Tesco: put your money where your mouth is

In the interest of intellectual honesty, I should say I’ve been pretty positive on Tesco for a long time – most of the way down, to be honest, so I was a little sheepish after Tesco released yet another poor trading statement last week. The behemoth seems to lurch from wound to wound, dragging more investors down with it, and tanking sentiment along the way. Not many people are sticking up for it at the moment.

I have to say, I disliked the trading update too – though maybe for different reasons to most people. I’m completely with cutting the dividend – absolutely no problem – and the trading profit figure for the year looks fine, too. Entirely unsurprising. What I really dislike, though, is the line that they’re ‘implementing further reductions in capital expenditure’. I’m no expert – far from it – I’m just an interested observer. What I really can’t abide, though, is having no idea what’s going on at a company. Clarke, the outward CEO, was talking about the need for a wide-ranging store refresh – something which I shrugged and probably agreed with. 

Craven House Capital – A treasure trail

There’re often interesting stories in the companies right at the bottom end of AIM. Some of them are decidedly dodgy – Zambian mining stocks and deep-sea oil exploration companies that were taken for a ride for a while before getting unceremoniously dumped, for instance. As you probably tell from the examples I picked, there’s a lot of tar-brushing going on here. Paradoxically for a value investor, that means there’s value – because the places you find really interesting companies are often in places where other people don’t want to look.

Anyway, yesterday I was browsing through Investing Sidekick when I found his half-yearly review and something caught my eye – a 30% allocation to one stock? I consider myself a pretty concentrated chap – I’m aiming for maybe 8-10 holdings in my personal account, so 30% seems a rather strong signal of confidence. What’s the deal?

To grandly tie my opening two paragraphs together like a wizened old storyteller, I’ll tell you what I found – a rather interesting micro-cap AIM stock called Craven House Capital. Their website is full of the sort of value rhetoric we love to hear:

The most depressing thing about the Quindell saga:

… if you haven’t been keeping up with Quindell, some might say you’re missing out – it sort of depends how you get your kicks in life.  It is rare you get to see such a public back and forth between the long and the short side of a stock; usually those bearish stay out and stay quiet, but in Quindell’s case you have a fistful of public legal spats, accusations of impropriety and the usual festival of characters wading in on either side of the debate.

I have nothing to add on the equity side; it’s either cheap and legit or it’s expensive and isn’t, and I look at situations like this with a shrug of my shoulders. Maybe I’m missing some value by permanently sitting on the sidelines, but the level of due diligence it’d take for me to get comfortable with a stock blasted with a reasonably convincing 74-page short manifesto just doesn’t appeal. It’s the same deal as I’ve said before with mining and exploration stocks – I find myself agreeing with most points I read. I lack the capacity to critically analyse the arguments, and I lack the desire to figure it all out. As far as I’m concerned, the returns to my time are much better looking for solid companies with good returns on capital at reasonable valuations – not looking for diamonds among the rubble and hoping for multi-baggers. Fortunately, it turns out more ‘boring’ companies might be a more reliable way of doing that.

General / Howden Joinery (HWDN)

I’ve given the blog a bit of a refresh after a friend accused it of being a bit ‘stodgy’. It should also look a bit better on mobiles and tablets now – which apparently make up 25% of my readers! Direction-wise, I will hopefully be back on the small-cap equity bandwagon soon enough – pending some final job-related stuff. The markets are looking decidedly wobbly at the moment, but there’s always value to be found if you overturn enough stones.

I continue my love affair with Howdens, for instance, which is more or less flat year-to-date even after continuing and relentless improvement in their figures. I sold out far too soon, and am now left with the slightly more difficult decision as to whether to buy back in. I think the group will make £140m in net profit this year, which puts them at not-cheap P/E of nearly 16. Countervailing that, you’re buying a quality business with great returns on capital. The real lever you have to pull to shift Howdens from being a decent investment to a great one is how much of that (effective) capital – they lease their stores, so outlay is fairly minimal, and they have basically no traditional debt obligations – is actually able to be deployed. One of the things that caught me out was management’s growing confidence that they’re able to open more and more stores in the UK without cannibalising existing sales. They seem pretty bullish on this trend continuing, hence my optimism for the group generally, but I would like to hear management’s plans on France. They have a small depot toehold over there that they’re clung on to, but things are beginning to move:

H&T Group (HAT)

Point & counterpoint

Some brief admin..

First things first, I’m happy to say that I am – as of the start of August – gainfully employed, thanks almost entirely to this blog. I am deeply obliged to all the people who contacted me, mentioned the post to other people and, more generally, everyone who’s read the blog. I started it three years ago as a way to learn more about something I found myself interested in, and now find it has proven a fantastic tool for meeting both private and professional investors on top of the learning process. All in, it’s been a pretty sweet deal!

My role is at a small hedge fund in London, basically researching stocks in a vein not too dissimilar to what I’ve done on the blog over the last three years. I haven’t quite figured out exactly what direction the blog itself will take; predominantly because, as long-time readers might have noticed, I vociferously complain about even a whiff of potentially divergent interests. Usually that’s with reference to company management teams, but given the overlap between my soon-to-be professional life and the stocks I cover here, there is a hypothetical situation whereby I’m not comfortable writing about a stock – or group of stocks – for one reason or another. Those are things I need to iron out!

I’m available, of course, on the same e-mail address as ever.

Plastics Capital & Vertu (PLA, VTU)

Played out and playing out

Last time, I looked at Tesco & Dart Group – one company I like the look of but haven’t bought, and one company I’m starting to like the look of less but hold having bought it many moons ago. Today, it’s another company which has been with the portfolio since inception – the perennially under-the-radar Plastics Capital, and the more recent portfolio addition of Vertu Motors. Both companies released full-year results in my little hiatus, and thus now present me with a great reason to reacquaint myself with what’s going on and decide whether I still think they’re wise holdings.

Plastics Capital

I really liked Plastics Capital’s business model when I ‘bought’ it way back in June 2011, and I still like it, though with more expressible reasoning now. I like Plastics Capital because they dominate a number of very niche industries, holding large market shares in things like plastic ball bearings, crease matrices (used in the production of cardboard boxes) and hose mandrels. These are ludicrously specific things, and by nature they lend themselves to a small group of small companies producing them. Like investing in the small cap space, I suspect a company investing in a small industry is likely to find more inefficiency and more potential for supernormal returns on capital. In some ways, you might even think of Plastics Capital as an investor itself – they’re acquisitive, and their results say they want to continue to be acquisitive, buying more businesses in the same framework they already have.

Results are broadly in line with market expectations, judging by the relatively small price movement, and now place the group on a worst-case P/E of about 20, and a best-case P/E of about 14. The discrepancy arises from the amount of amortisation you feel it’s appropriate to exclude from that figure; things like customer relationships, IP rights, trademarks and technology are all being amortised at different schedules, and investors should be cognisant of that before ever placing too much trust in a misleadingly certain headline profit figure.