Wednesday, September 28, 2011

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.

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