Robusta fundamental, leveraged investments

[craft]

Agree. Risk is permanent loss of capital.

My mind has been working overtime about 'market darlings'. I keep asking myself is it easier to calculate the likelihood of a market darling failing/PE rerate than it is to calculate the likelihood of a 'market darling' performing to perfection for the next 20 years?

Cheers

Oddson

For what it’s worth there is a mountain of academic research suggesting that buying and rebalancing to the lowest percentile P/E (or low P/B or P/S or whatever metric you want to use to show cheapness) will result in higher returns over extended time frames.
The converse is that the highest percentiles underperform. Ie on average market darlings don’t live up to their hype.

 

[odds-on]

I agree totally with this. COH is a good company but far too rich for my blood looking forward.

V's exercise was interesting. But the assumption was that you saw the value back in the early days. The exercise was about how much you finesse the entry at the risk of blowing the opportunity.

The opportunity for COH in the next 18 years is not the same as the last 18 years. But the lesson is applicable as we consider current opportunities.

I went onto the COH website

http://www.cochlear.com/corporate/financial-history

According to the 2002 data, investors were believing in the growth rate back then, my reverse 2 stage DCF indicates purchasing at 34.05 an investor would be making the assumption for 10 years = 23% growth and 20 year = 15%. However the EPS growth rate has been 17% over the period. I wonder how many investors bought and held COH for 10 years following a purchase in 2002.

Cheers

Oddson

 

[odds-on]

For what it’s worth there is a mountain of academic research suggesting that buying and rebalancing to the lowest percentile P/E (or low P/B or P/S or whatever metric you want to use to show cheapness) will result in higher returns over extended time frames.
The converse is that the highest percentiles underperform. Ie on average market darlings don’t live up to their hype.

Agree, that is my research to date. However for the fail/rerate to happen you need a catalyst to happen. I suspect it turns into a game of patience, looking for the correct combination of extreme overvaluation by the market and a high likelihood of fail/rerate/business hiccup.

 

[craft]

Agree, that is my research to date. However for the fail/rerate to happen you need a catalyst to happen. I suspect it turns into a game of patience, looking for the correct combination of extreme overvaluation by the market and a high likelihood of fail/rerate/business hiccup.

As well as all the academic research that points to mean reversion valuations metrics in the longer term there is another fairly strong theme coming out, that is, that in the shorter term momentum plays a role in market behaviour. Ie it takes time for the big trends to roll over and gravitate back towards a valuation peg. Your catalyst point is the key.

 

[odds-on]

As well as all the academic research that points to mean reversion valuations metrics in the longer term there is another fairly strong theme coming out, that is, that in the shorter term momentum plays a role in market behaviour. Ie it takes time for the big trends to roll over and gravitate back towards a valuation peg. Your catalyst point is the key.

This is getting far too complicated, I am going to take up golf as a hobby instead

 

[McLovin]

I have an observation regarding COH. The EPS (TTM) is 1.27 AUD according to ft.com.

Do you not think that perhaps it would be wiser to use a period that doesn't include the product recall?

 

[odds-on]

Do you not think that perhaps it would be wiser to use a period that doesn't include the product recall?

Good point. Using 2011 data, purchase at $72 implies 10 year growth at 13.5% or 20 year growth at 10%. Priced for perfection not absolute perfection

 

[McLovin]

Good point. Using 2011 data, purchase at $72 implies 10 year growth at 13.5% or 20 year growth at 10%. Priced for perfection not absolute perfection

Which is why I purchased at around $50.

The growth in this is going to come from APAC and LATAM.

 

[craft]

Which is why I purchased at around $50.

The growth in this is going to come from APAC and LATAM.

I was looking for $40 before even thinking about accumulating.

Oh well, wrong again – but there’s no rush.

 

[McLovin]

I was looking for $40 before even thinking about accumulating.

Oh well, wrong again – but there’s no rush.

Funny, I'm in that position with NVT, and look at it run!

 

[kermit345]

For what it’s worth there is a mountain of academic research suggesting that buying and rebalancing to the lowest percentile P/E (or low P/B or P/S or whatever metric you want to use to show cheapness) will result in higher returns over extended time frames.
The converse is that the highest percentiles underperform. Ie on average market darlings don’t live up to their hype.

craft, recently had the opportunity through work to go listen to some nobel prize winners in finance talk about what they have studied in relation to shares and managed funds. The basic gist of it is that value stocks and small cap stocks outperform the broader market over an extended period of time. They don't necessarily outperform at the same time but in general they do at some point (Value outperformance is gradual and takes time, small cap outperformance comes in spits and purts and happens quickly).

If you look at this in the most basic sense then you can see how it can hold true. In terms of value, it's not often a company will remain 'undiscovered' if they have no issues, are growing cashflow and carry a P/E of 6,7,8. In terms of smaller caps, medium/bigger companies have to start somewhere and the ASX200 doesn't stay the same forever. Where do the new entrants come from to the ASX200/300 - smaller companies who have grown faster then the bigger companies and hence outperform.

I'm not saying don't invest in bigger companies, but you can understand how buying value in the smaller end provides a lot of reward potential (and of course greater risk) then buying these wonderfully ran businesses such as COH that are priced for perfection and already in the big end.

Note: When I say smaller companies, i'm not referring to micro's with $10mill market cap, I mean the $100 mill to $500 mill companies who have room to expand in our constrained Australian market.

 

[odds-on]

craft, recently had the opportunity through work to go listen to some nobel prize winners in finance talk about what they have studied in relation to shares and managed funds. The basic gist of it is that value stocks and small cap stocks outperform the broader market over an extended period of time. They don't necessarily outperform at the same time but in general they do at some point (Value outperformance is gradual and takes time, small cap outperformance comes in spits and purts and happens quickly).

If you look at this in the most basic sense then you can see how it can hold true. In terms of value, it's not often a company will remain 'undiscovered' if they have no issues, are growing cashflow and carry a P/E of 6,7,8. In terms of smaller caps, medium/bigger companies have to start somewhere and the ASX200 doesn't stay the same forever. Where do the new entrants come from to the ASX200/300 - smaller companies who have grown faster then the bigger companies and hence outperform.

I'm not saying don't invest in bigger companies, but you can understand how buying value in the smaller end provides a lot of reward potential (and of course greater risk) then buying these wonderfully ran businesses such as COH that are priced for perfection and already in the big end.

Note: When I say smaller companies, i'm not referring to micro's with $10mill market cap, I mean the $100 mill to $500 mill companies who have room to expand in our constrained Australian market.

Kermit and Craft,

Setting up a simple screener to look for undervalued in the $100million to $500million market cap range makes perfect sense to me, so much sense I have done it since I started investing. The problem lies with the execution of this type of strategy on the ASX. Firstly, to get any decent discount you need a business trading beneath a fair value range. Secondly, the business model also needs to lend itself to being valued simply, some business models are nigh on impossible to value due to the lack of earnings visibility. Once you remove any companies where earnings visibility is low you are left with less than a handful to select from – the investor now has high exposure to valuation risk as well as business risk. However logic dictates that if you are going to hold only a few stocks you should hold only the very best business irrespective of market cap, the problem then lies in getting some meagre discount, serious patience is required.

IMO for the asx, active management of a few small caps is the only choice to keep the odds firmly in the investors favour. Except in times of market panic when the ASX will provide a smorgasbord.

I think about this a lot. Probably too much.

Cheers

Oddson.

 

[kermit345]

Oddson,

What you've suggested is essentially the basis i'm starting to work on now. My initial screen based on RoE, D/E, positive EPS and Cashflow PS leaves about 120 companies. Once I clean out the micro caps and stocks that have been incorrectly incorporated (maybe due to a capital raising inflating the metrics etc) i'm left with about 40 companies for further investigation. As you say once you look at earnings viability and reliability in this space your essentially left with between 5 and 20 companies that are ones you'd like to invest within.

As you've said, then obtaining these companies at some form of discount can be an issue in itself, however its still the preferred way i'd like to go about my investing as I can have a little peace of mind knowing the companies i'm in have their own established merits.

Sorry for basically hijacking your thread with our discussions robusta but I think your experience and journey gives some clarity to others and hopefully the discussion taking place at the moment does so for yourself too. I think there are opportunities out there and i've came to realise cashflow is king, particularly in this new world where extreme debt levels are now frowned upon and people have came to realise the debt fueled growth is simply not sustainable.

 

[McLovin]

Kermit and Craft,

Setting up a simple screener to look for undervalued in the $100million to $500million market cap range makes perfect sense to me, so much sense I have done it since I started investing. The problem lies with the execution of this type of strategy on the ASX. Firstly, to get any decent discount you need a business trading beneath a fair value range. Secondly, the business model also needs to lend itself to being valued simply, some business models are nigh on impossible to value due to the lack of earnings visibility. Once you remove any companies where earnings visibility is low you are left with less than a handful to select from – the investor now has high exposure to valuation risk as well as business risk. However logic dictates that if you are going to hold only a few stocks you should hold only the very best business irrespective of market cap, the problem then lies in getting some meagre discount, serious patience is required.

IMO for the asx, active management of a few small caps is the only choice to keep the odds firmly in the investors favour. Except in times of market panic when the ASX will provide a smorgasbord.

I think about this a lot. Probably too much.

Cheers

Oddson.

I agree. Running stock screeners and buying mechanically, I'd also prefer to be doing it with mid/large caps ($2b+). Whereas in Australia you are going to be dealing with a small handful of microcaps.

I've been having a look at stock screeners, but I have decided against it in Australia. I just think, as you said, the market is too small. Have a look, for instance, at this:

http://www.oldschoolvalue.com/stock-screener/cash-return-on-invested-capital-croic-stock-screen.php

The companies being tossed up by that screener are overwhelmingly large cap. And the results are impressive.

Maybe I am being silly and not appreciating the mechanics of it but I'd sleep better knowing I was in large companies if I was using a mechanical system.

 

[kermit345]

Agree McLovin with the points you've raised, particularly still investing in mid/large due to Australia's market size. This is what i've recently addressed in my own investing procedure.

Essentially what I do is eliminate micro caps from my screener. After all my screening and research if i like a stock i will weight to it based on 3 factors, quality, value and size. This is how I plan to still invest in quality stocks no matter their size but weight my portfolio towards the small/mid end, depending obviously on their value (MOS) and quality.

Still working through everything on my front as its a process i'm still developing but this is essentially what i'll be aiming to use in some form.

 

[robusta]

New investment


Bought 972 x TGA Thorn Group @ $1.505

Would have probably liked a larger position size but as I have $5000 sitting in the QBE spp, will probably get 16 shares unless they scale me back more for applying with my SMSF as well.

Probably the first time I have felt nervous holding a stock as I would love to sell QBE at current prices but have to wait for the allocation unless I want to pay double brokerage.

A lot of interesting discussion on this thread lately, hopefully I will find some time over Easter to respond.

 

[burglar]

... unless I want to pay double brokerage.

...

Didn't know what to make of this thread, but had some spare time on my hands.

It was an easy read.

All the while I expected the detractors and naysayers to appear.
I guess you have parried them somehow!?

Just an observation if I may.

If any of your picks was to treble you would be looking good, would you not?

 

[tech/a]

As well as all the academic research that points to mean reversion valuations metrics in the longer term there is another fairly strong theme coming out, that is, that in the shorter term momentum plays a role in market behaviour. Ie it takes time for the big trends to roll over and gravitate back towards a valuation peg. Your catalyst point is the key.

I have a feeling this is nothing but rhetoric.
Which is prevalent in the field of trading.
Lots of head nodding in the direction of he
Who can sound more convincing!

Can you point to any papers which can support
Your discussion?

I'm not aware of any in the fundamental field that actually
Show longterm profitability on valuations.
Simply because most valuations vary.
Any analysis is subjective and must be walked forward.

Even this thread with som clearly experienced and knowledgable
Fundamental exponents find themselves in loss.

 

[robusta]

I'm not aware of any in the fundamental field that actually
Show longterm profitability on valuations.
Simply because most valuations vary.
Any analysis is subjective and must be walked forward.

Graham, Dodd, Buffett, Munger, Templeton, Whitman, Ruane, Fisher, Pabrai, Tilson, Cundill, Greenblatt....?

None of these guys are 100% right but all get more right than wrong and have merket beating returns.

 

[robusta]

Didn't know what to make of this thread, but had some spare time on my hands.

It was an easy read.

Cheers, lots of good contributors have taught me a lot.

All the while I expected the detractors and naysayers to appear.
I guess you have parried them somehow!?

Not so sure about parried them, more like agreed with the majority when my errors have been pointed out.

Just an observation if I may.

If any of your picks was to treble you would be looking good, would you not?

Happy to wait, I thought I was looking good when $6000 + down