Robusta fundamental, leveraged investments

[odds-on]

I agree the the market is broadly efficient based on aggregate expectations and I have been able to determine this through my research. However, it is frequently inefficient in components. Therefore I think there are always opportunities.

Macros,

How many components do you consider? I really only focus on long term survival and short term success as I think they have the most influence on price and therefore my returns.

Robusta,

I agree that competitive advantage is king. However, I think that until I have spent 30 years owning and studying numerous businesses I will never be at the stage where I can successfully identify it, especially to a point where I am comfortable purchasing with little discount. Also everybody else is looking for it, so surely the thousands of participants in the ASX must have identified every company with significant competitive advantage by now? The ASX however seems to have 100 or so alright businesses where if the correct factors (fundamental/technical/economic/business model/takeover/ ‘gut feel’) are considered then the expected value of the investment makes a worthwhile investment. Due to the market being broadly efficient, sometimes opportunities present themselves where the price is wrong for either the probability of long term survival or short term success . The factors depend on the business model but it does not need to be more than a few factors, just the right ones! As per my GCS example, monitor the management guidance, watch the correct economic indicator and then buy at the right price to sales ratio.

There is no magic ratio. Price to Sale Ratio work for the Medium class. It makes me focus on how much revenue does buying the whole business get me. Revenue is where the “economic value” of the business begins and as an equity investor with no control of the inner workings of a company, if the beginning does not look good then I am not interested.

Cheers

Oddson

 

[robusta]

I agree that competitive advantage is king. However, I think that until I have spent 30 years owning and studying numerous businesses I will never be at the stage where I can successfully identify it, especially to a point where I am comfortable purchasing with little discount. Also everybody else is looking for it, so surely the thousands of participants in the ASX must have identified every company with significant competitive advantage by now?

Not so sure about this, there are a lot of different strategies out there and with the rise of ETF's, high frequency trading and a general short term outlook IMO there should be plenty of opportunities.

The ASX however seems to have 100 or so alright businesses where if the correct factors (fundamental/technical/economic/business model/takeover/ ‘gut feel’) are considered then the expected value of the investment makes a worthwhile investment. Due to the market being broadly efficient, sometimes opportunities present themselves where the price is wrong for either the probability of long term survival or short term success . The factors depend on the business model but it does not need to be more than a few factors, just the right ones! As per my GCS example, monitor the management guidance, watch the correct economic indicator and then buy at the right price to sales ratio.

This makes sense but I would still like to search for the extraordinary businesses in this group and wait for the rere opportunities - if I can be patient enough.

There is no magic ratio. Price to Sale Ratio work for the Medium class. It makes me focus on how much revenue does buying the whole business get me. Revenue is where the “economic value” of the business begins and as an equity investor with no control of the inner workings of a company, if the beginning does not look good then I am not interested.

I can see your logic in this but for me I am happy to pay more for the revenue of a business that I think may be extraordinary, particularily if they have the ability to earn high rates on retained capital.

 

[Macros]

Macros,

How many components do you consider? I really only focus on long term survival and short term success as I think they have the most influence on price and therefore my returns.

Interesting question.

I guess I think along similar lines if I were to use the words long term survival and short term success, however I think the way in which I think about those concepts are different. I'd also point out that my views and investment philosophy have been growing and are in a state of flux - I have not yet reached a point where I can encapsulate all things that I need to consider before making a decision to maximise potential while minimising risks (I always seek to do things better).

Components:

• Long term value trend against current apparent value
• Short term potential impacts or drivers of value change
• Qualitative factors which may impact value over 1-2 years (e.g. cash flow, debt, sustainability and other issues)
• The macro factors driving the company - e.g. market trends, global factors, things which could throw value around like a leaf on a river
• *New: macro economic indicator to inform me quantitatively of likely market trend direction and strength. I've had some exceptionally out-sized gains eroded by getting the trend wrong. Invest in companies that fit in with the market trend and point in the cycle.

 

[Macros]

Oddson,

I'm conducting thorough review of the market. Came across a particular stock (one of many so far - so many opportunities!) and thought... that is ripe for the upswing.

Lo and behold... GCS as you mentioned previously.

As I conduct my review, it is clear that there are many opportunities at present - hopefully a time soon to repair your balance sheet Robusta!

Btw, sorry if this is taking away from your thread Robusta - let me know if these types of discussions are best taken elsewhere.

 

[robusta]

Oddson,

I'm conducting thorough review of the market. Came across a particular stock (one of many so far - so many opportunities!)

I agree there are a fair few opportunities at the moment.

and thought... that is ripe for the upswing.
View attachment 45768
Lo and behold... GCS as you mentioned previously.

As I conduct my review, it is clear that there are many opportunities at present - hopefully a time soon to repair your balance sheet Robusta!

Btw, sorry if this is taking away from your thread Robusta - let me know if these types of discussions are best taken elsewhere.

GCS I agree is undervalued and the IV and expected price is higher then the current price but I see this as more a short to medium term opportunity (along with AZG on Suhm's thread) and not the sort of extraordinary business I am looking for with the potentual to hold through the cycle.

GCS has for me a ROE that is a bit low and a debt/equity that is a little too high for my taste, I would buy but would like to pay a whole lot less to take on that risk.

In my case portfolio management has to be considered as well, as not much available capital is left any further investments will have to be at very attractice prices.

Ahead of these guys in this sort of business on my watch list are FGE, MND, SWL and perhaps GNG, just looking for the right price on these.

Happy to discuss any stock, any time.

 

[Macros]

Robusta,

With regards to GCS, I was definitely referring to short to medium-term cycles. I personally view most Aussie stocks in terms of value cycles, it just depends on how long they can last. It isn't necessarily in the best economic segment, but if positivity flows through to the markets, the stock price could react well given that it appears to have the value to support it. It wouldn't be a prime candidate for me, but it definitely holds some opportunity for now.

I personally think the cycle is bottoming. Doesn't necessarily make a lot of sense when looking at the global geopolitical and sovereign debt concerns, but markets are always looking ahead. It is also supported by a change of trend in sentiment indicators.

I don't understand MND - has always looked like more of a market darling and prices seem to spend way too much time far above value. I think that the mining services business are in a good spot right now and should do well during improving market conditions. Many many opportunities, but hard to prioritise them right now due to the quantity and the balance of risk/reward.

The one company that has my attention right now (unexpectedly) is MGX - I don't typically like iron ore producers, however it appears to have the best recovery potential of all the stocks I've looked through thus far. Obviously it is not a long-term stable value play, but is more relevant to improving macro conditions combined with a likely value gap.

 

[odds-on]

Interesting question.

I guess I think along similar lines if I were to use the words long term survival and short term success, however I think the way in which I think about those concepts are different. I'd also point out that my views and investment philosophy have been growing and are in a state of flux - I have not yet reached a point where I can encapsulate all things that I need to consider before making a decision to maximise potential while minimising risks (I always seek to do things better).

Components:

• Long term value trend against current apparent value
• Short term potential impacts or drivers of value change
• Qualitative factors which may impact value over 1-2 years (e.g. cash flow, debt, sustainability and other issues)
• The macro factors driving the company - e.g. market trends, global factors, things which could throw value around like a leaf on a river
• *New: macro economic indicator to inform me quantitatively of likely market trend direction and strength. I've had some exceptionally out-sized gains eroded by getting the trend wrong. Invest in companies that fit in with the market trend and point in the cycle.

Views and investment philosophy change over time. Personally I started off reading the usual value investing books, then dabbled in some trading and technical analysis books, went back to value investing books. I then did a lot of reading on the internet. Started searching for books written by people who have outperformed the market for a significant period of time – I doff my cap to Mohnish Pabrai and Joel Greenblatt (You Can Be a Stock Market Genius: Uncover the Secret Hiding Places of Stock Market Profits is still the best book on investing IMO).Reread some value books, even bought a book by Monty. I want to start adding some market valuations techniques to my selection criteria – there is good article by Bassanese in this month’s issue of AFR smart investor, he reckons the market is undervalued by a number of tests. I will do some more online research about indicators such as the buffett ratio etc.

My research to date suggests two possible investment strategies suitable for me:-

1. Applying a “stingy investor” method. Refer http://www.ndir.com/SI/articles/0111.shtml. I think his screening criteria is an excellent starting point. Price to sales less than 1 to check the stock his cheap, then some balance sheet checks and cash flow checks to confirm the stock is safe. Cheap and safe, a great place to start for me. Do some research then buy a handful, and hold for a year or so then sell and select a new handful. Repeat until retirement.
2. Pick my own stocks. Usually search using one of the low price to sales, high div yield plus low P/E, forum tips, magazine tips and so on. I then spent time trying to figure out the expected value of the investments - I discard 19 out of 20 of my ideas, most sink like a lead balloon after 15 minutes of serious research.

I suspect that 1. will give the best returns for the amount of work involved. I am confident that I could get 15% CAGR over the long term for less than 40 hours a year work as long as I switch the market off in my head for the year. All I need to do is pick a date each year, run a screen to get it down to a dozen or so, spend 3 hours on each checking the “safe” aspect of the stock, select the best 10, buy and hold for a period suitable for tax purposes then sell. Unsurprisingly I think I am smart enough to pick my own, therefore I have been applying 2. for the last 18 months. I have made profit but it is not long enough a time period to see if I have good stock picking ability.

As for GCS, I will wait for management guidance about large contract wins, as I need some confirmation that FY13 will be rosy before I step in.

Robusta, sorry for clogging the thread up.

 

[robusta]

Robusta,

With regards to GCS, I was definitely referring to short to medium-term cycles. I personally view most Aussie stocks in terms of value cycles, it just depends on how long they can last. It isn't necessarily in the best economic segment, but if positivity flows through to the markets, the stock price could react well given that it appears to have the value to support it. It wouldn't be a prime candidate for me, but it definitely holds some opportunity for now.

So "A rising tide lifts all boats", I do agree to stretch the metaphor GCS is a more seaworthy boat than most.


I personally think the cycle is bottoming. Doesn't necessarily make a lot of sense when looking at the global geopolitical and sovereign debt concerns, but markets are always looking ahead. It is also supported by a change of trend in sentiment indicators.

I don't understand MND - has always looked like more of a market darling and prices seem to spend way too much time far above value. I think that the mining services business are in a good spot right now and should do well during improving market conditions. Many many opportunities, but hard to prioritise them right now due to the quantity and the balance of risk/reward.

There is a reason MND is a bit of a market darling, the performance over a long period of time is fantastic, it is however very difficult to buy at a attractive price.

This from me on MND thread Feb last year.

The time is here for me. Sold out of MND today at $20.06, love the company but my view is the sp has run too far past IV. Bought in Jan 2010 @ ~ 12.50 and again in May @ ~ $13.00 wanted to hold long term but could not go past market offer of $20.00 +

The one company that has my attention right now (unexpectedly) is MGX - I don't typically like iron ore producers, however it appears to have the best recovery potential of all the stocks I've looked through thus far. Obviously it is not a long-term stable value play, but is more relevant to improving macro conditions combined with a likely value gap.

Not a lot I can say about MGX, the numbers do look great but too many variables for me to try to value - good luck if you hold however.

 

[robusta]

NEW INVESTMENT

Bought 185 x QBE @ $10.81 = $1999.85

To get these guys at a touch above book value IMO should work out well given time.

Despite the recent downgrade I think QBE have a long history of good discipline in pricing premiums, and run a very conservative ballance sheet.

Have only allocated a small % of funds to QBE in a nod towards current volatility but will consider adding to holding in the price weakens a further 10-15% from here.

After banging on about competitive advantage on this thread in recent times I am not sure if QBE has one but if not it is still a very good business. Insurance customers are reasonably "sticky" and slow to change, QBE also has a very diversified spread of income and is one of the few ASX listed companies with a succesful history of growing by aquisition.

 

[skc]

NEW INVESTMENT

Bought 185 x QBE @ $10.81 = $1999.85

To get these guys at a touch above book value IMO should work out well given time.

1. Why the fascination with book value? You do know it is nothing more than an accounting term (ana historical one at that)? E.g. Mnay European banks trade at 50% book value...

2. Didn't you used to have a day job?

 

[robusta]

1. Why the fascination with book value? You do know it is nothing more than an accounting term (ana historical one at that)? E.g. Mnay European banks trade at 50% book value...

Sure do, but the main metric I use as previously discussed is ROE. Historically sp performance is often linked to a (hopefully growing) book value.

2. Didn't you used to have a day job?

On holidays until 30/1

 

[robusta]

NEW INVESTMENT

PRV - Premium Investors Limited

(Not PMV that is Premium Investments with Soloman Lew and Mark Mcinnes

Bought 916 @ 0.655 = $599.98

Back to Benjamin Graham and his supposition that if you can buy a LIC at less than the NTA things should work out OK.

With PRV I have bought not far above the 52 week low ($0.65) a nice ~ 22% discount to NTA, a 10% plus fully franked dividend yield and a generous 5% DRP discount (will participate).

PMV is run by TRG who I would like to invest in one day as well.

The funds are invested by these boutique managers.

http://www.premiuminvestors.com.au/about-premium/tis.html

http://www.premiuminvestors.com.au/about-premium/iml.html

http://www.premiuminvestors.com.au/about-premium/orion.html

http://www.premiuminvestors.com.au/about-premium/rare.html

http://www.premiuminvestors.com.au/about-premium/treasury-asia.html

http://www.premiuminvestors.com.au/about-premium/aubrey.html

http://www.premiuminvestors.com.au/about-premium/ar-capital.html

As you can see the majority are value investors. I also like the unhedged exposure to Asia with TAAM and the infrastructure in RARE.

 

[robusta]

PORTFOLIO UPDATE
Closed positions

Bought:
7,142 x TSM @ $0.66 = $4713.72 (25/07/11)
546 x MCE @ $6.95 = $3797.70 (25/07/11)
385 x FGE @ $5.37 = $2067.45 (26/07/11)
291 x FGE @ $5.34 = $1553.94 (27/07/11)
29,524 x SOO @ $0.105 = $3100.02 (01/08/11)
7407 x ZGL @ $0.43 = $3185.01 (05/08/11)
386 x MCE @ $5.15 = $1995.62 (08/08/11)
288 x MIN @ $9.96 = $2686.48 (08/08/11)
809 x MCE @ $4.20 = $3397.80 (24/08/11)
85 xBHP @ $35.60 = $3026.00 (22/09/11)

Subtotal $29,523.74

Sold:
7407 x ZGL @$0.40 = $2962.80
7142 x TSM @$0.49 = $3499.58
29,524x SOO @ $0.10=$2952.40
85 xBHP @$34.93=$2969.05
288 xMIN @$10.18=$2931.84
1741 xMCE @$3.50 = $6093.50
676 x FGE @ $4.53 = $3062.28

Subtotal $24,474.45

Capital gains (losses) ($5049.29)
Interest Paid / bank charges = $1564.51
Brokerage Paid = $458.50
Dividends Received = $453.16 Franking credit = $194.21

Tax Position, Capital Gains (Losses), Brokerage, Interest
($6,619.14) loss Franking credits = $194.21

Open Positions
Bought:
853 x CCP @ $4.48 = $3821.44 26/07/11
1115 x MTU @ $2.62 = $2921.30 08/08/11
520 x CCP @ $3.83 = $1991.60 08/08/11
65 x COH @ $45.85 = $2980.25 30/09/11
1373 xOKN @ $1.455 = $1997.72 23/11/11
837x MCE @ $3.08 = $2577.96 21/12/11
185 x QBE @ $10.81 = $1999.85 13/01/12
916 x PRV @ $0.655 = $599.98 25/01/12
Subtotal $ 18,890.10

Current Portfolio Position

1373 x CCP @ $4.55 = $6247.15
65 x COH @$60.23 =$3914.95
837 x MCE @ $3.05 = $2552.85
1115 x MTU @ $3.22 = $3590.30
1373 x OKN @$1.21 = $1661.33
916 x PRV @$0.665 = $609.14
185 x QBE @$11.82 = $2186.70

Subtotal = $20,762.42


Total realised and unrealised loss -18.6% or - $4,746.82
Cash contributed $1050.00 ($50/week) from 26/01

Realised return on contributed equity -~ 730 %

Return on contributed equity -~552%

Credit available $5354.13

Couple of small changes this month, bought two small holdings, QBE and PRV and increased my weekly donation to this portfolio from $40.00 to $50.00.

While happy about the market recovery on one hand, it is getting more difficult to find opportunities to invest, maybe the reporting season will throw up some interest.

 

[robusta]

NEW INVESTMENT

NVT - Navitas Limited

Bought 1023 @ $2.93 = $2997.39

Call me crazy if you like given NVT recent earnings downgrade and the rising A$ but I think NVT may be one of the few ASX listed companies with a sustainable competitive advantage.

Took me a while to understand the business and in the short term operating conditions may remain difficult but I will be shocked if EPS is not at least 3-4 times present levels in 10 years.

PART INVESTMENT SOLD

CCP - Credit Corp

Sold 520 @ $5.00 = $2600.00

To be honest I feel a bit foolish with this one. When I decided to buy NVT a couple of days ago (and placed low ball bid @ $2.820 thought it might be a good idea to take some profits on CCP and rebalance portfolio so I placed sell order @ $4.88
Anywhoo totally missed the announcement this morning and my order was filled @$5.00

CCP is still my largest holding - just.

 

[Klogg]

Robusta - loved your thread to date, a great read

Tell me, have you ever looked @ TGA? Could you please tell me your thoughts on this one if you have?

 

[McLovin]

NEW INVESTMENT

NVT - Navitas Limited

Bought 1023 @ $2.93 = $2997.39

Call me crazy if you like given NVT recent earnings downgrade and the rising A$ but I think NVT may be one of the few ASX listed companies with a sustainable competitive advantage.

You crazy!

I said in the NVT thread that I like the company but flat earnings and a pe of ~13.5 put me off it. And in this market it's inherently possible that it falls to a 8-9x earnings.

 

[robusta]

Robusta - loved your thread to date, a great read

Tell me, have you ever looked @ TGA? Could you please tell me your thoughts on this one if you have?

Excellent company Klogg, hold some in my SMSF and still good value at the moment. Have been very close to buying some recently - just thought at the time better value elsewhere.

 

[robusta]

You crazy!

I said in the NVT thread that I like the company but flat earnings and a pe of ~13.5 put me off it. And in this market it's inherently possible that it falls to a 8-9x earnings.

I almost hope you are right McLovin, if the price drops that much I will buy more - if i still have capital available.

About the only think that bothers me with NVT is the recent acquisition - I think they paid too much, hopefully this will not be repeated.

 

[Ves]

I almost hope you are right McLovin, if the price drops that much I will buy more - if i still have capital available.

About the only think that bothers me with NVT is the recent acquisition - I think they paid too much, hopefully this will not be repeated.

If it makes you feel better I thought they were excellent value at $3.37 and $3.18. You cannot hope to pick the bottom every time. More than happy to keep averaging in at these prices over the next 6-12 months if it doesn't bounce. I am investing for very long term growth in cash flow, rather than capital growth however.

 

[robusta]

If it makes you feel better I thought they were excellent value at $3.37 and $3.18. You cannot hope to pick the bottom every time. More than happy to keep averaging in at these prices over the next 6-12 months if it doesn't bounce. I am investing for very long term growth in cash flow, rather than capital growth however.

Agree it is often luck to pick the bottom but finding good companies at a fair price should help things to workout OK IMO.

I am also looking for a long term passive income, as the dividends rise so should the capital growth.