Monday, October 31, 2011

Diary: HSV, MCO, Magic Formula

HSV: Homeserve - Support Services - 337.9p/£1.5bn
Business: provides 5 million customers with cover against home emergencies such as broken boilers and burst pipes. An independent investigation by Deloitte found that their sales processes were sub-standard (which seems to be code for "mis-selling"). HSV immediately suspended all telephone sales and marketing activity until around 500 staff had undergone "retraining". The FSA (Financial Services Authority) could fin the company if it has breached sales regulation. Link. One commentor said "Homeserve is a non-stop menace".

The share price is down a savage 30.4% today on the news. Ouchies. What is instructive, though, is to see some of the comments from the pundits on HSV. It is instructive in the sense that "nobody knows". Anyway, here's what's been said about it:

30-Sep-2011 The Times said that it was attractive on growth, the shares are pricey at 17X, but was justified; buy on weakness.

08-Sep-2011 The Independent says it is a "rare British business", and the growth profile deserves a premium rating. It says that the price looks stretched, and advised taking profits (at around 482.2p). In some sense it was kinda right, but it never emphasised that rippy-offy nature of the business.

29-Jul-2011 Brewin Dolphin upgraded from buy to add, raising the price target from 566p to 600p. The PER of 16.9X was reckoned to be too low for the business which has "proven resilience and growth potential".

14-Jun-2011 The Scotsman rated it a buy, despite noting that the shares looked a little expensive at 19X (share price was about 524.5p).

Everyone was talking about growth, but no-one was talking about the legitimacy of the business. The company does have enormous returns on capital, no debt problems, but the company still isn't cheap even after the share price drop. So it isn't a buy. What is interesting is the severity of the decline. The share price opened at 240p - a decline of a little over 50% on the previous close. It's interesting because it's perhaps one of the most brutal savagings on a share price in a long while, and it's no minnow stock. At £1.6bn, it's heading towards Footsie territory (the smallest Footsie company has a market cap of £2.1bn).

There's a moral here, but first Moodys ...

MCO (Moody's Corp) is an American company, and provides credit ratings and economic research; although I'm sure you all knew that. Buffett has also been long-associated with Moody's, who likes a coke and a credity rating. On 13-Nov-2006, Emil Lee at Motley Fool waxed lyrical on the company. He didn't actually say "buy", but instead offered the more sensible advice: "All it takes is a single opportunity to buy shares of Moody's at a discount to reap the benefits of a decade worth of superior returns."

... or does it?  The article came out at almost the exact top of for MCO. If you had bought at the beginning of 2006, your shares would have declined 42%, compared with an increase in the DJIA of 13%. To be fair, Emil didn't actually recommend a "buy"; but he did think it was a great company. That reputation was tarnished during the credit crunch. That is not to say that no investment in MCO was a bad idea. If you had bought at the beginning of 2009, you'd be up 61%, compared to the DJIA of up 34%. All of that outperformace was attributable to its performance since about 2011. It is a very volatile stock, BTW.

This just in ... I see in my broker recommendation roundup, times at 12:27, both Panmure Gordon and Peel Hunt have downgraded HSV to "sell".One has to ask, rhetorically of course, "what's the point?".

And I think the point is this ... no-one really knows the future, and they tend to look at the wrong thing, or ommit important details that are more obvious in hindsight. I suspect that credit rating agencies didn't suddenly become rogue in 2006. Frank Partnoy wrote the book F.I.A.S.CO. (the title alone says it all!) in 1997, criticising rating agencies heavily. No doubt Buffett was aware of some of the dubiousness of the credit ratings business, but it didn't stop him investing.

All this is leading me to think that maybe Joel Greenblatt has it right all the time: look for beaten down companies where all the hideous news is out, but have good returns on capital. Worth thinking about.

Sunday, October 30, 2011


Buffett's portfolio strategy
I present a summary of a webpage that I saw about Buffett's early days. For the period 1957-1968, the DJIA returned 9.1% pa, compared with 31.6% pa for Buffett's partnership, and 25.3% for his Limited Partners. His method of operations for 1969 are broken down into the following ratios:
  • 30% Controls -rarities, but of significant size. It happens where a cheap security does nothing for a long time, allowing a significant accumulation, allowing some or complete control of the company's activities.
  • 20% Generals (Private Owner) - quantitatively undervalued stocks first, with considerable attention paid to qualitative factors second. There is often little to indicate immediate market improvement, and the shares lack glamour. He likes good management, a decent industry.
  • 11% Generals (Relatively Undervalued) - companies trading relatively cheaply compared to securities of the same general quality.
  • 23% Workouts -  sell outs, mergers, reorgs, spinoffs, etc.. The risks aren't primarily due to general market behaviour, but to unexpected developments. The profits and holding periods tend to be small per deal, with the occasional substantial loss. It produces steadier profits than generals, with the expectation of big relative gains in bear markets, and contrariwise in bull markets. The blog author warns that there will be blowups.
  • 16% Misc/US T-Bills
The page also point the reader to futher information about workout opportunities.

Saturday, October 29, 2011

Diary: 59 seconds, jdg, pspi, loq

I'm reading the book "59 seconds", by Prof Richard Wiseman. He has a section on motivation, and I'd like to rephrase his questionnaire in terms that are helpful or counterproductive in achieving your goals.
  • make a step-by-step plan
  • tell other people about your goals
  • think about the good things that will happen if you achieve your goals
  • reward yourself for making progress towards your goal
  • record your progress (e.g. in a journal or chart)
  • motivate yourself by focussing on someone you admire for achieving so much (e.g. a celbrity role model or great leader)
  • think about the bad things that will happen of you fail to achieve your goal
  • trying to suppress unhelpful thoughts (e.g. by not thinking about unhealthy food or smoking)
  • rely on willpower
  • fantasize about how great life will be when you achieve your goal

Share ideas
Here are a few share ideas that I lifted directly from a thread on Motley Fool:
  1. JDG (Judges Scientific)  It designs and makes scientific instruments, operating in 4 segments: fire testing, fibre optic testing, ultra high vacuum manipulation, and sample preparation for electron microscopy. ROC 26.5%, EV/EBITDA 7.3, intangibles:total assets 41%. It has a market cap of £18.2m, and directors own £3m worth of shares.
  2. PSPI (Public Service Properties) It is a property investment company which leases out real estate from government sources in areas such as nursing and residential homes, school and resource centre for children and adults with special learning needs. It's a contrarian play, with a yield of 11%, and a PER of 6.7. Its gearing is 114%. Interest cover is 1.9. It has a market cap of £64m, with negligible director ownership. Seems pretty risky, this one.
  3. LOQ (Lo-Q) Designs queuing systems for theme parks, so punters don't have to queue as long. They make a "Qbot". You rent it, and it allows you to reserve a place in a virtual queue line for your favourite rides without having to actually stand in line. You get a little gadget to select your ride, and receive a ride time. ROCE 28.7%, EV/EBITDA 9.1, intangibles:TA 12%. Market cap £28.5m, directors own £6.2m. There was a large directors sell for £1.5m in March 2011 at 154p. Share are currently at 166p.

Friday, October 28, 2011

Diary: vix, nok, ko, value investing, kelly formula

I thought it would be interesting to look at the stats of the VIX (Volatility Index) dating back to 1990. Using Yahoo Finance, I downloaded monthly data, and crunched some numbers in Excel. Here are the deciles:

MIN    10.4
P10    12.1
P20    13.4
P30    15.3
P40    17.0
P50    19.5
P60    21.2
P70    23.5
P80    25.4
P90    30.0
MAX    59.9

The table does not take into account inter-month figures. What is fascinating is that the VIX reached an all-time low in Jan 2007, and then reached an all-time high of 59.9 in Oct 2008, a period of less than two years. The VIX has been over 30% for much of the last 3 months, which, as you can see, puts it in the top decile. It was a very good buying opportunity. As at the close yesterday the VIX stood at 25.5, putting it in the 8th decile. It is also interesting to observe that at the beginning of April, the VIX was at 14.8, which is quite a low number. It was also near the top - although to be fair, the market was mostly flat from January to July, barring the hiccup in March when Japan had a Tsunami. So, caveat emptor.

I found an interesting lecture by a "great investor" ("GI") linked by csinvesting. The lecture was given in March 2007 at Columbia Vusiness School. I will attempt a summary below.

GI says that  the book "Valuegrowth  Investing" by Glen Arnold is the best single book on the type of investing he is interested in. GI likes, and agrees with, the following quote from Fischer Black (of Black-Scholes fame):
"We might define an efficient market as one in which price is within a factor of 2 of value; i.e., the priceis more than half of value and less than twice value. By this definition, I think almost all markets are efficient almost all of the time. 'Almost all' means at least 90 percent." (Fischer Black, 1986, Journal of Finance 410).
 Buffett has echoed similar words:
He said the US govt. bond market is efficiently priced almost always. It isalmost never able to present an opportunity that he would consider worthwhile.
GI cautions:

The Fischer Black  idea that companies trade at ½ value and 2x value most of the time is something thatmeshes nicely with my experience. You may have had people come to this class and tell you that theycan find stocks trading at half of value. From my experience I have almost never found a companytrading at ½ of value. Usually when my analysis leads me to believe that the company is trading at 50%discount to value or less and I go back and do my analysis again to see where I made my mistake.Except in times of extreme pessimism or extreme gloom and doom like year-end 1974, I can‟t think of a time when there were a large number of stocks trading at ½ of value.
GI says that there are large insitutional investors holding Berkshire who claim it is undervalued. However, this is at odds with Buffetts's claim that it is one of his missions in life to try to keep Berkshire at a fair value. So GI concludes that people who argue for its cheapness are arguing against the man himself.

All businesses are cyclical to some extent. Companies that report very smooth earnings are probably smudging them. GI used to invest in severly depressed cyclical companies. It was a successful style. But he wasn't getting high enough returns for the volatility. You could make 20 times your money, but it would take 25 years - which is only 9.6% CAGR.[Footnote by me: subscriber F985B on the Motley Fool says largely the same thing - it's not shooting for the stars that makes the money, but the slow safe companies that outperform. Also, I can't give you a reference, but there's academic studies which show that CAPM isn't quite right, whereby it's the low-risk stocks that seem to have the best returns].

What worked for Buffett in the 50's and 60's no longer worked in the late 70's. So he shifted strategies. Buffett: Turnarounds seldom turn.

GI's current method of investing: deal with seasoned companies, which are big and have a long track record through a variety of economic conditions. The insight that I bring to these companies is that their stock prices - this is historically demonstrable - are much more volatile than their underlying values. Look for companies with superior financial characteristics. Forget about companies with stories or narratives. Look for a consistent long-term record instead.

If you wait for really great companies to trade at two-thirs of value then you will never buy anything. Really superior companies, when they are really cheap, may trade at a 10% discount to intrinsic value and most of the time they sell above. At the horse track and stock market, investors underestimate the probability that good horses will win and overestimate that long shots will win.

He then foes on to devising a matrix as to whether something is a buy based on price and value movements:

  • price up and value down - no
  • price flat and value down - no
  • price rising and value rising - possible - this is the hardest opportunity for a value investor to identify, as it means there is an under-reaction to the good news. It will need to be in your circle of competence to know if it is good to invest
  • price flat and value flat - possible - but an unlikely scenario
  • price flat and value rising - possible. One reason for this is that there is some external distraction: war, etc. An opportunity exists, but people are slow to deal with it
  • price is falling and value is falling - possible. This equates, of course, to a genuine overreaction to bad news
  • price is falling and value is flat - usually occurs when there is a misinterpretation to the news
  • price is falling and value is falling - possible, but an unlikely scenario. usually there is a big external distraction, or it could be that they make changes for improvement (e.g. more marketing or R&D) which will negatively near-term impact earnings
Note one of the implication of the above: five out of six of these scenarios involve a share price that is going nowhere or is falling. So basically, you should be concentrating on share prices that are either flat or falling

GI gives an example of Nokia and Coca-Cola. Just by looking at the numger, he says that there is evidence that there is something special going on. Here's the stats that he produces:
                                    Nokia             Coke
P/E                                   16x              20x
Return on Total Capital               36%             28.%
Return on Equity                      36%            30.5%
Debt as % of Capital                  0.5%            6.0%
Growth 10-yr/5-yr in Book Value    21% / 19%     12.5% / 12.5%
Sales                            18.5% / 14%      4.0% / 3.0%
Cash Flow                        18.5% / 11%      7.5% / 7.5%
Dividends                        33.5% / 22.5%   10.0% / 9.5%
Buy backs                             >5%             < 5%

It's interesting to see how he looks at things. An investment in Nokia turned out to be very successful for him. [Footnote: the price of NOK rose from 20 at the beginning of 2007 to a peak of about 40 in late 2007. However, over the last 5-years, NOK is down 63%. Their revenues have declined in 2009 compared with 2008, with further falls in 2010. People are now asking if it's a value trap. This does raise the question: was GI right all along, or did he just get lucky with his timing? Over a 5-year period, KO is actually up 46%, compared with the S&P500 of down 7%. I think one could easily argue that the problem with NOK is that it is in a rapidly-moving market place with keen competition. KO, although at a higher valuation, has soldiered on relentlessly, despite being at a higher valuation. So, it's difficult to form an opinion as to whether he's right or wrong, at least in my eyes. If he had "followed the story", maybe his thinking would be different.]

GI doesn't use the Kelly Formula.

Hedge funds are leveeraged mutual funds. There is not a lot of hedging.

Thursday, October 27, 2011


Whopper Investments
On 22-Apr-2011, Whopper Investments posted some articles from around the web. The post talks about deliberate practice, the "Dan Plan", becoming the next Warren Buffett, and number of other topics. Well worth a read.

On becoming Warren Buffett
In the PDF of becoming the next Warren Buffett, Mark Sellers basically says "you can't". He identifies four sources of economic moats that are hard to duplicate, and thus, long-lasting:
  1. economies of scale. e.g. Wal-Mart
  2. network effect. e.g. eBay
  3. intellectual property rights (patents, trademarks, regulatory approvals, or customer goodwill). E.g. Disney, Genentech
  4. high customer switching costs. E.g. Microsoft
He dismisses the following arguments for achieving great investment returns:
  • Lots of reading, be it books or newspapers. The problem with journalists is that they pump out too much garbage, and this tends to influence your thinking too much.
  • An MBA/CFA/PhD
  • Experience - it's good, but there are diminishing returns to it
Moving onto the positives, he says that the "moats for investors [i.e. as an investor] are structural", which are principally psychology-related.  He enumerates 7 traits that he thinks will give you an advantage:
  1. ability to buy stocks while others are panicking, and sell them when others are euphoric. 
  2. obsessiveness about playing the game and wanting to win
  3. willingness to learn from past mistakes
  4. a sense of risk based on common sense. He cites LTCM (Long Term Capital Management) as a counterexample, which had plenty of PhDs and risk models but they didn't spot the obvious: they were overleveraged in the extreme
  5. confidence in one's own conviction, even when facing criticism. e.g. Buffett's refusal to buy tech stocks in the late 90's. He also looks at the Kelly Formula: if you have a 2% position, then that works out as a probability of a 51% chance of going up, and a 49% chance of going down. "Why would you waste your time even making that bet?"
  6. you need to use both the left (maths) and right (creative) side of your brain
  7. ability to live with volatility - he identifies this as the most important and rarest traits. You need to be able to average down, and accept short-term pain for long-term results

Wednesday, October 26, 2011


6 months ago
It was worthwhile looking 6 months back to see what I thought then as against how things have panned out.

On 18-Apr-2011, I said that PIC (Pace) was at a crazy price. It's gotten a lot crazier since then, having falling 51% over a 6-month period, compared with the Footise, which is down 8.5%. It was trading on a PER of 6 then, and trades on a PER of 3.7 now. A combination of missteps, Japanese Tsunami and floodings in Thailand have really clobbered the shares. However, there doesn't seem to be any waning in demand for their products, so just about all the known problems should be fully priced in. Let's hope the world doesn't meet financial Armageddon. Score 0-1.

On 16-Apr-2011, I said that AQP (Aquarius Platinum) there was a lot of downside risk and that it was not undervalued. AQP is down 48% over that period. Bringing the score to 1-1.

On 14-Apr-2011 I said that GAW (Games Workshop) was undervalued. It is down 2.5% over 6 months, so it has beaten the Footsie. It is on an EV/EBITDA of 5.4, which looks OK. Score 2-1 (depending if you think going down less than the index is a "win").

On 11-Apr-2011 I said that BLT (BHP Billiton) was on a good price. Over 6 months it is down 23%, massively underperforming the Footsie. It is on a PER of 7.8, and if you can believe it, a PFCF of 3.8, and an EV/EBITDA of 2.2. How it performs is completely dependent on commodities. Clearly the market is very bearish on this. This will either prove to be a great buying opportunity, or a problematical value trap. Score 2-2.

On 09-Apr-2011 I looked at retailers. A number of them passed a "magic formula" screen. Referring to Dixons specifically, Kevin Murphy of Schroders argued that it retailers were trading at very cheap valuations. DXNS is down 13% over a 6 month period, which is worse, but not hideously worse than the index. I cautioned against overoptimism in this sector. There's been a variety of changes in the shares: DB -1%, SMWH +17%, NXT +15%, JD. -10%, DXNS -13%, HOME -54%. HOME has clearly been slaughtered. I own JD. which has performed broadly in line with the Footsie. Let's keep the score at 2-2.

On 06-Apr-2011 I selected a director deal that looked interesting. I decided upon ICP (Intermediate Capital). It is down 29% over 6 months. It is trading on a PER of 7.6. Not a brilliant pick on my part, although I am confident in the future. That brings the score to 2-3.

On 02-Apr-2011, I didn't actually say DPLM was a "buy", but concluded it was a pretty good magic formula company. It has declined 7.9% over that period. It's beating the Footsie, but only by a whisker.

So, rather a disappointing showing on my behalf. If there is a secret formula to investing, then I haven't demonstrated a possession of it. YTD, my personal portfolio has performed almost bang in line with the Footsie. My worst performer was PIC, down over 50%. Ouch. My best performer was CTN (Clearstream Tech) - for which I've just received my takeover money. It's awkward to calculate the exact gain, as I did buy in dribs and drabs.  Then there's BATS (Brit American Tobacco), which has soldiered on relentlessly. So, I've made some good choices, and bad, and it's difficult to argue that my performance has been due to anything but luck.

Tuesday, October 25, 2011

Diary: CPP, PTEC, RM.

Just a round-up of various company news today.

CPP - CPP Group - Support Services - 130.5p/£223.7m
Up 10.4% today on latest IMS for p/e 30-Jun-2011:
We have continued the revenue growth shown in our half year results announcement, with Group revenue growing by 6% for the period. ... Costs and lost revenues associated with the ongoing FSA investigation have had a negative impact on margins, as has ongoing investment in the future growth of our business, the impact of which is partially offset by higher UK Identity Protection and Turkish Card renewals. Northern Europe revenue increased by 5% ... despite the ongoing suspension of new sales of our insured Identity Protection product through our UK voice channels. Operating profit for the region continues to be adversely impacted by associated costs and lost sales. ... Southern Europe continues to be impacted by well publicised challenging economic and regulatory conditions, and revenues have decreased by 6% ... North America has continued to exceed our expectations, and sustain the strong growth achieved in the first half of 2011. Revenues have increased by 26% ... India and China continue to drive revenue growth in Asia Pacific of 21%. With bankable populations of 748 million and 1,062 million respectively, we believe there is significant growth potential in these markets. ... Our financial position has improved ... On 28 March 2011 CPP announced that it was in discussions with the FSA in relation to certain issues surrounding the sale of the Group's Card Protection and Identity Protection products ... discussions are ongoing ... We anticipate continued positive Group revenue growth for the final quarter, albeit that revenues and margins for Northern Europe continue to be negatively impacted by the ongoing suspension of UK Identity Protection sales through CPP channels.
Strongly undervalued at a PER of 6.6. I really need to increase my exposure on this one. It's only a minute holding for me, but if I was going to choose 6 shares for a concentrated portfolio, I'd have this in it. Strong fundamentals, and totally hated.

PTEC: Playtech - Online gaming - 247p/£599m
Up 3.1% following successful resolution of staff disruptions in a number of William Hill Online operational locations, including Tel Aviv and Bulgaria. Cheap on fundamentals, in a growth market, but plenty of uncertainties regarding the possible conseuqnces of future regulatory environment.

RM.: RM - Software and Computer Services - 51p/£48m
Up an eye-popping 17.9% on the announcement of the resignation of CEO Terry Sweeney. I guess it's a case of "don't forget to close the door on your way out". Martyn Ratcliffe appointed Executive Chairman (1 June). Robs Sirs was going to leave after 21 years of service, but now isn't.

Monday, October 24, 2011

Diary: ng., gfs, special situations, , value investing, rights issue

Today I'd like to look at rights issues, and see if I can learn anything from them. First off, let's look, with perfect hindsight, as to what happened with NG.. Investopedia has an article explaining rights issues.

NG.: National Grid - multiutilities - 635.90p/£22.6bn
NG. is a big blue chip international electricity and gas company. I'm going to present something of a chronology of events below.

31-Dec-2009 NG. trading at 679p

14-May-2010 (a Friday). NG. at 618p.

17-May-2011 An RNS declares that it has 2.617m shares in issue, of which 0.141m are in treasury, leaving a balance of 2.476m shares with voting rights.

20-May-2010 (a Sunday) Announces a fully underwritten 2 for 5 Rights Issue to raise approximately £3.2 billion, net of expenses, through the issue of 990,439,017 New Shares at a price of 335 pence each. This implies that there were 2.476m (= 5/2 * 0.9944) shares in issue prior to the rights issue - although that figure disagrees with what's on Sharelock Holmes - which is pretty confusing. I'll use a value of 2.476. Assuming full take-up of offer, this implies a share price of (618*2.476+335*0.990)/(2.476+0.990)=537p

04-Jun-2010  (Friday) Shares bottom out at 487.60p on massive volume. This implies a discount of 9.3% (=1-487.6/537) of "fair" value (assuming that the 537p is "fair").

14-Jun-2010 (Monday) Announces result to rights issue: 94.2% take up of new shares, exact amount 932,648,512 issued. "The Board of National Grid believes the proceeds from the rights issue will allow the Group to fund a significant increase in UK capital investment and continue to deliver attractive returns to shareholders, whilst maintaining single A credit ratings for our UK operating companies in a more volatile economic environment." According to my sums, this should imply a value for ths shares of (618*2.476+ 335*0.933)/(2.476+0.933) = 541p

18-Jun-2010 (Friday) The shares trade at 516.50p, implying a discount of 4.5% (1- 516.5/541).

21-Oct-2011 Shares trade at 630p, having risen 27% since 18-Jun-2010. FTSE has only risen 5.7% during the same period. It was this kind of initial observation that got me excited about the possibilities of rights issues. However, looking at the charts further, it seemed that there was a close correspondence with the Footsie, and were neck-and-neck until about late Feb 2011, whereupon the shares outperformed the indices significantly. There was high volume of trading on 25-Feb-2011, although I don't see any real news.

So all-in-all, a disappointment. It was not the rights issue that created an exceptional opportunity (it looked only a 10% discount to fair value, which is debatable, and more like a blip than anything else). It's what happened after 25-Feb-2011 that created the outperformance. Oh well, at least I looked. Looking at some other rights issues might be advantageous, but it seems that for these larger-cap type shares, there wasn't much in the way of an inefficiency to be exploited. A 10% "maybe" isn't that interesting.

GFS: G4F - Support Services - 242.3p/£3.4bn
All of the NG. analysis was a prelude to looking at GFS. What it does:
which along with its subsidiaries is engaged in the provision of secure solutions including manned security services, care and justice services and security systems, and cash solutions, including the management and transportation of cash and valuables, as well as undertaking of other outsourced business processes in sectors where security and safety risks are considered a strategic threat.
I seem to recall that in the 80's (??) that it was involved in the transport of prisoners, and some of theme escaped. Way to go! On 17-Oct-2011 it announced:
Acquisition of ISS A/S for £5.2bn and £2bn rights issue. ... The Acquisition has a compelling strategic and financial rationale
yada yada yada.  On the day of the announcement, the share price dropped  from 283p on  Fri 14-Oct-2011 to 222p at close on Mon 17-Oct-2011, i.e. down 21.6%. The market, she no likey.  It has since recovered to 243p. It is a 7 for 6 rights issue at 122p, and they aim to raise £2bn. So a "fair" price for GFS might be (122*7+283*6)/(7+6) = 196p, although that does ignore any value from the acquired business. I'll keep an eye on this one, but I don't have any enthusiasm.

Sunday, October 23, 2011

Diary: tre

Gonna try to keep this one short today, as I want to do a bit of prep work for NG. and GFS.

TRE: Trading emissions - Financial Services - 49.5p/£124m
UK comedian Bruce Forsyth once quipped: "I'm not a fan of alternative comedy; either something is funny, or it isn't". And so it it is with "alternative energy": either it makes economic sense, or it doesn't. What it does:
Trading Emission PLC (TEP) is a closed-ended investment company. The Company operates in environmental markets, seeking to be involved in projects that reduce greenhouse gases, either as a purchaser of carbon credits, or as a financier or an owner of such projects. The Company also owns shares of companies that provide services, develop and / or own projects and trade in environmental markets. The Company has three segments: the carbon portfolio, private equity investments, and cash and other assets. The carbon portfolio further divided into carbon loan and commercialization.
You'll know I'm not a fan of alternative energy projects.  TRE was floated in April 2005, and since then has lost 51% of value, compared with a rise of the Footise of 13%. Mid-June 2011, TRE was trading at 108p, whereupon the share price plummeted on the following news:
Trading Emissions plc announced previously that it had instigated a formal sales process for its portfolio of private equity assets (PE Portfolio). Additionally, the Company announced that it had also received expressions of interest for its carbon portfolio. Indicative offers have now been received for both the PE Portfolio as a whole and for individual assets and, having considered these with the intention of maximising returns to shareholders, the Board will now pursue an individual asset realisation strategy with regard to the PE Portfolio. In addition the Company can confirm it has received a number of bids for its carbon portfolio. This process is entering its latter stages. The Board is determined to finalise these negotiations as soon as possible and will provide further updates to shareholders in due course. Proceeds from the sale of either private equity or carbon assets will be returned to shareholders as a matter of priority by way of the most appropriate method of capital distribution determined by the Board, subject to retaining sufficient working capital to enable realisation of the remaining portfolio. Proceeds from the sale of assets within the PE Portfolio and any other remaining assets will be distributed to shareholders at the appropriate time.

I'm not familiar with the company, but it looks like we've got a situation where the company was set up to trade carbon emissions in 2005 under a new investment theme, and it hasn't worked out.  An article in the FT seems to sum things up neatly:
The chairman and three of the remaining five directors of Trading Emissions are to step down following talks with shareholders as the clean energy and carbon emissions project investor warned it would pass on a full-year dividend amid falling prices for carbon securities.
The company added that chairman Mr Eckert, along with Malcolm Gillies, Nigel Wood and Bertrand Rassool will resign at the company’s annual meeting in December “following consultation with certain shareholders”.
This last quote is very very interesting.  Because I'm going to bet you 10 quid that I know who those "certain shareholders" are. According to an RNS dated 12-Sep-2011, Laxey Partners notified the company that it had taken its interests in the company to above 6%. The point about Laxey partners is that they are known as activist investors who try to unlock value. For FY2010, TRE announce that its NTAV was 135pps. Its current share price is 49.5pps, which is a huge discount to asset value. The market cap is £124m, and TRE is sitting on net cash of £118m. Its NCAV is 153m, and additionally it has "other non-current assets" of £131m - basically investments which should realise some resale value.

I've got the warm tinglies on this one, and feel that this could be an excellent special situation. Despite the horrid business, the company is trading at a PTBV of 0.37, the market cap is almost completely covered by cash, so any realisation of the portfolio is going to be a huge boost. You'll also have Laxey Partners making the best efforts they can to maximise shareholder value. As Monhish Pabrai would say: "heads I win, tails I don't loose very much". Alas, massive spread on this one.

Saturday, October 22, 2011


Larry Swedroe
Quotables from an article by Larry Swedroe:
There’s one other critical point we need to cover regarding stage-one thinking. Those who decide to sell until the “green light” comes back on, indicating that it’s once again safe to invest in stocks, don’t understand that there’s never a green light when it comes to equity investing. It’s never safe to invest. There’s always a high degree of risk. For example, if you had sold in March of 2009, when would have it been safe to again invest in stocks?
There never was a green light, which was why most investors missed the rally. And there never is a green light. So if you decide to sell, you must have a plan to get back in. But there’s really no effective way to design such a plan, because history is likely to repeat itself, and you’ll be trapped in a vicious circle of buying high and selling low. 
The last thing investors should do in response to a crisis, or any period of volatility and uncertainty is to let their stomachs take over.

Diary: net-nets, value investing, pvcs, tw., housebuilders, rcg, cwr , agk, growth, hlma, imi

So many things to talk about. So little time.

PVCS: PV Crystalox Solar - Alternative Energy - 7.55p/£31.5m
Shares in PVCS dropped 42% yesterday on news of weaker-than-expected demand in Germany, the biggest panel market. PVCS make "multicrystalline silicon ingots and wafers". which are used to make solar cells. I am a big detractor of "alternative energy", viewing it as a fad investment theme that is uneconomic in the real world and only exists because governments pump money into the idea. To me, the whole idea that you sell electricity back to the grid is going to look, in a few year's time, as harebrained as the notion of selling your excess grapefruits back to Tescos. It should be obvious that only centralised operations can produce economies of scale.

Now that my Alternative Energy rant is out of the way, it should be noted that PVCS has 25 years in solar tech development, so presumably it isn't a fly-by-night operation. It has only been quoted since 15-Jun-2007, though. The interesting thing about PVCS is that it's now a net-net. It has £36,2m in net cash, against a market cap of £31.5m. Its NCAV (current assets less all liabilities) is £74.1m. So it's well and truly a net-net. There's a monster spread on this share: bid 7.60p, ask 7.75p. I'll do a check-up on this company in 6 months time, and see how we get on.

Interestingly, I mentioned PVCS in a post that I wrote on 14-Nov-2010. I was looking in the top quintile of stocks that had a low "Graham Ratio" (market cap to NCAV). Their performance was "mixed", with some delisting for unknown reasons, possibly at substantial profits, possible at substantial losses. I said that there were 4 net-nets, 3 of which were housbuilders. Alas, I didn't identify the remaing company. Actually, the housebuilders seem to have acquitted themselves quite well YTD, having mostly risen (TW. Taylor Wimpey is up nearly 16%) whilst the market has fallen 7%. RCG (RCG Holdings) has been an ongoing unmitigated disaster, falling from 30.25p in November to 3.71p as of yesterday.

CWR: Ceres Power - Electronic & Elect Equipment - 17.5p/£15.1m
According to Google Finance, it:
is principally engaged in the development and commercial exploitation of micro generation products based on the Company’s solid oxide fuel cell technology.
... whatever that means.  The company has been listed since 03-Dec-2004. Shares have dropped 51% over the last month. The hubub reported in Bloomberg is:
 Ceres’s fuel cells won’t be commercially available until the first half of 2014. The Horsham, England-based company said in March 2010 that they would be available in the second half of this year. The cells provide heat and power for homes.
 CWR is another net-net, having cash of £26.7m, and a NCAV of £22.7m. The company has minimal revenues (less than £1m), and has never reported a profit. That will probably rule it out as a net-net possibility.

AGK: Aggreko - Support services - 1709.5p/£4.6bn
OK, now onto a company that wont make your belly twist into a knot. According to Google Finance, its trading activities are:
Aggreko plc is engaged in the rental of power generation and temperature control equipment.
Finally, something that makes sense. The numbers are very impressive:


Current 5 yr median
PER 20.4 18.8
ROE 25% 27%
Operating Margin 26% 22%
Gearing 29%
z-score 5.64
Net cash/mkt cap -6%
Net cash/net profit -1.5
Insiders £13m
Growth over years: 5 10
-revenue 23% 18%
- operating profit 37% 23%
- EPS (adj) 42% 26%

Dated: 22/10/2011

At a PER of 20.4, it's not cheap. Looking at the balance sheet, intangibles account for 5% of total assets - which seems very low when you look at most companies. So, it hasn't gone out on any big spending sprees. At first flush, it looks like one of those companies where you think to yourself: "solid balance sheet, good solid business generally, if I could get 10 such companies at a PER of around 15 I'll probably do very well".

HLMA: Halma - Electronic and Electrical Equip - 331.30p/£1.25bn
Trading activities according to Google Finance:
The Company operates in three sectors: health and analysis, infrastructure sensors and industrial safety. The Company makes products, which detect hazards to protect assets and people in public and commercial. The Company’s sub-sectors include water, photonics, health optics, fire detection, security sensors, gas detection, bursting disks and safety interlocks.
Another solid company. Here are some stats that I currently favour when looking at growth companies:


Current 5 yr median
PER 14.8 14.8
ROE 21% 22%
Operating Margin 20% 19%
Gearing 10%
z-score 4.93
Net cash/mkt cap -3%
Net cash/net profit -0.5
Insiders £4m
Growth over years: 5 10
-revenue 10% 8%
- operating profit 11% 10%
- EPS (adj) 13% 10%

Dated: 22/10/2011

The numbers aren't as impressive as AGK, and there is a lot more intangibles, but overall the numbers look good. Balance sheet looks fine debt-wise, and investors have been getting double-digit growth over the last decade. The business is what I call a "sensible" one, making all those little fiddly bits and bobs that no-one seems to pay much attention to. Its price multiple doesn't look excessive, and has been trading at around 15X for the last decade. A fair price for a good business.  YTD, the share price has performed about in line with the Footsie. It reached a peak in July, and has since then underperformed the market. The share price had gotten ahead of itself, when the valuation levels were too rich. At these levels, it looks like HLMA will be a solid, if unspectacular, compounder. Not a bad one to have in a diversified portfolio, I would say.

IMI: IMI - Industrial Engineering - 778.5p/£2.5bn
Trading activities according to Google Finance:
 Its businesses consist of five platforms organized into two principal activities: Fluid Controls, consisting severe service, fluid power and indoor climate; and retail dispense, consisting of beverage dispense and merchandising. Severe service designs, manufactures, supplies and service critical control valves and associated equipment. Fluid power designs, manufactures and supplies of motion and fluid control systems for original equipment manufacturers. Indoor climate designs, manufactures and supplies of indoor climate control systems and balance valves. Beverage dispense designs, manufactures and supplies of still and carbonated beverage dispense systems. Merchandising designs, manufactures and supplies of point of purchase display systems for brand owners and retailers.
 So, another one of those bits-and-bobs companies (not to be taken prejoritively). In fact, its returns are pretty impressive. Here's some stats:


Current 5 yr median
PER 10.3 12.7
ROE 36% 37%
Operating Margin 17% 13%
Gearing 29%
z-score 3.63
Net cash/mkt cap -7%
Net cash/net profit -0.8
Insiders £8m
Growth over years: 5 10
-revenue 6% 2%
- operating profit 12% 9%
- EPS (adj) 12% 11%

Dated: 22/10/2011
Like HLMA, the company has had a huge run-up to July, whereupon its valuation slumped. It is trading at a discount to it 6-year median PER. Intangible account for 30% of total assets, so the company isn't shy about making acquisitions. It hasn't damaged its balance sheet in the process, though. Revenue growth has been unimpressive, but its operating profits and EPS growth over the past 5 and 10 years had been pretty good. ROE is good, too, having been achieved with sensible debt. It recently acquired TH Jansen Armaturen GmbH ("THJ") for 12.3m EUR, and an EV/EBITDA of 7.6 - which looks OK. IMI currently trades at an EV/EBITDA itself of 7.37, which also looks OK. IMI is currently trading below its 5-year median PER. At a PER of 10.3, the valuation looks undemanding, and it looks like you're getting a pretty solid company for your money.

Seeings as I've mentioned many companies in this post, it will be worthwhile me doing a follow-up in 6 months time. Will the solid companies outperform the cheap-as-chips one? That's for Mr Market to decide. FTAS (all-Share index) currently stands at 2827 for comparison purposes.