Robusta fundamental, leveraged investments

[robusta]

Another anniversary for the portfolio today, two years since I first purchased some shares in Cochlear.

The first parcel was just after the recall;

65 x COH @ $45.85 = $3000.20 30/09/11

The second on some recent share price weakness.

27 x COH @ $56.23 = $1538.15 03/06/2013

It probably comes with the territory this being the largest cap in the portfolios but the brokers have been having a field day with this one. Constant upgrades and downgrades along with regular appearances on the list of the top ten shorted stocks.

So $4538.35 invested at a average buy price of $49.33. Cochlear has paid a total dividend per share of $2.52 over the last twelve months. So my yield is a touch over 5.1% plus a handful of franking credits. The real measure of success for this investment is how much will they grow into the future? I am happy to hold for a while to see how things work out.

If we take today's closing price of $60.48 the market is currently valuing my investment at $5564.16 as you can see from the chart below it has been a wild ride.

 

[robusta]

New Investment

IMF Australia Limited

Bought 819 IMF @ $1.83 = 1518.72 3/10/2013

This business has a fantastic record of excellent returns on capital deployed. The competitive advantage seem to me the ability to pick cases with a decent chance of a return and the feedback of the better cases being offered to IMF. The advantages of earnings not being tied to the economic cycle and the chance of growing foreign currency revenues are also attractive.

There has been many chances to pick up these shares at lower prices in the last couple of years. I have been watching this business for a while but have never had a chance to fit some into the portfolio. While the shares are not overly cheap there should be some upside on this small position given a long enough time frame.

 

[McLovin]

New Investment

IMF Australia Limited

Bought 819 IMF @ $1.83 = 1518.72 3/10/2013

This business has a fantastic record of excellent returns on capital deployed. The competitive advantage seem to me the ability to pick cases with a decent chance of a return and the feedback of the better cases being offered to IMF. The advantages of earnings not being tied to the economic cycle and the chance of growing foreign currency revenues are also attractive.

There has been many chances to pick up these shares at lower prices in the last couple of years. I have been watching this business for a while but have never had a chance to fit some into the portfolio. While the shares are not overly cheap there should be some upside on this small position given a long enough time frame.

You could have gotten the notes, which are shortly to be converted, for $1.71 yesterday.

 

[robusta]

You could have gotten the notes, which are shortly to be converted, for $1.71 yesterday.

Bugger missed that one McLovin, were the notes converted 1:1?

Anyway another nice little milestone for this portfolio today my third position to double in price.

So the first parcel was picked up at a little over $0.90 and the second averaged down at a bit under $0.80

1660 xIPP @ $0.915 = $1538.85 14/11/12

1910 x IPP @ $0.785 = $1519.30 22/04/13

I looked long and hard at averaging down more as the priced continued to fall but decided a bit over $3000 was enough of a risk on the only position that doesn't make a profit - yet.

Here is a 12 month chart.

 

[skc]

You could have gotten the notes, which are shortly to be converted, for $1.71 yesterday.

The notes don't carry the dividend so it is always going to trade 5c+franking below the headstock. There was perhaps 1-2c benefit.

 

[robusta]

Portfolio Review

Instead of showing the ducks feet of the portfolio I thought I might try a few more words this time.

So I owe the bank $27,570.57 the weekly 'investment plan' now adds up to $5825.00, the current market value is $44,596.42. If you want to flip that around $5825.00 invested has yielded equity of $17025.85 in a bit over two years.

Sort of makes me smile when I think of comments earlier in this thread like "if what you are doing isn't working, why keep doing it?" and "you have lost all your money". I couldn't argue with the latter comment, there was a lot of red ink there for a while and there could be again.

The interest paid to the bank in the past final year was a few hundred dollars more than the dividends received. This current year should see that number finally become positive. When more profits were taken on M2 Telecommunications the capital gains number finally turned green . Maybe profits have been taken a little early on a few businesses but not a bad comeback from being about $6000.00 in the red at one stage. With a capital gain of only $280.17 and equity of $17025.85 there must be a fair bit still at risk in the market so we had better review the holdings.

COH - Cochlear, current market value of $5365.44 up 18.22% on purchase price and 12.03% of the portfolio.
This is the business that is causing the most consternation at the moment. The initial entry point was lucky, almost at the low point after Cochlear's recall and even then for a normal security too much was paid. Later more were picked up for a bit over $56.00 after the price had fallen from $80.00 plus.

Cochlear is in the portfolio because of their sustainable competitive advantage, recent results are starting to show that moat may be slowly starting to erode. It is difficult to ascertain if this is short term or more lasting in nature. The trouble with this type of 'slow trading' is by the time I come up with my decision the answer will probably be clear to the rest of the market. COH has been a core holding for a couple of years, there could be a lesson to be learnt here on paying for growth.

DTL - Data#3, current market value of $4601.15, up $16.2% on purchase price and 10.32% of the portfolio.
Not much to think about the business, the dividends and cash flow both cover my cost of capital. Things have been tough in this sector but Data#3 has a rock solid balance sheet, nice reoccurring revenue and the hope of some growth in the future.

EZL - Euroz Securities, current market value of $1666.16, up 10.37 on purchase price and 3.74% of portfolio.
It is difficult to see a catalyst for these shares to shoot the lights out, but I like the way management handle capital and this gives confidence of a positive return in the long run.

HHL - Hunter Hall Limited, current market value of $5327.70 down 23.42% on purchase price and 11.95% of the portfolio.
Hunter Hall's flagship fund is the top performer since inception in 1994, the recent performance however has been poor, this sort of period is not unusual for value investors. The thesis is when investment performance improves the funds under management will increase with some nice leverage on earnings. While waiting the dividend yield more than covers the interest payments.

IMF- IMF Australia, current market value of $1466.01 down 3.47% and 3.74% of the portfolio.
The most recent addition, I look forward to some nice cash flows.

IPP- Iproperty, current market value of $7140.00 up 133.47% on purchase price and 16.01% of the portfolio.
This is the only holding that does not make money, they are however trying to build the same sort of network as realestate.com (REA) but in SE Asia. There does seem to be a lot of blue sky priced into these shares. IPP seems to have a competitive advantage in Malaysia and Indonesia. They are showing good results on Hong Kong and Singapore as well, things should be interesting in the future.

MTU- M2 Telecommunications, current market value of $3950.10 up 137.94% on purchase price and 8.86% of the portfolio.
MTU seems to me to be priced to perfection, profits have been taken twice on this position. To those that look at things that way this holding is free carry. Having said that the dividend yield is fantastic and just because it is priced to perfection who am I to say that perfection will not be achieved in the future? The income is nice and there may be more upside to come.

NVT- Navitas, current market value of $6301.68 up 108.85 on purchase price and 14.13% of the portfolio.
NVT looks like it may be a keeper, fantastic cash flow, nice dividend yield, sustainable competitive advantage and maybe growth.

SRX- Sirtex Medical, current market value of $1903.50 up 28.53 on purchase price and 4.27% of the portfolio.
There I go again looking for growth and overseas earnings. The worry with this business is the growth is somewhat tied to the clinical results to be released late next year. This risk has kept the position size small.

TGA- Thorn Group, current market value $6874.68 up 51.63% on purchase price and 15.42% of the portfolio.
Another keeper, it is very rare to find a solid business like this at a reasonable price. I can see no reason not to hold, collect the steadily increasing dividends and wait.


There really is nothing I can see worth buying at the moment, as the market rises the bias is more towards taking risk of the table. While I think about it the dividends will continue to be paid and I will keep on throwing $75.00 a week at the loan and the share prices will fluctuate.

 

[kermit345]

Robusta, great to see what you've achieved since starting this thread. Your journey is very similar to my own which i'll explain briefly below but just wanted to say congrats on what you've achieved. Also great to see some solid winners in your portfolio with only HHL being the major loser.

I started working in the financial planning industry almost 5 years ago now, was always interested in shares and took more of an interest with the research and newsletters I had access to via my job. As this was during the very depths of the GFC my first purchase was WESN on 5/2/2009 borrowing $1,800 from my parents to purchase them at a price of $14.94. To this day I still hold them with a tidy paper profit and re-invested dividends that have almost covered my original cost given my yield on original investment is around 11% now. Aaaanyhow from there I repaid my parents, continued to save and purchase more shares along the way eventually buying a further $10,000 worth of shares with a combination of my own savings and borrowing more from my parents. Some of these stocks were penny dreadfuls along with WBC, WPL, QBE, ORG etc etc most of which I still own. This is where the first lessons started to sink in.

As I repaid my parents and had made reasonable paper profit on my portfolio I started using a margin loan and quickly ran it up to having a $30,000 loan buying various stocks or adding to those I already owned like WBC, WPL, QBE etc. However the microcaps I purchased in those first few years are where I started to sustain losses, all taken from various newsletters or my own poor research and basing the investment decisions on fluff from MD's etc from these companies. So while i've lost some paper money on some of those stocks, it was certainly a lesson learnt.

Since first putting the margin loan in place i've continued to repay $300 a fortnight from it for a number of years now and whenever the loan decreases below $30,000 I start looking for something else to purchase. Learning from my mistakes has lead to me making smarter decisions regarding the fundamentals of companies and my own research in recent times, purchasing stocks such as CGF, TGA, adding to WBC at $27 as recently as May this year and HSN. I've been fortunate enough to watch my portfolio swell over the last 12 months as has the whole market. The goal for my share purchases was to eventually build a deposit for a home purchase which is definitely the case now. Until such time i'll continue to pay off $300 a fortnight and look for further opportunities but agree with Robusta that its very slim pickings at the moment for a fundamentals approach.

Anyway not to hijack the thread but just wanted to congratulate you on your path and share my very similar journey. All the best for the future of your portfolio and this thread.

 

[tech/a]

but agree with Robusta that its very slim pickings at the moment for a fundamentals approach.

For any approach.

The markets world wide are pretty well directionless.
Very little is sustaining a meaningful move.

 

[VSntchr]

but agree with Robusta that its very slim pickings at the moment for a fundamentals approach.

For any approach.

The markets world wide are pretty well directionless.
Very little is sustaining a meaningful move.

While a lot that I watch have gone up to and some cases over the value I believe they are worth - I still have a few opportunities demanding my capital from a fundamental point of view..

 

[kermit345]

but agree with Robusta that its very slim pickings at the moment for a fundamentals approach.

For any approach.

The markets world wide are pretty well directionless.
Very little is sustaining a meaningful move.

Certainly agree with the above. Looking at the Aussie market it's almost like now that we've reached 5,300 on the index the market is unsure on where we go now. Also i'm not sure if earnings have caught up to the large growth over the last 12 months. While P/E is a relatively simple and sometimes overly-simple indicator you'd have to think on a P/E basis the part is very close to fully priced at the moment.

In addition to this some of the research I see come across my desk there are very little full Buy recommendations from brokers and research agencies unless your a gold miner. Gold miners seem to be the only recommended buys at the moment given the shake up in the gold price over the last 12-18 months.

Anyway won't go much further then that but certainly agree with your sentiments Tech/a.

 

[robusta]

As I repaid my parents and had made reasonable paper profit on my portfolio I started using a margin loan and quickly ran it up to having a $30,000 loan buying various stocks or adding to those I already owned like WBC, WPL, QBE etc. However the microcaps I purchased in those first few years are where I started to sustain losses, all taken from various newsletters or my own poor research and basing the investment decisions on fluff from MD's etc from these companies. So while i've lost some paper money on some of those stocks, it was certainly a lesson learnt.

Money is a funny thing some people can not endure a period of losses like we have both been through. I'm not sure on your perspective but the losses sustained I consider to be money well spent. They tightened up my stock selection and portfolio management these lessons should pay me back over a long period.

Since first putting the margin loan in place i've continued to repay $300 a fortnight from it for a number of years now and whenever the loan decreases below $30,000 I start looking for something else to purchase. Learning from my mistakes has lead to me making smarter decisions regarding the fundamentals of companies and my own research in recent times, purchasing stocks such as CGF, TGA, adding to WBC at $27 as recently as May this year and HSN. I've been fortunate enough to watch my portfolio swell over the last 12 months as has the whole market. The goal for my share purchases was to eventually build a deposit for a home purchase which is definitely the case now. Until such time i'll continue to pay off $300 a fortnight and look for further opportunities but agree with Robusta that its very slim pickings at the moment for a fundamentals approach.

Good on you with the leverage the way I think about it is to treat it like fire. It can be a great servant but a terrible master if allowed to get out of control.

Anyway not to hijack the thread but just wanted to congratulate you on your path and share my very similar journey. All the best for the future of your portfolio and this thread.

Thank you I must admit to being a little envious the prices paid for a few of your holdings bought in 2008 that must have taken some conviction to invest in the middle of all the doom and gloom.

 

[robusta]

While a lot that I watch have gone up to and some cases over the value I believe they are worth - I still have a few opportunities demanding my capital from a fundamental point of view..

That is fantastic VSntchr. From my point of view however the more the market (and hopefully my portfolio) rises the more nervous I become with the amount of leverage used, this is motivating me to be as conservative as possible.

The other consideration is it is difficult to believe the volatility we have had over the last few years will not return at some point. The trade off seems to me to try to keep a significant exposure to the market so as to participate in a possible bull market while having sufficient funds available to take advantage of any price weakness.

 

[robusta]

Investment Sold

They say you shouldn't get too attached to your shareholdings but I may have become close with this one. This business was considered a core holding being the dominant market leader with a competitive advantage and good growth prospects. Now i'm not so sure COH seem to have stumbled while their competitors have moved forward.

The first parcel was picked up in late 2011

65 x COH @ $45.85 = $3000.20 30/09/11

While the second a few months ago.

27 x COH @ $56.23 = $1538.15 03/06/2013

A total of $4538.35 invested in this company.

Over the holding period $357.33 has been received in dividends.

Today 92 shares were sold @ $58.09 for $5327.33 a total gain of a little over 25.25% the other little positive is the lions share of the $788.98 capital gain will get the 50% CGT discount.

The overall investment strategy seem to be going to plan, as the market rises and businesses change profits are taken and leverage is reduced. To put it another way if the market rises I'm happy as there is still significant exposure, if the market falls (or a individual opportunity presents itself) still happy as there is capital available to take advantage of the situation.

 

[robusta]

Investment Increased

Navitas

Bought 266 @ $5.63 = $1517.53 30/10/13

Probably seems strange after talking about taking risk off the table then buying a business with a p/e this high... anyway I think this is a high quality business that will grow earnings well into the future, so happy to top up on the dips.

 

[Klogg]

Probably seems strange after talking about taking risk off the table then buying a business with a p/e this high... anyway I think this is a high quality business that will grow earnings well into the future, so happy to top up on the dips.

To be honest, this one doesn't make sense to me... (although I missed the investment initially, so I'm definitely slow on this one).

But a P/E of ~26 just doesn't compute, not unless it was some sort of asset/liquidation play, or it had temporarily depressed earnings (i.e. asset write-offs, one-off costs)
Is there any additional reason to this, or purely the quality of the business?

 

[robusta]

To be honest, this one doesn't make sense to me... (although I missed the investment initially, so I'm definitely slow on this one).

But a P/E of ~26 just doesn't compute, not unless it was some sort of asset/liquidation play, or it had temporarily depressed earnings (i.e. asset write-offs, one-off costs)
Is there any additional reason to this, or purely the quality of the business?

No it's mostly the quality of the business. NVT should grow earnings in the mid teens over a large number of years while spinning off a whole heap of free cash flow.

It is a difficult to justify buying at this price however, I think I may be guilty of a impulse buy. The cash was sitting in the broker account, the price was falling... Better go back to the strategy and get back to building the war chest for future opportunities with a margin of safety.

Not sure if this is justification after the fact but this excellent business is now a larger percentage of the portfolio and the average cost is about $3.52 per share.

 

[galumay]

It is a difficult to justify buying at this price however, I think I may be guilty of a impulse buy. ....

I had another look at NVT after they had that recent repricing, I came to the conclusion that about $4.50 would be roughly my entry point. I just cannot see the future growth to support a PE like that.

It remains on my watch list but too expensive for my tastes!

 

[RottenValue]

$3.50 is about what price I would buy it at so at least your average price looks good.

Hard to justify a PE of 25+ for a company that has only added 1 cent (18.77 to 19.87) to its EPS in 3 years. Is increasing revenue and cashflow but not profits.

 

[robusta]

New Investment

FGE - Forge Group

Well actually I've held this business in the portfolio before selling in late November 2011 a bit over two years ago.

INVESTMENT SOLDSold 676 x FGE @ $4.53 Hopefully the funds invested in FGE can be reinvested back into FGE or a similar company at a much more attractive price sometime in the future.

At the time the portfolio was heavily into the red and there was more pain to come from another cyclical business called Martix - MCE, and the turnover was horrendous for my chosen investment strategy, so this comment from skc was completely justified and hit a nerve.

Robusta... so you are now trading? You think FGE will fall further and want to buy back in lower... What happened to long term investing? What's your average holding period on closed positions? 2 months?

You need better planning and discipline in both entries and exits. Write down your investment plan with actionable, measurable, quantitative steps and look at it before you buy and sell. Do that until it becomes "intrinsic" to you. Get the process right first and worry about the methodology and returns later.

There was nothing I could argue against in skc's post both the returns and adherence to the strategy looked terrible back then. In the end today the next trade in FGE was executed.

Bought 3030 x FGE @ $0.66 = $2019.75

The share price has been hammered today due to the extraordinary long trading halt after the losses incurred by the CTEC business. When FGE bought CTEC in January 2012 at a really low multiple, somewhere around 3-4 x EBIT it seemed too good to be true. I wonder how long the sellers knew this time bomb was ticking away... You know what they say. "if it seems too good to be true it probably is."

The result from buying today will be fairly binary, either the business returns to profitability and there will be lots of capital gains and dividends to come or they will not and money will be lost. The one certainty is cyclical businesses will never again be such a large percentage of my portfolio.

 

[robusta]

New Investment

QBE Insurance Group

Bought 183 @ $10.93 = $2020.14 10/12/13

If you look at the NTA somewhere in the $4.20s per share and a ROE well under 10 on the surface this seems to be a ordinary investment and on closer inspection it may well be very ordinary. QBE does however have a nice history of recording a underwriting profit. The float may be able to take advantage of higher bond yields in the future while a lower A$ may also boost profits.