Tuesday, November 29, 2011

Diary: enq, pic

ENQ - Enquest - Oil and Gas producers - 91p/£730.1m

BTW, whenever I quote a price in a headline, it's usually at yesterday's price - I pull it off of Sharelock Holmes. This will help explain some inconsistencies in the prices I report.

ENQ is one of my forays into growth investing. I bought in late August at 109.6p (including all costs). Shares are up 11% today to 102.5p on a great announcement:
EnQuest sanctions the development of Alma and Galia. Production guidance shows growth potential of over 20% p.a. Alma/Galia:: Medium term production guidance: CAGR of over 20% per annum, 2009 to 2014. Crathes exploration: exploration well, 21/13a-5 encountered a 52ft light oil column in excellent quality Palaeocene sands.

Here's what a poster on LSE (that's London South East, remember, not London Stock Exchange. I've never had much joy at the latter's site) said about ENQ:
To those who have only recently come across Enquest let me tell you some facts. The CEO of this companyAmjad Bseisu is perhaps the smartest guy in business today. Not just the oil business but any business. He is a very very sharp, polished smooth operator. As smart business men generally do he has already made a LOT of money. When he joined Petrofac he was considering the idea of setting up his own hedge fund specialising in oily type deals. Enquest has given him the option to do this in a practical way with real fields and bits of kit but be assured they are merely the means to an end which is making much more money for himself and his shareholders. Look at the investment he has made with his own money in the company he is running! Why do you think he is doing that? Because he can't think of anywhere that he can make more money! Enquest will continue to put together innovative value enhancing deals for years to come. I admit I know the guy well and as a result have approx a quarter of my SIPP invested in Enquest at prices up to !35 but I'm relaxed as presumably Amjad is who also bought more shares at a much higher price than they are today. Long term this is a highly professional steady business that will make money for years to come. It's not a Wessex or a Chariot but as safe core high quality holdings go they don't come much better than Enquest.

OK, a bit rampy that one. There's not much other good stuff on the BBSs.

I'm pretty happy with this one so far. Directors do have an enormous stake in it. Bseisu has £68.7m, Hares has £3.5m, and the others total about £1m.

Shares are trading on a PER of 15.3, so as oilies go, they aint cheap. RDSB is on 9.3, and poor old BP. is on 6.6. ENQ has net cash of £149.2m, negative gearing, but a low z-score of 1.59 (although that seems to be normal for oilies). ROE is currently 8.4%.

The future is of course imponderable, but I'm pretty happy holding this one.

PIC - Pace - Tech hardware and equip - 45.3p/£138.3m

A quick glance at analyst forecast show that they're getting increasingly bearish since the last time I looked. I'm getting EPS figures of 2011F 18.87p -16.5% 2012F 17.77p -5.8%. I still hold this share, what little left their is to hold, that is.

As ever, the basic reasoning behind holding is that the problems are only temporary. And it isn't all bad news. Here's an article that appeared today, for example:
Norwegian triple-play provider sees 35 per cent service user growth with launch of Pace Elements-powered VoD (Video on Demand) portal. The new portal provides Altibox subscribers with a simple, highly intuitive experience when searching and navigating its on-demand film and TV content.
PIC is doing some very neat things, they've just been finding lately that water and electricity make poor bedfellows (yeah, laugh it up, us PIC shareholders need a sense of humour). It's trading at a PER of 2.4. Ugly indeed.

I've taken some snippets from the ADVFN BBS - a site that I'm growing to tolerate despite the jiggling baloney and dreadful layout. Here's some very recent opinions, which pretty much capture the sentiment of the market:
You see, you read news like that and I just think wow.... This company is going places. If the software side comes off big time this could be a massive growth company. Such a shame regarding the disasters this year.
Terrific news HOWEVER, and as so often there’s no £-$ attached to that news! Are we charity?  Had the potential numbers to this been significant they’d be obliged to say so. The market will likely just react with ‘oh very good’ NEXT! IMHO bla bla
I just don`t see the long term Case for Pace . I`m no Tech` expert , but , often these `Tech Superior` company`s are overtaken by `New Tech` . I don`t rate their Global Reach anymore in the hands of these Directors , I have no confidence that they will be able to exploit it , in fact it may well be another cash gobbling distracting disaster in the making . Both the above require funding as well as expertise , and even the funding via cash generation looks wobbly . So , the three reasons I originally made the mistake of buying here , now look to be highly suspect and unattractive . I got it all wrong , but I am also holding a small residual stake in the hope of a takeover .
Even if business declines to the point they earn only £50m profits they will still be worth £2 a share when debt free in two years time. Personally I think they can hold £100m profts year on year as a absolute min, I'm not convinced £200m will be achieved according to strategic review.

Monday, November 28, 2011


The Quality Conundrum

Interesting post over at the Value Restoration Project:
The way we see it, we are likely embarking on an era where high quality stocks will significantly outperform low quality stocks as we work our way through what will be the third, and perhaps final, painful market decline of the secular bear market and continue that outperformance as the seedlings of the new secular bull market which will eventually drive the broad market indexes higher in subsequent years. The attractive absolute valuations of many high quality companies which trade at single digit P/E and cash flow multiples, around tangible book value, and with respectable 3-6% dividend yields will be the foundation for those eventual gains.

Diary: dsg, idh, phtm

Been looking at some shares that had been down a lot last month.

DSG - Dillistone - Software and comp services - 72.9p/£13.3m

Down 10% on 14-Oct-2011. There was a notice of general meeting on that day to be held tomorrow, convened to address a technical issue for the dividends paid by the company for the years ended 31-Dec-2006 to 21-Dec-2010. The problem seems to be whether the divvies were paid out of distributable profits rather than distributable reserves. Under the Comapnies Act, the company may be able to recover the divvies they paid out because they did it under the wrong reserve. The meeting tomorrow should rectify that - I don't think they're actually going to demand money back.

Company has a ROE of 32%, has always been high, but is decreasing. Directors own about £6m worth of shares.

Business activities:

Dillistone Group Plc is a leader in the supply and support of recruitment software to the search and selection market.  Dillistone was admitted to AIM, a market operated by the London Stock Exchange plc, in June 2006.

Dillistone develops, publishes and supports FileFinder, its executive recruitment software, for recruitment companies and in-house recruitment teams.  FileFinder is unique in providing tailored workflow and 24 hour support for global users, to mirror the profile and demands of an executive search assignment.  FileFinder has been adopted by more than 1,000 companies in more than 60 countries.
 2011F 5.3p + 4.1% 2012F 6.10 + 15.1%
PER 13.8, yield 4.42%, net cash £2.1m z score 4.87.

Interims issued 21-Sep-2011:
Revenues up 16% ... did not expect to see the full impact of our new product prior to 2012 ... acquisition of Woodcote

IDH - Immunodiagnostic Systems - healthcare equip and services - 728.2p/£206.9m

Down 6.7% on 14-Oct-2011. Stockopedia reported on 12-Oct-2011:
A leading producer of diagnostic testing kits for the clinical and research markets last week announced a trading update for the six month period to 30 September 2011. Turnover from continuing operations for the period is 21 per cent ahead of the comparative period for last year at £27.3m (2010: £22.6m). The Company has made continued progress in placing IDS-iSYS systems into reagent rental accounts as well as outright unit sales. During H1 IDS sold or placed 81 systems compared to 66 systems in H1 2010, an increase of 23 per cent. Overall trading continues to grow and the Board remains confident that, as in previous years, H2 revenues will exceed both those of H1 and of the corresponding period last year due to both the enlarged estate of IDS-iSYS system placements and an expanded IDS-iSYS product menu.

 By a quirk of fate, I see that it is the biggest faller reported by LSE (London South East, not the stock exchange, which has an aweful website), down 41.3% to 461.25p at the time of writing. IDH released an IMS today for the 6 m/e 30-Sep-2011:
Revenue up 21% to £27.3m. Gross profit up 22% to £20.7m. Net Cash £3.3m. The impending introduction of competing automated products has coincided with efforts to contain health budgets, particularly in the US.  As a result we are beginning to see increasing price pressure, particularly on our larger accounts, and some very recent disruption to equipment ordering patterns which we believe will persist in the short term. [This presumably is the killer]. Since its launch in 2009, revenues from IDS-iSYS have continued to grow and were £8.3m for the period, representing 30% of total sales, compared to £3.3m (14% of total sales) for the 6 months to September 2010.Although the total number of IDS-iSYS systems sold or placed is 33.6% higher than at March 2011, as we indicated in our pre-close update the period has seen a reduction in placements made compared to the second half last year. This is mainly due to a number of potential USA customers delaying purchase decisions beyond the end of the period as they wait to evaluate new products that are being launched shortly by competitors.

PER 13.8 (based on a SP of 778.2p. though), ROE 16.4%, z-score 7.88.

PHTM - Photo-Me International - leisure goods - 51.2p/£185.1p

This one was down 6% on 02-Nov-201. Trading activities:
The Company, along with its subsidiaries, operates coin-operated automatic photobooths for identification and fun purposes and a diverse range of vending equipment, including digital photo kiosks, amusement machines and business service equipment. Sales and servicing consists of the manufacture, sale and after-sale servicing of both the above-mentioned equipment and a range of photo-processing equipment, including photobook makers and minilabs. The Company’s products include photo booths, biometric solutions, digital photo kiosks, minilabs, photobook machines, kiddie rides, amusement machines and service machines. Photo booths include Easybooth, Minibooth1, Minibooth2 and Minibooth3. Digital photo kiosks include Speedlab 100 and Speedlab 200. Minilabs include Wet Digital Labs and Dry Digital Labs. Photobook machines include Photobook Pro and MyPocketbook.

 ROE 15.5%, ROE10 11%, z-score 3.53 net cash £40.7m. PER 12.98, yield 4.28%. 2012F 4.09p + 9.4% 2012F 4.51p + 10.3%

Sunday, November 27, 2011


Analyzing Capital Expenditures

csinvesting is definitely a blog worth reading. An article on "Analyzing Capital Expenditures-Buffett and Sears Case Study" points to a scribd document of his. Sketch notes below.

His opening quote was great: "If you want to beat the S&P 500, here's what you do, you buy 500 stocks, and then you sell the airlines. You should do better." - Tom Gayner

owner earnings = a) net reporting + b) depreciation, amortisation - c) capex (maintenance & growth)

if a+b>c, then company is earning sufficient amount for the shareholders. I think that capex should only be maintenance capex (??)

You have to pay less for companies with a lot of "restricted earnings". Companies with a lot of restricted earnings often have high asset/profit ratios. They're "restricted" in the sense that inflation requires that some of the earnings must be ploughed back into the business.

owner earnings = net income + depreciation + depletion + amortization - capital expenditures - additional working capital

Saturday, November 26, 2011

Diary: lms, weir, sge, sgp

Reasons to be bullish

Despite all the doom-and-gloom surrounding the world economy, there is actually some bullishness about.

F958B has written on Motley Fool:
Of all the asset classes out there, shares are among the least expensive asset classes. Shares are slightly cheap. Commodities are overvalued. Bonds are overvalued. Property is overvalued. Cash earns next to nothing. The last time that the dividend yield on shares was this attractive relative to bond yields was during the depths of the 1970's stockmarket bear. From the troubled mid-1970's to early 1980's, stockmarkets began a 25-year bull market (1975-2000), but the first several years were very erratic and volatile - but the trend was still up, on balance. The share-price lows were in the mid-1970's (several years after the mid-late 1960's peak), but the P/E lows were in the early 1980's (about a decade-and-a-half after the 1960's P/E peak).
 There's an interesting article on ValueWalk (does it ever print a boring one?) pointing out the bull case. Sketch notes below.

Investor sentiment in extreme pessimism range, although it is improving. Ms Sonders contends is that all macro is priced in. Flight to quality (I think she's refering to bonds though, not defensives) could backfire, as there has already been heavy outflows of equity funds into bond funds. Five-year normalized P/E slightly above median, but forward PEs are dirt cheap (her graph shows that they're almost at the cheapest levels they've been since the graph began in 1990).

LMS - LMS Capital - Equity investment instruments - 56.3p/£153m

Spotted this one on in an article on 24-Oct-2011 in Investors Chronicle - almost seems a no-brainer. It is currently trading at 0.72 PTBV. The idea is simple enough. LMS invests in a portfolio of quoted securities. The company is winding down in an orderly fashion. So shareholders should realise significantly more than current share price.

WEIR - Weir Group - Industrial Engineering - 1776.1p/£3.8bn

This one might be of interest to those looking for quality compounders. It has increased its divvies every year for the last decade, and analysts expect the trend to continue (don't they always?). It has a low yield at only 1.8%, trades on a PER of 14.1, and has a z-score of 3.77. Net debt is £289m, against net profits at the interim stage of £119m. So, debt situation looks very comfortable. It has a ROE of 21%, and median for the last decade is 18%.

Nigel Thomas, an "alpha" rated manager at AXA Framlington UK Select Opps, has it as his number one holding at 5.1%.

Business activities according to Google:
 The Weir Group PLC operates in three segments: Minerals, Oil and Gas, and Power and Industrial. The Minerals segment designs and manufactures pumps, hydrocyclones, valves and other equipment for the mining, flue gas desulphurisation and oil sands markets. The Oil and Gas segment manufactures pumps and ancillary equipment and provides aftermarket support. The Power and Industrial segment designs, manufactures and provides aftermarket support for rotating and flow control equipment to the global power generation and industrial sectors. Other segments supplies equipment to the liquefied petroleum gas marine and onshore markets.

Some sketch notes on the latest IMS issued 07-Nov-2011:
  • market conditions remain strong
  • reported order input was up 27% in the quarter
  • macro-economic uncertainties haven't had any impact
I'm not sure how dependent all this is on the commodity "supercycle", mind.  Anyway, it certainly looks good.

SGE - Sage Group - Software and Computer Services - 265.2p/£3.5bn

Here's another one for you quality compounderers out there. It's been on my radar for awhile, and it's been part of my Defensive portfolio over on Stockopedia (just don't ask how the value portfolio is doing!). Business activities:
development, distribution and support of business management software, and related products and services for medium-sized and smaller businesses. It operates in four segments. Its products and services range from accounts, enterprise resource planning (ERP) and payroll software to payment processing, customer relationship management (CRM) and industry-specific solutions, such as healthcare, manufacturing, non-profit and construction.

Book-keeping software, in a nutshell. Quite a sticky product, and I think that many people would have heard of the Sage accounting system. SGE recently appeared in a Citywire article on "7 tech stocks help by top UK fund managers". I don't own any SGE, but it's a possibility, and the article also mentioned IDOX, which I do own, and has actually been doing very well for me. But I digress.

SGE has a z-score of 3.13, net debt of £73m compared with interim net profits of £118m. So debt looks perfectly comfortrable. It's trading on a PER of 13.6, which is fine by me. Yield at 3.0% is pretty good. Growth for the next two years is expected to be low, though. It currently has a ROE of 14.8%, compared with a decade median of 15.5%. Looks like it will be a solid company, if performance might be expected to be unspectacular.

SGP - Supergroup - Personal Goods - 475p/£381m

Riskier one that's been getting a lot of attention lately due to 2 management logistical errors. Business activities:
SuperGroup Plc, formerly DKH Clothing Plc. is United Kingdom-based retailer. It focuses on the youth fashion market with its clothing and accessories for both men and women. The Company has two segments: Retail and Wholesale. Retail comprises the operation of stores, concessions and internet sites. Revenue is derived from the sale to individual consumers of its brand and third party clothing, shoes and accessories. Wholesale comprises the wholesale distribution of its branded products (clothes, shoes and accessories) worldwide and the design and ownership of brands. It has 42 standalone retail stores and 56 concessions and a large number of wholesale relationships. Superdry is sold in approximately 70 countries worldwide via its websites, and in 36 overseas countries through a network of distributors, licensees, agents and franchisees. In February 2011, the Company acquired the Benelux and France franchise and distribution partner, CNC Collections BVBA, from its principal Luc Clement.
The words "youth fashion market" will be enough to make many run, not walk, away from this one.  SGP is expected to have fast growth in 2012 and 2013, having exhibited fast growth in 2010 and 2011 since it was floated. It has net cash of £32m, negative tangible gearing, and a whopping z-score of 7.0. It currently trades on a PER of 9.6.

The FT has an article on 05-Oct-2011:
  • shares lost more than quarter of value after it warned that stock management problems would wipe up to £9m from full-year profit
  • the IT system problems has led to delays in moving stock to UK stores and forced it to rent temporary warehouse space
  • international and wholesale operations are unaffected
  • almost two-thirds of shares are owned by senior management
  • the shares floated in 2010 at 500p in March 2010, rose to almost £19. Ouchies!
 There's a thread on Motley Fool, which raises the points:
  • paulypilot was tempted (at 685p on 05-Oct-2011)
  • it's significant to note that the problem is with the back end processing, not with demand
FT Alphaville notes the following:
  • suspicion surrounds the timing of the warning. It wasn't raised at the AGM on Sep 22, nor in the preceding week when staff sold shares, nor a month ago at the trading statement
  • poster speculates that the real reason for the slowdown in sales were not with warehouse issues, but with brand coming off the boil
  • "exacerbated by the unseasonal weather" [oh dear, I hate it when companies talk about unseasonal weather], and "uncertain economic outlook" [and I especially don't like that]
  • Brokers Espirito "maintain sell", saying that 16X forward PE is too high given riskiness of growth. They thought that the market may re-rate the shares [turns out they were exactly right. Their we go then. Analysts. They're not just for show].
Should be interesting to see how this one plays out.  My guess is that they will sort out their problems and the stock will be up again. Long term: French Connection, 'nuff said!

Friday, November 25, 2011


Index relegation

Saw this yesterday; All the following leave the FTSE250 in a week or so.

Unite Group
Premier Foods
Thomas Cook Group

Not sure if the trackers will have already dumped them.


I picked up a few interesting tweets a couple of days ago. I shall probably return to them in 6 months time.

23-Nov-2011 paulypilot Paul Scott
IND on sale at 205p - mkt cap £15m, £5m+ in net cash, plus trading well again (recent buoyant Tr Stat). Probably best value its ever been

24-Nov-2011 MrContrarian Mr Contrarian
Sold Thomas Cook Group (£TCG) at 14p for a 75% loss. Peel Hunt recon up to £700m recap needed, in which case equity of £122m @14p worthless.

24-Nov-2011 paulcurtis123 PAUL CURTIS
Just spoken to oil company focused Hedge Fund. Redemptions forcing sale of anything with no immediate upside. Value irrelevant.

24-Nov-2011 MrContrarian Mr Contrarian
Hampson (£HAMP) FD buys 100k at 2.96p. That's only £3k worth - a token buy. He now holds 125k. Not impressed by that. I bought at 4.9p.

Recessionary times evidence

I was going to post this as part of my growth versus value investing post. I knew there were comments by Kelpie Capital, but I just couldn't find them. Anyway, I'm going to give some sketch notes on his blog post.

Recession expected in 2011Q4 ot 2012Q1, likely to be global.
  • business outlook indicator is down, which is often a leading indicator
  • Hussman's composite of stats suggest bad outlook
  • Achuthan's broad range of stats indicates recession. His track record is unblemished.
  • emerging markets will not save us
  • we are at peak profit margins, so contraction is likely
  • corporate profits are at the highest ratio to GDP in history

Thursday, November 24, 2011

Diary: Netflix, growth versus value


I'm generally not interested in US shares, but Netflix has so much publicity, what with Whitney (or as some unkind soul is calling him, Whitless) Tilson going short and then long. Slashdot is having an interesting discussion about Netflix. Check out the cartoon. There's a lot of scepticism around Netflix, and my bet is that Tilson is gonna get burned on his long position. It's not all bad news for Tilson, though, as someone said: 2 and 20 baby, 2 and 20.

Growth versus value

I said I was going to talk about growth and value yesterday. So here goes ...

Why isn't everybody doing it

I came across an article in the excellent Valuewalk website, which launched my whole interest. Some notes ...

There are structural return patterns relying on certain factors. These factors come down to buying cheap instead of expensive (value factor), stocks on the rise (momentum factor), avoiding stocks that have recently issued new shares (equity offerings factor) and several others. [This feeds into my increasing convictions about choosing the correct structural pattern, rather than being especially savvy on individual securities].

Lakonishok et al looked at the idea risk not as beta, but the underperformance of an asset class in times of economic stress as good indicator of embedded risk. They discovered, though,  that there were only few instances where value stocks underperformed at all.

So, doesn't that mean that in order to generate above-average returns, we just need to stick to value strategies? There's some equivocation here. Grantham April 2010 argued that the value effect is related to a special risk if you look closely enough (top quality paper - read it!). The problems occur when the economy goes down a lot (e.g. Depression of post-1929 and recession of post-2007). The crux of the analysis is that the outperformance of value stocks is a compensation for the near-wipeout investors suffer in a value portfolio when very hard times hit. Grantham also points that high-quality stocks out-perform the market. Quality is important, especially in times of deep economic trouble but value stocks rarely possess quality attributes.

The upshot should be to buy value stocks to capture institutional mispricing, and avoid the large declines during deep recessions (in Ken Fisher's book, The Only Three Questions That Count, he says the same thing: if you can simply the capitulation phase of a bear market, you'll automatically come out ahead). You should be able to achieve that by combining "good" and "cheap" - for example the Greenblatt Magic Formula or the Piostroski F-score. I think that even here it's not quite so cut-and-dried, as I think Greenblatt found his formula very disappointing in 2007, IIRC.

Grantham April 2010

I want to cover some additional points on the Grantham quarterly letter (same link as above). Sketch notes follow.

page 1: on our data [the market is] likely to have a second consecutive very poor decade. speculation is rewarded because Bernanke creates an asymetry by bailing out burst bubbles.

page 4: UK house prices expected to decline 40% to get back to trend . if they don't do this, then it will be the first time in history that a bubble has not behaved that way.

page 6: now for the really good stuff: "On the potential disadvantages of Graham and Dodd-type investing".

page 7: Grantham likes chapter 12 of Keynes' General Theory of Employment, Interest and Money, and is non-plussed by its remainder. Grantham calles Graham irrational, because they are just as much prisoners of the future as anybody else. [It's interesting that Munger takes the same view: Graham is throwing out highly pertinent information]. Grantham thinks Grahamites have too narrow a focus. When you buy a stock, because it has surplus assets or a good yield or a great safety margin, you are really making a bet on regression to the mean. Statistical fact: industries are more dependably mean-reverting than stocks. Individual stocks can on rare occasion permanently change their stripes. Sectors, like small caps, are more provably mean-reverting than industries. Stock markets of a country are more mean-reverting than sectors. Asset classes are more mean-reverting that individual countries. Asset classes are the most predictable of all: when a bubble occurs in a major asset class, it is a near certainty that it will go away. He defines a bubble as a 2-sigma event, so it would be expected to occur every 40 years under normal conditions. He defines "near certainty" as over 90%.

page 8: We are up to 34 bubbles. Every one of them has broken all the way back to the trend. All the data errors that frighten us all at the individual stock level are washed away at these great aggregations. It's simply more reliable, higher-quality data.

page 9: a potential weakness of the Graham and Dodd approach, as it is usually practiced, is in its reliance on low price-to–book (P/B) ratios as one of its cornerstones. Low P/B ratios are, after all, the market’s way of saying “these are the assets in which I have the least trust.” It should not be surprising, therefore, that when you have a depression, or nearly have one, that more of these “cheap” companies go bust than is the case for the “expensive” Coca-Colas. In late 2006, many cheap companies failed. There were several that were blatantly bankrupt, but were fortunately bailed out by the government. So, despite the pain suffered by value investors, they were lucky in being saved by the Great Bailout [I think there's even a letter floating around that Buffett wrote to the effect that Berkshire would have been bankrupted had the government not done its bailout. Bonus points to anyone who can provide a link!].

To put it in my own words, value stocks are more subject to black swan events, causing Grantham to say that Fama and French were right, but for the wrong reason. What Grantham showed in his "exhibit 1" was that post 1933 the low PBV stocks would take 41 years (!) to catch up with high PBV stocks.

Page 10: in other words, the 1932 drop chewed up what amounts to 41 years worth of reasonable risk premium. The rest of the time until 2007 you made extra money by buying low PBV stocks, of course.  Graham lost 70% in the Crash of 1929 - he was in a leveraged position, though. Leynes got wiped out in the early 1920's currency speculating, and was bailed out by a rich friend.

Now Grantham really gets cooking ... The “cheapest” P/B ratios have another potential weakness. Sometimes they are not usefully cheap at all. In 2000, the range between the P/B of the market favorites and the market pariahs was very, very wide. As wide as it had ever been. When the range is wide, the top end – the high P/E favorites – are very vulnerable, and the cheap, contrarian stocks at the other extreme can make you a fortune.

Page 10: In 1983, he pronounced the "Death of Value". Everybody wanted to be a value manager by 1983 becasue it had done so dazzlingly well since 1974. It had beaten the market by 100 percentage points. The growth managers were hiding under the table. Yet from 1984, because value investing became so trendy, you made no extra money in the cheapest PBV stocks for 19.5 years. AND you weren't being compensated for the fundamentally lower quality of these stocks.

Sidenote: Having read Cundill's book - who was very interested in net-net stocks - people touted what a great performance that the fund has had. The fund was formed in late 1970's, and the performance was until 2010. People who crow about him explain that his fund worked even better since 2000 - presumably implying that his investment acumen had increased during that period. BUT. BUT ... and this is something nobody seems to have picked up on ... IIRC correctly he had an initial outperformance, which helped him stay ahead of the indices for a long time. IIRC the indices caught up with him in 1987, but then he outperformed for awhile, and then lagged. Significantly, though, it was in about 2000 that again the indices matched his performance. Think about this.You could have invested in his fund for 20 years, and still only matched the index. It's true that he outperformed from 2000 onwards, but as the above notes state, that was at a time that value was poised to outperform. So we can reach a rather frightening conclusion. Even though the fund had been operating for 30 years and outperformed the index, this outperformance was due to a relatively short period, and is probably merely due to style preference (i.e. "luck") than great investment acumen. As Richard Beddard at Interactive Investor speculated - Peter Lynch has only operated a fund for a relatively short period, a period in which a growth style was coincidentally favourable. I used to be skeptical when naysayers said that there was insuffiicient statistical evidence of the outperformance of managers - but it's clear from the above that they might really have a point! (which brings me back to my original assertion: it's style, not stockpicking, that's important. And: you're a macroeconomist, even if you don't know it). You can outperform an index for a decade - and it still proves nothing!

OK, back to Grantham ... Grantham defines quality/growth companies his own way: principally level and stability of profitability and secondly on debt. He doesn't give specifics, but it seems sound enough. Now here he makes an interesting observation: Grahamites wouldn't buy the quality companies because they would not be considered cheap. But they must have been, because they outperformed - which is the only thing that counts. So fundamentally, PBV (or PE or yield) does not represent intinsic value [something that Buffett says, too]. To prove his point, he says that given a choice, everyone would buy Coca-cola at 1.2 times book instead of General Motors at 1.0 times book. Ergo, PBV is not value.

Page 12: OK, now be prepared to have your mind blown. These factors [value stocks 1973-1983] in the past had delivered the goods because the "spreads" - the range between large and small cap and between high and low PBVs - had been wide. As the value strategies became popular, the spreads narrowed, and then failed to deliver an excess return. Low PBV stocks or small cap stocks only outperform when priced to do so [this guy must be channeling Howard Marks, or something]. This was the problem by mid-2006.

Now we move on to exhibit 4, where he plot the relative value of the cheapest 25% on price to book to the market. I consider this THE MOST IMPORTANT PART OF THE PAPER. He draws a heavy line at 0.5 - which I presume to be the "average". He has circled three peaks (about 1987, 1994,  2005), which are around or above 0.6. This represented when value stocks were unattractive. I think it is a very very important graph, because it allows you to guage when value investing it like to work, and when it isn't. My only gripe is that I don't quite understand what he means by "the cheapest 25% - is it the PBV at the 25th percentile, or the average PBV of the stocks in the lowest 25 th percentile? I assume the former.

I highly recommend that you read page 12 in its entirety.

Page 13: He makes a similar argument for small cap stocks. They may well outperform, but tend to get slaughtered disproportianately in black swam events like the Great Depression [Graham noted this problem, too]. Using high ROE as a proxy for quality, they lost 25% of their value during the crash. The value ones lost 95%. Quality stocks have outperformed the market since 1965 (when their quality data began). Interestingly, this also echoes a poster on TMF whom I respect highly. His basic assertion is that the value stocks are too erratic to be useful, and it's the quality ones that have produced the superior returns over the long haul. Granhtam says: Warren Buffett doesn't really talk much about the fact that he is playing in a superior universe. PBV, despite its low beta, is a risk factor because of its low fundamental quality and its vulnerability to failure in a depression. Ditto for small cap. Quality has outperformed "forever".

Whare are we now?

Well, I did some number-crunching (buyer beware!) on some data that I have on PBVs for over 400 shares (excluding investment trusts) with the highest market caps. I ranked them in quartiles. Here's what I found:

Q1 0.99
Q2 1.68
Q3 3.13

So the median is 1.68 (doesn't look that bad, actually), and at the 25th percentile, the PBV is 0.99. This gives the ratio of Q1:Q3 of 0.59 (0.99/1.68). If I have interpreted Grantham's chart exhibit 4 correctly, this means that value stocks are at their "high" end of relative valuation, and are therefore priced unattractively. A portfolio of value shares are likely to underperform, whilst quality and growing companies are likely to out-perform. This is consistent with my post from yesterday, where I mentioned that high volatility coupled with a high put/call ratio is likely to favour growth. In low-growth environments, growth companies are likely to outperform. Then there's the whole macro picture, which is bleak. I'm not confident that the market is pricing in the ultimate cost of the fallout.

My analysis could be wrong, of course. Whilst formerly I would have said that the drop in share prices coupled with high volatility is bullish for value, now I'm more reticent to conclude that. Given the cheapness of quality companies, it may make more sense to invest in them. I'll leave you with snippets from a recent post by "F958B" on TMF, an investor whom I greatly respect:
We're approaching a point where the ECB will soon start their printing press. France is on the brink of a credit downgrade and even the German government now appears to be struggling to find people willing to lend it money (half of their bonds at auction today were, apparently, not able to be sold). The Fed, BOE and ECB seem likely to very soon supply their economies with possibly the biggest synchronised monetary-adrenaline shot ever seen. In such a stimulatory situation, commodities would probably launch into a huge speculative bubble - similar to the late 1970's ... Like Buffett, I believe that now is a good time to accumulate high-quality companies if the price is sensible. Don't buy bombed-out junk; buy quality which you would be prepared to sit on for several years. Prices are so attractive for many companies that there is no need to buy what appears to be the cheapest; even the relatively more expensive shares are mostly at sensible prices nowadays and look perfectly capable of delivering good long-term returns for brave and patient investors. Even ignoring share price moves, the 4-6% dividend on some of the most solid of defensive blue chips would not be bad at all, for an annual average return.

Wednesday, November 23, 2011

Diary: death of value predicted

Just a little teaser post this one  ... I've been doing some number-crunching on price-to-book values, and comparing what I find with a letter by Jeremy Grantham. My conclusion, backing up my previous post, is that value wont outperform in the near term. I hope to write up my reasoning tomorrow, which will take some time.

Stay tuned.

Diary: growth versus value, ptec, jd., tcg, tt.

PTEC - Playtech

PTEC is down nearly 4% to 212p on news that it is to place shares at 215p, representing approx. 19% of the company's issued share capital immediately prior to the placing. The company has identified a number of bolt-on acquisitions and strategic joint ventures which require funding.

This will be an interesting one for me to watch.

The move seems ill-timed in view of the fact that the company is currently on a low rating; implying that the cost of the capital raised is high. Silly rabbits. It is expected that admission will become effective and that dealings will commence on 21-Dec-2011.

JD. - JD Sports

JD. down 4.9% on latest IMS updating progress since 17 Sep. "Continuing downward pressure on all elements of discretionary spending" about says it all.

TCG/TT. - Thomas Cook / Tui Travel

TCG is up 24% in early trading, having slid a monster 75% yesterday.

This chilling article from the Telegraph yesterday:
[It] has been forced to delay full-year results due tomorrow because its auditors cannot sign it off as a "going concern".
Holy Moly.  As a commenter noted:
The damage is done already by the media if nothing else.... The fact that the financial difficulties of this once great company are all over the media will make customers think very hard before booking holidays and flights with them which in the short term is the worst that can happen.
What's not getting a lot of media attention at the moment is TT. (Tui Travel). It had better hope it can steal customers from TCG is all I can say, because it's not looking too pretty either. It has only had been floated since Sep 2007, during which time it has never reported a net profit. z-score is a pitiful 1.03, it has net debts of £1.2bn, and an interest cover of 1.58. I suggest that, like TCG, it is far too vulnerable to setbacks, and should be avoided. TT. is currently up 10.5% in early morning trading.

Growth versus value

I saw an interesting post on Seeking Alpha, dated 02-Feb-2011:
  • When both the CBOE Put/Call Ratio and VIX are high (compared to 6 month average), small cap growth will out-perform value a mean annualized 18.35%.
  • When the CBOE Put/Call Ratio is low and the VIX is high, value stocks will outperform by up to 26%.
Currently, the VIX is high,and so is the CPC . Another interesting indicator is the Yield Curve. CXO Advisory looked at Ken Fisher's investigations into the yield curve. They conclude:
limited analyses do not support the hypothesis that growth (value) stocks systematically outperform when the T-note/T-bill yield spread shrinks (grows).
However, a reader submits that Fisher was not talking about th US yield curve, but about the world yield curve.

Amateur statistician hour now ... as I recently computed quartile PEs for a broad range of companies, excluding market caps. The data is fairly recent, an cover caps over about £200m. Here's the results:

Q1  7.9
Q2 11.1
Q3 15.9

So, we see that the median PE of the market is about 11.1 - an historically low figure. At the lower quartile market (the "value" shares), PEs are about 7.9 - which doesn't seem much of a discount to the market. Also, at the upper quartile (the "growth" shares), it's 15.9. This is slightly above the long-term median of shares, suggesting that you can buy growth shares today at prices which match historical averages (for the "average" shares, not the growth shares).

So, value shares are trading at only a small discount to the market, whilst growth shares are trading at only a small premium. This suggests that your bias should be towards growth shares, not value shares. You are only paying a small premium for growth, so that's where you should put your money.

In low growth environments, growth shares are likely to hold up better. If this whole Euro thing hits the fan, then I see value shares as being crucified further. Or, you're a macro-economist whether you know it or not.

I'll have some things to say about Jeremy Grantham, P/B values, and where that likely puts us in the cycle as regards the desirability of growth relative to value in a future article. Gotta crunch some numbers first, though.

Tuesday, November 22, 2011

Diary: tcg, gmg, icp, pic, opts

TCG - Thomas Cook Group

Thomas Cook down 72% today as of writing on fears of its finances. Readers may recall that I tipped this as "one to avoid" for 2011. Unusually for me, I have been remarkably spot-on for this share. It has fallen 93% YTD, vastly under-performing the market. I am, of course, chuffed to bits at having made a good call.

I can't help thinking that there's actually a viable business tucked in there, if not for the debts. Maybe they'll be a debt-for-equity swap, wiping out current shareholders. I wouldn't say that's a prediction, though, that would be too bold an assertion. I prefer the Delphic Oracle approach - where there's sufficient ambiguity in what I say to be proved right whatever the outcome.

My verdict on this badboy is: avoid. I couldn't rule out a dead cat bounce, of course. No-one can do that. Except for those that can.

A poster on today's Motley Fool article on TCG pretty much sums it up in a nutshell:
This company has large borrowings and negative net tangible assets. It is in a highly recession-prone industry and also vulnerable to international unrest. IMHO it will not survive.

GMG - Game Group

Beleagured retailer GMG drops another 15% today. I can't imagine there's too much doubt that we're in the end-game (no pun intended) on this badboy, and now we're just waiting for the inevitable. It's an interesting share, because there's a poster who I highly respect who bought in on this not that long ago. The theory was that it was a cigar butt that was so cheap that there was a statistical likelihood that a more normal valuation will prevail at some point in the future. It's sliding downhill fast, mind, so that looks like an increasing struggle.

ICP - Intermediate Capital

ICP up nearly 10% today. I own this pup, so that's the kind of thing I like to see. It's on a PER of 6.9, PBV of 0.6. The company announced its results for 6 m/e 30-Sep-2011:
As the majority of traditional lenders continue to retrench from the credit market, we also see considerable opportunities emerging to acquire debt at attractive discounts in a distressed market, to provide finance to existing buyouts to restructure their overgeared balance sheet and to offer reliable financing solutions for new transactions, thereby delivering high returns to our institutional investors. The progress made on fundraising in a difficult environment is also a testament to our fund management franchise
I wont bore you with the numbers they reported, they look OK, nothing noteworthy. I have to admit I'm a little perplexed as to work out why the market upped the shares 10%. The results seemed fairly predictable to me. This kinda reminds me of what I saw with RWD earlier this year - shares marked up strongly on results that contained no surprises.

My investment "thesis" (not sure I like that term) is that the stock is cheap, the management have outlined where they believe growth will come from, and I believe them. So, a pretty simple idea: cheap, with bags of upside.

PIC - Pace

PIC is having a bit of a rebound the last couple of days. Given how far it's dropped, it's probably about time, too. Couple of points from the FT:
Exane forecast Pace’s problems to erode its cash pile to just $35m by the end of the year, though it said concerns over the balance sheet were misplaced. “We believe Pace should be able to accommodate any bump in the road by factoring part of its circa $400m of receivables,” it said. Separately, Pace was facing relegation to the small-caps in next month’s FTSE review.
 I can resist including the following quip from some wag on the bulletin boards:
I can´t see how this stock will correlate with the wider market from the point is has reached. More likely an Asian weather index!
 Amen to that!

OPTS - Optos - Healthcare equip and services - 225.8p/£161m

Shares up 0.6% on finals. Looking pretty good. Revenues up 35%, profit after tac up 63%, and generally all OK, except that they have increased net debt, and cash flow from operating activities is down.

PER is 11.3, ROE is 23%, gearing is 25%, z score 3.71, so there's nowt to dislike there. EV/EBITDA is 5.3, so you're definitely not overpaying.

OPTS is looking like a pretty interesting GARP idea, admittedly a bit riskier than average, and analysts do expect a 12% dip in earnings for 2012.

Other notes:
  • unveiling Daytona, the next generation desktop retinal device, in 2012Q1
  • Optos' core devices produce ultra widefield, high resolution digital images (optomaps) of approx. 82% of the retina, something no other device is capable of doing in any one image
  • potential to offer opthamologists and optometrists the most powerful tools for disease diagnosis and management.
  • expanded salesforce
  • moving into new territories in Europe and Australi
  • newly launched device 200Tx addresses important export markets such as Japan
I don't own any shares in OPTS, but I must admit it's giving me the warm fuzzies. I can see it as part of a smaller-cap riskier but high-growth potential share.

Monday, November 21, 2011

Diary: aly, dplm, fccn, grg, jd., mrw, pic, rtn, rwd

I see that the market's taking a tumble today. Down 2.02% as I speak.

DPLM - Diploma - Support Services - 302.5p/£342m

Gratifyingly, DPLM is actually up 2.94% on latest prelim announcement of final results for y/e 30-Sep-2011. All-round excellent news of revenues up 26%, profit for the year up 20%, adjusted earnings per share up 48%. The only negative is FCF down 16%. Revenues up from strong demand and acquisitions, margins up due to cost reductions.

Net cash is down to £12.2m (2010 £30.1m), but there was an acquisition of £28.2m, so I'm happy with that. Full dividend up 33%. Excellent. Good performance across all divisions.

A new phrase that I like from DPLM is "GDP plus":
Diploma's businesses are focused on essential products and services that are generally funded by the customers' operating rather than capital budgets, providing recurring income and stable revenue growth. This resilience gives us confidence in delivering the "GDP plus" levels of underlying organic revenue growth which we aim to achieve over the business cycle.  In addition, by supplying essential solutions, not just products, we are able to sustain attractive margins by delivering real value to our customers and suppliers.  Finally we encourage an entrepreneurial culture which ensures that our businesses are agile and respond quickly in changing economic and market conditions.
Maybe I'll use that to replace the phrase I sometimes use as "steady compounder". 

I have held these shares since the end of Jan 2011, during which time the shares have risen 3%, against a Footsie decline of 13.3%. The company has a ROE of 19%, against a decade median of 15%. As I reported yesterday, the company has been growing its dividends by about 16% pa over the last decade. Yet it trades at a PER of 10.8, and offers a dividend yield of 4.0%. In the directors outlook, they describe the business as resilient, a good geographic spread of activities, a strong balance sheet, and expect further "GDP plus" performance.

Very good buying opportunity, especially at these levels.

I think DPLM, along with BATS, is starting to drive home, very slowly (I seem to be a slow learner), that if you buy decent companies with good balance sheets and reasonable growth prospects at sensible prices, then you'll probably do well. I'm not saying you can't go wrong, but at a PER of 10.8, that looks a pretty sweet deal for DPLM. The problem with "value" shares like the banks, insurance companies, iffy retailers and suchlike, is that they're "all over the place", swaggering around like drunken sailors on shore leave. Those falling knives are very difficult to catch. It's not so much that I "mind" volatility, it's just that it seems to be too easy to be wrong about them. Look at Bruce Berkowitz's Fairholme fund. It's down 31% YTD, compared with +2% for the DJIA. He might ultimately be right on the financials, I think he's a very smart guy, but he has created an enormous headwind for himself.performance-wise.

6 months ago

Time for me to take a trip down memory lane, to see what I was writing about in May.


I had a look at RWD, which is down 18% over 6 months, compared with Footsie down 12%. That's possibly not especially meaningful, because it is only int the last 2 months that the share has underperformed. So it could just be market noise. I see that on 15-Nov-2011 Numis has downgraded RWD from add to hold. The share price has underperformed the market by 3.6% since that date. That could be a contrarian indicator as much as anything.

It's now on a PER of 9.5, which is by no means stretched. The fly in the ointment is that EPS is expected to decline by 41% in 2012. It has low gearing and a PBV of 1.1, which is very low. ROE of 16% looks respectable, and it's trading on a PFCF of 6.6, which seems almost irresistable. Berkowitz has said that he is looking for a free cash flow yield of at least 10%, and can't kill the company. RWD would appear to meet both of these criteria. It's a bit disappointing to see net debt increase to £28.2m since I last looked at them. It should be said that their balance sheet is still very robust, though.

I said that the prior reduction in operating profits by 30% looked scary, but it should be remembered that y/e Apr 2010 was particularly strong for them. I calculated an EBIT/EV of 13%, which offered an attractive return. Revising for the interims, I get EBIT 30.1m (= 13.7+37.4-21.0), and EV 209.4m (= 187.9+21.5), giving UEY (i.e. EBIT/EV) of 14%. So about the same.

Towards the end of my post on RWD, I said:
 Expectations reflect a lot of negativity surrounding consumer spending and commodity prices. If sentiment improves, then the share price will, hopefully, reflect a shift.
So far, we're still waiting.


I also took a look at DPLM, an "old-fashioned British combine dating back to 1931 that's seen more restructurings than Joan River's face". The directors report was confident in their outlook, Interactive investor said "the stock still looks good value and shows long-term potential", and Richard Beddard said " looks like a superior business that will continue to earn high returns". He said other good things, but a bear point for him was that although its products are specialised, most companies succumb to competitive pressure sooner or later. "The odds are against Diploma". He didn't like its price at 2.5X BV and 27X 10-year average earnings.

Greenblatt talked about the issue of competitive pressure some time ago. When someone asked if he was worried about reversion to the mean, he replied that he thought there was a distinction between reversion to the mean, and towards the mean. So, I think the point is that long term we're all dead, but that doesn't necessarily mean we'll be dead tomorrow.

I noted one investor write about the company:
I watch some shares go up and down like West Ham but not this one. Just lie back and smell the Roses.
How right he was!

My ultimate verdict on DPLM was:
Given current valuation levels, the market seems to have recognised the merits of the company, so I wouldn't expect a short-term pop out of it. However, I would expect a portfolio of say a dozen such companies of similar quality at similar valuations to give investors a satisfactory performance.
Indeed, the shares haven't dazzled me with their performance (although they are beating the market by 20% YTD, so I guess I must be fussy ;) ),  but I believe that DPLM is now at a very attractive valuation. The whole thing about a dozen such companies looks completely on-the-money, in retrospect. Well, I had to get something right, didn't I?


Ah yes, good ol' retailers. Haven't they had a rocky ride lately?! I took a look at FCCN (French Connection) and JD. (JD Sports). Rental lease obligations are generally off-balance sheet, tending to make retailers look better than they are. I gave a whole spiel about trying to adjust for them.

In my original post, I noted that there was heavy negative sentiment surrounding retailers. During the 6 month period, JD lost slightly less than the market (-8.7%, compared with FTSE -11.7%). FCCN is down 32.1%, an unmitigated disaster.

I said that I expected the company to be bigger in 5 years time than it is now, although short term outlook is for a decline in EPS for 2011. Despite all the doom and gloom, and for all the ostensible wobbliness that you associate with retailers, JD. has been an exceptionally steady company. I had the feeling that the market was not quite "getting" what JD. was about, so I continue to have some confidence in the future of JD..

Contrast that with FCCN. It had had a cracking share price performance at the time - up 20% YTD, but has since come down to earth in a big way. I wrote recently that it was approaching net-net territory, but that didn't necessarily make it touchable. Its operating margins are wafer thin, and it occasionally has to dip into its surpluses, thereby diminishing its NCAV. I view FCCN as a risky turnaround, with a healthy but diminishing supply of fat to live off. If it can pull off a reversal of fortunes, this will probably become a spectacular share. The problem is: will it? FCCN's latest trading statement didn't make for pleasant reading, hence the slump in share price.

Another company that I mentioned was ALY (Laura Ashley). It showed record profit in y/e 29 Jan 201, but did note a decline in performance since the report. In the 6 month period, ALY has had a similar performance to JD..


I took a look at 3 defensive companies: GRG (Greggs), MRW (Morrisons) and RTN (Restaurant Group). It's a bit debatable whether one could call RTN a defensive. I think "quality compounder" what be a better description. It clearly wont have the resilience of Morrisons the supermarket.

Over the 6 months period, all three shares have held up better than the Footise, a fact that should surprise no-one. FTSE is down 11.6%, RTN -2.8%, MRW + 0.4%, GRG -6.6%. I recently highlighted RTN as a company that has been growing its dividends by nearly 11% for the last decade.


Ah, PIC. I took a look at this, and noted:
 Pace is infamous for being a "serial disappointer", and this year it has seen it perform a veritable tour de force on that score.
And my, its catalogue of woes just keeps getting bigger.  Since then, we've had floodings in Thialand, which have created supply problems of the hard disks used by PIC.

PIC is down 52% in 6 months, vastly underperforming the Footsie by a massive margin. It currently trades at a PER of 2.39, a PBV of 0.58, and has a yield of 4.8% (despite having a dividend cover of 8.6). Analysts expect dividends to increase throughout 2011 and 2012, although I wouldn't count on it. Seeings as PIC isn't really what you call a "dividend share", the company would probably be better off conserving cash and paying off debt.

Like I say, I have been wrong at every stage on this share.

Stripping out exceptionals, I calculate an EBITDA of £88.4m (DB02/25), and net debt of £181m. This gives an Net debt/EBITDA of 2.0, so we're still looking safe enough at the moment in terms of debt.

Despite all the crud that's happened to this company, I still reckon it's a buy, albeit risky (did I mention that  I have been wrong at every stage on this share). My "variant perception" is that everything that has happened to this company has been the result of temporary setbacks, rather than a deterioration of trading per se. Mind you, any breakup of the Euro, bank failures, rising of sea levels, or hell being full causing the dead the roam as zombies, wont help.

What did we learn?

I'm always wary of this question, because I think that's there a big risk of learning the wrong lesson, or just being wise after the event. The general lesson seems to be is one of a "continuance of trends", I think. DPLM was a good company, and still looks a good company. RWD is "solid enough", but not great, as it is still in a bind with its pricing power. FCCN has been a flakey company for years, and so has been up and down. JD. seems to have a little extra which makes it much more resilient.

Against declining stock market, the defensive and quality companies have shown a better performance. I think there are two things at play here. The first is that quality coupled with good, if unspectacular, growth, has one out over the ropier candidates. It has paid to go with the trend, rather than against it. Secondly, the results could simply be an artifact of market conditions - high beta is a two-edged sword. Market volatility (as measured by the VIX) is high, suggesting that a move to some of the cruddier end of the market may prove more profitable. And yet, and yet, I have skepticism. We may yet come to see the economic picture deteriorate, in which case the solid companies will probably continue to do well.

Sunday, November 20, 2011

Diary: KIO


Carrying on with my theme of steady dividend growers, I've been able to produce a table of dividend growth rates. They span a period of at least a decade, and include projections as well. Here's the list I produced, which has filtered out some of the junk from yesterday:

    EPIC D001     D002
4    ABF TRUE 1.069044
12   AGK TRUE 1.158246
17  AMEC TRUE 1.131922
35   AVV TRUE 1.306032
39   BAB TRUE 1.240291
40   BAG TRUE 1.098031
42  BATS TRUE 1.152424
44   BBY TRUE 1.122745
48   BG. TRUE 1.183927
55   BLT TRUE 1.230515
58  BNZL TRUE 1.094876
96  CLLN TRUE 1.148205
97   CNA TRUE 1.168868
102  CPG TRUE 1.118597
103  CPI TRUE 1.243734
107 CRDA TRUE 1.175611
114  CWK TRUE 1.102375
120  DGE TRUE 1.059755
125  DLN TRUE 1.129090
128  DNO TRUE 1.171795
129  DOM TRUE 1.369654
131 DPLM TRUE 1.162500
157 FDSA TRUE 1.217958
159  FGP TRUE 1.089025
163  FSJ TRUE 1.114708
164 FSTA TRUE 1.074836
176  GNK TRUE 1.080341
184  GRG TRUE 1.115695
186  GSK TRUE 1.062259
194 HILS TRUE 1.127068
197 HLMA TRUE 1.061268
208  HSX TRUE 1.240077
214  IAP TRUE 1.152070
224  IMT TRUE 1.127836
234  IRV TRUE 1.043480
243  JHD TRUE 1.161381
246 JMAT TRUE 1.073016
284  MER TRUE 1.244401
309  MTO TRUE 1.190080
313  NG. TRUE 1.106575
337  PHP TRUE 1.080437
342  PNN TRUE 1.082607
346 PSON TRUE 1.065418
349  PZC TRUE 1.109271
368  RPC TRUE 1.113094
369  RPS TRUE 1.148004
375  RTN TRUE 1.108101
391  SGE TRUE 1.235762
412  SPX TRUE 1.333527
413  SRP TRUE 1.165958
414  SSE TRUE 1.095391
422  SXS TRUE 1.109053
423  SYR TRUE 1.219902
431 TLPR TRUE 1.174420
435 TSCO TRUE 1.109814
441  ULE TRUE 1.145565
442 ULVR TRUE 1.086471
446  VCT TRUE 1.482120
452  VOD TRUE 1.229207
455 WEIR TRUE 1.115412
463  WTB TRUE 1.104917

You'll need to look at column D002. You'll see, for example, that WTB has been growing dividends at about 10.5% pa over the last decade. That's excellent. Even yawnworthy TSCO (Tescos) has been compounding at double-digit rates. Fascinating reading, I'm sure you'll agree. I should have been a quant!

KIO - Kiotech International - Pharma and biotech - 88.5p/£16.5m

I wrote about KIO about a week ago, and saw what I thought was a balanced post on it that I thought I would share. It was on 16-Nov-2011 over on Interative Investor:
Kiotech was kindly pointed out to me by another discussion board user as I was looking for profitable UK microcap companies with major exposure to emerging markets and experienced management, as I reckon this combination is likely to provide good opportunities for growth. I must admit I have not read any broker reports on Kiotech but, having done some internet research, I can see that Kiotech is jumping on the bandwagon of companies saying that they are looking to benefit from the increasing demand for food as the world population grows. This is actually a good strategy but some companies, such as major seed producers, have found that competition increases as more companies follow this approach and margins are difficult to maintain. Kiotech is a tiny fish swimming in a pond full of multinational sharks so it is very important that it can avoid direct competition for its specific products from larger companies - this must be a big danger. While I would hope and expect its fish pheromone technology to be well protected by patents I'm not sure the degree to which its animal feed additives use intellectual property to protect against competition but their prospects look quite good to me, particularly as the company would be able to collaborate, rather than compete with some larger companies. The multibillion pound market for feed additives is certainly large enough to provide Kiotech with massive growth opportunities, though of course Kiotech is not involved in all the sectors, but is already expanding into emerging markets. One negative point is the fairly recent sale by board member, Richard Scragg of much of his holding in Kiotech. He was the founder of Optivite, a company recently acquired by Kiotech, and I would have thought he would have wanted to keep his stake at this exciting time for Kiotech, unless he knows something that we don't! On the other hand Kiotech's lack of debt and decent dividend does give confidence for the future. In fact I was going to purchase a small investment until I saw that, at the time I looked, the spread on Kiotech shares was a ridiculous 9%. I have an aversion to spreads over 5% and will not be buying any unless the marketmaker decides to be a bit less greedy. This is why I buy most of my holdings in small companies on overseas stock exchanges, such as the Canadian and US exchanges, because the spreads for small companies are so much smaller and there is no stamp duty to pay. However, Kiotech looks quite an attractive speculation to me.

Saturday, November 19, 2011

Diary: FCCN, PIC


In my last post I'd said that I'd look for dividend growers with a long dividends record. I produced a list of 117. I've whittled down the list further. The list comprises of non-micro companies (I don't have details of the threshold I used, but it should be above £200m) with dividends increasing every year, and a record of at least 10 dividends, including projected dividends. This whittles the list down from 117 to 67 companies (so about half of them have only short divvie histories). Here's a list of EPICs:

$ passes | tr -d \\n 

The original list amounted to 537 companies, and just over 10% of them are in turn able to exhibit a long track record. As I mentioned before, special dividends and share splits will likely throw the numbers out; so some companies would have been unfairly rejected.

For the nerdy types, the list was compiled on UNIX, using Python and "Beautiful Soup", and Gfortran. Yip, good ol' Fortran, I had to see if I could get that one in there! The Fortran code was surprisingly intuitive and simple to write - so maybe it's a case of getting some good data structures. I have sometimes quipped that more programmers should be forced to write in Fortran, as its lack of fancy libraries forces the programmer to boil their algorithms and data down to the barest of forms.

FCCN - French Connection - General Retailers - 59.9p/£57.4m

I see that on 17-Nov-2011, FCCN shares dropped a massive 15.5% on tough trading conditions. I see that during the interims, revenues were £102.8m, and the operating profit before exceptionals was £0.2m. FCCN is heading into net-net territory, as it has a NCAV of £54.2m. Its margins do look the thinnest of thin, though, so I can well imagine it making losses if it's not careful. Difficult! On the one hand, "net-net", on the other hand, it's been a pretty weak company since 2005 by the looks of it, so maybe this is a net-net to avoid. I see, for example, that at the interim stage it 2005, it had a NCAV of £72.8m. It did improve a little thereafter, but then started going down again. Maybe things will keep heading south until they run out of money.

PIC - Pace - Tech hardware and Equip - 46.7p/£142.5m

Here we go again. On 17-Nov-2011, PIC dropped 24.5%, after announcing that it would suffer due to problems with hard drive supplies from Thailand. That puts PIC on a PER of 2.39. I hear that the word "covenants" was mentioned, with the news that they are safe. The word "covenants" to investors is a bit like the word "Macbeth" to actors: it doesn't matter the context or legitimacy, the mere mention of it is enough to bring bad luck. Difficult to imagine this dog getting any cheaper, but I've been wrong at every stage on PIC.

Thought for the day

"None of this means, however, that a business or stock is an
intelligent purchase simply because it is unpopular; a contrarian
approach is just as foolish as a follow-the-crowd strategy. What's
required is thinking rather than polling." -- Warren Buffett

Wednesday, November 16, 2011


I've been learning my "R" programming language. It's a free tool, and what a great statistical analyser it is. Anyway, I'm searching for "dividend stocks", and those that have had increasing dividends every year, including projected amounts. My database is from July, but should include at least all the FTSE350 companies with the exception of investment trusts. I've processed 537 companies in all. Out of those, 117 pass the increasing dividend test. Not all of the companies have a long dividend record - which is part of the point of the investigation - but it's something that I'll work on in the next phase. So treat this as a jumping-off point to search for quality stocks.

Glancing down offhand, I see BATS (British Amer Tob) obviously, BVIC (Britvic) the soft drinks company, CWK (Cranswick) the sausage amkers, DGE (Diageo) the not-so-soft drinks company, DNO (Domino Printing Sciences), GRG (Greggs) the bakers, SGE (Sage) the software company, TSCO (Tescos) the supermarkets, ULVR (Unilever), VOD (Vodafone). Absent is MRW (Morrisons), which kept its divvie constant 2005. SBRY got lopped off the list, it looks like because it had a rights issue, which distorts the divvie figure. It's going to be difficult to make those kind of adjustments. Anyway, here's the list so far:

        htms EPIC  DMO
1    3in.htm  3in TRUE
3    abc.htm  abc TRUE
4    abf.htm  abf TRUE
7   achl.htm achl TRUE
8    adm.htm  adm TRUE
13   agk.htm  agk TRUE
15   agr.htm  agr TRUE
22  amec.htm amec TRUE
25   aml.htm  aml TRUE
29  ancr.htm ancr TRUE
30  anto.htm anto TRUE
48  avgr.htm avgr TRUE
51   avv.htm  avv TRUE
52  azem.htm azem TRUE
55   bab.htm  bab TRUE
56   bag.htm  bag TRUE
58  bats.htm bats TRUE
60   bby.htm  bby TRUE
62   bet.htm  bet TRUE
63  bez .htm bez  TRUE
64   bg..htm  bg. TRUE
71   blt.htm  blt TRUE
75  bnzl.htm bnzl TRUE
88  bvic.htm bvic TRUE
95  capc.htm capc TRUE
117 clln.htm clln TRUE
118  cna.htm  cna TRUE
123  cpg.htm  cpg TRUE
124  cpi.htm  cpi TRUE
125  cpp.htm  cpp TRUE
127  cpw.htm  cpw TRUE
128 crda.htm crda TRUE
131  csn.htm  csn TRUE
138  cwk.htm  cwk TRUE
144  dge.htm  dge TRUE
150  dln.htm  dln TRUE
152 dnlm.htm dnlm TRUE
153  dno.htm  dno TRUE
154  dom.htm  dom TRUE
156 dplm.htm dplm TRUE
171 emis.htm emis TRUE
176 essr.htm essr TRUE
179 expn.htm expn TRUE
185 fdsa.htm fdsa TRUE
187  fgp.htm  fgp TRUE
192  fsj.htm  fsj TRUE
193 fsta.htm fsta TRUE
202  gfs.htm  gfs TRUE
209  gnk.htm  gnk TRUE
211  go..htm  go. TRUE
217  grg.htm  grg TRUE
219  gsk.htm  gsk TRUE
222  hat.htm  hat TRUE
225  hfd.htm  hfd TRUE
226  hfg.htm  hfg TRUE
230 hils.htm hils TRUE
231  hl..htm  hl. TRUE
233 hlma.htm hlma TRUE
235  hmy.htm  hmy TRUE
240  hsd.htm  hsd TRUE
241  hsp.htm  hsp TRUE
244  hsx.htm  hsx TRUE
247  hyc.htm  hyc TRUE
248  hzn.htm  hzn TRUE
251  iap.htm  iap TRUE
254  idh.htm  idh TRUE
258  igg.htm  igg TRUE
266  imt.htm  imt TRUE
273 intq.htm intq TRUE
278  irv.htm  irv TRUE
279 isat.htm isat TRUE
282 itrk.htm itrk TRUE
288  jhd.htm  jhd TRUE
291 jmat.htm jmat TRUE
292  jup.htm  jup TRUE
296 kenz.htm kenz TRUE
321  lsp.htm  lsp TRUE
324 mail.htm mail TRUE
327 mayg.htm mayg TRUE
328  mbt.htm  mbt TRUE
332  mer.htm  mer TRUE
333 metp.htm metp TRUE
348 mony.htm mony TRUE
359  mto.htm  mto TRUE
363  ng..htm  ng. TRUE
368  nwf.htm  nwf TRUE
369 nwg .htm nwg  TRUE
383  pay.htm  pay TRUE
386  pfc.htm  pfc TRUE
392  php.htm  php TRUE
398  pnn.htm  pnn TRUE
406 pson.htm pson TRUE
409  pzc.htm  pzc TRUE
434  ror.htm  ror TRUE
435  rpc.htm  rpc TRUE
436  rps.htm  rps TRUE
440  rsl.htm  rsl TRUE
442  rtn.htm  rtn TRUE
458  sge.htm  sge TRUE
459  sgp.htm  sgp TRUE
468  sl..htm  sl. TRUE
480  spx.htm  spx TRUE
481  srp.htm  srp TRUE
482  sse.htm  sse TRUE
492  sxs.htm  sxs TRUE
493  syr.htm  syr TRUE
494 talk.htm talk TRUE
503 tlpr.htm tlpr TRUE
507 tsco.htm tsco TRUE
508  tt..htm  tt. TRUE
514  ule.htm  ule TRUE
515 ulvr.htm ulvr TRUE
518  vaa.htm  vaa TRUE
519  vct.htm  vct TRUE
525  vod.htm  vod TRUE
528 weir.htm weir TRUE
536  wtb.htm  wtb TRUE

Dairy: GMG

Ah yes, GMG (Game Group) - and US equivalent GME (Gamestop) - a company doing the rounds amongst value investors so much lately that everyone's dizzy. Wait, I'm sure there must be better wordplay in it than that. Game over for Game Group? ... now that's just hackneyed. At the Value Investors Conference, legendary investor Joel Greenblatt has been touting it as a good and cheap company with a lot of negative sentiment, whilst at the same conference, Jim Chanos has been touting it as a value trap that will look cheap all the way down. Anyone who's been following HMV will know how that one works. In light of today's news, it's looking like Chanos 1, Greenblatt 0.

I had GMG lined up to talk about some time in the future, but in light of the fact that it's down 37% (was at nearly 41% at one point), I thought now is the time to talk about it. Clearly, when a share bombs 37% in a day, there's something wrong. It doesn't take long to find out why. They issued an IMS today. Some snipppets: lfl sales down 8.6% across all categories, including pre-owned [emphasis mine - and is it really too much for management to say "second-hand"?]. customer footfall down, and internet sales flat. online margin has doubled since launch of a new web platform, and online share has remained at 19%. group digital sales have grown over 40% YTD. pre-owned is 28% of total sales at 40% margin. GAMEwallet, a new way for customers to find and pay for digital games, launched in October.

Clearly, the market is focussing on the bad stuff, and dismissing the good stuff.

I've said it before, and I'll say it again: being a second-hand trader seems like a bit of a daft way to go for a major retailer. A "mom and pop" business can maybe get away with it, but major retailer, no. I continue to see Steam as a serious threat. I'm not a games player, but I get trial offers when I'm playing my Deus Ex Human Revolutions (great game, I love it. I'm replaying it actually). Steam will be able to lock down games tighter than a camel's arse in a sandstorm - so you can forget about second-hand games being a long-term business model - "Doctrine of First Sale" be damned!

The Motley Fool reported on 27-Sep-2011 that managers pledged to buy shares in GMG every month in lieu of 20% of their salaries. Perhaps the most insightful and convincing comment ever about GMG which clearly articulates why it's a sell is from "Stevokkenevo":
I would count myself as an enthusiast video gamer and have worked at Game in the past and I really can't see the company existing in 10 years time. The audience they target is non-enthusiast gamers and mums and dads. If this market grows out of playing video games they will have very few people to sell products to. Nearly everyone I know that plays games on a regular basis refuses to shop at Game because their customer service is disheartening and awkward.

If games go fully digital in the next 10 years with the increase in internet connectivity and speed, Game is dead in my opinion. Sounds to me more like the directors are just trying to convince people their business is sound.
On the same artcile, F958B (a poster I highly respect) offered the advice:
Investors are not required to have a buy/hold/sell opinion for every share in the market. If in doubt - leave it alone: take no action: do not short it: do not buy it. It can't go wrong then. Nowadays, we see periodic opportunities to invest in good businesses at sensible prices. There is no need to get involved with falling knives.

He continues:
My comment was also to remind investors that "falling knives" and "value that's too good to be true" is dangerous and more likely to end in losses than profits.

On 16-Aug-2011, James Emerson wrote a piece on Seeking Alpha, calling it a value trap:
fundamental changes in the industry have rendered the business model obsolete ... Consumers will download software directly to their gaming device and will play on websites like Zynga and Flonga bypassing GameStop completely and eliminating the market for new games.
There has, of course, been counter-opinions to his article. 

The ever-intelligent valuestockinquisition wrote an article about UK retailers on 18-Aug-2011. GMG was one of the companies he wrote about. He offer some additional insights:
On the surface many UK non food retailers trade with net cash on the balance sheets, but these do not reflect the reality of off balance sheet committments in the form of lease agreements. ... the fixed charge cover on the last balance sheet date is 1.6. By my reckoning a 4% fall in sales cet par would leave fixed charge cover below 1. ... So for the moment, despite valuation seeming to be attractive, I am not prepared to part with hard cash to buy any UK retailer.
An interesting comment by a poster on a BBS:
Game are their own worst enemy, they have pretty much given up with sensible retailing. And are now just after marketshare, check their trade-in deals page for a complete joke, Games that are for sale at Tesco for £25/£30 GAME are offering £35 trade in on them against a new release title. Funniest one was RAGE, Gamestation (part of game) were selling for £24.99 and GAME were offering £35 trade for it when people were trading towards Gears of War. Anyone can sell £10 notes for £5... GAME seem being undercutting and selling them for £4.95

The Motley Fool pulished an article about GMG today, in which the author expresses relief at not having pulled the trigger earlier on buying in. He called it a "Death or glory" punt. The article doesn't contain any new insights.

Having all said that @MrContrarian over at Twitter rates it a buy: "Game Group (£GMG):another warning. FY LFL down 7% at best, margin -150BP. At 11.75p PSR 0.02, EV/sales 0.06. Priced to go bust. Bt small pos" He has more investing acumen in his little finger than I have throughout my entire body, so you're likely to be better off listening to him than me. I asked him to explain his position, and he responded: "GMG will continue to shrink but if it survives to the next console cycle the PSR should revert somewhat. High risk high reward." A real cigar butt, then.

I leave you with this wit from a twit @GSElevator:
I'm not afraid of anybody, except maybe black guys who have scars... You know they didn't get them from falling off a bicycle.