Diary

The FTSE 100 dropped another 68 points on Friday, marking the end of the blue chip index's worst quarterly loss since 2002 Link

Diary: DLAR

DLAR: De La Rue
DLAR is a money printer. In 2010 there was a big debacle, where it announced that an employee had falsely signed off on quality controls. This led to a loss of confidence, and the withdrawal of India from its contract. Oberthur, a rival, then made a bid for DLAR, which was rebuffed. They are locked out of a bid for 6 months. This post on LSE sums up the position nicely:

Despite the apparent bad news from India, DLR has performed well against the market - actually going up when most other stocks were being caned. I read this as - India - no surprise, expected in fact and therefore in the SP. Takeover - Oberther can come back again in Dec - which is only 9 weeks away - and they have been selling assets to feed a war chest of cash. That doesn't mean they WILL come again, but it does mean they CAN and don't forget they hired the ex-CEO of DLR for "special projects". Anyone can put 2 + 2 together and get 4, but if O are not planning a rebid, their behaviour is mighty peculiar. That is what is probably driving the price gently but ever upwards. The last failed bid was 935p and major shareholders wanted £10. I'd hate to see DLR go to foreign ownership, but hey for £10 - bring it on. I think there are others out there who agree with this logic and are accumulating.

Makes sense, right? Very interesting situation. Unlike a lot of analysts speculations, this one seems pretty credible to me.

Diary: risk, bubbles, banks, MUBL

Uncertainty of Risk, Real or Imagined?
This article contains the following  points of interest:

• Since 1957 18 of the top 20 performing S&P stocks were either pharmaceutical or consumer staples companies if reinvested dividends were factored in.

Stages of a bubble
Link to a graph on Wikipedia showing the various stages of a bubble. Lol, I like the way that "institutional investors" is separate from "smart money".

Bank raid
Valuestockinquisition explains his purchase in banks in this article. This part is eminently quotable:

Despite having spent 14 years as a professional equity investor and having spent most of the last four as a specialist in Banks and Insurance equities, I have no idea what the future will be like ... and neither do you. One of the issues of having spent so much time in financial markets in  essence is that one knows too much, and most of it is junk. It can be difficult to discern signals from noise. At times like that I go back to valuation to stand as my sanity check.

Here is an interesting measure he uses for banks:

In principal the valuation has attracted me to Lloyds Banking Group, to be more specific it has one of the lowest Mkt Cap/Deposits of any European Bank at 4.3%, as well as a trailing P/B  of 0.4. The Banks that offer better value according to this metric are largely Italian popolari banks and the Irish banks. I got the idea of using Market Capitalisation/Deposits as a bottoming indicator for bank valuation from James Montier, an equity startegist with the value based investment manager GMO. In a prior life, Mr Montier worked at Societe Generale ? there he authored a piece on bank stock valuation at the bottom of cycles. As a valuation tool, market capitalisation as a % of deposits below 4% has represented value in prior cycles. In Europe Lloyds is toward the bottom of the league in terms of this metric. It can be thought of as a price to unlevered balance sheet.

 You'll also be quoting this one a lot:

Some of the most compelling investments often come with a whif of cordite

 He ends with:

My next round of research is on an amended Greenblat screen. I have taken the traditional Grenblat Magic Formula and emended to to include an average historical 5 year RoCE, rather than the last years returns. I will more than likely overlay this with a leverage and Piotroski screen.

Turtle Investing
Blog site dedicated to value-base investing, run under the principles of:

The investments discussed are for the long run. A slow and steady approach will accumulate the biggest returns.

Unfortunately, I think he makes some mistakes. For example, in his article on Ford, I think he mistakes what is basically a high-risk cyclical company as a dependable one. Since recommending Ford at the beginning of Nov 2010, Ford has declined 36%, against the S&P500 of 4% decline. Oops. A lesson there in mistaking a cyclical company for a growth one.

MUBL (MBL Group)
MUBL do something like being a wholesaler of DVDs - although the actual activity is now a bit moot considering the following ... It has MRW (Morrisons) as its principle customer. Earlier this year, MRW decided to stop using its services, and consequently MUBL has collapsed 87% YTD, compared with FTSE -9%. Ouchies. Let us remind ourselves of the important rule to never invest in companies depending critically on either one supplier, or one customer. One interesting little factoid to emerge from this post of TMF is:

I do not have a shareholding but would be tempted to ask some embarrassing questions to Peter Cowgill the chairman who is also the head of JD Sports where he earns millions for running a FTSE250 company. He has the most to lose reputationally in this fiasco.

 The thread also highlights a number of other oddities that effectively questions the integrity of management.

It was at this point that I thought "job done", but there is an additional twist: this company is a net-net. It has NCAV of 10.3m, against a market cap of 1.9m - obviously a very very tiny outfit. An RNS on 26-Aug-2010 also points towards possible disposal. So, maybe of interest to all you net-netters out there.

Diary: DPLM, GMG

Since trying to write a diary every day, it's amazing to find at how I'm bursting with things to write about.

DPLM - Diploma
Readers may know that I'm a holder of this share, and like it for its reasonable price, reasonable returns on equity, and pleasant growth. DPLM issued a pre-closing statement today, sending the shares up nearly 9% at the time of writing. Revenues are expected to be up 16%, operating margins strong, and PBT likely to be at the top end of expectations.

GMG - Game Group
I'm not a holder of this one - it gives me the heebie-jeebies. GMG is a computer games retailer. Everyone is trying to work out whether it has an obsolete business model, and is doomed to failure, or it is just in a games cyclical low point. Trading on a PER of 3.8 and PBV of 0.2, this is one of those shares where you're either right, or you're wrong, with big risks and big payoffs to match. Interim results published today made for bleak reading. Like-for-like was down 9.9%, they're closing stores; but gross profit margins were only down a little: from 26.0% to 24.3%.

One of my major worries is that the internet will kill this business. The internet couldn't be more perfect for game-makers. I think one has to be very careful about the market for second-hand games (no, I'm not going to call them "pre-owned"). Whilst the "doctrine of first sale" means the practise is of course perfectly legitimate, the game-makers clearly don't like it, and have even spoken out to that effect. With the advent of things like the online Steam system, they could potentially kill-switch second-hand games. Of course, they'll be a bit subtle about it, and apply plenty of obfuscation. I don't think they're planning to do it, but imagine a scenario where you can download a game for free, try a few demo levels, and then have to pay to unlock the full game. That kind of thing would kill the second-hand games trade stone-dead. I'm not saying it is going to happen, but with improved internet connections, the murmurings of the game-makers, the ascendancy of Steam, I think the threat is quite credible.

On the upside to all this, GMG will maintain dividends, and irrevocably announced an intention to take 20% of their fees as shares for the next 12 months. The dividend yield is a monster 20%. At the interim stage, the company had net debt, although this is fairly typical; and moves into net cash at the final stage.

So, it might be worth a speculative punt. Having said that, there's quite a lot to choose from in the stock market at the moment.

Diary: RSI, BEG, TPT, SDR, SQS

RSI - Relative Strength Index

RSI is a techinical indicator used in technical analysis (oh noes!). It measures "velocity and magnitude" of directional movements (Wikipedia source). The basic idea is that if the RSI is below 30%, it indicates that the stock is oversold, whereas if it's above 70% then it is overbought.

Sharecrazy gives you graphs of this indicator for any share that you care to tap in. The interesting thing is, you can actually look at a graph for a year, and determine if, in hindsight, the indicator was predicting highs or lows. Unfortunately, the RSI doesn't seem a particularly useful tool. For example, looking at PIC, it showed an overbought at 230p. The share price subsequently fell to about 155p, into oversold  territory. So far so good. But then share subsequently broke out of being oversold, went to about 160p, but then plummeted to 95p. Oops! There are numerous other instances where RSI doesn't predict that much in other companies.

It might be useful to use it in conjunction with value-based approaches, although I'd take it with a pinch of salt. With that huge caveat in mind, I thought I'd take a quick look at some shares which are currently oversold according to RSI. I shall brazenly steal (ahem, I mean "copy") the ideas from EV's (ExpectingValue's) Stockopedia article, and add a couple of my own. I'd like to thank EV for his article, as it gives a nice little summary for each company. Here goes ...


BEG - Begbies Traynor
This one was suggested by EV. BEG is a counter-cyclical play - it deals in insolvency, restructuring, liquidation and risk management. The founder sits on the board and has a substantial shareholding. BEG has a beta of 0.23 - confirming that it has little correlation with the market - which is what I'd hope to see for a claim of counter-cyclicity. It's on a PER of 3.3 and a PBV of 0.3. It has a market cap of 18m. Seeing PERs of 3 should raise alarm bells, as it usually indicates some kind of distress. In 2011, the EPS was down 26%, which might explain the collapse in share price. I'm quite concerned about the fact that it has net debt of 22m, which seems very high in relation to cash flows and market cap. My own feeling is to be very very careful with this one. Over one year, share price is down 74% against FTSE down 8%. It's at times like this that I am reminded of the immortal words of Admiral Ackbar: "It's a trap!".

TPT - Topps Tiles
This one was also suggested by EV. It has a beta of 0.52 (enough of your sorcerer ways, I hear you say). It is a nationwide tile retailer. They issued a profit warning earlier this year. It is on a PER of 5.5. Its PBV is negative. Its EPS has been declining for 3 years, and a further decline is forecast. High risk play.

SDRC - Schroders
This is a home-brewed idea of mine. Schroders are asset managers. No doubt investors wont need me to tell them that. Beta 1.15. market cap 2.7bn. What I like about it is that they are large, and offer a diverse range of products. I view them as safe, and a bet on market recovery, due to their high beta. So, the question is: do you think the market is going to go up?

SQS - SQS Software Quality Systems AG
I can't remember how this one came onto my radar. I think I saw it in an article on Motley Fool about cheapo growth shares. It has a market cap of 47m, and a beta of 0.05. It is trading on a  PER of 7.8, and PBV of 0.8. This puts it in the "smell a rat" category. Net debt is 12m. Its description on Google Finance seems a bit muddled. I can't work out whether it sells shrink-wrapped software, or is a general IT consultants. I think maybe the latter; like Logica. They expect profits for the second half to be at the lower end of expectations. It beats me what to make of this one. I think that IT consultancy can be such a fickle business. I can't help thinking that this is a trappy business, and heavily cyclical. Admittedly, I'm just talking off the top of my head.

Diary

CTN - Clearstream Tech

Regular readers will know that my CTN was a growth company where there was a recent takeover announcement. It was a high-growth company that I was able to obtain at a very reasonable price.  The original idea wasn't my own - I copied it from a suggestion on Motley Fool. I liked the story very much, and thought it worth a punt. Maybe I just got lucky, or was able to recognise someone's superior idea. Growth investing is not really my "style". I tend towards low PE stocks. However, I was becoming frustrated with that, because a lot of low PE stocks are quite boring. I wanted to try my hand at a bit of growth investing.

I had tried to do a bit of growth investing about 10 years ago. I think the company was Real Time Control - although I could be wrong. Maybe I am getting it mixed up with another company, that made some kind of equipment, and it went bankrupt. Anyway, the company I invested in didn't. It made electronic cash registers, and did some back-end processing, or something. I remember seeing one in a Happy Eater, would you believe. The company was tipped in Investor Chronicle. I liked the story, so I bought. Within a few months of my purchase, the company was taken over. I'll put that down to coincidence, though.

So 10 years passed since I made my first growth company purchase until my next try. They're quite risky, of course; and volatile. Looking in the rear-view mirror can often be an unappetising experience, as the company may well have made a succession of losses. So they definitely wont appeal to those who take a more traditional Graham or Buffett approach.

Since CTN is going to be taken out of the game, I thought it would be a good opportunity to hunt around for some other growth companies. I'll be doing this on an irregular basis. They're not "recommendations", you understand, merely explorations of what's out there and what might or might not be interesting. Let's start ...

IQE - IQE
IQE make semiconductors:

• wireless - these are wafer products that customes use to make RF chips for all sorts of wireless and satellite communications
• optoelectronics - devices that convert electricity into lights (lasers, LEDs, etc.) and vice versa (fiber optica, solar power)
• and electronics.

IQE has a market cap of  134m, and a PER of 14.8. It has net cash of 1m, negative gearing, both tangible or otherwise, and a z-score of 3.7. It is trading on an EV/EBITDA od 10.2 - which is probably about the market average.

What I think is interesting is that the company seems now to be taking off. It was making operating losses until 2006. It made an operating profit of 0.6m in 2007, it it's up to 7.2m in 2010. Operating margins are increasing very nicely. So it seems that the company is getting "critical mass" as it moves from some kind of "experimental" stage to actually producing something.

On 14-Jul-2011, IQE gave a trading update:

Continued growth in revenues and profitability ... The outlook for the second half remains upbeat. The Board expects continuing robust growth in the Group's core wireless and optoelectronics businesses, as demand for both industrial and consumer end user devices containing IQE products remain strong.  This confidence is strengthened by the continued progress being made in new product developments and qualifications. ... The prospects for the Group are very exciting and, with our highly geared business model, provide the Board with considerable confidence in a continued improvement in financial performance for the second half.

On 24-Aug-2011, IQE announced the appointment of Norio Hayafuji as Head of Sales and Marketing for the Asia Pacific region:

We confidently expect China, Taiwan, Korea and Japan to become major global powers in emerging technologies over the next decade. We already have a considerable presence in the Far East with a solid customer base and state-of-the-art manufacturing facility. The appointment of an acknowledged industry expert with extensive knowledge and experience of our industry in the region will help ensure that IQE is well positioned to exploit this growth potential.

The announcement also details some of the rationale as to why you'd want to invest in IQE:

IQE is the leading global supplier of advanced semiconductor wafers with
products that cover a diverse range of applications, supported by an innovative
outsourced foundry services portfolio that allows the Group to provide a 'one
stop shop' for the wafer needs of the world's leading semiconductor
manufacturers.

IQE uses advanced crystal growth technology (epitaxy) to manufacture and supply
bespoke semiconductor wafers 'epi-wafers' to the major chip manufacturing
companies, who then use these wafers to make the chips which form the key
components of virtually all high technology systems. IQE is unique in being able
to supply wafers using all of the leading crystal growth technology platforms.

IQE's products are found in many leading-edge consumer, communication, computing
and industrial applications, including a complete range of wafer products for
the wireless industry, such as mobile handsets and wireless infrastructure, Wi-
Fi, WiMAX, base stations, GPS, and satellite communications; optical
communications, optical storage (CD, DVD), laser optical mouse, laser printers &
photocopiers, thermal imagers, leading-edge medical products, barcode, ultra
high brightness LEDs, a variety of advanced silicon based systems and high
efficiency concentrator photovoltaic (CPV) solar cells.

The manufacturers of these chips are increasingly seeking to outsource wafer
production to specialist foundries such as IQE in order to reduce overall wafer
costs and accelerate time to market.

IQE also provides bespoke R&D services to deliver customised materials for
specific applications and offers specialist technical staff to manufacture to
specification either at its own facilities or on the customer's own sites. The
Group is also able to leverage its global purchasing volumes to reduce the cost
of raw materials. In this way IQE's outsourced services, provide compelling
benefits in terms of flexibility and predictability of cost, thereby
significantly reducing operating risk.

IQE operates a number of global manufacturing and R&D facilities: Cardiff,
Milton Keynes and Bath in the United Kingdom; Bethlehem, Pennsylvania, Somerset,
New Jersey and Spokane, Washington in the USA; and Singapore. The Group also has
11 sales offices located in major economic centres worldwide.

This company reminds me of CTN, where the story is building.

 On 07-Sep-2011 IQE reported:

Continued growth momentum in smartphone market ... revenues up 15% ... EBITDA up 13% ... adjusted EPS up 20% ... Wireless  growth driven by continued strong adoption of smartphone and other mobile computing devices ... Significant growth in opto-electronics ... Several patent applications ... Continued  investment  in  further  production  capacity

It must be remembered that IQE has fallen quite a lot in share price since  Feb 2011 - in fact, it's halved. I attribute this to a share price that was probably ahead of itself at that time, coupled with overall swingeing declines in the stock market since then. The following statement in their report was also highly likely to be a contributing factor:

Our overall upbeat outlook is tempered by recent growing uncertainty in the global economy. This has the potential to impact inventory levels downstream in the supply chain or of individual customers although we have not seen any evidence of this at this time.

Despite this, my view on IQE is very positive. I think that there's always something to worry about, and to some extent, one has to go into this kind of thing knowing that it's a question of probabilities, not of certainties. Not everything you try will work out. IQE has a beta of 1.28 - so expect it to be very volatile.

Some points expressed on the BBs:

• economic headwinds are a worry.
• possible takeover candidate. IQE is trading at a discount to the sector, which could tempt potential bidders.
• great explanation of IQE's "epitaxial expertise" by "Babbler2" io LSE: normal silicon wafers only have a single film of properties. IQE has developed a "compound gallium arsenide substrate technolody" that allows several films to be layered on. This allows it to be faster, more powerful, and complete many tasks at once.
• The epitaxial wafer could sit at the heart of many transformational tech trends: superfast active optical cabling, energy-efficient LEDs, lasers for next-gen comms and entertainment, and electricity transmission from solar panels.
• sales to mobile phones account for about 75% of turnover, with the rest going to various unproven technologies. So it should best be viewed as an established wafer manufacturer with a couple of outside high-tech bets on the side. This gives IQE a speculative component.
• IQE is the industry's largest epitaxial foundry, with an estimated market share of over 30% - almost twice the size of its nearest competitor
• Apple is poised to sell as many as 27m iPhone smartphones in 2011Q3 and 40m in 2011Q4 following the launch of its next-gen iPhone handset.
• (speculative) potential that optical interconnects could replace copper cables. Over 2bn USB cables were sold last year
• potential for pico projectors (miniature laser projectors). They emit primary colours as opposed to white light, giving them a focus whether they are project from 6" or 6'. Poster sees potential to disrupt encumbent tech in this area. One of IQE's subsidiaries was granted patent protection for this in 2010.
• company has substantial tax losses to bring forward

Directors own about £8m worth of shares, against a market cap of 133m. I'd say that they had significant skin in the game - although the bulk of it (7m) is in the hands of just one director.

I think you'll find that that's my 10 minutes well and truly up.

Diary

PIC - Pace
I've talked about this STB (Set top box) maker quite a lot before. I see good growth potential (analysts have 2012 forecasts at 24% growth, for what they're worth). 2011 forecasts predict growth as down 9%, which is partly (but only partly) to explain for the share price weakness. At 98.1p, the shares are on a PER of 4.7, with a very noteworthy EV/EBITDA of 3.2. Pace just looks far too cheap. Think about those numbers for awhile. They're usually the numbers you would expect to see for a company that is in deep trouble, where its viability is coming into increasing doubt. I think this is far away from beeing the case for PIC. There is a lot of economic uncertainty in the world at the moment, that's true. Maybe we're heading for a global depression that will last decades, I don't know. Maybe there will be widespread personal bankruptcy or high levels of distress. IF those things happen, then maybe we can forget about such luxuries as watching the telly. Seeings as we don't know that, I'm suggesting that PIC is far too pessimistically priced. Its current ROE is 28%. Median ROE over the last decade was 19% - although there's certainly been volatility of returns. It looks like a nice little "magic formula" stock.

Belief in God and Cognitive Style
An interesting article is available here. It says:

that those with an intuitive cognitive style tend to have a stronger belief in God than those with a more reflective cognitive style. As defined in the study, intuitive thinkers make judgments quickly, based on automatic processes and instinct. Reflective thinkers prefer to pause and critically examine initial judgments before making a decision.

The study found that intuitive thinkers not only tend to believe more strongly in the existence of God, but their faith also grows more certain over time. Alternatively, reflective thinkers become less certain of the existence of God over time.

Tinywm
Nerd alert for all the Linux fans out there! From the site:

 TinyWM is a tiny window manager that I created as an exercise in minimalism. It is also maybe helpful in learning some of the very basics of creating a window manager. It is only around 50 lines of C. There is also a Python version using python-xlib.

Diary

Market changes

Don't worry, I'm not going to report on market prices every day. I thought that, given I made some observations on market movements yesterday, I thought I'd see how things had changed. FTAS (FT-All share) was up 0.3% to 2626.

• CHW -  down 1.6% (down 0.9% yesterday)
• CTN didn't budge, same as yesterday. As expected
• DLAR - unmoved, same as yesterday. A strangely stubborn beastie. I wonder if anyone is accumulating this one.
• DNO - up a fraction, same as yesterday.
• DPLM - down 1.4% (yesterday down 0.2%)
• IND - down 5.5% (unmoved yesterday)
• GDL - down 2.2% (down 1.7% yesterday)
• JD. - up 2.1% (yesterday fractionally up)

So, the shares seemed to be doing pretty much what they were doing yesterday, with the expection of IND, where there was some selling. Speaking of IND ...

IND - IndigoVision
IND makes business-grade (as opposed to retail grade) CCTV cameras that work over ethernet. It's been very interesting to watch this company, although I've never actually owned any shares. It is a small (13m cap) company, and is considered a growth share. The share price is down 66% YTD. It gapped down about 34% on 16 June after issuing a profit warning. It reached a high of approx 950p in 2007, and now sits of 170p. It has a massive spread, so what the share price is is dependent on what figure you use.

IND currently has a PER of 21 - which sounds a lot, but its recent results have been poor. PBT in 2010 was 3.1m, and the finals in 2011 were 1.2m. So you could argue that the high PER is an anomolous figure (although I'm not saying that that's my argument). Oliver Vellacoot, a director, owns nearly £3m of shares. So he has skin in the game.

IND is followed extensively on one of the Motley Fool boards. Some of those investors are very probably amongst the savviest private investors in the UK.

The whole issue surrounding the collapse of the IND's share price is as to whether the company has gone ex-growth or not. The fact there is no concensus view does, I think, demonstrate just how hard it can be sometimes to determine the future prospects of a company. A lot of experience and intelligence can go into a difficult problem, and yet it's still not clear who is right. Some poster worked out that the company might acutally slip into a loss, given its high operational leverage.

There's been a lot of good debate on the TMF boards, and this post by Paul Scott summarises his position:

• the doubts that IND will make a loss, regardless of what sales as margins do. The company will protect its cash
• it's cheap, so if you think it will recover, it will multi-bag
• if you don't think it will recover, then don't invest
• it has a mkt cap of 12m, and net cash of 5m
• it's in a growing sector
• he has had a senior management role in a growing company. As such, he is aware that things are rarely smooth. Things can often get bumpy.

Some of the facts are disputed, for example that IND will be able to prevent itself from making a loss. There also seems to be concern that IND will introduce down-market products, which could spell long-term disaster.

On interesting aside: a few weeks ago, a poster said that investors were panicing. This suggestion was rebuffed, saying that on the whole, investors were not panic selling but instead hanging on. This stuck in my mind - because I felt that that probably indicate further downward movement: people weren't yet capitulating. Since then, the shares have, indeed, moved lower.

It is interesting to consider this company from an investment case. There seem to be so many pros, cons and undecidables about it that it makes one wonder how one should approach it, if at all. I had been thinking about this today, and came up with the following idea: instead of worrying about exactly IF their Canadian sales would do this, or their US sales would do that, let's look at it this way: we basically can't be sure, but let's say there's a very plausible case for the company's growth phase to continue. We - or rather I - just don't know the probability. So, I figured, if one could purchase the company cheap enough, then it would make an attractive bet. Remember that management is committed. So, IF one could purchase the shares as a net-net, then I think it would make a very interesting purchase as a bargain share with the distinct - but by no means guaranteed - chance of growth. If you look at it that way, then I think it's worth the risk. I wouldn't bet the farm, but I do think it would be a viable idea.

IND has net current assets of 12.6m, and negligible non-current liabilities. So its NCAV is about 12.6m. Graham would insist on purchasing it at 2/3 of NCAV (a tall order). The company's market cap is 13m, so the shares would need to fall about another 33% for that condition to hold. At 172.5p, the share price would therefore need to fall to 115p to make the play.

Diary

Market takes a caning

FTSE is down 4.64%. What's really noteworthy is that every share in the Footsie is down. That must be a pretty rare occurance. The biggest hit were miners. The biggest faller was VED (Vedanta), down 13.1%. In the US, the VIX was up 12.7% at the time of writing, sending it to 42.06. Pretty impressive stuff.

What I think is interesting is to  take a look at some of the stuff that hasn't been affected much, or has actually gone up (belive it or not, some stocks have). I think it is useful, because it may offer important clues as to which stocks are likely to be beaten down as low as they can go, and so may be worth considering from an upside. There are some that Richard Beddard over at Interactive Investor has either talked about, or owns in one of his portfolios. I'm not tracking all of his shares, bear in mind, but I can see that AMR (Amour Group) is down a mere 0.24%, MRX (Metalrax) didn't budge, VLK (Vislink) is actually up 0.8%. UKM (UK Mail Group) isn't one of Richards, but it is held by one of his "regulars", so it was worth mentioning.

Miners and banks took a caning, of course, together with Motley Fool favourite AV (Aviva), and there was some surprises like BATS (Brit Amer Tobacco), down 4.7%.

What other interesting stuff is there? Well CHW (Chime Communications) is down only 0.9% - a share that was bought to my attention by Cautious Bull, which I'd like to talk about sometime. CTN didn't budge - not surprising since there's a guaranteed bid of 85p. Alas - if only that would tumble, there'd be free money. DLAR (De La Rue) remained static - this is a company that I also want to talk about. DPLM (Diploma) is down only 0.2%, which I rated as pretty good quality, on a PER of 11. DNO (Domino Printing Scicences) is actually up 0.1%. I had talked about it on Motely Fool yesterday, explaining that I thought it was a quality company that I thought could deliver above-average growth.

Retailers seem very robust today - perhaps not what one would expect at all. GMG (Game Group) - company that Geoff Gannon talked about recently - it hasn't budged. It has 120m in net cash, and a market cap of 74m. I see today that it announced an RNS for a strategic partnership with OnLive. ALY (Laura Ashley) didn't move, and JD Sports was acutally fractionally up. It's not all consistent though: TCG (Thomas Cook) was down 6.8%, MKS (Marks & Spencers) is down 3.9%, and FCCN (French Connection) was down 3.1%.

IND (IndigoVision) - remember I touched on them yesterday - didn't move. GDL, a spinoff in the oil industry, which I looked at a few weeks and decided it was overvalued, is down only 1.7% - not bad, when you consider that all things resource-related are being clobbered.

MFI shorting

To follow up on shorting, the original sentence taken by Greenblatt's appendix to his second edition of the Little Book is:

If we had actually tried this strategy of buying all of the Group 1 stocks and shorting all of the Group 10 stocks over the last 22 years, wewould have had a tough time of it. Instead of earning 15.4 percent (15.2 percent from our longs in Group 1 and 0.2 percent from our shorts in
Group 10), somewhere in the year 2000 we would have had a little problem. Okay, a big problem. Okay, we would have gone brokeâ€"losing100 percent of our money! No matter how long our time horizon, the number 0 does not compound very well!

Greenblatt versus Graham

Geoff Gannon wrote an interesting post on combining low PEs with low P/E or high ROIC.

I wont repeat his arguments, but I thought I'd add a little comment. It's trivially true that:
P/B = (P/E) * (E/B)
E/B is effectively a return on capital. Let's suppose we fix P/E low. If you want a high E/B in the Greenblatt style, then you are choosing a bit of a mixed P/B. If you go for a Graham approach, then the low P/B range implies a lowest E/B range. So you're kinda assuming a reversion-to-mean.

What's interesting, is that I actually have some stats to suggest which one will work better. Penman, in Financial Statement Analysis and Security Valuation, p 18, actually gives a table of P/B versus P/E for different quintiles. If I concentrate on the lowest P/E quintile, then it turns out that the lowest P/B quintile gives the best result (30.0%pa), against the highest P/B quintile (19.7%). It turns out that that they didn't quite get a monotnoic ordering for the quintiles. From highest to lowest P/B quintiles, the returns were 19.7%, 22.1%, 21.6%, 24.3%, 30.0%. So interestingly, if two men enter, one man leaves, I would be inclined to say that Graham would emerge the winner. -- FINISH HIM --, as they say on Mortal Kombat.

A poster on Geoff's blog notes the following:

If you read "Behavioural Investing" by James Montier you will find a graph where he backtested a pure EBIT/EV approach and a EBIT/EV combined with ROA approach for the US stock market. He found that over the long term focusing on high ROA actually subtracts returns from a pure EBIT/EV screen. However ROA reduces the variability of returns a bit. I bet this is also true for the magic formula. Since both EBIT/EV and ROA are mean reverting you combine tail wind (EBIT/EV) with head wind (ROA) when screening with both.
Therefore if using a pure screening strategy I believe including business quality metrics such as ROIC, ROA, ROE will diminish returns. BUT if you are as good as Buffet and Fisher and know how to figure out if the business has a true moat these will probably work in your favor.

Diary

IND - IndigoVision - Finals
IND make CCTV cameras that work over IP (i.e. over a local network). It issued a trading statement today, sending the share price down 19.4%. So, not good. I think it makes an interesting case study, which I want to talk about; probably tomorrow, though.


JD. - JD Sports Fashion - Interims
Intermins out for 26 w/e/ 30/7/2011
Revenues up 14.6%
Gross profit 48.0% against 48.2% comparatives
Operating profits before exceptionals down 12.7% - this was expected
Interim divvie up 7.9%
Acquisitions in Ireland (Champion Sports) and Spain (Sprinter) have continued the international expansion of the Sports Retail concepts.
Gross (i.e. inc VAT) LFL increased by 0.8%, but not a net basis fell by 0.9%.

ADVN sums it up quite well: 

Sports fashion retailer JD was in demand on the FTSE 250 after saying that while like-for-like sales fell by 1.6% in the first half, the group has returned to sales growth in the second half.

In fact, overall, I am impressed by newspapers in their ability to sum things up so succinctly. I tend to waffle too much.

I like this little snippet from the RNS (Regulatory News Service): "The acquisition of 8 Cecil Gee stores, from Msss Bross Group ... We believe that by applying out established merchandising and buying skills and disciplines it will have the opportunity to become a profitable standalone entity." That's an interesting observation: looking through Sharelock Holmes for MOSB (Moss Bros), I see that their operating profits are negative in 6 out of 10 years. So I think what we're saying is that MOSB management are useless, and that they could make a profit if it were only for the fact that someone knew what they were actually doing. I hope that the managment of MOSB aren't being overcompensated for their "achievements".

Share price is up 1.1% against FTAS (FTSE All-Share) down 0.5% at time of writing. It reports on current trading and outlook:

Trading since the period end has continued to improve ... The result for the full year remains very dependent on the sales and margin performance in December and January

PIC - Pace - News item
Pace Americas: "Home Media Center[sic]" (HR34 server hub) will launch in October, enabling DirecTV's multi-room DVR service. There is strong and growing demand for interconnected capabilities in the home. With HR34, all connected devices with the home network have access to stored recordings in the DirecTV Home Media Center. It works over coaxial cable or ethernet. It can deliver up to 5 HD streams around the home. It has 1TB (terabyte - that's 1024GB) storage. Link

Diary

I was interested in the suggestion by Geoff Gannon about writing for 10 minutes a day. Here goes - I hope my failing memory, and commitment, will allow me to keep it going.

VOD up 1.1% on announcement of forming a strategic partnership with Conexus Mobile. http://bit.ly/qGSSjX This will allow VOD to expand its presence in Asia. This sounds quite exciting. I first became interested in VOD a few months ago, when I saw it sitting in many manager's portfolios that I admire. I must admit that I didn't really understand the "thesis" at the time, but I'm warming to it. PER is 9.9 and yield is 5.7%. The interesting angle will be a divvie that it will receive from its stake in Verizon. The debt situation of VOD looks aweful when you see a z-score of 0.46. However, I've seen posts on the BBs that have convinced me that the debt situation is OK, in that it's a known issue and VOD are able to pay loans as they fall due. VOD is on a PBV of 0.9. Can't see anyone making a mint out of VOD, but I think investors will do OK.

CTN (Clearstream Tech) up 77% on offer by Bard. I think CTN has a great growth story - they make stents - and were available at a reasonable price. I think I would have preferred that no bid was made, as investors are taken out too early in the game. Bard has received irrevocable offers from 58% of the shareholders. Its not quite game over yet, though, because for 41% of them (the remaining 17% are directors), the agreement becomes non-binding if someone else offers at leaast 93.5pps (10% over the offer price of 85p). If that happens, the Bard offer will effectively collapse, thereby allowing shareholders to get a better deal. There's no downside risk to shareholders as this stage, so it makes sense to hold on. The worst that happens is that shareholders will get 85p in December, as opposed to 81p now. Think of it as a bonus divvie.

PTEC (Playtech) - the online gaming software company. Just reviewing this one, and it actually looks quite cheap. PER 7.8, yield 6.1%, ROE 29%, net cash £56m  against mkt cap of £656m. I heard about this company last year, where Collins Stewart recommended it on Motley Fool. Analyst forecasts look robust. It agreed to acquire Mobenga in July 2011, which will give it mobile sports betting capability. Cheap price and good story on PTEC. Donwside I see is that the returns on capital are too good - so there's a lot of competition wanting a piece of the pie. There are quite a few listed online gaming companies out there, so although the story looks good at the moment, it may be stifled by competition in the future.

PIC (Pace) - STB (set-top box) manufacturer - ah, perennial serial disappointer to all that hold. I acutally think this offers a good risk/return profile, and I think the market is missing some exciting upside potential. It's expanding in Africa, India and Brazil, and its relationship with DirecTV seems quite good. It recently accounced a box where you can watch telly in any room. They've recently announced the "Elements" software platform, which gives broadcasters a lot of flexibility in designing their offerings. A lot of good stuff is coming out from Pace, there seem to be many exciting opportunities, but the market seems to be completely uninterested - seeming to focus just on the missteps earlier this year, and all the doom and gloom surrounding Europe. It's on a PER of 4.9. Downside is debt of £181m due to acquisitions. Net debt is decreasing, so at least we're heading in the right direction. A director also thinks the threat of Google and Apple TV is overstated.

MFI shorting doesn't work

Just saw this note from jthe MFI Yahoo Group:

In the appendix of the last edition of the Little Book, Greenblatt briefly reported the results of backtesting a portfolio in which there were both long positions of stocks taken from the first 50 in the MFI list, and short positions of those stocks being at the very last positions of the same list.
According to him, the results were completely negative and this approach would have lost the entire invested capital.

Bogle says that index funds increase volatility

There's an interesting 20 minute video on Jack Bogle here. At 6:26, interviewer Jason Zweig asked whether index funds are destabilising the stock market and made stocks more volatile and making them move more in lock-step. He asked "do you think that indexing, your creation, has gotten out of hand?" Bogle's response was "The answer to that is unequivocally 'yes'".

Bogle estimated that 40% of all trading on the stock market takes place in index funds, principally ETFs, rather than in traditional funds pioneered by Bogle. He described this as "the edge of insanity" (7:29). He said that some ETFs might turn over 10,000% pa.

DNO IMS disappoints

DNO (Domino printing Sciences) slid 11% today on publication of their IMS. Some points that seem to be causing concern to investors:

• At the half year sales growth was 8 per cent; in the subsequent four months sales were 1 per cent below those of the corresponding months in the prior year.
•  demand levels for new equipment in Western Europe and North America have been subdued, especially since the beginning of August, and are expected to remain so for the balance of the year

 There was some good news:

• Sales activity for new equipment in Asia, Middle East, South America and parts of Europe remains good, with our overall strength in these regions positioning us well for continued development and growth. 
•  In April 2011 we announced that we had invested US$50 million for a 15 per cent interest in TEN Media, a business set up to provide solutions to the egg industry. Progress has continued to be positive and we expect the first financial returns from this business to start in the second quarter of our next financial year.

According to SharelockHolmes,  DNO is on a PER of 14.9 (excluding recent price drop), a ROE of 21.4%, and net cash of £12m against a market cap of £623m. Median ROE over the last decade has been 19%.


DNO still looks a good quality company on a reasonable valuation, and I think it will continue to do well in the long term. My mistake was in becoming too eager on it earlier in the year. I would have been better off exercising more patience. With the benefit of hindsight, and a cooler head, I would probably now wait until DNO looked more oversold before buying, despite the 11% drop today.

MFI Diary abandons the formula

MFI diary, a blog that tracks a portfolio of stocks using Greenblatt's Magic Formula, has decided to abandon the approach. His rationale is explained in this post:

My MFI Index... is down 5.5% since I started it in February of 2006. The Russell 3000 is down ... 7% since February 2006 (recall, my measurements are weighted by when I put money in, so it is not a point movement from February 2006).

Some of my own thoughts on MFI:

1. Nobody really knows what the Magic Formula actually is! Everyone has their own interpretation of it, but Greenblatt hasn't spelled out the exact details in a blow-by-blow analysis. In my opinion, he would do well to chop out a lot of the book, and replace it with example balance sheets and P&L statements to show how the numbers are calculated. BTW, he makes the same omission in his latest book, The Big Secret for the Small Investor. He never actually tells you how to construct a value-weighted portfolio.
2. The ROCs that are generated are generally too high to be credible. My understanding is that Greenblatt is attempting to determine an "incremental return on capital"; he wants to know what each new dollar will earn. I think this is very difficult to use accounts to determine that. ROC, and most return on capital calculations, exclude intangible assets in the denominator. I am very sceptical of the exclusion for the following reason: the company did actually expend money on intangibles (probably goodwill) in order to generate its current return, so calculations of future returns must take that into account. After all, if a company didn't "need" to pay goodwill, then why did it? If you argue that a company overpaid for an acquisition, then surely you must conclude that the company is a poor allocator of capital, and any calculation you produce for a return on capital will be overstated. Contrariwise, if you argue that the company consistently underpays for acquisitions (a rather less likely scenario), then this is in itself a game-changer as to how you assess the company. Finally, almost no companies are able to generate returns suggested by most return on capital calculations. Sharelock Holmes reports ROCE for BATS (British American Tobacco) of 74%. Digital Look reports a figure of 65%. Whilst undoubtedly BATS enjoys excellent returns on capital, it seems unlikely that it can generate returns that high. Maybe a company like Microsoft can generate eye-popping returns, but truly excellent returns on incremental capital are available to only a very few. To borrow from Bruce Greenwald, you can't get good information from bad data.
3. It seems implausible that it is possible to generate returns of over 30% pa (page 56) using any mechanical formula - beating market averages by a monster 18.5% pa. If only. What's more curious, is that in Greenblatt's latest book (the "Secret"), on page 122 he posts returns from a value-weighted index of 13.9% pa, compared with 7.6% pa for the S&P500. In that case, the outperformance is 6.3% - a far more plausible figure, and one in which I actually think is possible as a mechanical strategy over the long term. The puzzling thing is, though, is that Greenblatt on page 121 of Secret, he refers to constructing a value-weighted based on good and cheap, and specifically cites his "Magic" (The Little Book That Beats the Market) book. So what's going on here? Is he saying that the magic formula doesn't really return 30% pa, but that it's more like 13.9%?

Nominee accounts and shareholders rights

I thought it was worth highligting a message written by Paul Scott (paulypilot) on Twitter:

Restore Shareholder Democracy by Ensuring Nominee Account Shareholders are on Share Registers by Default - e-petitions

 It is an e-petition on the HMGovernment site, who's content is:

Restore Shareholder Democracy by Ensuring Nominee Account Shareholders are on Share Registers by Default

Responsible department: Department for Business, Innovation and Skills

Private shareholders represent more than 10% of the shares held in publicly listed companies. They typically do not receive information, do not vote, and cannot attend general meetings of the companies they own because they are now mainly in nominee accounts. Unfortunately many stockbrokers do not, and will not, enfranchise their nominee clients. The reforms in the 2006 Companies Act did not solve this problem. The alternative of an electronic replacement for share certificates was killed off by vested interests. We need a proper system to ensure that all beneficial owners who hold their shares in nominee accounts are treated in the same way as those on the share register. Indeed they should be on the share register with the ability to opt out of company or third party communications if they wish. Such an option should only be granted if they have read specific wording to advise them of the loss of their normal legal rights and an explanation of the disadvantages of doing so.

If you would like to sign the petition, the link is as follows:
https://submissions.epetitions.direct.gov.uk/petitions/16769

9/11 and the stock market

On 11-Sep-2001, 19 members from al-Qaeda hijacked four passenger jets. Two were flown into the Twin Towers of the World Trade Centre, one into the Pentagon, and a fourth jet crashed into a field in Pennsylvannia before it reached its target in Washington DC (Wikipedia).

Below I present a table of the values of ASX (FTSE All Share Index):

05-Jan-2011 2976

14-Sep-2011 2306

21-Sep-2011 2128 (lowest point)

04-Jan-2002 2580

11-Sep-2011 2706

The index dropped 22.5% from the start of the year to 14 September. If you had bought at that point, then by the end of the year, you would have made 11.9% profit; whilst the index returned -13.3% (negative) over the year as a whole. If you had been especially prescient - and there's no real indication that you would have been - and bought at the lowest point, then the index would have dropped 28.5% in the period from the start of the year to 21-Sep-2011, and subsequently gained 21.2% to year-end.

I do not have a value for ASX at 11-Sep-2011, so I need to use the one for 14-Sep-2011. During the decade since then, the ASX has returned an average compound rate of 1.6% pa, excluding dividends. If you had bought at the year-end, then the comparable return would have been approximately 0.5% pa.

Sticky situations fund - update

  EPIC       THEN        NOW      PERF%      FTAS%
 PIC.L     107.70     108.40       0.65     -14.01
 SHG.L      23.00      24.99       8.65     -13.68
 CWK.L     644.00     627.50      -2.56     -12.25
TALK.L     134.30     126.40      -5.88      -2.63
 CPP.L     126.50     155.50      22.92       3.00
  JD.L     872.00     830.00      -4.82      -4.04
 ICP.L     229.60     238.00       3.66      -4.11
PTEC.L     303.25     295.75      -2.47      -0.29
 CHW.L     182.50     180.00      -1.37       0.01

PERF% is percentage gain on share, FTAS% on All-share
XIRR sticky:      36.00% (Internal Rate Return)
XIRR   FTAS:     -58.00% (Internal Rate Return)

Remember that it's a new portfolio, so IRR figures are likely to be exaggerated.

CHW added to sticky situations

According to Google:

Chime Communications plc, along with its subsidiaries, is engaged in providing public relations, advertising, sports marketing, market research, direct marketing, design and event management consultancy.

Kudos go to S Baines for bringing the company to my attention. His brief notes on Twitter:

Earnings growth, strong FCF generation, recent director buying and decent valuation (8.8x FY10) mean I'm happy to hold Chime Communications. 1H11 Results were actually OK. PBT +15%yoy, dividend +13%yoy. Cash from operations of £7.3m compares to mkt cap of £145m. Took a kicking a Chime Communications plc (£CHW) position while I was on holiday. Now down 40% from it's peak.

Directors own £2.6m in shares. There was a recent top-up by 2 directors totalling £46k.

ROE 11.4%

Recent problems on 28 Aug have been reported here:

Unrest in the Middle East has had a negative impact on Chime Communications’ PR operations according to the group’s half-year report. The company said that PR was “affected by the slow down in geopolitical work as a result of the turmoil in the Middle East, a reduction in government communication work and the impact of severe debt problems in many countries”. Bell Pottinger stopped work on its lucrative contract with the Economic Development Board of Bahrain earlier this year due to political instability and emergency rule in the country.

 CHW goes in at 182.5p. FTAS at 2655.

PIC notes

Pace plc today announced that it has been selected by Norwegian cable company, GET, to develop the platform for its pioneering new converged home service. The hardware platform, incorporating Pace’s new next generation Media Gateway and companion HD client device, will deliver media content and data to a variety of devices, giving subscribers the freedom to utilise GET’s services when and where they want around the home.

Link

Some share ideas

Looking for some share ideas? Here's some suggestions for some safer, quality companies. My descriptions will be ultra-brief.

BATS - British American Tobacco
Beta 0.71
They make fags, in case you didn't know. It has a great dividend and great returns on capital.

DNO - Domino Printing Sciences
Beta 0.62
The make industrial printing equipment and consumables. Profits and revenues have increased every year for at least the last decade, and it doesn't look like the trend is about to be broken. A PER of 14.7 is not too demanding for this quality company. They are increasing their R&D spend, announced strong growth in thermal transfer and inkjet product, and they recently invested in TEN Media, which prints on eggs for traceability purposes. The growth prospects seem exciting, coupled with safety.

DPLM - Diploma
Beta 0.89
It operates in three business segments: Life Sciences, which supply a range of consumables, instrumentation and related services to the healthcare and environmental industrie; Seals, and Controls. The Seals sector businesses supply a range of hydraulic seals, gaskets, cylinders, components and kits used in heavy mobile machinery and specialized industrial equipment. The Controls sector businesses supply specialized wiring, connectors, fasteners and control devices used in a range of technically demanding applications.
In a recent IMS: "the Group is confident of delivering "GDP-plus" levels of underlying revenue growth."

SN. Smith & Nephew
Beta 0.83
In simple terms, it makes medical equipment, artificial knees, and dressings for wounds. ROE is a massive 21%, achieved with modest tangible gearing of 20%. It has been subject to recent takeover speculation, explaining its recent hike in share price of 14% over 5 days (Footsie is up only 3%). PER is currently 13.4, which still seems acceptable. Note that a poster that I respect highly doesn't like Smith & Nephew.

3 great growth shares for 2010

 In contrast to me previous post, TMF published another article on 12 Aug 2010 profiling another 3 growth stocks. Lee Samaha suggested: SDL, DNO and NCC. Over a 1-year period, SDL was up 14%, DNO was up 18%, and NCC was up 64%. All of them beat the Footsie, which is down 3%.

What is interesting about the "good" and "bad" suggestions is the level of debt. 

Let's look at the bad suggestions. CNT had net debt of 97m against operating cash  of 0.3m for interims. SPI had net debt of 118m against operating cash flows of 35m. Both of those companies failed. RM, OTOH, had next cash of 8m; and it's still going. RM currently trades on a PER of 6.4. It is disquieting to see that there have only been director sales during YTD.

On the good suggestions, SDL had net cash of 53m, and DNO had net cash of 12m. NCC has net debt of 20m, but its operating cash flow is 17.9m. SDL currently trades on a PE of 17.5, DNO on a PE of 14.7, and NCC on 18.3.

3 not-so-great growth shares for 2010

In January 2010, Alan Oscroft of TMF tipped the following shares in an article: RM (RM), CNT (Connaught) and SPI (Spice). Turns out that the companies were not such good picks. CNT went bankrupt, SPI suspended trading in December 2010, having been acquired at 70pps. I don't know what the price was at the time of the recommendation, but I assume it was higher. Over the period since TMF recommended the shares, RM is down 44%, against the Footsie of down 4%.

Not great picks, then.

TCG notes

Been bearish on TCG since before year start. At the beginning of the year I opined on TMF that TCG was one to watch as a potential disaster. Later on in the year, TMF revealed it as the number one faller in the Footsie. Alas, I can't find the links to the relevant articles: but they're on TMF somewhere. Always satisfying to make a good call.

YTD, TCG has falled a massive 78% to 42.39p, against a decline in the Footsie of 10%.

Saw this interesting post:

Studying the TCG presentation of May this year, TCG during H1-10 carried debt of ?1065m serviced at a 3.9% interest rate. Post the refinance, the status in 1st half 2011 is a total debt of about ?1.3bn, however to an average interst rate of 6.1%. This in my book means interest payments for 2011 are likely to be twice that of 2010.

Just to support Gator, I have somewhere else read that the total TCG liabillities mounts 3bn against what is mostly intangible assets, however I cant at the moment recall from where I got this data.

What's interesting is that last year, TCG make an operating profit of £391m, with interest of £116m, giving it an interest cover of 3.37. Debt has gone up, and if you assume that the interest rate of 6.1% is accurate, then TCG looks extremely vulnerable. Operating profits in half-year stage has worsened against its comparatives, and it looks like we're in for a bumpy economic ride. TCG is of course economically sensitive, heavily indebted, and the debts are mounting. It is vulnerable beyond belief.

888 a logical buy for PTEC?

Time for some totally random speculation.

Interesting recent statements for PTEC:

 Playtech is increasingly consolidating its position as the supplier of choice for technology and services for the worldwide online gaming industry ... The Board has determined that due to exceptional joint venture and near term acquisition opportunities currently under discussion in certain key markets, it will defer a decision over the interim dividend until the final results for 2011, in order to retain maximum flexibility.

 There are 3 interesting major shareholders in 888: E Shaked Shares Trust, O Shaked Shares Trust, and Ben-Titzak Family Shares Trust; "The Israelis". Together, they hold a combined value of £57.9m, out of a market cap of £106m (55%).

888 has been a fiasco lately. Maybe a shakeup would be something that the Israelis would welcome, and PTEC might be able to do that with a purchase (at the right price).

There's some other interesting angles to consider. 888 has a market cap of £105m, and net cash of £37m. That would give it an EV of £68m. Well, PTEC has net cash of £56m, so a buy would look within reach. Also, 888 has an EV/EBITDA of 3.92, compared to PTEC of 7.33 (according to SharelockHolmes). So PTEC might view it as value-enhancing.

Compare that with, say, BPTY, which has a market cap of £1bn, net cash of £180m, and EV/EBITDA of 13.52. BPTY is too big (although in the world of finance, that doesn't necessarily stop anybody) and probably too expensive to be interest to PTEC relative to 888.

I'm not saying it's going to happen, of course, I'm just putting down a marker so I can claim bragging rights if it does.

I was seriously considering adding 888 to sticky situations, but decided against it. Their ROE doesn't seem especially high. The Earnings Yield looks good, but given the instability of the earnings, it's difficult to determine if the return will be exceptionally high, or only mediocre. I like the restructuring angle, but I have doubts about the competency of the board. To buy a company, and then basically write it off a year later as a mistake is a great cause for concern. Also, my sticky sits already has a gaming company in it.

It's an interesting setup, and I have a feeling that the odds are good. I am keen to keep an eye on this one to see how this one plays out. I'm not brave enough to commit, though.

888 notes

Some notes about what people have been saying about 888:

• the fact good news can't lift it means when the market weakens yet again which it will, 888 will head lower.
• has no major city interest
• Excellent results, 888 are slowly but surely repairing the numerious mistakes that crook Levy made. 
• The cost of trying to keep up with the big boy is astonishing, and will be repeated in every new market that opens. Future taxation changes and potential US liabilities make anybody staying here very brave. I was out earlier this month, and far happier for it. Profit, or realistic future profit, are everything. Increased figures purely through other sites closing because they were operating illegaly aren't any great achievement. The board certainly shouldn't take any credit for it. Invest in a quality board elsewhere and reap the benefits, in my view. 
• I am patient and believe the share price will double in 12months / would be extremely surpised not to see a firm offer at around 80p before this 12months is out anyway. Likely will be from BPTY, Playtech or Caesers, but we will see. If you take Ladbrokes debacle away and put the share price at 45p during that crazy 6months 888 are down but not much more than many many other shares, including BPTY that have lost far more value.
• I don't see why they [Playtech] wouldn't go for 888, as obviously the Ladbrokes offer was too low. 888 has great technology and has the fastest growing traffic numbers over the last year.

Gigi Levy received a settlement of $3.9m from 888 following his resignation as CEO in April 2011, although he has stayed on an a non-exec director.  (FT article). His board seat is crucial in preventing an immediate payment to the vendors of Wink Bingo. (Telegraph). Daniel Stewart sees a risk of the UK imposing a remote gambling tax, which could be as high as 35% of EBITDA on 2013, and hence is a seller of the stock.

For the half-year just ended, 888 had an EBITDA of $20m. With depreciation of $7.1m. That gives it an EBIT $12.9m for the half year, which annualises to $25m, or about £15m. This gives 888 an unleveraged earnings yield of 22% (15 / (105 mkt cap - 38 net cash)). That's very high. Let's say the gaming tax takes effect, and that 888 can now only earn 65% of that. That gives it a yield of  14% (0.65 x 22).

Greenblatt's poem

I'm reading The Big Secret for the Small Investor, by Joel Greenblatt. I love his witty comments about the post office:

Emblazoned across an entire city block on front of the building is the well-known motto "Neither snow not rain nor heat nor gloom of night stays these couriers from the swift completion of their appointed arounds"

Later, he notes:

Of course, during a recent snowstorm it turns out that it's "only a poem", according to our local postmaster.

A footnote states:

Actually, it's a poem written by a famous Greek historian 2,500 years ago (but only delivered in the last few centuries, due to some unforeseen weather conditions.