t understand the benefits. Has anyone got an insight into this business fit that they wouldn`t mind blogging on?
Michael Horn
:
TGA has been renting stuff to the cash-strapped for some 74 years, having opened its first shop in Sydney in 1937, and as a consequence it has a great deal of skill and processes (the X factor) to handle the cash-strapped demographic. In earlier years people looking for a small personal loan would give TGA (then RRA – Radio Rentals Australia) as a credit reference, and this induced TGA to enter that line of business in a tentative way a few years ago. This new business is performing well.
It is not a huge leap for TGA to use that X factor to collect other debts, and hence the NMCL deal. If this works, it opens up opportunities to collect other debts.
Andrew
:
Hi All,
Had the pleasure of heading up towards the NSW and Queensland border over the weekend and saw an article on my plane trip which i found extremley interesting.
I flew up with Virgin and in their in flight magazine they had a report on the future of retail. As those who have read my first post on this blog will know, this is an area i am interested in and keeping an eye on.
What it was saying is that as online retailing becomes more prominent in the market the role of shopfront bricks and mortar retailers will change to be more a showcase for the brand than an actual shopfront.
This echos my thoughts on the future of retail which are that most stores will be more for display with all the purchasing being done online. Retail companys will spend more time setting up the infrastructure needed to have an efficient online retailing system.
I think in the end retailers will either go down two routes, they will set up to have most of their sales go online or they will limit all their products to needing to be bought instore at a bricks and mortar retailer. The latter will need a big differentiating factor that will make people visit these shops, for example Chanel.
The companys that go a more online route will still need bricks and mortar shopfronts but these will be more to showcase their products and brands, staff will need to be less salespeople and more brand ambassadors with increased product knowledge. I think if anyone wants a peek as to what i mean about a showcase for the brand, visit the nescafe store in pitt street mall.
I am excited about this future as i think in order for retailers to truly have a differentiating brand and competitive advantage than they need to manufacture it as some type of experience.
Jason R
:
Hi,
I think the whole online retail scare factor for bricks and mortar stores is overated. If i go to a shop and see what i want i (like 99% of others i believe) will buy it there and then. The other option is to go home – log on and buy and then pick up from the post office a week later. No matter what the saving it is just not worth the delay and the hassle – also the lines and service at post offices leave a lot to be desired.
Love the blog!
Cheers
Andrew
:
I know a lot of people who do the opposite, they will go to the store and see what they like, get a product description and go online and order it online. The savings are enough for people to take up doing it. My fiance saved more than $500 on a pair of shoes doing it this way and had the shoes delivered to our home in less than 3 weeks from europe.
I think the younger tech savvy people coming up will jump on board this trend.
Books are an obvious one too, i have saved hundreds buying them online.
It will not completley destroy bricks and mortar retailing this will always exist as there will always be some form of demand for it, but it will change the landscape of it though and bricks and mortar stores will be effected and need to adapt.
Roger Montgomery
:
High Andrew,
Rob wrote on another thread:
Before Mal quotes it.
“The reports of my death are greatly exaggerated” – Mark Twain
I’ve been reading all the comments about the demise of bricks and mortar retailing and thought “value investors certainly aren’t immune from the herd mentality”.
I had considered tracking bearish and bullish comments about retail and the economy and matching them to the Dow or ASX.
Before Easter there was a host of comments regarding retail, especially what makes a good and bad retail store.
Now it’s doom and gloom and even the good ones are going to hell in handbag (sorry for the pun ORL).
Do people really think b & m retailing is dying?
Just let’s look at one store that does it well. It’s always packed. It’s always full of young people, this new generation that’s ringing the death knell for B&M with their online habits.
There are two stores nowhere near me, at least 40 mins in good traffic and I’m equidistant from both. On bad days when parking’s aplenty and the shops are deserted this store is packed.
They have a massive online store and have had so for as long as I can remember. They now have probably the biggest volume of online sales in the world and guess what they’re in the hot IT sector. Yes, no surprise it’s Apple! I’ve been in the New York store at midnight and it’s the best example of having a licence to print money I’ve ever seen.
Let’s look at JB HiFi and all the conjecture about it’s future. It’s been competing against iTunes since 2003 and yet here’s what JB has to say about software (music, movies and games) in their February 2011 Report to Investors.
“We continue to gain market share in all software categories, with customers attracted to our great prices and broad range. We continue to invest in all software categories, with it being an important part of every new store that we roll out.”
“The reports of my death are greatly exaggerated” – B&M Retail.
Cheers
Rob
Ray H
:
Sorry Jason, but I have to disagree. For some purchases you are right, but for many purchases online is the way to go.
I recently found myself looking for a new watch. I wandered in to a jewellers in the local mall and happened across a watch that fit the bill and I actually really liked. The retail price was $495. There is no way it was worth that much. I attempted to obtain a discount and after playing with her calculator the saleswoman generously offered me the watch for $460. I memorised the model number and went home and entered it in Google. The watch was available from a dealer in Singapore in US dollars – including FedEx shipment it was less than one third the price I was offered locally. I purchased it with my Visa card (which offers online fraud protection) and 3 days later the watch was delivered to my desk at my workplace via FedEx.
Now if you reckon I will bother buying anything in that jewellers again, forget it. But they are useful for making the decisions about what to buy and what not to. They just don’t get paid for helping with that. A broken model.
Darren
:
If bricks and mortar stores are doomed how come it still takes me 10 minutes to find a car park at my local Westfield!!!!!!!!,
By the way I also had trouble finding a car park at a stand alone JB Hifi last week.
Cheers
Roger Montgomery
:
Consumers must really want the Australian warranty, because price alone does not explain it.
Darren
:
Roger,
For a lot of people the shopping experience is also about instant gratifaction. They see it, they want to buy it on the spot, they do not what to wait for it to be delivered.
Darren
:
G’day Roger,
What do the team think of jbh at the moment, the share price is getting smashed, just out of interest I went into my local jbh today and spoke to the staff. They said that they were quite busy and selling heaps and beating their required budget. So there seems to be a good MOS at the moment. Might be worth a bite.
Cheers
Ilya
:
MOS of about 15% on Roger’s 2011 figures, so JBH is coming into play. Plenty of uncertanty about the future of retail sales at the moment though.
Andrew
:
I think a lot of people might have went a bit cold on JB Hi Fi and are instead looking out for companys in the small/micro cap area that are going to be a better growth prospect than the mature JB Hi Fi.
Due to JB Hi Fi becoming a mature company you can expect that the either ROE will drop or POR will rise or both. So there is some future things to take into account in regards of future valuations.
From the business perspective, it is still a good business with a great brand and competitive advantages working for it. Their could be some headwinds in the future prospect area in regards to the impact of online retailing on the electronics and entertainment sector, also when a company starts becoming more mature i think there is the added risk of management doing something that is not in the best interests of shareholders such as an overpriced acquisiton etc but i have not seen any evidence of this yet, it is just a general view i have.
I am a fan of this company and am keeping an eye out for it, i would however like a bigger Margin of Safety for me to feel comfortable in investing in it than is currently present. It is in my view a great mature company that might be a handy investment ala Fleetwood. I wouldn’t expect capital growth in the future however.
Roger Montgomery
:
Lots of fund managers bought JBH in anticipation of the buyback. The scaleback of the buy back meant they were caught long and so have had to sell.
Andrew
:
Thanks for the insight Roger, i didn’t know this. I was alluding to the lack of discussion of JBH on here. Still, i will need a bigger MOS than what is currently offered to buy into.
Keep up the good work Roger.
Jonesy
:
I have found the last few months very interesting from a retail perspective and the psychology of investing. There has been a (now) real concern about the impact of the internet and online businesses stealing market share from bricks and mortar retailers. The first time there was a news item about this, the share prices of retailers dropped, as you would expect. However, it seems that every time there is another news article about online businesses taking market share, the retailers take another hit. But this is the SAME piece of news. Just because the same piece of news is repeated on multiple occasions, doesn’t make it more predictive, but Mr Market obviously does not realise this. It reminds me of the people who repeatedly bang the button at pedestrian crossing multiple times because they think the lights will change faster. I for one am grateful for the pessimism of Mr Market recently and continue to be happy adding to my holding of JB HiFi recently.
Ash Little
:
Hi Guys,
Price follows value eventually and I think this buyback has added heaps to IV.
If Ben Graham is right the I would expect some good capital growth out of this one
ron shamgar
:
i thought this was an interesting article about Saudi’s oil reserves:
http://www.theaustralian.com.au/business/news/digging-deep-for-saudi-oil/story-e6frg90x-1226062008130
Mark
:
Hi Ron
I worked for Saudi Aramco for quite a long time and it was common knowledge that the Saudis were overstating their oil reserves.
I socialised with pipeline guys, engineers etc who really knew the true state of affairs and they maintained the Saudis didn’t have anywhere near the reserves that they stated.
Roger Montgomery
:
Thanks for reminding us Mark.
Steve I
:
It is my understanding that the Saudi’s either revise reserve count upwards or retain it at a level regardless of depletion in order to produce more each year than they could otherwise due to OPEC rules. I believe that all OPEC countries have these practices and that the official reports of reserves don’t really tell us much as a result.
Matt
:
I really don’t understand why a commodity supplier would overstate their reserves by such a large amount as supposedly the saudi’s have. Wouldn’t true visibility of this finite resource only send prices skyward (even more)?
Perhaps saudi arabia et al could admit to only having 20% of their “actual” reserves and truly cash in?
The only reason for over-stating I can think of is; saying “there’s plenty left in the tank” suppresses investment in the alternatives and that serious investment won’t occur until 1 minute to midnight..
Matt
:
still trying to get my head around steve’s comment..
Lloyd
:
Within OPEC each member’s oil production quota (MMB/day) is established on a formula that links directly to remaining oil reserves. Spot the incentive to overstate reserves?
Matt
:
thank-you both. cheers!
Trevor
:
Hi Roger,
First time blogger long time reader,i hope ‘banishing Ron” was a tongue in cheek comment,this person mentioned VOC,ZGL and BGL,as potential “valuable” stars.
I enjoy investing in the stockmarket,and reading your book Roger and the comments by Ron,Ash and Loyd and co on this blog has helped me immensely.As a shift worker and a fulltime dad i do not have the time to sift through the 2000 stocks.
So the stocks nominated by Ron and others, i can do my own research and apply the “valuable” methods shown in your book.
I thought a blog was a forum for reflections,opinions and commentary,and if Ron is “banished” for delaying his mystery company by a few days,how’s that secret gold stock of yours going?
Thank you Ron and co,
Trevor
Roger Montgomery
:
Trevor,
I was asked in an interview what gold stock I liked and I responded by saying I cannot mention it. Here on the blog, there was speculation about what it might be, so I commented that I would not be mentioning it at all. And I haven’t mentioned it. That strikes me as quite different. I have no problem with solid research and unique insights being posted at all – thats what this site is about. I encourage it and Ron has indeed offered plenty of useful information for readers.
My team however identified a post(s) as concerning and asked me to check it. They had independently quarantined it. I take their views seriously. I felt it was ok as there had been some unique insights and independent research and posted but then I found the same comment cut and pasted on three separate threads. That is unnecessary and doesn’t sit well with me. We were already on alert following these comments:
The comments that concern me:
1) “All I would add is that there r 4 cheap opportunities right now in this space and one of them is Vocus. The rest u need to keep digging…”
2) “Hi rob, u will b surprised but it’s not as rare as u think to find A1s at big discounts…have a look at the small/micro caps.”
3) “In regards to the list above….one of them is a bargain!”
4) “I hope we’re not fighting for the same gems! All I can say is that all this talk about market falling and general pessimism everywhere makes me think we might go higher by the end of the year? Contrarian anyone?”
5) (Following a warning from me) “i will roger. but as you say publicly, i also don’t like to compete buying the same stuff with other people.”
6) “i will post about a little hidden gem i have found tomorrow.”
7) “if you miss out thats OK, be patient and other opportunities will present themselves – i guarantee you that! Cheers”
8) “i am trying to post an overview of an interesting opportunity i have found. stay tuned.”
9) “First of all I would like to apologize for being secretive in the last few weeks. The reason is I have found several interesting opportunities! In this post I will talk about one of them which is presenting huge value. For those of you who remember, this is not my mystery company I have mentioned before – it’s actually BETTER! So, did you know you can make money from air? Apparently you can! It’s called BigAir Group (BGL)”
Do not build up/anticipation this way again please. Umpire’s decision is final.
ron shamgar
:
hi Roger, as i said I’m not complaining – your blog, you’re the boss!
because the blog does not allow to edit your posts after they are submitted, i accidentally posted my post in the wrong section. afterwards i made some changes and noticed the post was not to be seen as “awaiting to be posted”. so i thought something went wrong on the upload and re posted. i apologise.
Roger Montgomery
:
Delighted for the clarification Ron,
You are offering some terrific insights. So don’t let my concerns detract from your contributions. Keep digging and discussing. Thats what the Insights Blog is about.
Scotty G
:
This may have already been mentioned on the blog somewhere but there is an interview with Seth Klarman up on YouTube at the moment which is really interesting with regards to the value investing approach.
Basically it is Mr Klarman giving a presentation to a college class about his style of investing. Fascinating insight in to one of the best value investors few people have ever heard of and great insight for those new to thinking about the market.
Just search Seth Klarman on YouTube and you’ll find it. It’s split in to about 6 parts
Siva
:
My valuation says 26c for BGL. Current price .25C. Doesnt look like a very actractive discount. Im not sure if my valuation is rite or not. can anyone help?
Paul
:
This year it is as IV but the upcoming years is what there is to be excited about with future estimated IV looking far greater than the current share price. Other bloggers have posted their est IV and company value further down on this page.
David Martin
:
Your right but it is the future that looks very bright – i reckon (based at Jun 2010) it was worth around .25 and its reslts to December for the 1/2 yr increded my IV to around .42.
I think it is trading at around .25 at the moment and like most on this forum we are trying to buy businesses at a discount – it is not as big a discount as many but it is not bad.
My only concern is that there might be future capital raisings in the future and we will need to make assessments at the time.
Chris B
:
Hi Roger,
You have me a little perplexed in regards to a few of your valuations, so I was hoping you might be able to show me where/what I might be misunderstanding.
For example, around a year ago I remember you had a valuation for PTM somewhere north of $5.00. I remember when I applied your valuation method and i couldn’t get anywhere near $5.00 – no matter how I tried to manipulate the numbers. Even with a RR of 9 (I think I remember you saying you don’t use a RR < 9 for any business) I couldn't get close to your valuation.
Now, According to a recent Eureka article, I note that your valuation for PTM is now $3.87 – a lot closer to the valuation I was obtaining. Has your RR or some other variable changed dramatically re PTM?
More recently, MTU. A recent post showed your 2011 valuation of $2.70, then on YMYC I'm sure I heard you say $3.60.
I don't wish to be picky or waste your time. I just wish to understand why these valuations can be so different in such a short space of time.
One other question – Do you find any time to sleep? Even reading your blog can be a full time job!
Thanks,
Chris B
Roger Montgomery
:
Hi Chris, I remember our dialogue well. Yes, PTM was due to some very dramatic changes to expectations about required returns and the prospect of interest rate increases. Now fully automated. MTU is simply looking at two different years.
John M
:
Hi Roger, the Value.able team and the whole Value.able community.
Roger, your prescience never ceases to astound me. A very timely reminder to check the compass and get back on track. I am very pleased with the recent changes to the blog. It is really bringing out quality work from all the community.
Investor Psychology:
As in any worthwhile endeavour, psychology plays a very important role for individuals, businesses and markets. In any collective, studies have shown that the intelligence of the group is reduced to the level of the least smart individual. In the case of the market, a collective of funds and individual investors attend an auction. Australia’s retirement funds (Super) is dependent on how this collective are feeling on any particular day. Are you feeling lucky? What mood will Mr Market be feeling when you want to retire?
Patience has two enemies: fear (from now on I will use the cognomen Brutus) and greed (Henny Penny). When there are no fat pitches around, Brutus screams ‘if you don’t buy now, you will miss out again’. When the market has reached is nadir, and Henny Penny has already seen the dark shadow of black swans fly over, only then does Henny Penny cry ‘the sky is falling, sell, sell, sell’. Of course it is already too late and it is probably just before the market resumes the upward trajectory of its circadian rhythm (what time of day is it on the investment clock?). Value.able’s core principles quieten Brutus and Henny Penny, so a third sensible, reassuring voice (let’s call this one Roger) can be heard. “Look for extraordinary businesses at prices far less than they are worth” – such a simple yet powerful statement, but in reality, it can be so easy to forget the fundamentals.
Risk Management:
Warren Buffett’s well known and often quoted two rules are as follows:
Rule No.1: Never Lose money.
Rule No.2: Never forget rule number one.
How does one go about not losing money? Answer, risk management.
Roger has provided everyone a very well thought out and powerful set of risk management tools. Every work place has mandatory standards of risk management, yet how many people employ that same minimum standard in how they manage their own future prosperity? How many people actually know what the risks are? I believe the biggest risk is also the biggest reward. The power of compounding can be your friend if you can invest your hard earned wealth above the rate of true inflation (10% ?). But compounding is your worst nightmare if you have your after tax dollars invested at less than the true inflation rate. What is the opportunity cost differential, compounded over 30 or 40 years if you invest at less than real inflation rates?
The Economy:
Terry McCrann’s economic piece today in the Sun Herald paints what I perceive as an image of the Sword of Damocles hanging over Australia’s prosperity. This mural was painted as a diptych. The first part of the mural is the housing market – whose fortune is so delicately intertwined with our four major banks. The second part is demand for Australia’s resources, viz. BHP and RIO. Take away either or both parts of the diptych, and the picture looks like a mess. Take the above six leading Australian companies out of this rosy picture and all Australians will take one Super hit. What are the Super funds doing to mitigate this risk? Investment Funds mandates generally require a set percentage in equities (in proportion to their respective weightings). When the market falls over, regardless of whether a fund gets average market returns (which will probably be negative); many people will be postponing retirement ad infinitum.
What is being done in this country to smooth out the inevitable speed bumps of a lumpy commodity cycle that is dependent on so many uncontrollable determinants? The only thing in our great nations control is to put some of the bounty aside for the future (sovereign wealth fund?). Why is it, that no matter the size of one’s income, there is a tendency to spend up to and just a little more. In this second phase of the mining boom, we are still in a deficit. With huge incomes we can’t even afford to pay all of our bills. What happens when the boom is over? Hard times ahead! If the nation won’t prepare for the future, it is up to us to prepare for ourselves. Pay ourselves first and then spend what is left. Not pay our bills first and subsist on what is left. Value.able investing.
http://www.heraldsun.com.au/ipad/wake-up-call-about-banking-on-property/story-fn6bn4mv-1226060218798
What do I think lies ahead:
Instead of looking at what are the opportunities, I will invert this time and look at the risks.
Back on November 29, 2010 Alan Kohler wrote an article listing the two (maybe three) big-picture risks in the next five to ten years as being European defaults, Chinese inflation and possibly climate change.
http://www.eurekareport.com.au/iis/iis.nsf/pages/54BDE26558AD2D74CA2577EA00079173?OpenDocument
I agree, GFC Mk2 will probably entail sovereign defaults, as opposed to GFC1 in which corporate defaults (subprime loans and then liquidity crises) where the norm. It wouldn’t be too much of a stretch to expect European Union unravelling thanks to the yawning divide between the profitable nations vs. the PIGS nations. Will any more dominoes fall due to political uprisings in the MENA nations? Will China’s property bubble burst? Is inflation in China getting out of control? Is the USA broke? Will the US keep on raising its debt ceiling? Is the printing of money in the US inflationary to the rest of the world? Different economic commentators think these are all a given at some point in the future and I agree with them. Given that the Western nations are sensitive to oil prices and the emerging nations are sensitive to food inflation, any of the above scenarios are all intertwined and conducive to market pandemonium. Nothing new here. Market cycles will always keep on turning, so all we can do is be aware, take care and focus on what we do best – value investing.
Mentors:
For the benefit of beginners on the investment journey:
I like to look at both the big picture as well as the individual companies and see how everything fits together, like a big three-dimensional jigsaw puzzle. I also like to use the Pareto principle in everything I do. So I come to the personal conclusion that if I could find one or two places to supply the majority of my financial education and investment needs it would save a lot of time and effort. So after a lot of searching I have turned to Roger Montgomery and Alan Kohler.
We all know Roger, his blog, Value.able book, his media appearances, his Fund and his generous charity work.
Alan Kohler is a veteran of the financial markets. He has a subscription based Eureka report (Roger publishes his Valueline – now Value.able article each Wednesday). Alan and his team regularly ponder over what has, what is and what will happen in all aspects of the financial universe. Alan also has a free sister site – the Business spectator and Climate spectator and I think Technology spectator. He also is the finance guru for the ABC evening news and hosts the Business Insider on the ABC Sunday mornings.
Alan was the first person to get me interested in investing seriously. Thank you Alan if you are reading, because you showed me to the path. After a couple of years dithering along this yellow brick road I finally crossed paths with Roger. Now the future is looking much greener, to say the least, and my journey has really picked up some pace. Sometimes what we need is right in front of us, but until we are ready for it, we can’t unlock its secrets. Roger and Alan have handed me the keys.
I have always been a fundamentals person, but I have not neglected the study of technicals (thanks to Alan Kohler’s famous love of graphs) as I think it is important to understand every determinant of the market puzzle. I don’t use technical’s as a decision making tool, but I find that the visual input sometimes helps me to see trends and understand what is happening in the market.
Warren Buffett (WB) and Jim Rogers (JR) are also two people worth researching.
Competitive advantage:
Like you have mentioned Roger, the only true Competitive advantage is the case when you can charge more for an item and keep selling the same amount of units (or more units), for the increased price. The only trouble is that the opportunity for these at discount prices is limited in our little island nation, so patience is required.
Other forms of competitive advantage I deem as being secondary, and possibly temporary in nature so I am much more cautious in dealing with these.
Searching for and requiring a competitive advantage is a powerful way of mitigating risk in a portfolio, not to mention increasing the chances of market beating returns in the long term.
In conclusion:
To quote my second favourite author JRR Tolkien (after Roger of course), the world’s economic fate ‘stands upon the edge of a knife. Stray but a little, and it will fail.’ The only problem is that we will not when it will fail. So we must stay prepared for opportunities. The macroeconomic factors are out of our control so all we can do is focus on the bottom up side of investing. “Look for extraordinary businesses at prices far less than they are worth” sums that up very nicely thanks Roger.
I am not wanting another GFC to transpire, but when the next crash occurs, all the Value.able adherents will be ready for the next round of ‘fat pitches’ that will inevitably occur.
I am now looking for a much larger MOS now, as my RM and AK risk indicators have started to get to the “fasten your seatbelts lights on” stage. I have also unloaded all the ballast from the ship, and installed a much better compass. I am currently looking at purchasing a Radar system as well. Ready once again to navigate through the uncharted waters ahead.
Thanks for your company and keep on Carrying On.
Roger Montgomery
:
Thanks for all your effort putting that epic post together John!!! Excellent collection of ideas too.
Andrew
:
That was a great post John, thank you for putting this together.
You have definitley put forward some top quality thoughts. I like your mention of the Pareto principle. I use a version of this myself. If i focus on core companys i understand very well than i will be better off and have less problems than focusing on others that i don’t. This is the reason i will watch retail companys but not mining companys, sure retail might not be as attractive as resources at the moment but it helps me sleep at night.
All of you guys who invest in resources are quite welcome to share around whatever quota i have for investing in those companys.
Risk management is an important part of investing and one that is not often discussed, well as much as it should be as usually it means in us not investing rather than hearing a voice say “yes, do it!”. My whole approach is developed around the idea of risk management. If i miss out on some big gains than so be it, at least i am better placed to follow rule #1.
Brad
:
“the future is always uncertain, you pay a very high price in the stock market for a cheery consensus”
Warren Buffett
Roger Montgomery
:
Good application Brad,
Always a good line for a barber to use too!
garry
:
Hi Ron,
Ahh the mystery company you have eluded too for weeks now,I said on this post it was BGL.But you said you would never invest in a company like this.I averaged18c in this a month ago i think this can be a huge risk reward play.
Now that you have publicly endorsed BGL i know im on the right track as i value your opinon and always rate your posts highly.Also mentioned this stock to Ash weeks ago for his opinion,i hope you got on board aswell Ash,there was an article on Eureka report on BGL and now posters on the Montgomery blog are aware of it we shall see 40c soon.
Another guess at your mystery company MTU?My guess at Rogers mystery gold stock NST.
I totally agree with Loyds warning for the market in the coming weeks.Be careful out there!!!!
ron shamgar
:
hi Garry,
i have to confess i thought BGL was a different company when i responded to you. (i thought it was a solar panel business i looked at earlier).
but good on you for buying into this one on the cheap!
my personal opinion is that if this company can keep growing and diversifying into other data services, one day it may be worth $200 – $300 million.
mystery company is not MTU. i own MTU its cheap. keep digging.
take care.
darrin
:
HI Garry
I agree NST could be Rogers Gold stock. Did some research and it appears to have some good elements for a good business. Will jump into to buy some today.
cheers
darrin
Andrew
:
Hi Darrin,
Just make sure you are jumping in to buy based on the fact you believe it is a quality business that is trading at a big discount to IV and not just because you think its Rogers gold company, it could be, it might not and probably isn’t, i don’t really care about anyones mystery company.
Patience is the best attribute a value investor can have and i think it is something that is missed by a lot of people on here in their rush to use their newly received skills from reading Roger’s book. be patient and you will be rewarded.
Roger Montgomery
:
Sounds logic Andrew…
Greg Mc
:
I concur with Andrew. Don’t let money burn a hole in your pocket, Darrin. I recall someone saying a few days ago that they had jumped in to a few things too early only to watch them fall.
As MattR would say, invert! What things could go wrong with NST? There are several that spring to mind and I haven’t even looked at it closely (things that are common to many such companies). I’m not convinced that NST is the ‘fat pitch’ that will bring tasty rewards.
Steve I
:
With regards to NST, the shareholders equity figure is exceptionally low, thereby resulting in an inflated IV. It looks solid overall, but clearly is in an early phase so has a higher degree of risk. There seems to be some value in it, but it would take a while to determine what the IV actually is.
Lloyd
:
Skype, LinkedIn, Glencore IPO…. some warning bells are starting to ring for me and the Bernank is yet to talk of ‘irrational exuberance’ unlike his predecessor did and then ignored it for a decade.
QE2 winds down next month. US Government debt hit the ceiling at $14.2 trillion last week and almost $6 trillion of that has been run-up in the last three years on Obama’s watch. Figure the consequences of that on US GDP growth and tell me how healthy the private sector is in the US and how sustainable the current position is?
Better expand that margin of safety on any buy decision you are contemplating as the economic headwinds are increasing at the same time as irrational exuberance is rising.
Alternatively, as Jeremy Grantham currently suggests ‘Lighten up on risk-taking now and don’t wait for October 1 as previously recommended. But, as always, if you listen to my advice, be prepared to be early!’
Lloyd
:
PS …. and don’t forget to buckle your seat belts for the next six months or so. We live in interesting times!
matt
:
Or..may you get what you wish for
ron shamgar
:
Lloyd BUY COTTON!
As 90% of the US currency is made out of that, you know they will just keep on printing.
Lloyd
:
Helps cotton producers,, but otherwise a futile exercise in the near and longer term as inflation will eat the lunch of the US industry and consumers under that scenario. To be frank the trigger for QE3 is a collapse of the S&P 500 in the next few months, so its pretty much a sharp double edged sword.
ZORAN
:
OMAHA TRIP
Just returned from yearly pilgimage to Omaha. Main point(apart from Sokol affair) that I picked up from WB and CM(we did not hang out together) was: SELL all and any gold shares you have and if you cant/dont want to then DO NOT buy any .
Any thoughts
Cheers
Zoran
John W
:
My impression is that Warren has never liked gold or gold shares:
‘Gold gets dug out of the ground in Africa or someplace. Then we melt it down, dig another hold, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
Many have and will do well owning gold shares while Warren will probably continue to do well with his income producing alternatives.
Best of luck with both,
John W
Roger Montgomery
:
Good post John. Thanks for the reminder.
Scotty G
:
G’day all.
At what point would you start to buy stocks based on their 2012 valuation given that there is only a month and a bit left in FY2011?
I ask becasue a couple I am watching are trading at about their 2011 IV but are at a decent (20%+) discount to the 2012 IV.
Cheers.
Andrew
:
For me it will be the 2013 financial year. I will use the calculation derived from the 2012 annual reports of the companys I am interested in. I only use the forecast iv’s as an indicator and will seek discounts to the current iv which is calculated from the annual report.
William
:
this is great question i would assume it would be the middle of 2011-2012 business year or use half yearly data? I hope Roger see’s this one and answers. Cheers Roger
Roger Montgomery
:
You are onto it. COnsistency more important than anything.
ron shamgar
:
i made some changes…
Hi Roger and Everyone,
First of all I would like to apologize for being secretive in the last few weeks. The reason is I have found several interesting opportunities! In this post I will talk about one of them which is presenting huge value. For those of you who remember, this is not my mystery company I have mentioned before – it’s actually BETTER!
So, did you know you can make money from air? Apparently you can!
It’s called BigAir Group (BGL)
BGL owns and operates Australia’s largest metropolitan fixed wireless broadband network. The Australian business market comprises nearly one million businesses and BGL’s network provides near blanket coverage across 7 metropolitan areas. BGL sells broadband and data services directly to business customers and also partners with other IT service companies who have existing relationships with business customers in order to deliver BGL’s high speed, cost effective fixed wireless broadband solutions. Additionally with its recent acquisition of Access point it has entered the student accommodation broadband market.
The CEO and co-founder, James Ashton, is as entrepreneurial and as energetic as they come. At the age of 27 he already managed to co-found and sell an Internet business for $20million. 10 years on and he has delivered on his promises, launching BGL by organic growth and some smart acquisitions.
This year BGL is forecasted to earn $5.2million in EBITDA or about 2cents per share. By fy12 this company is forecasted to earn between $7.5 – $10.5 million EBITDA or about $4 – $5millon NPAT on revenue of approximately $23million. Quoting from the company’s latest guidance:
“In addition the company is pleased to announce that consolidated underlying EBITDA exceeded $625,000 for March with $485,000 contribution from the Fixed Wireless division and $140,000 contribution from the Student Accommodation division. This represents an annualized “run rate” of $7.5 million for underlying EBITDA which represents an increase of 134% versus the $3.2 million EBITDA earned in FY2010.”
In order to produce these profits the company will employ about $15million of shareholders equity. That’s about 30% ROE. In contrast, Vocus, which wil benefit from BGL’s growth, is forecasted to earn $15million in EBITDA for this year and its market cap is $140million. BGL’s current market cap is only $30million!
They are currently debt free and have recently acquired their biggest competitor clever communications and access point in the student accommodation sector. The increasing focus by universities to provide on campus student accommodation provides BGL with significant scope to increase its user base.
Balance sheet wise, this company will produce tremendous cash-flow going forward from fy12 and is forecasted to pay a dividend. Now I am no Roger, but I believe this company is currently a B1 (small chance of short term borrowing to cover their trade payables) and I am quite certain it will be an A1 come fy12. (I hope Roger can confirm this). Now don’t be alarmed by this, remember Matrix needed 3 capital raisings to get to where they are now, and all were in the space of about a year!
Competitive advantages and NBN risk?
BGL’s competitive advantage includes its state-of-the-art WiMAX and proprietary network which allows it to install business-grade symmetric broadband services at speeds up to 1 Giga Byte per second and distances up to 30km from its base stations with installation taking just a few hours. Most of BGL’s competitors rely on access to Telstra’s copper network which can take weeks to install a service and often does not deliver fast symmetric speeds.BGL like other ISPs is in an essence not so much of a technology company but rather a customer services company that uses technology as the competitive vehicle to deploy those customer services.
Since BGL uses its own network it does not rely on the NBN and the access costs associated with it. Considering the fact it will take many years and to build the NBN (they can’t even get a contractor to competitively tender for it), there is enough time for BGL to grow and entrench itself in its industry.
The verdict?
There is not doubt that internet and data demand will grow exponentially into the future where businesses and students will require fast, efficient and quality internet services. The great advantage of BGL is no matter what happens to commodity prices, the Aussie dollar or china, BGL will continue to experience demand for its services.
At 22cents (last price) BGL is trading at just under its intrinsic value (IV) for this year, BUT looking ahead to fy12 I have their IV at between 35cents – 45cents. If you remember I have always emphasized on this Blog buying at BIG margins of safety, well this is as BIG as they get!
To me it reminds me of Matrix at $3.50 when we all knew their order book was at $180million for the next year. Sometimes it’s just a no brainer. Apparently some other people think the same (Eureka report article on last Friday and AFR article last week).
Finally, I will never forget something Roger once said during one of his presentations in Sydney last year:
He said “When you see value, it smacks you right in the face!”
Well… my cheeks are very sore!
BGL has been added to my portfolio alongside other quality businesses such as MCE, FGE, VOC and MTU.
Good luck!
(Side note)
This is a small and sometimes illiquid stock that may be volatile in the short term. I urge you to do your own research and seek and take personal financial advice. The reason is that if the share price falls in the short term, you can at least blame your financial advisor and not me. ;-)
Ash Little
:
Hey Ron.
Yes we have been competing,
This is a very good post.
The only thing I will add is there is much talk about the NBN and high speed data transfer but we tend to follow trend from the USA and they have a much higher rate of wireless use than is Australia.
We are a bit behind but wireless use is increasing in Australia at a very high rate. This is what makes this company so attractive to me. It is not all about speed. Other factors come into play here. Things like mobility and flexibility are probably more important especially for our younger generation.
If speed was so important why Wally Lewis, Allan Langer, Darrin Lockyer and Matthew John (last one thrown in to appease our NSW bloggers) so good.
Adam
:
Hi Ron, appreciate your research. Can you provide some NPAT figures rather than EBITDA? Warren buffet has spoken of how EBITDA is not enough information to assess a business with, and I believe Roger would back me up on this.
ron shamgar
:
if you read my post carefully all the information is actually there. for this year and next.
Michael
:
I estimate the NPAT based on the EBITDA released would be about $2.5m. The tooth fairy must be paying there taxes and for upgrades to their plant and equipment.
I haven’t done alot of research, but I noted that the company showed virtually nil free cashflow in its most recent accounts and in the prior corresponding period and has a deficiency of net current assets. Obviously many people have done their research and don’t have an issue with this, so good luck to them.
Ben
:
Hi Michael
If you have a look under note 3 in the half yearly accounts the trade and other creditors figure is explained. It is basically in relation to a takeover (Clever Pty Ltd) which had not been finalised at the end of the reporting period. The accounts are restated in their presentation to investors with the full amount now included in equity and not liabilities.
I had a look at this company. Since they started using their own last mile network their customer service seems to have improved markedly. The other thing I liked is that for a relatively small outlay (c.$100k) they can get incredible reach. Of course on the flipside this means their moat is not as strong as someone who has laid cable in the ground, and the associated capital investment required.
Cheers
Ben
matt
:
You are a coy fellow!! I’be been thinking about BGL (still am) . Thanks for your great insights.
Ilya
:
Hi Ron, Thanks for the tip. Where are you getting your 2011 and 2012 forecasts from? There is nothing on CommSec.
Ilya
:
Sorry, Ron. I figured it out when reading the second time.
Wow, a few people must’ve read your post and went shopping. The stock is up 20% today! I think I will give it a bit more thought.
Roger Montgomery
:
Less liquid than ZGL…A Eureka report article helped too perhaps. Only one analyst covering the stock. I believe that analyst may own 7% of the company.
Ash Little
:
Hi Roger,
The fund the analyst works for now owns nearly 8% so they are putting their money where their mouth is so it seems.
This is pure speculation but that fund has had at least 2 takeovers of businesses they own over the last 12 months or so at prices that they believe were well below IV. Ultimately they held out but compulsory acquisition got them in the end. They may be moving to a blocking stake to protect their position or this all could be a total pump and dump.
I had done my own figures before this report was released and my figures were lower but not massively to this report so I am not getting the pump and dump at all.
Just my view
Jeff Burnett
:
Hi Ron
I have noticed sometimes a Roger effect on the market following a favourable discussion about a particular stock, but following your excellent insights into BGL I see another blogger effect with a 20% jump in BGLs share price this morning!!
I just wonder how much research went on last night?
Jeff Burnett
Roger Montgomery
:
Everyone,
BGL was covered in the Eureka Report on Friday.
Brad J
:
WOW!!! Ron you beat me to it!!
I say this in the Eureka report and decided that it was an outstanding buy. I was going to put a post up on this today after I had secured my holding, but you got in before me.
As you say Ron they are just too cheap and with earnings next year, I value them at $0.49 so they are still trading at a huge discount to IV (49%).
I will need to do more research on their Moat to see whether they are more of a VOC rather than a MLD but with a MOS like this it is still an outstanding buy.
I will be doing more research and will post any interesting insights up on the blog.
Brad J
:
Ok, I rang the company and they offer much faster/reliable speeds than you get with most ADSL lines and of course normal wireless can’t compete. They offer faster installation and their service can be easily moved, provided their base stations are in range. They are suitable for mid sized to large organisations but their technology would not be suitable for the very small operators.
Their biggest threat is the NBN, but as you say Ron, this is likely to take much longer to roll out than current forecasts. In fact it is likely to be a disaster if you consider the Labour govt’s track record on stopping the boats, home insulation etc.
Lets hope that price catches up to value soon so we can all double our money.
darrin
:
HI Ron
BGL ticks all of the boxes for me.
I went to the market today and bought in at 25c.
cheers
darrin
ron shamgar
:
thanks for all your feedback. i would like to think that its me who moved the stock today, but thats wishful thinking. :)
as roger mentioned its been discussed on the eureka report and there was an article in the fin review last week.
PLEASE do your own research before deciding to buy this one. Cheers.
Roger Montgomery
:
And Ron. no more ‘build ups’ like that or you will be banished.
ron shamgar
:
no problem roger. next time i will keep my mouth shut.
darrin
:
HI Ron
Your blog commentaries I have found very helpful on my valu.able journey. Especially the mention of good businesses to research for investing.
cheers
darrin
Matt R
:
Ron
I for one hope you don’t keep your mouth shut. thanks for your insights…
Roger Montgomery
:
Ron and others,
My team identified the post as concerning and asked me to check it. They had independently quarantined it. I take their views seriously. I felt it was ok and posted but then I found the same comment cut and pasted on three separate threads. That is unnecessary. We were already on alert following these comments:
The comments that concern me:
1) “All I would add is that there r 4 cheap opportunities right now in this space and one of them is Vocus. The rest u need to keep digging…”
2) “Hi rob, u will b surprised but it’s not as rare as u think to find A1s at big discounts…have a look at the small/micro caps.”
3) “In regards to the list above….one of them is a bargain!”
4) “I hope we’re not fighting for the same gems! All I can say is that all this talk about market falling and general pessimism everywhere makes me think we might go higher by the end of the year? Contrarian anyone?”
5) (Following a warning from me) “i will roger. but as you say publicly, i also don’t like to compete buying the same stuff with other people.”
6) “i will post about a little hidden gem i have found tomorrow.”
7) “if you miss out thats OK, be patient and other opportunities will present themselves – i guarantee you that! Cheers”
8) “i am trying to post an overview of an interesting opportunity i have found. stay tuned.”
9) “First of all I would like to apologize for being secretive in the last few weeks. The reason is I have found several interesting opportunities! In this post I will talk about one of them which is presenting huge value. For those of you who remember, this is not my mystery company I have mentioned before – it’s actually BETTER! So, did you know you can make money from air? Apparently you can! It’s called BigAir Group (BGL)”
Do not build up/anticipation this way again please. Umpire’s decision is final.
Sean
:
Hi Roger
Have followed the blog since day dot and own a collector’s edition of your book. You have been very generous with your sharing of knowledge.
I notice with particular interest that the earlier bloggers were appreciative and well aware that you are offering us all a leg up and not a hand out!
I also notice you’ve clamped down on comments and kind of wish you would even more so. The difference between this one and the previous couple are chalk and cheese!
In light of comments published here over the last few weeks and months I’ve noticed a distinct migration of postings to those you’ve mentioned above and believe the quality and integrity of the blog could be compromised if it continues.
It’s all very well to come here and share ideas and knowledge with like-minded individuals and I don’t mind some ‘banter’ but have noticed that a lot of people that are now following seem to be just looking for stock tips to jump on and hope that they can get a quick free ride and a nice little profit of 10-30% in a few days/weeks. That’s not investing. And as you have mentioned previously, if you jump on something others have already bought you’re doing them the favour by pushing the price up, sometimes even beyond their IV.
After the drawn out teasers about BGL, you have to wonder how much research was done when you read comments like this: “BGL ticks all of the boxes for me.
I went to the market today and bought in at 25c.”
This blog has become an invaluable resource for lots of us and has certainly changed the way I look at investing in companies. Would hate to see it lose its relevance.
Just a few thoughts.
BTW, BGL is not for me at any price.
Cheers
Roger Montgomery
:
Thanks Sean,
Others share your sentiments and have expressed them to me via email. I will not be publishing any more comments about this issue. The subject is now closed. lets get back to sharing insights about businesses and industries…
darrin
:
Hi Ron
Keep adding the sizzle to the valu.able bbq.
cheers
darrin
Ray H
:
An interesting company Ron, and you could well be right that it has bright prospects, however some very cursory investigation has led me to put it into the ‘too risky’ basket.
Lots of Intangibles on the asset side of the balance sheet – managers who start paying too much for aquisitions often tend to continue doing so.
Cashflow is marginal at best.
Current liabilities – Trade Payables is a serious problem given cashflow and current assets.
Lots of new shares on issue – the dilution makes me nervous and the company harder to value.
Accumulated losses have a significant impact on the reported equity for this business – once this is added back to represent true equity (‘money put in and remaining in’) I get a current IV (14% RR) of $0.14 and a FY12 IV of $0.29 (assuming a fairly generous profit of AU$3m next year). That is not a significant MOS.
Interesting, but not investment grade for me.
Ron shamgar
:
Hi ray thanks for feedback. Don’t forget matrix raised capital 3 times in one year and a bit! But as Roger says, different opinion is what makes a market. Cheers
Ilya
:
Hi Ron, I am running some figures on BGL and I get very different results regarding BGL’s IV. How many shares are you using in your calculations? The latest updates gives a figure of 150m outstanding shares which to me dilutes earnings quite a lot. Do you also use 150m or some other number? I am relatively new to this and find trying to forecast value without CommSec figures very tricky. Any guidance would be appreciated.
Ilya
:
Sorry again. After looking over the figures a few times I have made the maths work and can confirm that my results are very close to yours albeit on a lower side. I get 2012 IV of 0.33 to 0.43 on RR 14% – 12% respectively. Practice makes perfect, hey :-)
Ron shamgar
:
Hi Ilya, 150.5mil shares. U will need to use the companys guidance as a guide or u can call them up and ask which broker/analyst is covering them. I do though think I gave all the information in my post. Cheers.
Matty
:
The year is AM 1 (Anno Montgomeri, Roger please excuse the latinisation of your name). It is less than a year ago since I first read Value.able and it has already had a profound impact on the way I invest. I will not try and analyse where the market is going because there are already many posts on the headwinds facing various sectors and I also need to spend my precious spare time looking for quality A1’s rather than speculating on market gyrations. Speculating is what many of my previous investing attempts have been. I have almost weeded them all out. I am still waiting for a little spark of life from a couple of my last speculations before they are jettisoned now that they are such a small part of my portfolio.
A couple of posts below mentioned turnarounds and one stock that came to mind is Macquarie Group. I picked this one up in the GFC thinking it was a bargain and now recently sold it for a small profit. Their last report was disaapointing enough for me to sell. They seem to be paying alot to retain their staff, which they mentioned in the report that poaching was a problem and they are also sitting on alot of extra cash. This is a big turnaround question as you wonder where they will deploy this cash to increase their paltry ROE. Shareholders seem to be getting the short end of the stick if you ask me to look at all of these staff bonuses they are paying.
One other observation I have noticed from trying to find A1’s with a margin of safety to deploy my cash is that there are A1’s and then there are A1 minuses. The hardest part I find is to recognise businesses with bright prospects. This is a big factor in finding that special business that can really have a high margin business to grow off a low equity base with little effort on some niche capabilities. Maybe VOC is one such example even if I struggle to see the moat on this business and haven’t invested. TSM is another that many bloggers have mentioned that seems to have that “X” factor of bright prospects (even if the retailing environment has some big clouds hanging over it). I am glad for the recent price weakness because when it took off at the end of February I hadn’t finished building my position.
One other that may also have that “X” factor is Infomedia (IFM). I find aspects of this business exciting with their move to online cataloging, but their last half-year market update was disappointing with flat earnings forecast for the year and big currency headwinds. Just wondering what others think of this business and whether Roger could provide a quality rating on this one. Thanks.
Roger Montgomery
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Hi matty,
You make some good points. Will look at IFM for the blog.
Ron shamgar
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Hi matty
unfortunately IFM is a business with no competitive advantages. It’s customers the car parts distributors are in strife, the us dollar is not helping and it’s prospects don’t look too bright. Together with falling profits, no wonder the founder had to step back in to take control.
Personally I like to invest in a growing industries (Internet/data) and not a dying one (cars)!
Just my thoughts. Cheers.
Jarrod
:
Ron.
I think differently about IFM’s competitive advantage. They have increased their subscriptions over the years and I think it would be very difficult for a competiitor to take this from them. Posibly only by way of a takeover!
The high Aussie dollar has taken a hit on it’s profit, but will this continue? Who knows! I think they are in a position that they can gradually increase their subscription fees, thereby increasing revenue and profits.
They seem to have good positive cash flow, are using excess capital wisely by buying back shares under intrinsic value. They are a non sexy business, that go about their business quietly while producing a good return on equity.
I don’t see cars dying of any time soon. Every where I look, people, businesses and governments are still buying them!
At the right price, I don’t see a problem.
ron shamgar
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i meant their customers in the US are struggling.
Paul Eagle
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Roger I like you writings and am thinking about applying but are you stretching the truth a little with your performance?
Your unit price was 1.003 (buy) 30 Dec and 1.0233 (sell) 19 May. That looks like a little over 2% return for nearly 5 months.
Is that correct?
Regards,
Paul
Roger Montgomery
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Hi Paul,
Yes thats correct and thats 5% outperformance. Our benchmark index is down around 3%.
Kim Jordan
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Great topic Roger, and many great contributions thank you to everyone.
I note that there was a couple of comments about Stop Losses, and Roger commented that it is a big topic and it should be covered properly and indepth sometime (soon?) – I will be looking forward to that, and I predict it will generate almost as much participation as this page has.
It is a topic that I have commented on before and would like more thoroughly thrashed around – to put the subject more generally, how do we insure ourselves against a massive catastrophic correction? Now some here will say – just sit back and ride it out – good buying when it happens – go fishing, etc. But some knowlegeable investors would say that such attitudes are lunacy, and actually stem from the inability of the proponent to be able to do anything else!
I have just finished reading(on my iPhone – Kindle app):
“The Invisible Hands: Top Hedge Fund Traders on Bubbles, Crashes, and Real Money”
by Steven Drobny.
Now a lot of it was waaay above my head, but there was enough in there to keep me reading, and I enjoyed it a lot. It questions top performing fund managers, and topics covered include what they learned about/from 2008, and if they had the chance, how would they manage a $billion pension or endowment fund. It talks a lot about insuring your portfolio against 2008/GFC incidents, and the lunacy of accepting compounding losses – i.e. “Siegel’s Paradox”: how gains and losses are not symetric, but losses are far worse, and, for example, a 50% loss requires a 100% gain just to break even! The bigger the hole, the harder it is to dig out.
So, I would love to have a topic on all of this, because I think it is the “missing chapter” in Value.able.
Roger Montgomery
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Your point of asymetric win/loss is best summarised thus: Rule 1; Don’t Lose Money, Rule 2, Don’t Forget Rule 1. The GFC was not a surprise, its depth was. That billions of sub-prime mortgages would reset in 2008 at much higher rates for mortgagees was well-flagged. There were lots of columns about it and what made many underestimate the risk was that the stock market kept going up, and up ,and up for nine months AFTER the problem was flagged. because many investors and commentators take their cues from price action, they concluded the stock market was right and the resettting mortgages were nothing to worry about. Here’s an example http://www.marketwatch.com/story/mortgage-reset-tsunami-could-end-up-an-economic-ripple.
Adam
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Hi Kim, in relation to “stop losses” as i have said before, they in fact lock your loss in! People sometimes forget that the only people who lost money in the stock market during the GFC were THOSE THAT SOLD! Stop losses may be useful for traders, but we are investing in business’s here, not buying a stock and hoping the price goes up in the next few months.
ron shamgar
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hi everyone,
i noticed a lot of jittery mindsets here on the blog. share prices falling a bit and some are rushing to the SELL button.
i don’t know about everyone else here, but in the last 8 months the ASX200 has gone nowhere BUT my portfolio has just about doubled in value!
now I’m not stating this to show off, but to convey the idea that if you focus on quality businesses and buy them at BIG discounts to their intrinsic values, you are going to do very well.
so for example, if you bought MCE at around $4 – $5 you are still almost double your money. but on the other hand, if you bought MCE at $8 – $9, well in that case you didn’t have a big enough MOS.
stick to the rules in Value.able, find quality businesses, buy them at LARGE MOS to IV and have a little bit of diversification in your portfolio and you will do very well in the long run.
i will post about a little hidden gem i have found tomorrow.
cheers.
Roger Montgomery
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Hi Ron,
I would have to say, I have noticed from the comments on this thread, far more investors holding the line and keeping the faith.
Brad J
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Well said Ron,
The only point I think you have missed out is time. We can’t all expect our portfolios to double in just a few months. Sometimes price will take a lot longer to catch up to value. I have noticed some bloggers rating their success on how their stocks have preformed over the last month, which to me is just crazy. If an investor purchased MCE at $8 to $9 they could be doing very well in a year or two and it would still be looked at as a great buy.
I also have found a gem which I will mention next week once I have secured my shares.
ron shamgar
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thanks brad. dont get me wrong, i do not expect my portfolio to double that quick all the time. i was just trying to show that we should ignore what the markets are doing and stay focused.
i am trying to post an overview of an interesting opportunity i have found. stay tuned.
Jim
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Hi Ron
Agree with your sentiments. The only point I will disagree on is also time-related. The ASX 200 is the same as it was in September 2009 at the end of the six month recovery bull run.
This however reinforces the importance of stock picking at good MOS and thus keeping the faith.
Simon Anthony
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Value Investing: The Ten Commandments
Value investing was made famous by the world’s most successful share investor, Warren Buffet.A strategic approach to buying shares of value and holding them for the long term, It’s a philosophy that equates share ownership to ‘buying’ part of a extraordinary business.
It sounds simple on the surface: find a company of value, buy its shares when the price is below relative to its worth, and hold on for the long term. Yet although value investing is not overly complex and doesn’t use intricate formulas and graphs, it’s often misrepresented and misunderstood. Many articles and guides to this style of investing skip or misconstrue the main message: value is separate to price, and value can only be truly determined by knowing the business whose shares you are buying.
Here are 10 Commandments that if followed religiously I have no doubt you will as an investor outperform the market.
1. Know thy business intrinsic value, don’t mistake price for value
2. Do your own research to know thy business, read as much about the business as possible; annual reports are the best source of information.
3. Margin Of Safety, buy at a big enough discount to intrinsic Value to allow some room for error in your estimation of value.
4.View share investing as business ownership.
5.Don’t overlook competitors – you need to research them too in order to assess future earnings properly.
6.Take advantage of Mr Market’s fluctuations to buy bargains and sell overpriced assets.
7. Own a wide selection of a number of businesses (up to 14) to diversify your portfolio.
8. Buy businesses in sectors that are out of favour yet continue to deliver high ROE
9. Competive Advantage. Know what it is, whether it can be eroded in the short term and whether it can be increased over the long term.
10. Avoid debt and business that rely on debt to ensure their own cash flow.
LukeS
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Reasons to be cheerful.
Kids have left home. Magically there is now money left at the end of the week. I can see a finish line up ahead so saving hard so I hit that line running. From now to dust I will spend less on housing, cars, education, shampoo, food, finance, shoes, haircuts.. in fact if I didn’t have a wife I would barely spend anything.
It is likley for the next decade I will just keep on saving. After that, doctors and medical establishments will get their fair share, along with bait shops, hotels, restaurants, airlines and if I go completely mad maybe even a caravan manufacturer.
There are a lot of people like me. A big wave of boomers coming through spending less, saving more, putting a different slant on the whole economy. 2011 is the start of this wave. Get out the longboard and start paddling.
Roger Montgomery
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Very curious about this LukeS, what will you do with your house?
Robert
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Hi Roger & LukeS
I have been thinking about this issue for a little while now.. Now that the baby boomers are set to retire, what will they do with all the investment properties they
hold. Its an interesting one and its not at all clear what will happen. If they all dump on mass (more or less) then what does that do to the property market, and who will they be selling to!? We live in interesting times.
RobF
Roger Montgomery
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I have a simple take on this: If the largest generational cohort of people ever, need to sell their homes to fund their retirements (health and lifestyle), and the generation to which they will be selling ‘can’t afford a home’ then prices should fall to meet the buyer’s price.
Scott W
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Roger I agree with your contention on this one. I also wonder if the sentiment of never ever removing negative gearing could change very quickly. As the baby boomers are still the rule makers in the government. Governments are always self serving, so when they see no more use for a costly policy why would they continue? As the massive retirements begin I can well imagine that negative gearing for property investment may be removed, after all it would be of no use post retirement.
In any case I am out of property in Australia and in the next few years I cannot see myself buying back in beyond my development in rural Thailand. But I admit that investment is an opportunity from the high currency and rainforest lifestyle that was too hard to ignore.
LukeS
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I have never grown old before so I have no experience to know what will happen. Probably I will downsize. I currently enjoy watching my wife mow the lawn but she is likely to find that difficult by the time we both have walkers. I expect we will sell this house, buy something smaller and hopefully pocket the difference.
A few years after that our kids will probably put us into care. They have been threatening that since I have been in my 40s.
I am not quite sure the angle of your curiosity but if it is to do with me spending less on housing then although I will probably have 2 more property transactions before I go, they are likely to be smaller each time.
LukeS
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You said this in a report last year on healthcare businesses.
In the next 30 years, the proportion of the population aged over 65 will double to 22% and in 40 years, the number of Australians aged 85 and over is expected to increase from 1.8% of the population to 5.1%
Spending patterns are different for demographic groups. 42 year old people buy the most potato chips. The average age of their children is 14 so those parents are buying for the kids. Men from 50 to 55 buy the most Harleys. After that they are either dead or over it. And of course demand for Healthcare is the highest after 50.
LukeS
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Spending patterns are different for demographic groups. 42 year old people buy the most potato chips. The average age of their children is 14 so those parents are buying for the kids. Men from 50 to 55 buy the most Harleys. After that they are either dead or over it. And of course demand for Healthcare is the highest after 50
You said this in a report last year on healthcare businesses.
“In the next 30 years, the proportion of the population aged over 65 will double to 22% and in 40 years, the number of Australians aged 85 and over is expected to increase from 1.8% of the population to 5.1%.”.
Brad J
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No one in my opinion has any idea where the market is going. We all need to focus on what is important and knowable and short term market movements in my opinion are not knowable. So what is knowable –
– For the investor that is prepared to put the time in, companies and their prospects most importantly and then what price we are prepared to buy at.
– Very long term trends, like the China and India story. Not to say they won’t have significant head winds along the way.
– A growing world population which will put upward pressure on oil and agricultural commodities. I will not comment on hard commodities and I am not prepared to speculate on where they are going and this includes Iron Ore and Gold, good luck to the rest of you on these.
– Human potential and a system built to bring out this potential which in large is a point I believe is ignored on this blog. There are certain things that numbers can’t pick up and this is one of them and an extremely important one. This is why I am a lot more positive about the long term future of the US than most other investors on this blog and so is WB. The attitude and drive of the Americans can’t be underestimated and is vastly different to most other countries. I have spent a lot of time doing business with India and I often used to say to myself that I thought one Aussie would get as much work done as three Indians.
So look for great businesses with bright LONG TERM prospects, don’t worry about short term trends and your rewards will be amazing. I don’t think WB has ever sold most of his investments because he felt the market was over valued and I am sure we would all be happy with his returns over the long term.
Rob
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“No one in my opinion has any idea where the market is going”
Brad I couldn’t agree with you more. Before Easter, I listened to almost every Guru on Sky Business, one after the other report how nothing was going to stop the market from heading towards 5500.
We had that super long weekend the Dow climbs over 100 points and our market bucked the trend and tanked. All in one business day.
If that doesn’t make you want to turn the market off, nothing will.
Brad J
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Hi Rob,
Not that I am complaining with my portfolio up substantially in the last 6 months. In my opinion stick to what you know and stay in your circle of competence. You will do well if the business does well so by choosing the right businesses you are unlikely to go wrong regardless what the market does in the short term. I am looking forward to the reporting season which has got off to a good start with FGE upgrading earnings on Friday.
One other thing, I have noticed the media and bloggers are a lot more bearish just lately. While I don’t take much notice of this I do feel that maybe it is time to be greedy when taking recent sentiment into account.
Interesting also to note that not even WB can forecast short term market directions so what hope do we have.
Jim
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Hi Bloggers
How true!!! We are supposed to have the world’s resilient economy-yet the Dow is up over 10% in the same time as our ASX 200 hasn’t gained from around 4700.
How many times in the last 12 -18 months has the Dow gone up to our surprise and yet the ASX 200 drops “despite a good lead”?
Cheers
Jim
Ash Little
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Hi Jim,
Good point but the dow is measured in $US which has fallen alot. I have just finished listening to a U tube preso about the mexican stock market during thier financial crisis. Their index over a 10 year period went from(rough figures from memory) 1000 points to 130,000 points but in us dollar terms went nowhere.
An index is only as good as the measuring stick you use to measure it
Greg Mc
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I note though, Brad, that while FGE pointed out that their expected earnings before tax for the half are expected to be 26% above the pcp, it will also be about 10-15% below that of the first half.
Simon Anthony
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“An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today.” – Laurence J. Peter
Roger Montgomery
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“…economists make sheep look like independent thinkers” is another that gets a laugh but perhaps undeservedly.
Michael
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One theme throughout this post is using what is happening in the economy to forecast what will happen in the stockmarket. This is a flawed method. You should use the stockmarket to forecast what will happen in the economy. Stockmarkets tank when the economy has been booming and then stalls, not when it is generally accepted that things are not going as well as they could be.
A key theme for me that will influence the stockmarket over the coming years is deleveraging – without easy credit a major bull market is unlikely. However, I think a significant correction is also unlikely for the Australian market in the near term. Significant corrections in the stockmarket usually occur when the majority think that stocks only go up. There is enough caution out there at present to tell me that there will not be a major crash coming.
The next few years promise to be frustrating for most stockmarket players – moving up and down in a gentle manner without making much progress either way. Stimulatory policies by governments will see inflation breakouts and rising interest rates leading in a few years time to a slowdown and bear market. At that point – around the middle of the decade, when the majority think the stockmarket never goes up anymore, and the economy is terrible – a new bull market will erupt – just at the time you will least expect it.
Grant Duggan
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First of all Roger i wil choose my questions a little more with care next time we talk on YMYC.MTU is the company and it is now a lesson learnt for asking you to put out there to all your IV on a quality company,as it might just be coincidental but when it was just appearing to show some MOS that appears to be gone.There is not a lot i can post about this company as John M recently wrote a great deal about them,hi John hope all is well.
In relation to the topic of this blog however for those who are starting to feel as though the instability of a market that offers little value is getting to them,and rash decisions are starting to creep in,i can only recommend to pick up value-able and re-read chapters 1 to 4 as i have recently done and you will quickly be reminded why for one value investing is not only about being patient and two big MOS is how we have have made good gains in the past.Thanks Roger and all for your patience toward the not so quick learners like myself.
darrin
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HI Grant
I am afraid I am one of those which felt the market was offering little value, lost patience and made some rash decisions. Jumped in the week before to buy zgl at 56 and voc at 2.67 and NST at 40.Lesson from this is now well learnt. Must reread ch 1 to 4 again to achieve the valu/able mindset.
cheers
darrin
ron shamgar
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Darrin, over the longer term you will do OK out of these but try and buy at larger MOS to IV. if you miss out thats OK, be patient and other opportunities will present themselves – i guarantee you that! cheers
darrin
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HI Ron
Appreciate your supportive comments.
Thankyou
cheers
darrin
John M
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Hi Grant,
Good to hear from you. I do not own MTU. I am still doing some thinking about it. You never know what Mr. Market will do, just be patient and wait for the fat pitch. Maybe an even fatter pitch will come along during the interim.
If you are really keen on MTU, employee benefits entail stock options, the latest employee option plan was exercised at 70 cents. Now that’s what I call a good deal for staff.
Andrew S.
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Hi Roger,
I think TSM looks good round 0.68 particularly noting the emphasised 40% MOS in your ‘Who made the Value-able grade?’ post from last December 16 as well as the 3.5c dividend now offering over 5% yield.
TSM also has very strong technical support round this level – it occurred to me it might bounce soon; I also noticed its highest volume so far this year trade today – buyers coming in at these prices?
I suspect I know at least one of the 6 referred to above but will keep mum because you said on YMYC (I think) you were still “building a position in it” and you didn’t want the viewer bidding against you. Me neither!
As always, thank you – I panicked a bit when MCE dropped almost 25% recently and sold a quarter of my holding – only to have it promptly turn about face and head back north again! So this post is very relevant to me: that was a lesson well learnt – I won’t be selling anything else under IV.
Roger Montgomery
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ANdrew,
My current take on the sell off is that it is related to the prospect of flat earnings for next year and a depressed retail environment. Oh, and one very agressive seller.
Greg Mc
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Their market update during the week was remarkable for including no actual detail. The new product in the UK has been up and running for 6 months now and several months of the current business period. If the numbers were looking fantastic, they would have said so.
I am also mildly amused that TSM makes a big song and dance about ‘Growth from cashflow rather than debt’ – but apparently capital raisings are ok.
I don’t mind the TSM ‘story’, but there are a few things about TSM that make me uncomfortable.
Roger Montgomery
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Agreed, however I dont mind capital raisings being deployed at 28%.
Chris B
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Hi,
I came across an article on Reuters. The article explains that all 34 PC City stores are to be closed in Spain, together with the head office and on line operations of PC City.
Here’s the link if you wish to read it for yourself.
http://in.reuters.com/article/2011/04/14/dixons-idINLDE73D0DD20110414
As most TSM investors should know, TSM commenced trading in Spain through PC City stores back in 2005.
With all 34 PC City stores closed, This no longer seems to be an option for TSM!
I was not sure whether or not this will have a long term material impact on TSM’s growth prospects etc so I contacted TSM.
I was informed that yes it is the case that Dixons plans to exit the Spanish market – their preference is to sell the existing business. They now believe it is likely that some stores will be sold to existing competitors including FNAC. TSM already trade with FNAC in Spain.
I was also told that this recent development is expected to have only a small impact on TSM in 2011 and 2012. This I can believe given that Gross revenues from Continental Europe (incl. Italy and Spain) is approx. 3% of total group revenues.
So while this might not be disastrous for TSM, one thing it certainly does highlight is the fact that the retail space is having trouble gaining traction in many parts of the world.
Based on my research TSM is an outstanding business that is now trading at a discount to IV. The company does however operate in a cyclical sector, and right now that cycle is more bearish than bullish. I am not expecting TSM to shoot the lights out in the short term, but they have a very scalable product, which, given the right macro tailwind might just be fruitful.
Patience might be the key here.
Roger, you wrote ‘Oh, and one very aggressive seller.’ I assume you know who the seller is? I would never ask you to name the seller, but I am just curious if you do indeed know who it is?
Take care everyone,
Chris B
Roger Montgomery
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Perhaps we share one of the same brokers is the only answer I can offer. TSM’s offshore exposure to this is very small.
Michael H
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according to change in substantial holder interests, IOOF has been an active seller of over 1M shares in the last week or so
Grant Duggan
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I am having trouble getting my blogs on.
Roger Montgomery
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What problems exactly Grant?
justin smith
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Slater & Gordon (ASX:SGH)
Ambrose Bierce described litigation as “a machine you go into as a pig and come out of as a sausage”. Does this apply to SGH or its clients?
SGH has been mentioned by you once or twice (see http://rogermontgomery.com/do-these-three-companies-represent-the-last-of-good-value/) as a lesser known company to look more closely at. Since it operates in my field, I am doing that. I will give a more thorough run-down once I have finished, but thought I’d share a few of my current thoughts.
There are two principal difficulties for me with this company: first, it does not have a truly sustainable competitive advantage. It is, at heart, a personal injuries law firm. While its main corporate (as opposed to professional) activity seems to be the acquisition of other personal injury law firms, there are many many more of these firms. It claims that its “brand” is an advantage. While that may be true and it may bring in a large number of clients it is not free to raise its charges and, to a large extent, the real advantage lies in the personal relationships developed by the solicitors who engage with the clients. That advantage is ephemeral, particularly in today’s fluid employment market.
The firm’s charges are subject to regulation and close supervision, not only by the clients (who may or may not know whether fees charged are appropriate), but by the various professional bodies and the legal services commissioner. Indeed, one of the firms recently acquired by SGH (Keddies) was in a number of well-publicised disputes about the extent of their fees (and, in some cases, whether their excessive nature constituted unprofessional conduct). One might speculate that this fact might harm the “brand” of SGH rather than add to its bottom line.
The question of fees is linked to the second major disadvantage: regulatory interference. Legislative reform in and around 2005 changed the face of personal injury litigation in many states of Australia. This reform was addressed at many aspects of civil litigation, but arguably the most important were the changes to the amount of “general damages” (i.e. money for pain and suffering rather than for medical expenses) that could be awarded by courts and the amount of fees that could be charged (not just recovered from the other side). These reforms continue to have a direct impact on firms like SGH (and are referred to obliquely in their announcements). That will not be the end of it, however. The majority of clients for whom SGH act will be vulnerable members of our society, either because of personal injury and inability to afford to pay lawyers (other than those such as SGH who act on a “no win no pay” basis) or some other disaster imposed on them by the negligence of their advisers (including lawyers) or other professionals or institutions. The protection of the vulnerable in society has been the hallmark of many political platforms (whether, on a cynical view, it is simply to gain votes, or out of humanitarian principle). Protection of lawyers and the fees charged by them has never been (publicly) stated to be of concern to any government I am aware of.
In light of this, I see many potential headwinds for SGH. Their core business of personal injury law cannot be sustainably better than anyone else; their engagement in class actions (which deserves its own chapter – and is something I know roger has some knowledge of, albeit not with SGH) faces stiff competition from other large firms and litigation funders with greater resources and fewer restraints (such as being able to run a managed investments scheme – class actions funded by litigation funding are such schemes), and last, but not least, many governments acting on a public perception that lawyers’ greed needs to be curtailed.
The share price has risen well over the last year, but it’s not on my list of investment grade companies.
Roger Montgomery
:
Hi Justin,
My apologies that I hadn’t thanked you for taking the time to share your insights. Coming from someone practicing in the space, I trust everyone reading the blog has found your comments as insightful as I have.
Roger Montgomery
:
And I meant to add that this time last year, it was at a discount to intrinsic value, hence its mention in the post: http://rogermontgomery.com/do-these-three-companies-represent-the-last-of-good-value/ It is now well above intrinsic value.
Dan S
:
Great comments Justin! I disclose an interest and agree that the stock looks fairly priced around $2.50.
I am comfortable with their competitive position for the reasons I will list below.
Although SGH has market leadership, I accept they are unlikely to ever be allowed to reach a position where they can achieve pricing power.
I think their brand and marketing strategy does add value though, as this is a legal firm that doesn’t rely on partner-client relationships to generate recurring revenues. As such this more like a consumer retail service business, where bigger volumes of relatively smaller cases (than corporate law) are targeted.
Under this model there is a greater emphasis on being a “low-cost” producer, as the services provided are difficult to be differentiated across the market (win rates and speed aside). I accept this is a different way to think about legal services.
SGH’s competitive advantage also lies on being a low cost producer, (although whether they can produce the same service at a higher margin than the competition is difficult to verify). I understand that SGH employ a higher proportion of non-professional staff (para-legals and clerks) to professional staff than industry. Their strategy of corporatising a fragmented industry should result in economies of scale through consolidation of cost centres, i.e. better processes.
I believe that their history of ROE above their cost of capital (albeit not by a massive margin) is prima facie evidence of these competitive advantages.
I think the risk of a bad acquisition / integration is a material risk additional to those you have mentioned. They do, however have quality management and a good track record.
Cheers,
ben
:
what the hell is up with tsm? doesnt stop falling.
Brad Voigt
:
Hi all, Was interested to see LinkedIn listed in the US overnight at double its offer price. It has a market cap of close to 10 Billion with revenue of 243 million and profit of 3.4 million last year. Who said people are rational brings back memories of the tech boom. No value here!
Julian Hunter
:
And it won’t stop with LinkedIn, look out for some crazy valuations when Groupon, Zynga, Twitter and Facebook eventually float. People must be expecting some spectacular growth to account for the market capitalisation of LNKD. Personally I think it isnt a bad company and has bright prospects for the future, but is the company worth 10 Billion dollars? I don’t believe so. Buffett made a comment recently about some social networking sites being overvalued and I’m inclined to agree. Seems some investors are hoping to re-live the .com bubble all over again.
Jim
:
Hi Brad & Julian
The BIG lesson of the dot com bubble is again explained by the difference between speculators and investors. Having said that the cream of the companies will still rise to the top- based on their fundamentals.
Having just seen “The Social Network” this will be interesting to watch.
Jim
Ed M
:
Not sure which way to jump.
At present I am very long resources (BHP in particular). Looking forward at projected earnings (if they are realised), BHP FMG RIO are at massive discounts to intrinsic value in 2011 and 2012.
However, the quantitative analysis counts for nothing if China is a bubble and commodity prices fall over. Mind you, the bubble could burst and then the long term commodity inflation trend could re-establish (ala Jeremy Grantham’s analysis).
As for primary production (my area of expertise (read farmer)), this sector of the economy has operated at very low ROEs for years. However a few thoughts (source FAO). Homo sapiens have been on this earth for 200 000 odd years. We left Africa about 70 000 years ago. We started agriculture about 10 000 years ago. The world population was 200 million at the time of Jesus. It took 200 000 years for the population to reach 1 billion (in 1800). It took 130 years for us to reach the next billion (ie 2 billion). Each successive billion has come along even quicker. We are now very close to 7 billion. It is suggested (UN FAO) that over the next 50 years we will need to grow as much produce from our primary production sector as we have over the entire history of agriculture!! I better get busy! And don’t forget we are running out of fertilizer and diesel – the very things that have kept everyone fed over the last century.
Bruce Meiers
:
With regard to ‘Keep Calm and Carry On’ I would like to express my thoughts on the future direction of the Australian equities market.
Currently the major influences acting on Australia are the Global Industries, China, our domestic interest rates and our real estate prices.
None of these major influences are currently positive for the future growth of the stock market.
Global Industrial Slowdown.
We are now headed into a global Industrial slowdown that will affect every nation including China and this will show up with a reduction in commodity volumes and prices, a market slow down and reversal followed eventually by an economic slowdown. 50% of the time these global slowdowns result in a recession. We are now in the first phase of that slowdown.
Until a significant amount of private debt is removed from the world economy we will be involved in many recessions over a short period of time, much like the 70’s only worse.
China.
There is no other name for China’s economy at this time other than a huge speculative bubble that is now starting to wobble. Real estate sales are slowing and there are some suggestions of commodity stock piling and using the increased prices as collateral for new loans.
Pivot Capital Management produced a report a couple of years ago that compared the infrastructure of China to the USA as the land mass was similar, the report conclude the building was complete and the only shortage was the total length of railroads and that was in construction.
So the last few years has seen very speculative construction. This has been highlighted by the empty cities etc. Someone calculated, about 12 months ago, there were between 60 to 80 million unoccupied new units awaiting a purchaser and with the new construction and selling slowdown this figure could be substantially higher now.
How will the Global Industrial slowdown add to China’s problems I am not sure except to say, they will not be positive and the governments control of the economy will most probably come unstuck.
Australia.
Those that can remember Paul Keating’s 1990/91 recession we had to have, would remember home interest rates going from 13.5% to 17.5%. This rise of 30% in interest rate and the increased unemployment that snowballed would recall the dramatic reduction in home prices, some exceeding 50%. Our current RBA rates have gone from 3.25% to 5.00%, a 50% rise, with the added banks share and you wonder why retail is flat and this does not consider the effect of the Internet on sales. Interest rate increases have always killed off housing booms. Unfortunately our real estate down turn actually started in November 2009 and has been quietly slowing ever since, and all that we need now is higher unemployment and the median house prices will take a major tumble. For those who live in the areas that received the highest growth they will also be the ones that see the highest declines.
With the high Aussie dollar our industrial companies are seeing a significant reduction in profits and losses are mounting with a higher number of companies in liquidation.
The housing boom was by far the largest of any boom in Australia to this time and this will result in the biggest bust of any boom. If you invested at the peak of the second largest real estate boom of 1896, taking into consideration inflation, you would not have broken even until 2002 some 106 years later, so much for investment properties and then try and sell during a down turn at the right price to cover your equity.
So What Do You Do?
With an economy that has many recessions over a short duration the buy and hold strategy will only wind down your capital consequently you must be ready to sell at the beginning of a down turn and buy at the bottom. Roger has given you the tools for purchasing and in a down turn you should be asking for deep discounts to intrinsic value, but as for selecting the time of a peak is somewhat more difficult. There are some very good companies that deal in this matter and you should do your homework and find these companies on the net, there are only a couple of genuinely reliable companies.
My strategy at this moment is to liquidate my profitable stocks, all but two, and put the cash into an at call interest bearing deposit, plus short the CBA, short RIO, short the ASX 200 and short the dollar for the following reasons.
Safe guarding your capital is the most important financial move you can make.
The stock price of the CBA is directly linked to house prices and if housing tanks so will the CBA and their share price is the highest and so should fall the most in number terms.
The market will go down and taking advantage of the ASX will add to your coffers and as the big four and the two miners are such a large percentage of the market the two key sectors of the slow down are covered.
RIO’s price is the highest and will fall dollar wise the most so with the Global Slowdown it should move the most and be quite profitable.
The Australian dollar value is directly linked to commodity prices and as during the GFC and other times when commodity prices were low so was the Aussie. Moving your money into US dollars and then shorting the Aussie in US dollars can have the biggest gain.
The biggest advantage of owning equities is that you can move your money very fast and real estate does not allow this flexibility and using Roger’s valuation methods you can purchase good companies under the realized true value.
Roger Montgomery
:
Very convincing Bruce…are you able to provide us with some indicators you are using to explain your comment “We are now headed into a global Industrial slowdown”. I am not stating my own position, merely want other readers to understand yours.
Bruce Meiers
:
Roger, since 2003 I have been following a site called the ‘Economic Cycle Research Institute’, ECRI and this has paid large dividends to me in the form of advanced knowledge, I sold my shares down in January 2008 and sat in cash on deposit during the worst of the GFC.
The site itself does not tell you much unless you read the book produced by the company and that can be purchased as a pdf.
I actually graph the WLI and WLI Growth and it is quite interesting if you look at the shape of the graph for events like late last year, so all is not told by these 2 indicators alone. Another primary indicator is inflation that is available on the site. Just click on USWLIW.
If you go through the Media Coverage the information provide is excellent.
If you purchase a client membership, and that starts at around $8500 at last check, there is further information available and that data is around three months in advance to that presented on the site.
At different times I have been able to find past membership reports and the information at the release date would have been a decisive advantage.
I know these indicators are mainly US based but they do have geographical area base information available, but when you graph the DJIA and ASX 200 side by side they correlate very well.
Two of the other indicators withheld without membership is the Long Lead Indicator (LLI) and of course the Global Industrial Indicator. The LLI has 2 months advantage over the WLI.
Let me know what you about the site and the information available.
I hope I am not stepping out of bounds of this site and if I am you can delete this section, but using an entity (consortium) to buy a yearly membership of ECRI and distributing equally to partners of the consortium may be an advantage.
Rob M
:
HI Bruce
The inflation indicator I follow on ECRI’s site is the FIG. I also graph their WLI and WLI growth.. It is a great service isnt it.(the free stuff). The media interviews on the site often spill the beans and are very useful.
Regards CBA – I have in the last year graphed it against housing (being a housing bubble believer and looking to short CBA) but while there is a small (visual) correlation that can fail sharply for long times (Dec99 – Aug06), the far greater and much more consistent relationship is with the SP500 and ASX200.
Also closely follow Harry Dents work!..and Chanos..Did you catch Chanos saying recently that Chinese RE sales are slowing and RE sales offices are shutting down etc?
And I have charted the inverse dependency ratio against house prices and believe this is a very valid causative factor with seemingly large impending implications to the downside.
Roger – how do people get in touch directly with other bloggers? Can you forward my email address to Bruce please? Bruce it would be good to chat further. BTW – I share a similar surname too.
Rob M
:
Hi Roger
Bruce is talking about an interview the ECRI MD did recently (but the main point is also on their front page currently) – http://www.businesscycle.com/ go to News then Media coverage and the 6 May interview on CNBC.
Best regards, Robert
Roger Montgomery
:
Thanks Rob.
Craig B
:
Bruce,
You make some interesting points.
However many people see things differently to you, including this bloke:
http://www.theaustralian.com.au/business/opinion/coming-boom-will-dwarf-all-that-came-before-it/story-e6frg9p6-1226058524113
We are getting views from oppposite ends of the spectrum that are quite extreme, which further stokes the fires of uncertainty, and it seems to me most reactions to uncertainty involve an element of fear. But I always think about that bloke from Nebraska, who hardly bothers with the macro – though I suspect privately he has a better handle on it than he lets on.
Part of the reason retail is struggling is simply that families are not spending as much as they used to. Credit Card purchases are way down on recent years, for example, but for the longer term, aren’t the repair of family balance sheets and cooling housing prices positives? Going up forever will just end in tears will it not?
Bruce Meiers
:
I am not surprised to see extrapolations of the future similar to the one detailed in link above, and over time it will probably be very or close to that shown in the graph.
Unfortunately the economy does not work in straight lines even though we have had 20 years of expansion, one might have thought so. The last period is a rarity and at no other time in the last 100 years has an expansion of this nature occurred and hence we must again learn to live with short duration cycles.
As we are now past the peak spending of the Baby Boom generation, the previous peak of generations being 1929-30 and 1968-70, we will have substantial volatility primarily owing to winding back the size of private debt, and so predicting straight line increase in investment returns will cause you pain.
As I said earlier it is important to conserve capital and as it is the most important part of investing it is crucial to understand when and how to do so. You can make far more money in volatile times than in a booming market simply because there are more rises and falls hence finding ways of predicting turning points is paramount. I read somewhere that during the 30’s depression in the USA there more millionaires made as a percentage of the population than in any other period in US history, but I have never check this story.
I have forwarded Roger some details that he may make available to the people who visit his site and there is also a possibility of expanding upon the information available.
Ilya
:
Hi Bruce,
Agree with much of what you are saying but have to take exception about China. Sure China will have a few setbacks but the long term outlook is very bright. China’s biggest mistake right now is to foolishly prop up the US dollar. This is the real cause of China’s inflation problem and inflation-fed bubbles which cannot be resolved without de-pegging the Yuan from the USD. I am hopeful that Chinese will wake up to this fact and stop propping up the US economy, let their currency appreciate and let their citizens enjoy a much higher living standard then they do now. They have earned it! Once this happens Chinese will find themselves able to buy the stuff they produce themselves instead of shipping it over to US in exchange for useless paper. The long term effect this will have on China and this region will be absolutely amazing. Just imagine what the internal consumption of China could be if the value of Yuan doubled, tripled… It is mind blowing. I think we haven’t seen nothing yet.
Bruce Meiers
:
CHINA
I am not expressing a view about China’s long term future but I am somewhat pessimistic about Australia’s near future and what the disruption will be and the impact on our country.
It is impossible for China to run a straightline course from a very poor society to the strongest and most vibrant society on earth, the control required by government is not possible. China will pass through many economic up and downs like any other nation, remember the nineties Asian crisis.
Also China is facing some difficult future problems because of their demographic makeup that is significantly worse than what Japan has been enduring since the 1991, refer to Harry Dent for further particulars. Remember China’s one child family, primarily male, and the average age plus the size of the 55 plus group.
China has no social security and their medical and education are not free and both are expensive to the average person in China. China’s move from a totally exporting nation to a domestically consuming modern nation will take many years and this is not in the time frame I am currently concerned about.
Jim Chanos runs a hedge fund called Kinykos and was the one who realized Enron had major financial problems consequently his company benefitted extremely well from his investigation.
The link included here Jim discusses China with Charlie Rose and the interview is far better than most that you will see and if you are interested there are several other interviews on this matter.
http://www.youtube.com/watch?v=q9AsyCN11io
Michael Pettis and Andy Xie, both held in high regard and their opinions are worth taking note. They both have papers on their sites that will give you some understanding of their current thoughts about China and China’s immediate future.
If you Google Caixin and in the search box type Andy Xie you should read his reports on China and if you have any doubts of his credentials you can find his personal details on Google.
Professor Michael Pettis teaches at a university in China and he is a well regarded economist around the world, Michael can be found by typing into Google ‘Michael Pettis China Financial Markets’.
Pivot Capital Management has a good report that is well worth reading and can be found via Google as ‘PIVOT CAPITAL MANAGEMENT China’s Investment Boom the Great Leap Into the Unknown’.
AndyC
:
I am currently reading a book “The little book of sideways markets” which is a surprisingly good resource from a value investor, who espouses recycling your portfolio based on value/MOS.
He also has a quality + value slant similar to Roger’s style. I recommend others take a look if they want another similar but distinctive perspective on what to do in tough non-cheap markets.
I should add, I prefer Valu.able!
Craig B
:
Andy,
I’ve read a couple from this series:
The Little Book of Value Investing, by Christopher Browne
The Little Book that Beats the Market, by Joel Greenblatt
Different slants on the whole value caper.
“Buy stock like steaks, when they’re on sale.”
As someone else on this blog commented recently, its good to see how different people have interpreted and implemented value investing.
I might take a look at this one also.
regards
Gavin
:
The Little Book that builds Wealth by Pat Dorsey of Morningstar (Moat Ratings) fame is a good and easily digestible book dealing mainly with Competitive Advantage. Also worth a read.
Michael
:
Thanks Gavin. I will check that one out. I have read Pat Dorseys “The Five Rules for Successful Stock Investing”, and it is in my top two value investing books.
Mal
:
Hi Roger,
Was wondering if you’ve read the book “Value: the four cornerstones of corporate finance” from the guys at McKinsey. I think it’s a very good adjunct to value.able, and really has a similar core emphasis to yours (although from an exec point of view). It does note a distinction between ROIC and growth and makes the obvious (in hindsight) point that increases in ROIC will improve value at any level of growth, but businesses with a ROIC less than the weighted average cost of capital will be adversely affected by growth. The corollary of this is that companies with relatively low ROIC (esp 20 will actually improve value by pursuing a growth strategy.
Your A1 companies create the most value by being in this second category (high ROIC companies pursuing growth). A very easy way of seeing this is putting a filtered search on Commsec/ Etrade of ROIC >0.15 and revenue growth 1 yr >0.03, and you pretty much get a list of the A1s. The second category of value creating company is one that has a relatively low ROIC, but is improving this steadily. I’d be interested to know if there was a filter for these types of stocks, and if you agree that this would *at least theoretically* be a way of finding good value opportunities.
Roger Montgomery
:
Nice idea, give it a try and see what it throws up.
Mal
:
Hi Roger,
Spent some time doing this but it’s very hard to do given the lack of filters on my online broker. The data is all there, and it would be very easy to manipulate the raw data to get ROIC growth rate or the like!
That said I have found a couple that look to be very good in this space (they are microcaps), and not surprisingly they are turnaround shares that have actually managed to turnaround.
The three that I have found (on metrics alone- I have not done in-depth fundamental analysis on them) are AMA, GCS and LGD group. All three are at quite reasonable discounts to IV, but I am will be particularly interested to read the coming financials of LGD group as I think the ongoing high oil prices and the de-coupling of natural gas prices will are a macro-economic factor that would significantly impact bottom line. GCS is cheap, but I am wary of the Perth property sector(DGX, FRI anyone?) and AMA is very close to intrinsic value, but may rise substantially on the next financials. They have all gone on my watchlist.
Another stock that I know a fair bit more about, and will be watching very closely is Coffey International. From industry insiders, the Australian geotechnical division is very highly regarded, and speaking to graduating geotechnical engineers, they are all aware that Coffey is the best place to go (in fact, Coffey is actually well regarded worldwide).
This company did what many of the bankrupt companies in Value.able did- in the lead up to GFC, had multiple debt-fuelled value destroying acquisitions, and you can see the deteriorating ROIC (from high 20s to below the weighted average cost of capital). At the same time margins have gone from 5% to 2% (Cardno has margins of ~ 7%).
The reason I will be keeping a very close eye on this is because they are a fantastic underlying business and they have created a number of initiatives to turn it around. The share price has rightly been smashed after failing to announce a dividend in a very long time (I’m not actually sure when the last time was). However, given the poor capital allocation practices of the past, the fact they are still in reasonable financial shape is promising.
Market cap: ~ 80 million
Debt: 110 million
EV ~ 190 million
The interesting thing is during one of the worst halves in the companies history, with a number of one off costs (including downsizing, changing the management team etc.), the EBITDA was positive, and marginally cashflow positive once interest was taken into the equation. There have been clear precipitants to both the deteriorating fortunes of the company, and for a successful turnaround (new management, restructuring etc) and underneath it all is a well reputed, solid underlying business.
If the full year results show the downsizings are actually trimming the fat and not reducing the overall income generated by the company (although a small contraction would be perfect in this phase of the turnaround) and the operating income comfortably pays off the interest, (the new management has stated that there will be 6.5millions savings directly in second half FY11, so it shouldn’t be a problem) this is a turnaround story that might actually turn!
I would be interested to hear your thoughts,
Thanks
Mal
Peter Reid
:
Roger
Great thought provoking blog and comments by you and the many contributors. My comments are:
1.You mentioned there were 56 A1s. As part of my immersion into value investing – inspired by you – I’ve been reading your blogs and other articles over the 2010/11 period and have recorded 31 (I might have not been interested in some areas and left them off my list!) so I would love to see the full team.
2. Based on recent 2010A performances for my base case (not adjusted on a comprehensive historical performance review), CommSec EPS/DPS forecasts for 2011F and a 10% ROR, my figuring indicates ACR, DWS, FGE, JBH (Post Buy Back), MCE, MIN, CAB, NCK and TGA all have significant MOSs.
3. My calculations indicate the JBH Buy Back results in a significant IV improvement. Is it a no brainer or am I missing something? I too (like Jim S) would appreciate your comments on the Buy Back impact on JBH’s IV – perhaps with a before/after calculation comparison illustrating the changes in the key input variables.
Regards Peter
Roger Montgomery
:
Hi Peter and Everyone,
In relation to your comment; “You mentioned there were 56 A1s. As part of my immersion into value investing – inspired by you – I’ve been reading your blogs and other articles over the 2010/11 period and have recorded 31 (I might have not been interested in some areas and left them off my list!) so I would love to see the full team.”, the answer is that you will soon be able to access every listed company, their quality, their intrinsic values, historically and forecast, you will be able to filter and rank and sort and I think you will love it…stay tuned.
Callan
:
Roger, this will be the best resource on the net when it becomes available. Along with many others in the community, i believe that should be a resource which requires a subscription of some kind.
Would be more than willing to pay for such a database, especially if updated regularly with forecast IV’s.
Roger Montgomery
:
Thanks for the thought Callan. Will keep you posted.
ken fraser
:
Yes many would be willing to pay for this type of data base.
Ash Little
:
Just A thought Roger,
The Best internet businesses are lists, list of Jobs, lists of cars list of hotels and in googles case list of lists
I hope I am hear year right and we may have a list of stocks soon
Take care
Roger Montgomery
:
There’s a thought Ash!
Ken D
:
This really is the best news I’ve heard in a long time. I’ll take a lifetime subscription if it is on offer. Do you sell off the plan?
Tim Phelps
:
Maybe it should only be available to people who have bought the book? Sounds like an amazing resource!
Roger Montgomery
:
Thanks for the suggestion Tim. Perhaps it will be restricted and offered by a lottery-system. Haven’t decided yet.
Craig B
:
Peter,
I calculate JB’s intrinsic value going up by about 5%.
I get the equity per share reducing from $2.70 to $1.83, but the ROE going up from 45% to 60%.
cheers
Roger Montgomery
:
They will be more highly geared, which is not a problem if rates don’t rise by a lot. I would increase the required return slightly and you must remember that there is no way they will be able to continue retaining so much of their profits and employing it at that high rate of ROE.
Parag
:
While the market seems to be going up and down on the spot lately, I am not concerned. I am the most in cash that I have ever been since adhering to the Value.able way.
However, I am looking forward to reporting season (July-Sept) to find some mis-priced securities (i.e. large MOS) like last year around when the bulk of my investments were made and are now showing phenomenal returns. Exciting times ahead in my mind.
Jean
:
Hi Roger,
You put 89 per cent of your Fund in cash and just under 11 per cent of invested in extraordinary businesses.
To me, your current portfolio strategy is a reflection that you are not confident with the near future of the Australian Stock Market. Otherwise you would have allocated more funds in the stock market.
Roger Montgomery
:
OK Jean. Thanks for that.
Greg Mc
:
Ah yes, Jean,
But the fund is also new so I wouldn’t necessarily read too much into Roger’s current cash allocation. If it had been around for 3 years I’d wager it would have a lower % of cash currently.
That said, the market in general is quiet at the moment in my opinion (not many screaming buys, in other words).
Matt R
:
Where do I think the market is headed?
Who knows?
I do see an incredible amount of uncertainty in the markets, and Greece/Portugal/?slowing economy in China will not inspire investors confidence. If you asked me what I think, I think the share market will drop lower this year.
In an step to avoid a repeat in my portfolio following the GFC (when the value of my share portfolio followed the Titanic) this week I decided to sell off 75% of my portfolio (mostly at a profit- the rest of the loss-making rubbish I got rid of after reading VALUE-ABLE 6 months ago), paid off the horrible margin loan, and changed my super into cash, and am now a coiled spring awaiting a buying opportunity.
Hopefully, I may even re-buy the same shares at a significantly lower price later this year.
However, I may also have made a monumental financial mistake, but for now I am happy sitting mostly in cash…
Ron shamgar
:
Matt, your call may be right, but you shouldnt focus too much on where the current share price is but rather how the business is performing and where it’s value is heading.
Good luck with ur bet.
Matt R
:
Ron
good points and agree with you
i guess i’m taking some cash off the table in preparation for a further market correction…not something i do routinely, and definitely counter to strict value investing…
Matthew R
:
Hi Matt R – have we met? :)
Can I leave a quote with you?
“Do not swap what you know for what you don’t”
– RM referring to a discount to value (known) vs where the share market might go (unknown)
I have this one imprinted in my thinking
The future is always uncertain, but if you find good opportunities don’t let them pass. If your timing is a bit off and you are in the red in the short term it doesn’t really matter that much (recognizing the even better value on offer will actually turbocharge your returns). But if for a sustained period the good opportunities are thinly spaced while the market marches ahead then holding cash throughout that time makes a big difference.
I’m all for holding cash, but I’m searching for ways to deploy it. Holding a lot of cash is not a comfortable activity for me.
Just some thoughts
Matt R
:
Ron/Matthew R
Thanks for the feedback. I have appreciated your very informative comments over the last 8 months of frequenting this blog.
I agree with your comments, and am still looking for value companies to invest in…
David V
:
The key factor I am watching at the moment is the Chinese bubble. Inflation has been outside the band and initial attempts to curb it have not been succesful with inflation still being over 5% last month. Should this continue, we could see a significant pull back in resource related stocks. This could bet teh trigger for a buying opportunity as the rest of the globe still has some significant imrpovements to make and will eventually take up the ‘demand’ slack that may be created by China.
One company that seems to have dropped off of the A1 radar of late is TRG. They have delivered strong consistent results (ROE around 30%). There competitive advantages are their staff and their startegy to segment the group into niche markets. Their staffing competitive advantage took a hit recently with the loss of their MD to the Future Fund; however I still believe they have good growth opportunities. It will be interesting to see if they decide to stick with the interim MD, as they are currently conducting a global search for a replacement. I have IV around $5.70 so they offer a good dsicount.
One othe aspect that hasn’t been discussed much is how insurance will stifle the market. The cost of insurance is set to grow signifcantly as we have seen an unprecedented number of natural disasters across the globe in the past 12 months. Insurers hedge against these losses by purchasing reinsurance policies that come into play when a certain threshold of losses related to a single event occurs (e.g. $100-million). The reinsurers have been hit hard and are now asking for signifcant premium increases to cover their recent losses. These osts will be passed on to insurance product consumers, directly through premiums and indirectly through goods purchased from intermediaries who will in turn need to creep back some of the lost margin through increased costs. With a high $A- we may see some protection from these cost increases on imported goods, however as the $A- drops we may see greater than equivalent price increases.
Finally, Roger, thanks again for the lessons you have passed on. It is great to see Mr arket ride the RollerCoaster on a daily basis. I had to laugh a few weeks ago when the ASX was down by 75 points one day and up by 75 points the next. rationale long term thinking is definitely the way to go. I must say that recent drops in some of my A1 portfolio have had me thinking about selling, but in need I can grab your book and re-read the paragraph on selling. I feel like an addict breaking the cycle :)
Roger Montgomery
:
glad to hear it David. Thanks for sharing.
Mark
:
A lot of posters and commentators are talking about the possibility of a China bubble.
Although this is a possibility and would have obvious repercussions for investors on the up side dont forget the India story.
India is on the way up and the possibilities for Australia have still not been fully recognised.
Dan S
:
Hi David,
I have been watching TRG for some time also and think the fund incubation model is interesting, albeit highly leveraged to fund performance, and therefore broader market performance.
What concerns me is 1) recent management changes, which are rarely leading indicators of good operational performance and 2) fund outflows from IML, one of their more significant funds.
My FY11 valuation is slightly closer to $6 then yours, however I think operational risks are probably balanced towards the downside.
I am finding high quality businesses with bright prospects and thick margins of safety thin on the ground.
Dan
Daksha
:
Roger,
Great slogan ” Keep Calm and Carry On “.
Before reading your book Value.able I used to get very nervous when market used to drop even few % points, but now no more anxiety and worries, it drops for two days in a row and then goes back up, then down again and up again and down again, as a Value able graduate I do not care about what goes on daily basis. In fact it presents some buying opportunities, particularly A1 companies.
From what I am reading in the newspapers and hearing in news around the world every day there are bad news eg floods, cyclones,tensions in middle east or trouble in Europe over too much debt, end of QE2 in June in USA, or rising inflation in China and India list goes on on, so I think Mr Market is going to go side ways for much much longer then the pundits are expecting it to be. I think gone are days of market heating highs of pre GFC.We all will have to learn to live with the volatility. Stock market is much more volatile then used to be before
Also every now and then you hear, some one saying to take some profits of the table for the shares purchased so gone are the days of “buy and hold fore ever”. Investors have burnt their fingers too many times so every one is going to take the opportunity to take the profits of the table, this behavior will also stop the market heating news highs. Any bad news in the world is going to trigger sell off and vice verse.
Patience! Patience! Patience! is the name of the stock market game.There are lots of buyers and lots of sellers in the market transactions takes places every second, every minute in a day, one just need to work out the IV, of course with MOS, greater the MOS better the return, of the company that one would like to buy the shares and buy the stock when the opportunities comes one’s way. Same rule can be applied for selling the stock that one no longer wishes to hold,
Daksha
Roger Montgomery
:
Thank you for sharing how the Value.able approach is changing the way you think about investing and the markets.
Jim Smith
:
I am struggling to get through pages 180 on & am having trouble with what figures to use 2010? 2011?. But I will persevere until I get it. At 70 I am a bit slow!
But you might like to comment on how BHP & JBH’s Intrinsic value was effected by the recent buyback.
I have a ‘floating’ stop loss on all my shares of 15% which has seen MCE auto sold. What is your view on stop losses?
Roger Montgomery
:
Hi Jim,
Stops are a good topic to leave for a future blog post. Thanks for raising it. There is a lot to discuss..
David V
:
Hi Jim,
I think Roger previously referred to stop losses as a guaranteed way to make losses (they should be called ‘loss makers’). This has been my experinece with them. If the business is fundamentally strng and has bright propsects, then a pull back in price represents a buying opportunity, not a sell signal.
Jim
:
Hi Jim
You raise VERY interesting issues. One of the best things I have learnt from Roger is that if you are confident in the quality of a business and its value,then a stop-loss as you describe becomes a potential trigger to buy. This is a very real difference between investing and trading, because a trader/speculator will not care about the fundamentals of a business; once the level is reached it’s time to sell and look for something else.
What I’ve not seen discussed on the blog-and please correct me if I am wrong- is WHEN to buy a quality business that is decreasing in share price. For example, with Matrix’s recent fall, when was the optimum time to buy and does it matter? I’d be grateful for other peoples thoughts.
Cheers
Jim
Fitzy
:
If I stock is well above its intrinsic value I wouldn’t think a stop loss to be a bad thing. When you’ve decided to buy or sell something based value traders tools could be useful.
Michael H
:
Hi Jim,
I agree. One of the fundamental concepts that I have taken away from Roger’s approach is to focus on the quality. If you are confident that it is sound, then pullbacks can be viewed as a topping up opportunity. As to WHEN…I have tried to avoid catching a “falling knife” by waiting till the stock takes a breath and then crosses the 20 day moving average of the way back up. Of course, by definition you don’t buy at the bottom but you do avoid a continual fall. A case in point in the current market would be TSM. Whilst it would appear to be a sold business, it certainly is out of favour and is falling precipitously. It’s falling under strong volume. In theory that means it’s bad to buy right now. (I never quite understand that logic since buyers and sellers must match up!- maybe some technical person out there can explain the logic). Who knows where it may fall to, but if you believe it is undervalued it’s a buy now in any case. Trying to pick the bottom to outsmart the market is a very difficult call made on pure luck in my past experience. Some you win and some you are the goose (in the short term), but either way if focused on the quality both will still allow being comfortable about your position and in the long term gain under either scenario.
cheers
Michael H
Jim
:
Hi Michael & Fitzy
Thanks for your thoughts. I agree if you own a stock at a price well above IV then a stop-loss is very helpful. Adding some technical analysis has to come into the equation I feel, mostly because this is how Mr. Market works.
Cheers
Jim
Frank
:
Interesting article. A timely reminder that investing is not a short cut to wealth.
I listened to Ross Greenbergs podcasts with Dr Sawas Savouri from the Tasco fund a couple of days ago. He gave a couple of really good insights as an outside to the Australian market predicting that the Aussie could reach 1.70 (which he says is a conservative estimate). He is in fact suprised that the Aussie is only at 1.10 at the moment. The point being is the resources that Australia have. He pointed out that the other four nations with large resources Brazil, South Africa, Russia and one other country are nowhere near as blessed as Australia in terms of geograhpics, legal system, stability and business ethics.
In his view, it is Australias loss that the mining tax did not go through! These companies generate mega returns and the wealth should flow to the country – possibly by way of a sovereign wealth fund. The notion that BHP or RIO will not invest in Australia is rubbish as the commodities cannot be moved from Australia and because of the inherent advantages of Australia.
What will the future hold if indeed the Aussie does reach 1.70?? I have no idea but according to Savouri, it is something to be embrace instead of afraid of. I am not so sure about that one though.
Frank
:
One other thing to add
The notion that the big mining companies will go to the other countries to invest such as Russia and South Africa is also not credible. Although their tax is a lot lower, the have another form of tax in the form of corruption and bribery.
Roger Montgomery
:
Correct.
Roger Montgomery
:
Hi Frank,
Seems like a few people share exactly your view.
Ash Little
:
I am one Frank,
That is for sure,
The mining advert that things could go off shore totally forgets the fact that you need the resources in the first place.
I have been talking about Dutch disease with family and friends for a long time now and this is the first mention on the blog but we have it in spades.
Roger Montgomery
:
My friend Simon Bond just came back from a trip to Mongolia…he sold every last share of the company he’d gone over to visit. If you think you have seen the wild west, you ain’t seen nothing yet!
Ash Little
:
HI Roger,
I saw him interviewed on th business channell regarding this.
Very good interview
Sean
:
My 2 cents
I believe the “China story” has a ways to go yet. Notwithstanding various issues with currency manipulation, verification of economic data and inflationary pressures in China and macroeconomic issues with the world at large; the immense population of this country and its surrounding region is mind boggling and lost on a lot of people with their nay-saying.
Basic economics is about supply and demand; imagine if all these people gain the wealth and capacity to start demanding stuff; and who is going to supply it? At the moment we’re lucky; we have a supply that can meet their demands. We are however selling a lot of stuff that can only be sold once – finite resources.
China has approximately 1.3 billion people which is circa 20% of the world’s 7 billion population. If you include other poorer south-east Asian countries (Laos, Cambodia, Thailand, Indonesia, Vietnam etc) there’s another 600 million people. India has about 1.21 billion people (circa 17.5%) and if you include Pakistan and Bangladesh in their region there’s another 338 million people. That’s roughly 3.4 billion people in that region give or take a few hundred million that want what we have; a better standard of living. And that’s not including Brazil or South America. I believe we are witnessing a seismic shift in the dynamics of world economies that will forge into the future.
As an aside; I read recently that a Chinese company has started purchasing property in the USA for their manufacturing plants because land is cheaper there than in China. They also added that labour is still much more expensive in the USA but who knows where that may lead. Who on earth are we going to get all that “made in china” stuff from when it’s too expensive to get it made in China????
Of course this continued rise will not go up in a straight line and will face bumps in the road; but up I believe it will continue.
For us this is the boom to end all booms.
Of more concern to us should be how we handle this huge windfall given a lot of non-mining companies are really struggling. God knows our current government haven’t a clue about managing our money. A high AUD is smashing any business that exports, sells in US dollars (CSL, QBE) but reports in AUD, or competes with imports (retailers and manufacturers). It’s also not been great for our sharemarket with prices not rising in line with earnings. Some companies navigated the GFC with the skill and precision Captain James Cook would’ve been proud of and could really go gang-busters in a buoyant economic environment. It’s also no good being able to go for a cheap OS holiday if you don’t have the money to burn anyway; not to mention what it’s doing to our local tourism industry.
And it’s OK if you’re from WA in the eye of the storm but try telling someone paying off a mortgage, putting a couple of kids through school with higher than ever energy consumption, food and other bills that we are going to have to keep raising interest rates because Australia is sooo lucky and we’re sooo rich right now.
Most people would turn out their empty pockets and say……huh, really? Lot’s to ponder and lot’s to manage.
Cheers
Roger Montgomery
:
Thanks Sean,
Really great thoughts.
Ilya
:
Hi Sean,
You mention high AUD as a problem but really the problem is weakening USD. What should be a solution? Debase our currency in line with US in a bizarre race to the bottom. All the way with LBJ, sort of speak? Why should we steal the purchasing power of all our citizens by debasing our currency for the benefit of exporters and the tourist industry?
Remember we export in order to pay for imports, when our currency is strong we can export less to import the same or more. We don’t need the exports for the sake of exports; we need exports to buy stuff most of which comes from overseas and gets cheaper as our currency strengthens.
On a personal level we go to work to pay for the things we like. If somebody asked me if I would like to have my salary cut by 25% so I can work 25% more hours, I would tell them exactly where to go. I don’t need work for the sake of work. The same way as we don’t need to maintain every export and tourist job in our economy just for the sake of it.
If there was anything I would like our government to do to help it to get out of the way. We live in one of the most over-regulated countries in the world and we could make ourselves a lot more competitive by getting rid of a large chunk of this burden. I would also like our government to stop spenging our money as carelessly as they have in the recent past.
ZORAN
:
WELCOME BACK ROGER
With this blog Roger is BACK and on TOP again.
We missed our favourite “drug” (Rogers originality)
Cheers
Zoran
Roger Montgomery
:
Actually I think it is you guys that are BACK. Well done on such high quality comments. Looks like a bit of shock treatment worked.
Mark Ab
:
Hi Roger,
As Ash Little mentioned previously, I find the IT/Data sector the most interesting at present. What we’re witnessing in the States (LinkedIn debut etc.) is that a lot of the ‘real’ businesses have started off as private firms and are slowly making their way as listed entities whereas what we witnessed over 10 years ago were nothing but pipe dreams. One thing that hasn’t changed for the sector though is the market’s ‘prospective pricing’ and this is where investors need to ignore media driven hype and go back to the basics and value companies on their IV. RKN, MMS (MMS is really a service business) are the obvious standouts but are trading well above IV to purchase at present. I would be interested to hear from anyone else that has looked at this sector in detail and found other opportunities that may present themselves as I have gone over the whole market many times in the last 4 or so months and are struggling to find suitable quality purchases with sufficient MOS.
happy fruitful investing…
Regards
Mark Ab
Ash Little
:
Hi Mark,
Just to clarify,
This sector also includes telcos
Ron shamgar
:
All I would add is that there r 4 cheap opportunities right now in this space and one of them is Vocus. The rest u need to keep digging…
Roger Montgomery
:
Hi Ron,
If you’d like me to be more open, you will need to be too…
ron shamgar
:
i will roger. but as you say publicly, i also don’t like to compete buying the same stuff with other people.
Mark Ab
:
Hi guys,
I respect your views, position and importantly the integrity of this blog. I think Roger’s new guidelines in recent times were needed to maintain the focus on well-considered views and prevent this from becoming just another stock forum. I have looked at Vocus among others previously. I’ll keep digging…
Regards
Mark Ab
Ben Wieland
:
Hi Roger and Ash
Completely off topic, but Ash, East Group Australia is an accounting based business specialising in primary production.
Would you mind dropping Roger an email to roger@rogermontgomery.com regarding the piggery for sale and I am sure he will forward it to me (Thanks Roger)
Kind regards
Ben
Ash Little
:
Hey Ben,
we have a few investors lined up for the piggery so I will keep that under our hat.
We don’t want to increase our competition.
Thanks for the info regarding your group. I will have a look
Andrew
:
Hi all,
I don’t blame you for sitting on so much cash roger. One trend I have noticed looking at my 2011 forecast valuations for my small sample of companys I keep a close eye on, is that most are forecasted to have a decrease in forecast IV for 2011 and then rising again in 2012. The high percentage of this on my list indicates to me that this would be the case for most bsuinesses.
I am not in the market at the moment, need money for activitys with a higher intrinsic value to investing. But even if I was, my belief would be to stay put and wait for bigger margins of safety and see how the companys faired in reporting season. Lucklily I don’ manage a fund (well not yet) and there for no-one will care but me. In the meantime I will continue to refine my little version of value investing and create the systems needed to support that so I can take advantage as soon as I jump back in.
One area I am watching is the long term impact that online retailing has on all companys associated to that industry both up and down the chain, including shopping centres.
I have really enjoyed the blog since the return to a focus on quality (kind of resembles our investing) over what it was like a while ago. Keep up the good work roger. If I could add one suggestion it is that I love posts where we get to put forward our views. I am thinking a form of post where there is a simple scenario and the posters can use our independent judgement and viewpoints to say whether we agree or disagree. For example it could be due to a company action like a buyback or something more in the realm of investing and business theory for example the benefits of having a competitive advantage or why should a pay out ratio be increased etc. Just some food for thought and know it might not be everyones cup of tea.
Keep up the good work roger and grads, let’s focus on quality in every aspect of our lives
Roger Montgomery
:
Thanks for the support Andrew.
Scott W
:
Roger I try to apply a basic principle to investing and business strategy. As you say correctly in your post, we need to stick to our plan even when times are changing around us all others are sure the storm will rage until the cities are levelled.
But the quote I stick by is ‘ Just because you are lost, does not mean your compass is broken ‘ I think it sums up the struggle to always be Value Able quite aptly.
However in terms of market direction I have learned a lot from reading one of your early influencers as BT, Mr Richard Farleigh, and his work on markets teaches us that markets are like to react and move much further either up of down than we expect, as there are always laggards. I like his quote that technical analysts are ‘the astrologers of the stock market’, so the only way we can see when the market has truly turned is to watch what the market itself is doing rather than looking for ‘support levels’ etc that we can convince ourselves have some real significance.
Martyn C
:
The real question is how long will this period of reduction in sales revenue last (ie EPS). It would seem to me that if it is for a sustained period then companies with lower debt servicing requirements will become the new vogue. The lower the proportion of income being used to pay the bank the higher the proportion available to pay dividend, grow ROE and entice the masses to pay outrageous prices for good stocks, which we can sell, to buy more piggeries.
Peter M (Mully)
:
I’m of the view that the strong and strengthening AUD is a major headwind for our market which is likely to get worse in the short to medium term.
As long as the AUD remains strong it will serve as a disincentive for international investors to invest in our market and as an incentive for those who already have to take profits and head for the hills.
Given the contribution that international investors make to our local market, I expect the buy/sell demand and supply curves to favour over supply in the short to medium term. As a result, I see further downward pressure on current share prices and the emergence of of some meaningful opportunities for patient, vigilante and selective value investors.
Rob S
:
One of your best in recent times. Thanks Roger.
One issue I think the value.able/MQR methodology misses out on a bit is the potential of recovery in earnings.*
NPAT is a big determinant of “quality” as defined on these pages, but earnings are influenced by so many factors beyond just cash flowing to the business – accruals, depreciation/amortization expenses, goodwill/intangible asset write-downs, provisions, hedge accounting, etc… Of the 1175 companies that ‘made no money last year’ (zero or negative ROE), some will actually have had strong, uninterrupted cash flows and sound competitive advantages in their core business – but temporary setbacks, accounting quirks or macroeconomic developments outside the companies control have conspired against them. It’s just a matter of time before the quality in their earnings follow through.
Not all of us have made perfect investment decisions in the past, and equally so we are likely to make mistakes again in the future, despite the quality of our investment education. So it is unreasonable to expect managers to make perfect decisions every time. In my book, I’m willing to accept companies with an imperfect track record and therefore not A1s – companies that overpaid for an acquisition during the boom years of easy credit; or expanded into new markets, extending beyond their competitive advantage – particularly when there is a core valuable business (that hasn’t been impaired), and management has admitted to it’s mistakes, learnt from them, and accepted the changes that need to be made (often times resulting in changes in the executive suite).
While Roger focuses on businesses with bright prospects and therefore intrinsic values that are improving ‘at a good clip’, intrinsic values can rise at an ‘equally good clip’ simply when prospects are no longer dire and are now ‘on the mend’. The benefit of course is that negative sentiment often over-reacts, persists for longer than is rational, and provides ample opportunity for the investor with a long time horizon to buy with a significant margin of safety.
As Graham and Dodd so aptly quoted from the ancient poet Horace in the beginning of Security Analysis:
“Many shall be restored that are now fallen and many shall fall that are now in honor”
*This is not to say I haven’t found Roger’s book and ideas extremely rewarding, I have just found an application of the philosophy more in harmony with my way of thinking and would like to share what I have learnt.
Roger Montgomery
:
Great thoughts Rob…I note Buffett’s subsequent thought (after adopting more Munger and less Graham); “Turnarounds seldom turn”.
David Sinclair
:
Buffett would have been more honest if he had said “I’m no good at picking which turnarounds are going to turn”. Seth Klarmann, on the other hand, is happy to go for turnarounds (among other things) because he has someone on his team who specialises in turnarounds and is better than Buffett at picking which ones are actually going to turn.
To continue the Buffett references, in his “Superinvestors of Graham and Doddsville” essay Buffett names a group of investors who take very different approaches to investing but have track records similar to his own. The only thing they had in common was that they all focused on buying companies for less than what they were worth, even though they all invested in different types of companies and used different methods to figure out what those companies were worth.
My conclusion? You don’t have to imitate Buffett’s approach to get good results. Instead, you should go with what your own strengths are. If you are good at identifying turnarounds then invest in turnarounds. If you are good at identifying businesses with bright prospects then invest in businesses with bright prospects. If you are good at identifying boring but reliable businesses that are out of favour with the market then invest in boring but reliable businesses that are out of favour with the market. If your strength is identifying turnarounds but you try to invest in businesses with bright prospects because someone else told you that you should, even though you are no good at it, then you are likely to end up making a lot of poor decisions and losing a lot of money.
Don’t try to imitate others. That path leads to failure more often than success. Learn what you can from others, but know your own strengths and use them.
Dave S.
Roger Montgomery
:
Agree David,
I have bought several companies on the cusp of switching over to being cash flow positive…and when they do switch, it has been very satisfying.
Ash Little
:
David,
I think that is a fantastic post.
Well done
Dan S
:
Are you David Sokol?
Edward
:
This website is an excellent investing resource for a beginner like myself. However, I do not think turnarounds should be dismissed straight away. From my investment research to date, the odds on a turnaround situations are not favourable, however it is the expected value of an investment that matters. Purchasing A1 companies put the odds in your favour, however if the MOS is only 10%, then the expected value of the investment could be less than buying shares in a C5 with a 70% MOS. It is obvious that some of the posters put considerable effort into assessing companies, so why not put the same amount of effort into assessing turnarounds? This would open up the number of investment opportunities when all the A1 and A2 companies are at IV.
Roger Montgomery
:
Agree entirely Edward.
Andrew
:
Hi Rob,
I agree that companys can sometimes recover from not so good positions to becoming an A1 company.
However, in my mind and my method, if a company has such serious external factors that it would consistently affect the performance of the company than i will not find that company attractive regardless of the potential it might have. i will instead wait for the turn around to have happened and proved, i may miss the boat but all i will lose is opportunity and another one of those will be around the corner.
If a company has strong cashflows, competitive advantage etc but still can’t turn a net profit than it makes me think that it is in a non-attractive operating environment (think airlines). In these situations usually the reputation of the industry as a bad place to invest stays intact. I will find it hardly unlikely that this environment will change to the extent that investing in these companys for the turnaround will be profitable or that the turnaround will even happen.
I can see that there would be potential for big windfalls in investing for the turnaround but the risks of getting it wrong are far too large for this investor.
I also think if the track record shows that the factors that led to poor performance are a regular occurence than i will only assume that it will be continue. Like Roger says, “if the abnormal happens more than twice its normal”. Sorry Roger if i got that slightly wrong.
Roger Montgomery
:
“Turnarounds seldom turn”.
Rob S
:
I’m glad to see my comment generated some good discussion. Thanks all!
I like what you say there David, the value clan is a disparate family indeed – read widely and you are bound to find individuals whose approaches resonate with your personality. One of the most important things in investing (and life too I guess) is to accept your strengths and weaknesses and work with them rather than against them.
In reply to Andrew’s comment, not many companies will excel in all conceivable economic environments, those that do often trade at large premiums to IV. In addition, one could argue that those with impeccable records have been beneficiaries of certain unique economic conditions that may or may not continue into the future. I tend to worry when an investment only looks attractive if the current high returns or high rates of growth are required to continue in order to achieve a margin of safety. I find it easier to think about what would have to go wrong for the current price to reflect the intrinsic value of a company rather than what would have to go right.
When Mr Market gets moody, the future becomes uncertain, or large shareholders are forced to sell shares for reasons unrelated to the underlying business, then prices and value can dislocate dramatically. These are the kind of situations that I’m attracted too.
I mention turnarounds as a particular instance in which I have found that the primacy of the income statement (not just here, but in the market in general) distracts from the economic reality of the business. I find this can sometimes be a fruitful place in the market to look for gems others may have discarded. I’m not talking about a rubbish business turning into an A1 in a year, but where corporate decisions that ultimately improve shareholders’ value are interpreted as negative moves in the market – such as discontinuation of a loss-making non-core business unit (and subsequent asset impairment charge) that masks an otherwise strong performance from the main business concern. In Warren’s words I’m looking for one foot hurdles. This is just one such place where I have found them.
I’d love to own a portfolio full of A1’s obtained at <50% of IV, but unfortunately great companies tend to be widely followed and opportunities are rare. In the mean time, as the late great Peter Cundill was known to say "There's always something to do."
Ron shamgar
:
Hi rob, u will b surprised but it’s not as rare as u think to find A1s at big discounts…have a look at the small/micro caps.
Edward
:
Rob S,
Good post. I like your thinking. My evaluation process for the non A1 type situation is as follows:-
I begin by reviewing 5 years worth of financial data and recent annual reports. I calculate the liquidation value of the company (how much money I could lose) then using crude valuation methods I estimate a range for the fair value of the company (how much money I could gain). As I read the annual reports, I will be giving the company points for profitability, management performance, management personal wealth incentives (very very important!), last 5 years operating performance and so on. These points allow me to calculate a confidence in the company. I now have sufficient information to perform a simple expected value of the investment if I bought it at the current price. This process takes about 15-30 minutes using the internet, the back of an envelope and a pen. If the expected value looks favourable, then I am interested enough to start the serious work – read the annual reports again, search investing forums, read newspaper articles and so on. If the reason for the depressed price compared to my crude estimate for the fair value of the company is not obvious after a couple of hours of research, I walk away, it is too difficult for me. If the reason (govt reforms, poor performance of a new product affecting the NPAT, new competition) for the depressed price is obvious then I will make a detailed valuation and a thorough assessment of possible outcomes for the company – this is where I need lots more practice but I believe it is critical to becoming a successful investor. Time will tell :-)
Roger,
Regarding your comment – “I have bought several companies on the cusp of switching over to being cash flow positive…and when they do switch, it has been very satisfying.” – I would be very interested in some case examples.
Ash Little
:
Hi Rob I agree with you about turnarounds,
The best examples are our banks in early 2009. I have seen some charts that suggest that in hindsight the market got it right and they were trading at about their value. These charts are courtesy of fellow blogger and friend Trav Adams.
We were talking about this last week and as the market tends to do it project forward the recent past forever into the future. This was obviously not the case with our banks. I remember at the time saying to a colleague that the best part about a bad debt is that once you have written it off it does not keep coming back year after year unlike rent.
As Trav can attest I was very greedy with the banks in last 2008 and early 2009. But a series of capital raisings and a big rise in selling price saw them trading at a price by October 2009 well above their value.
This turnaround was a no brainer as even bushies like me got this one. Others are much harder,
I put the same thoughts in HVN at the time and due to kevies cash splash the share price rockets. Luckily for us it got to a price that was too hard to resist to sell but this was just luck because as we have seen the Banks may have turned but HVN has not
Just my view
fred
:
Hi Roger,
I would like to add that I have added a new concept to my pre buying of a A1 type of stocks after doing all the research off course and that is;
1) Take a couple of days to think about it!
( I go to the local golf course and chip and putt and think about the company that I have researched). This is really helpful
2) Talk to people about the sector that that company is in sometimes I might mention the company and sometimes I might NOT ( like yourself Roger in NOT mentioning that Gold company) (It is a feel thing which I fully understand!) Example is this blog for bouncing stuff of each other. (Its great)
There are some others which I will post later if thats ok with Roger of course.
Thanks always Roger ( enjoyed your money your call )
Roger Montgomery
:
Thanks Fred, I enjoyed being on the show too.
Tony
:
What have I missed? Did the sky fall? The market corrects by 5% and there is a rush to the exits? Good riddance to bad rubbish. This is normal for markets. Get used to it. Me, I’m buying FMG which will be worth north of $18 in a few years
Roger Montgomery
:
Thanks for sharing Tony.
Ron shamgar
:
So what ur saying Tony, is that Andrew Forrest will be as rich as Buffett?
Rod
:
Thanks for the helpful comments, Roger. Keeping cool is the key, and salivating at the right times! I should explain that I’m not in a position to spend a lot of time on this, and my own list, still VERY incomplete and imperfect, is a hotch-potch of IVs gleaned from this blog and a few of my own calculations. I’m very slowly getting better at them, but balance sheets seem to contain an awful lot of confounding data and confounding terminology. Can I just offer this list of some A1/A2s from my own rather short list which I have at a discount right now by way of provoking further discussion? In descending order FGE, MCE, ACR, ANZ, TSM and CDA. I make no claim that these are right, but there is room for interpretation in such figures.
Even for a Value.able undergraduate, those of weak resolve make us strong! I recall many years ago, just after a big international crisis, seeing the stock markets plunge and thinking that this was simply absurd. I jumped in and bought, and never regretted it. There have been some common sense in me somewhere. Thanks Roger for giving this obscure intuition a ‘local habitation’.
Jonesy
:
“And this is where Value.able Graduates’ attention should be focused, not on the bailout of Greece or Portugal.”
“Its only natural to want to throw up your hands in dismay, but this is where the rubber hits the road – Keep Calm and Carry On.”
“Low prices should not bring consternation, but salivation.”
“With a falling market the daggers will come out, so also be prepared for those of weak resolve. They may try to discredit our Value.able way of investing.”
“The issue of course is not the reliability of the Value.able approach, but the patience required to execute it.”
Thanks for a great blog post Roger. Always difficult to stick with a value investing approach when the market isn’t seeming to give you the results you’re craving. But it will. Great to keep in mind these quotes above. Keep calm and carry on (love that poster!) and just remember that these lower prices are being offered by investors, a lot of whom dont really understand the price vs value concept and as a result are panicking. We should thank them for this opportunity!
Ilya
:
I think there are a few themes in play at the moment and I will try to cover some.
We have had a number of bad economic news from the US. These news always come as “unexpected” which just shows how clueless much of the financial establishment are! The US has not addressed any of the causes that led to the GFC, in fact they only made things worse so far. Their economy is not “recovering” no matter what Bernanke and Obama tell us. It’s on its death bed on the drip of QE.
We also heard pronouncements from the Fed designed to soften the fears about inflation. Bernanke came out and said a few times that they can stop QE2 any time if need be. This probably fooled the market “gurus” again. I think they may be anticipating the end of QE2 which would mean a major slowdown of the US economy, which is only propped up by Fed’s liquidity. This would be very bad for the price of stocks and commodities alike, hence the across the board sell-up.
I think there is absolutely no way the Fed can stop QE and easy money policies. America is addicted to cheap money and the economy would absolutely nosedive if the Fed was to withdraw liquidity. There is just no way. They will probably not call it QE3 but they will not stop printing money, which means the commodity prices and $AU will be going higher.
There is also much talk about China and how terrible they are with all their dirty currency manipulation and inflation over there. This always ignores the elephant in the room. China is only trying to maintain Yuan’s peg to the US dollar which is being debased by the Fed. This is really an idiotic race to the bottom with no winners but US is going to get the first price for ugliness because the debtor always loses to the creditor. Chinese will have to figure this out soon and stop propping up the dollar. Let their currency appreciate and let their people enjoy higher living standard while Americans learn that you cannot run an economy based on IOU’s and money-printing.
I think we will start seeing further evidence of decoupling where US markets will have less bearing on international markets as US economic power wanes.
On the domestic front, it looks like Australian housing market is coming off the boil which would make me nervous about holding bank stocks. I am weary of financing companies like CCP whose assets are mainly comprised of purchased debt ledgers, sounds very sub-prime to me.
Hopefully we will see opportunities to buy some top quality A1’s at low prices soon.
Robert P
:
JB hifi (JBH) was enough below my value to purchase a small parcel today. I expect more bargains in the future weeks. It depends on the ‘lemmings’ (One of the very good publishers of stock market mathematics papers said in one of his published papers that the ‘mathematics of the stock market as the mathematics of lemmings’).
So when the lemmings are pushing prices down, and the value is good it’s the time to buy.
Look at A1, A2. and if you have cash then consider buying
Craig B
:
I don’t know where the market is going, but the financial and political news cycle has been out of control lately, adding to the uncertainty being expressed at various outlets.
This includes the stock broking industry, who I’ve been reading having a lot to say on the state of the market and economy as a whole, especially the lower volumes and lack of progression of the index.
What’s lacking in their analysis, when comparing prices now to those a few years ago, is the possibility of substantial over valuation in the period of reference they use in the past.
Why should share prices rise each and every year? And why should trading volumes be a barometer of health for the economy? Surely the frantic trading in a bull market benefits one party more than it does the majority of participants? And if the incomes of stock brokers are a bellwether of our economic fortunes we’ve got it all wrong.
I also find it difficult to be disappointed with an increase in profits circa the values stated in Roger’s post. So what if that’s after a downgrade, overall we’ve much to be positive about – despite some risks, of which our dependence on China is first and foremost.
Seems to me if the easy money’s not available, like in the long bull run up until 2007, some people think its all bad. Perhaps too many participants know nothing else, but I’m sure there are others who played in the 70’s more circumspect about where we are.
As for me, I’m keeping an eye on inflation both here and in China, and I’m concerned enough at one end of the spectrum to have fixed a chunk of my mortgage for 2 years at 6.99%.
Great post Roger.
Daniel
:
market is cheap… with some A1 standouts. if only I had excess cash laying around! MCE is a bargain at $8 (2011 IV = $11)
The market seems concerned about softer US economic data, European debt concerns, ending of QE2 in late June, battles over deficit ceilings in the US Congress and slower economic readings out of Asia combined with inflation. hopefully aussie market is headed to 5200 before the end of the year… or about 10% higher from here.
Peter A
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Hi Roger,
I don’t have any startling insights, and I don’t know what will happen next. I have about 50% of my SMSF in cash at the moment. I am opportunistically doing some minor nibbling (eg MCE at sub $8, TGA at sub $2, etc), but apart from that I am sitting tight. I have no plans to sell any of my current holdings, but will need Margins of Safety to improve substantially before throwing any more money in.
For MOS to improve, it will need Mr Market to turn much more bearish or profit outlooks to substantially improve. If I was a betting man, I think it’s likely to be the former but I really don’t know so will simply wait and see.
I work in the Manufacturing sector and things are very, very difficult for us at the moment, which may be influencing my negative sentiment.
Peter A
Michael Horn
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Turn your negative sentiment to advantage – look for Poverty Stocks. You did well to buy TGA – consider a few others like CCV and CCP. I have heaps of TGA and a few CCV (sold most to buy more TGA at about $2.00 recently.
fred
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Hi Roger,
What would you do ???? if you purchased a company at well under intrinsic value and then;
1) the share price declines even more
Warren Buffet says ( buy more )
2) the next annual report is presented and the intrinsic value has dropped below what you have purchased your shares for.
Thanks Roger
Roger Montgomery
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Thats an easy one Greg, You’re out. The performance of the business does not justify the current price. remember; bright prospects!
darrin
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HI Roger
Great Blog
Now I understand why you buy shares with a high MOS. I am afraid I did follow the valu.able rule of patience and jumped into the market last week.
What is the probabiity of naming the 19 businesses which are trading at a discount to IV at the moment?
cheers
darrin
Ash Little
:
Hi Roger, and fellow blogs
Who care where the matket is going.
Just look to what you own and want to own
Ron did a nice post a few weeks back listing 5 areas to invest in, I very much like 4 of these.
Energy, Gold, Mining Services, IT/Data.
Being from the bush I would like replace Ron’s consumer/debt category with agriculuture. Although it is difficult to find quality in this sector not to mention MOS.
My Portfolio is not large by number of stocks but I cover the 4 sectors above and if I am patient I may get a shot at a agriculture business some day. If not I know a really good piggery for sale out here.
Just my view
Roger Montgomery
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Hi Ash,
I give your comment; “Who cares where the market is going.” an A1. AWB, Ridley and Graincorp have had and have (respectively) lots of M&A talk surrounding them but you are right quality is not outstanding. Private Equity funds are known to buy thematically though. Other companies in the agri/aquaculture/food space include Clover Corp (A3), Marine Produce Aust.(A4), Minemakers(phosphate) (A4), CLean Seas Tuna (A4), Phosphate Aust.(A4), Subsoil Technologies (now doing DD on a Manganese project) (A4), Select Harvests (B2), Ridley (B2), GrainCorp (B3), Maryborough Sugar (B3), FFI Holdings (B3), Tandou (B3), Ruralaus Investments (B3), Patties Foods (B3), TFS (B3), Warrnambool Cheese & Butter (B4), Penrice Soda (sodium bicarbonate) (B4), Goodman Fielder (B4), Freedom Nutr. (B4), AACL Holdings (B4), Tassal (B4), Farm Pride Foods (B5), CI Resources (phosphate) (C2), Franland River Olive (C3), AACo (C4), Redisland (olives) (C4), Gunns (C4), Elders (C4), Papyrus Aust (C4), Sterling Biofuels (C4), Montec Internation (C4), Leaf Energy (C4), Arafura Pearls (C4), Webster Limited (C5), Style Ltd (C5), Namoi Cotton (C5), Farmworks (C5), Australis Aquaculture (C5).
Ash Little
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Thanks for the list Roger,
Great Stuff
Ash Little
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Hi Roger,
One you don’t have on this list is ruralco which is very expensive and ROE is currently not flash, but seem to me to be in the right space.
I have a reasonable understanding of one of their partly owned subsidiaries and can say they are well regarded and pretty much entrenched in the area. Can’t comment about the other areas though
Another is Namoi but a quick looked at the accounts gives me the impression they may have some problems. The recent preliminary final report is well named. No Cashflow, and huge movements in derivates and short term borrowings.
I am sure if I was a shareholder I would not be happy with this disclosure.
Just a few thoughts
Roger Montgomery
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Hi Ash,
I thought I had put it on. Apologies for leaving it out. Thanks for the note.
Mal
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Whilst I don’t know a lot of the companies on this list, it really does make me wonder how you get your MQRs. Of the ones on the list that I know there is some absolute rubbish (pretty much all of the Cs), but on what I have seen on the balance sheet Patties Foods and Tassal are pretty good and far better than Select Harvests (who are about to have a new major competitor), TFS (who knows how good this Sandalwood is going to be!) and Minemakers (who haven’t made a cent)!. In particular, Tassal’s management of the takeover offer really demonstrates excellent management if they achieve what they say they are going to (compared to the last stock of mine that has been taken over for instance!).
Although I like A1s at a discount, my method of value investing is only about getting safe-ish stocks cheap (with smaller positions for the – this includes anything trading under book value/ NTA, in-the-money options with no time-value ascribed to the share, good & safe stocks that are cheap (a la Benjamin Graham) and of course those with extraordinary growth opportunities, even if they aren’t making money yet.
I think the current market downturn has presented quite a few excellent opportunities (in which I have absolutely loaded up), and I think that whilst interest rates are high, the market (on the whole) is going to steady. I think of the interest rate as a surrogate for the required return- as it gets higher, so does the risk free rate, and the higher the required return. On a global level, the interest rates are sky high, and although not necessarily on an historical level for Australia, I think both equities and property are affected.
On a side note, thought I’d mention a few that have caught my eye and see what you and the other value.able grads think of them (in my view they are all trading at a discount to IV, although they are not necessarily all A1s).
BGL
BSA
MCP
WLL
EOS
GLG
SEA
SLM
And of course, plenty of miners if you know where to look!
Roger Montgomery
:
Thanks Mal,
Appreciate your thoughts. I reviewed them all. You must understand I don’t make investment decisions based on the quality score of one year. There are many years over which consistency can be assessed. By the way, we know our quality assessment is consistent, and it works for us. Different opinions makes a market!
Roger Montgomery
:
And see my comment to Craig below and repeated here:
“Hi Craig,
Don’t worry we would never invest. First; A4 is below investment grade, second; in every previous year, the quality score has been C5 or B4. We look for consistent performers.”
Ron shamgar
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Hi Mal,
Good to hear from you. Congrats on GDO! I wasn’t happy the Chinese bought them on the cheap, but I’ll take 25% profit in 2 weeks anytime.
In regards to the list above….one of them is a bargain!
Take care.
Ash Little
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If it is the same one I am thinking about then I agree.
A little GEM
Mal
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Hi Ron,
Yeah, I thought the whole takeover was conducted poorly from the management point of view, but I got into GDO early (and actually had a large percentage of my capital invested there), so did quite well out of it. It has however, forced me to have another look at the market to re-allocate my capital.
I think the one you’ve identified as a bargain is the same one I have ;), but I think a couple of the others on the list above are pretty decent as well. Gold stocks apart from GDO have been hammered and there are quite a few that are trading at big discounts currently- the BIG discounts are for RSG and TGZ, but I have moved my money into safer (in my opinion) goldies.
Happy investing,
Mal
Craig Subocz
:
I’m interested to see you rate Clean Seas Tuna an A4, Roger. From my understanding of the company, I would not consider it anywhere near investment grade. From memory, Clean Seas Tuna has never turned a profit. I really rate it a very speculative investment, along the lines of a minnow explorer or a junior bio-tech stock.
As I understand it, Clean Seas Tuna recently diluted its shareholders by effectively giving away a large chunk of its equity to a Norwegian angel investor (by that I mean that if the angel investor hadn’t come along, the company would likely be under water – boom-boom).
There’s constant speculation of a cap raising in the near future and I understand that the current spawn is basically the last roll of the dice.
I have some friends who have invested in this company for some time so I have some knowledge of the fundamentals of this company.
Roger Montgomery
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Hi Craig,
Don’t worry we would never invest. First; A4 is below investment grade, second; in every previous year, the quality score has been C5 or B4. We look for consistent performers.
ron shamgar
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thanks ash.
i would like to emphasize that currently the value is in the IT/Data part of that portfolio…. hope that helps.
Ash Little
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Agreed Ron,
I have found gem in this area,
Very excited
Ron shamgar
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I hope we’re not fighting for the same gems! All I can say is that all this talk about market falling and general pessimism everywhere makes me think we might go higher by the end of the year? Contrarian anyone?
Peter
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Little games. Just say it loud and clear: BSA. Otherwise dont waste blog readers valuable time with teaser posts.
Roger Montgomery
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Agreed. This post started with some very high quality comments. Its already deteriorating into one-liners, “LOL’s”, “IMHO’s” and other guff that is for teenagers texting their friends. Keep it value.able please everyone…
Craig B
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Hi Ash,
If I remember rightly you mentioned Koon Holdings a few blogs ago, and I was wondering if you knew what the conversion ratio is for turning the CDI’s listed here into actually fully paid shares (listed on the SIngapore exchance presumably?).
I’ve read that it is usually 1:1 for this type of security, however I can’t find anything specific on the subject in the 2 annual reports I’ve had a look at.
I was hoping you might know.
cheers
Ash Little
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Hi Craig,
What I assume you are thinking is exactly what what I was thinking but I did not research it further when I found out the company is very illiquid in Australia and Singapore.
So sorry I can’t help
Craig B
:
No worries.
I appreciate the response.
Andrew
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Hi Ash,
In regards to agriculture is their any specific area that you would like to have exposure too?
The reason i ask is too simply learn more, as a city folk who rarely gets his hands dirty and isn’t used to breathing clean air i tend to perhaps oversimplyfy agriculture as the farmers who produce the fruit, veges, meat and other food.
The more i think about these type of businesses the more i think it is not particularly an attractive market. yes everyone needs to eat but i think the farmers don’t appear to have that much pricing power over their product and they are forced to operate under the chokehold of their consumers, two major ones which are currently in an aggressive price war.
It also seems to be a pretty capital intensive business so it makes me picture some farmers paying more for expensive equipment on one side and then having their margins cut by their customers on the other reducing margins.
I do not pretend to be at all knowledgable on this front so thought i would ask the question.
Andrew
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Sorry, forgot to add that all of the above is even before you take into account the impact bad weather (too wet or too dry) could have on production.
Ash Little
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Hi Andrew,
I am currently doing tax estimates for our clients and I can tell you the incomes of the Farmers and Mining Services companies that we deal with are eye popping and I think this will only improve over time especially for the farmers. I am really excited about their prospect.
That said, as you say droughts and flooding rain are the norm in australia so any one farm may and will see dramatic swings in income. (These swings wont shoke the farmers as they are pretty much used to it).
Unlike the shareholder of a really good business that sells when the company puts in a bad year the farmer does not do this as they take a much longer view on overall profit situation. (Good farmers have all the qualities to be good investors)
Personally I like investing in Mining services rather that the Mining companies themselves. You have all heard the story “picks and shovels”
Well farmers don’t use picks and shovels much but they do use chemicals, fertilizer,and buy machinery, They also need an agent to sell their cattle. etc etc.
So I am looking for Agricultural services companies. This makes sense to me but I just can’t find one of investment grade and cheap.
Hope this help Andrew
Peter Kruckow
:
Hi Ash and Andrew
It will be interesting to see if AA Co (ASX: AAC) can drag itself up to investment grade some time in the future. They have just announced building their own meatworks at Darwin ,which they claim they have the cash for, so won’t need to borrow which will be a change. They have new management in Don McGauchie and ceo David Farley who are well respected in our industry. For those who don’t know ,Don McGauchie was heavily involved in the waterfront reforms in the late 1998 and has until recently sat on the RBA board, something I didn’t know.
They say they won’t have buy any cattle to supply the works as AA Co is quote ‘Long cattle’. They will have the full loop as in having their own breeders, their own feedlot and soon their own meatworks.
The final positives I can come up with is they recently recorded their first profit since being spun back out of Elders albeit a modest $904,000 ,considering the $260mil in revenue that they grossed, and they didn’t see the need to pay a dividend. Ash would know more about this than me , but one of the main reasons I see that Ag companies aren’t investment quality is that the industry is built with other people’s money. In the main they borrow big heaps to buy the asset then only pay back the interest, so in reality the banks are really the landlords. It ‘s generally an asset rich, cash poor industry and nearly every grazier I know absolutely loathes giving the tax man any joy, which unfortunately, is probably holds a lot of the industry back. ( My wife used to look forward to paying tax as it meant we had a good year)
Anyhow it’ll be interesting to see AA Co can rid themselves of the C4 Roger has given them. Time will tell , but I don’t think it will be in the immediate future.
Hope this helps
Cheers
Pete
Pete
Ash Little
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Good summary Pete
As you say time will tell but not investment grade at the moment
ron shamgar
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hi Ash, check out this article if you haven’t already regarding agriculture investments:
http://www.businessspectator.com.au/bs.nsf/Article/Galahs-make-a-good-call-pd20110519-GZA79?OpenDocument&src=sph
Ash Little
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Thanks Ron,
That piggery is looking better and better
Rainsford
:
Roger, another great insight from you , Thanks to you I feel comfortable with the market heading lower. Bring on discounts to intrinsic value. I am prepared for reports from directors that will explain to us, using terms like “underlying profit” and “earnings before special items” how well they would have done if they hadn’t done so badly. I’ve been doing my home work and honing my analysis skills to improve the accuracy of my IV calcs so hopefull I’m ready
Roger Montgomery
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“how well they would have done if they hadn’t done so badly”, can I use that?
Michael
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I really like this phrase as well, up there with “management fire the arrow, and then paint a bullseye wherever it lands”
Roger Montgomery
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It is a good one.
Scott W
:
Roger I tend to watch the Australia economy through the retailers. As Australia has essentially closed down most manufacturing we have a consumption driven economy so retailers are a good test for the mood of the overall economy. Retailers in Australia are mostly unsophisticated and are heading down the modern mantra of being ‘value retailers’ I was recently sent to an expensive course for Dulux to help understand their biggest retail customer and it was run by US academics talking about the global shift to ‘value retailing’ the lead taken by Home Depot, and Walmart from their homeland of course. In the end I concluded it was just the path to trouble, selling based on price and the erosion of real value propositions through product innovation, But it is the way the market is headed, everyone flogging cheap rubbish as a small margin.
What does that mean? It all means that the first sign of slowing sales and all the retailers drop that price and discount as they have not other method left to build business, if you train the market to be value shoppers you need to be the cheapest.
That being the case the economy is clearly weak given my measure as the retails have everything on sale all of the time recently. A side note of the recent profit announcement from Dulux this week was that the commentators who said the first half profit was ‘despite’ the factory in QLD being totally flooded are exactly wrong, as the first half ends in December prior to the factory being offline for months, some food for thought…
My call for the future? The share market should start to get a slow increase in support, as capital misalignment is corrected. The last couple of decades too much money has gone to housing as well as housing investment. They trend seems to be over, the only people who deny it are the vested interests. With more money looking for a home away from real estate trading well above IV, some will have to find it’s way to the local sharemarket. This might end if with a few of the local favourites heading back above their IV, because with a cooling economy directly reducing the profit of these companies while more money is look to buy shares, things will get out of balance, because Aussies are so reluctant to use the excess cash to invest in the bargains available in other markets as their economies are still on the canvas following the beating they continue to take from doing the same as Australia (speculating on their housing stock)
Final thought, with house prices falling the outlook for suppliers and retailers in the renovation market must be questioned. Who spends a fortune fixing up a house that is falling in value? That might spell trouble for Wesfarmers and Woolies as they prepare to battle out the spoils of the hardware market in the next few years.
John Watson
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Like others here, I too am not concerned by the recent fall in share-prices. I am focussing on the increasing MOS in MCE, FGE, TSM, VOC and am trying to make an asset allocation shift out of Qld residential property into the aforementioned extraordinary businesses – anyone like to buy a 3 bedder 2 streets from a surf beach on the central Qld coast!
Roger Montgomery
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Thanks for coming back to share John.
Andrew
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Hi John
Thanks for your offer for the 3 bedder however with three years housing supply on the market, it’s still got a long way to go down to hit its IV :-)