Contrarian Investment Journal

[traderxxx]

thanks rnr.

 

[aus_trader]

As I mentioned in this forum before, I was going to start a thread with my own portfolio called "Medium/Longer Term Stock Portfolio". Well it got posted today with just two stocks to begin with...

 

[Cam019]

I have chopped and changed between F/A and T/A in this thread trying to discover what investing/trading strategy is suited to my personality and views of financial markets. I keep coming back to a long-term contrarian strategy - buying companies that are currently unloved by the market and that are trading with a large margin of safety and then selling them once they have recovered.

Companies will be selected from the nano, micro, and small cap sectors of the market to begin with (and will expand into the mid and large cap sectors down the track) based on loose stock screener criteria and then further analysis will be applied to determine whether a company belongs in the portfolio.

What further analysis? Debt to equity, free cash flow, enterprise value, operating earnings and other factors that give me an insight into the companies ability to survive through an industry or economic downturn, and whether there is a fundamental problem responsible for the current unloved share price or just short term over reaction of the market.

What risk management will I deploy? Short answer - none. I am not interested in diversification across industry sectors to reduce unsystematic risk, just for the sake of it. I will simply be investing in companies that have a significant margin of safety that protects my downside against a permanent loss of capital. I plan to hold for a bare minimum of 12 months (although I will not hesitate to sell within a 12 month period if a company shoots up to my calculation of intrinsic value).

As always, if I've missed anything you would like to know, please, chime in.

 

[Cam019]

The first pick for this portfolio is Mobile Embrace Ltd (MBE). MBE is a mobile commerce company which is comprised to two sectors; carrier billing and mobile marketing. Over the 12 months prior to purchase date (10-07-17), MBE's SP was down over 78%.



MBE's SP has had two significant dips of 42% and 46.67% respectively off the back of two market updates over the past 12 months and has external factors impacting international DCB market roll-out, but I don't believe this to have a long-term detrimental effect on the SP. MBE have stated they are being cautious and prioritizing cash preservation and accumulation for increased growth over FY18 and beyond. MBE's mobile marketing division has now become the main revenue and earnings driver due to the short-term external factors currently impacting DCB.

MBE has reaffirmed they are on track to meet FY17's revenue and EBITDA forecasts, and although both being lower than FY16's numbers, my belief is that it is nothing to be concerned about with a long-term investment horizon.

Using the numbers or the FY16 financial statements, MBE has an:

EV - $38.1 million
Operating Earnings - $11.95 million
FCF - $3.7 million
FCF Yield - 9.69%
Acquirers Multiple: EV/Operating Earnings (Tobias Carlisle metric) - 3.19
Earnings Yield - 31.38%
ROIC - 10.74%
Long Term Debt/Equity - 31.66%

I believe this company is undervalued and currently trading at significant discount to its intrinsic value. I'm in @ 0.063.

 

[tech/a]

Don't mind this short term
Technically

 

[OmegaTrader]

I have chopped and changed between F/A and T/A in this thread trying to discover what investing/trading strategy is suited to my personality and views of financial markets. I keep coming back to a long-term contrarian strategy - buying companies that are currently unloved by the market and that are trading with a large margin of safety and then selling them once they have recovered.

Companies will be selected from the nano, micro, and small cap sectors of the market to begin with (and will expand into the mid and large cap sectors down the track) based on loose stock screener criteria and then further analysis will be applied to determine whether a company belongs in the portfolio.

What further analysis? Debt to equity, free cash flow, enterprise value, operating earnings and other factors that give me an insight into the companies ability to survive through an industry or economic downturn, and whether there is a fundamental problem responsible for the current unloved share price or just short term over reaction of the market.

What risk management will I deploy? Short answer - none. I am not interested in diversification across industry sectors to reduce unsystematic risk, just for the sake of it. I will simply be investing in companies that have a significant margin of safety that protects my downside against a permanent loss of capital. I plan to hold for a bare minimum of 12 months (although I will not hesitate to sell within a 12 month period if a company shoots up to my calculation of intrinsic value).

As always, if I've missed anything you would like to know, please,ch company be equal wa chime in.

Good on you for posting in so much depth and especially for having a go.

I am still an amateur myself. This not advice, just what I see as an outsider.

What I see is you are still finding what works for you and changing the rules. Your mind seems torn. For example you entered a position based on fundamental indicators and then left because of technical indicators. Which wasn't really in your plan.

I could say that, if you have a plan stick to the plan. If it doesn't work change part of plan or the strategy etc. But changing midway doesn't really help to nuance the plan or strategy. That is a mental game to have control.

Imagine a index tracker fund just changing to technical analysis mid way haha. Investors would not be that happy at all.

Also that in part led to the 30% drop, which could/can/is quite destructive

Also as you stated that brokerage is really destructive at 8% round trip is ridiculous. But this is to learn not for a fulltime job so in that context it makes sense.

You wanted to trade based on fundamental, then technical, now back to fundamental value investing.
I know it is easy to succumb to an ideology but try it all and pick what works for you for your circumstances.

To confirm what are you actually using at the moment?

or are you just still exploring?

1)Why is the position sizing equal?
Before you stated 40-45% on one trade with 5% of total capital lost as a maximum. What is your rule now?


2) Why do you use a technical indicator for an entry but only fundamental indicators for an exit?t is a bit confusing?.

A true true true value investor would stay there no matter what the price was doing only when the fundamentals changed, it is about owning an asset not what other participants think reflected in the price. But obviously that could create conflict. I see you torn again.

I think try and have the rules first.

Finally a long term time frame will be very hard to evaluate and could require 10-20 years of performance to determine if it is working.

Just some thoughts

Cheers

Omega

 

[Cam019]

Good on you for posting in so much depth and especially for having a go.

I am still an amateur myself. This not advice, just what I see as an outsider.

What I see is you are still finding what works for you and changing the rules. Your mind seems torn. For example you entered a position based on fundamental indicators and then left because of technical indicators. Which wasn't really in your plan.

Hey Omega,

Thanks, and you are correct. I did buy MCE, MML, and MDL as fundamental asset plays, and then sell them using T/A. I wasn't at all trying to mix T/A and F/A. I was just selling out of those positions so I could transition into a T/A (VSA) based trading portfolio.

Imagine a index tracker fund just changing to technical analysis mid way haha. Investors would not be that happy at all.

Haha, no, they definitely would not be happy! I guess that freedom to swap between strategies with no outside influence is both the benefit and detriment of managing your own funds. I will not be making another switch now though.

To confirm what are you actually using at the moment?

or are you just still exploring?

I am no longer exploring and am now using a value based strategy buying temporarily unloved companies that can be bought at a significant discount to their intrinsic value.

1)Why is the position sizing equal?
Before you stated 40-45% on one trade with 5% of total capital lost as a maximum. What is your rule now?

Equal position sizes at the moment due to low capital base (university student life). Also, the broker I use (CommSec) now has $10 brokerage for entry and exit into positions less <=$1000. So I am using a maximum $1000 position size for the time being.

2) Why do you use a technical indicator for an entry but only fundamental indicators for an exit?t is a bit confusing?.

I am not using technical indicator for entry and fundamental indicators for exit (I'm a little confused as I can't work out where I have used T/A for entry and F/A for exit). I am now using F/A for entry and if and when the time comes, F/A for exit.

A true true true value investor would stay there no matter what the price was doing only when the fundamentals changed, it is about owning an asset not what other participants think reflected in the price. But obviously that could create conflict. I see you torn again.

I won't be torn. I know what does and does not need to be done now.

Just some thoughts

I appreciate the thoughts, thanks Omega.

 

[aus_trader]

Hey Cam, Good to see you back and making changes to improve your strategy. I haven't come across "Tobias Carlisle" company valuations, but there may be something in this, so I will keep watch...

 

[OmegaTrader]

Hey Omega,

Thanks, and you are correct. I did buy MCE, MML, and MDL as fundamental asset plays, and then sell them using T/A. I wasn't at all trying to mix T/A and F/A. I was just selling out of those positions so I could transition into a T/A (VSA) based trading portfolio.

Haha, no, they definitely would not be happy! I guess that freedom to swap between strategies with no outside influence is both the benefit and detriment of managing your own funds. I will not be making another switch now though.

I am no longer exploring and am now using a value based strategy buying temporarily unloved companies that can be bought at a significant discount to their intrinsic value.

Equal position sizes at the moment due to low capital base (university student life). Also, the broker I use (CommSec) now has $10 brokerage for entry and exit into positions less <=$1000. So I am using a maximum $1000 position size for the time being.

I am not using technical indicator for entry and fundamental indicators for exit (I'm a little confused as I can't work out where I have used T/A for entry and F/A for exit). I am now using F/A for entry and if and when the time comes, F/A for exit.

I won't be torn. I know what does and does not need to be done now.

I appreciate the thoughts, thanks Omega.

Yeah thanks for clearing that up.

So 2% round trip is an improvement. Still in the future look for ways around this as it is just throwing away money for nothing in return.

Also to reiterate 3-5 years is a long time. To have a significant sample size will be a long time.

Imagine a tennis match with only 15 points. Hard to tell which player is the best...

Say in 10 years there may only 10-15 trades/investments. That could be hard to determine the success of the strategy. If the stock market is bearish and the strategy is returning 7-10% that would look really really good but if the market is going up and up like in the US. One can start to question what all the time and effort was for.

In terms of position sizing each person has their own methodology and approach. What I would say is A more volatile strategy in general would require smaller position sizing. Some of these small cap companies can be all over the place or even go bankrupt. So in this case one needs to determine the volatility they are comfortable with as well as the sweet spot between making returns and taking too much risk.

In other cases looking at larger companies, in general less movement, so people may use derivatives or gearing to increase the volatility.

Say $5,000 capital and you pick 5 stocks at $1,000 each. 2-3 or all of them get busted. That is it. Rodeo to the end and over the cliff. Now the strategy has to catch up on the massive losses

In my opinion, there has to be some form of risk management. Even fundamental investors will get out if fundamentals have changed or there is a miscalculation.

Also more specific or thought out position sizing is better than just equal weighting in my opinion. But other people will prob disagree with that too.

See you in another 3 years ahhaha

Good luck and have the momentum to keep going.

Cheers

Omega

 

[Cam019]

I'm not really concerned with monthly performance, with that said, I am still going to put up EOM summaries measuring absolute returns just in case readers are interested.

EOM July 2017:

 

[aus_trader]

MBE is having a brief pull back at the moment (around 7.4c as I write); will probably bounce back up if the upward momentum continues...

 

[aus_trader]

Well looks like there is upward momentum on MBE today Cam... Helped by an announcement on FY17 guidance and market update. Looks like this one is doing well...

 

[Cam019]

Okay... second pick for this portfolio is Countplus Ltd (CUP). CUP is a national aggregate network comprised of 18 professional services practices. Over the 12 months prior to purchase date (09-08-2017), CUP's SP was down over 46%.



Interestingly, not unlike MBE, CUP's SP has had two substantial dips of 22.98% and 11.1% respectively over the past 12 months off the back of a market update and strategic review/revised dividend policy update.

With the appointment of new CEO Matthew Rowe in February this year, the board is now focused on the transformation of Countplus Ltd with measures including debt reduction, capital management and potential acquisitions to support the companies new growth strategy.

The dividend for the quarter ending 30-06-2017 was cut, and dividends have also been moved from quarterly, to biannually. Dividends are intended to be between 40-70% of NPAT and minority interests.

Using the numbers from the FY16 financial statements, CUP has an:

EV - $108.5 million
Operating Earnings - $36.7 million
FCF - $9.2 million
FCF Yield - 8.48%
Acquirers Multiple - 2.95
Earnings Yield - 33.86%
ROIC - 4.46%
Long Term Debt/Equity - 42.98%

I'm in @ $0.485.

 

[Cam019]

Just found an error in my spreadsheet that I use for EOM reporting. Please see below for the revised EOM July summary.

 

[aus_trader]

Hey Cam, I was going through the stocks in my watch list and saw big news on your stock MBE with an aquisition today...