More (late) spring cleaning
With the fluctuations of the past few months, and the time I spent researching stocks, I figured it was time to go back to the portfolio and see what I wanted to change. I take a relatively laissez-faire approach to managing the fund in that respect - I probably only rejig things once every couple of months, though I'll break that trend if something interesting happens (bid for a company, 60% price surge etc.) and I can clearly see a company either on my watchlist or in my portfolio is under/overvalued. Most of the time my investing eyes are so cloudy and estimates of value suitably fuzzy that I tend to not worry too much about what happens on a day-to-day basis. There's a good deal of evidence that value investors tend to sell too soon, anyway, so perhaps letting momentum take hold and holding back on the pruning is a winning strategy.
Still - there was two companies I liked - Tricorn and Vislink, and I knew much of my portfolio had appreciated. This meant that the value in some of my stocks had become less obvious, but the portfolio also had a reasonable (~8%) cash pile to play with. I don't like holding cash - if I were to have no ideas and didn't think I'd find any for any prolonged period of time I'd either buy an index tracker or another 'productive' asset like bonds. Here are the transactions, then:Continue reading
Value company, value stock
Greggs is a company well known by most in the UK - it's a high-street (and increasingly off-high street; we'll come to that later!) baker famed for catering towards the hard value end of the spectrum. It's a sector I admit I have a little experience with personally, and I have often observed that Greggs does a pretty good job differentiating themselves from the rest of the high-street. The 'higher-end' is clustered with faux-authentic pasty outlets and ubiquitous coffee shops, but if you fancy something cheap and relatively warm (don't start this again..) to my mind Greggs is probably your best bet. I think it's essentially a monopoly, though the differentiating lines in real life are always more complicated than in theory. It's probably safer to say that they have a well-differentiated niche.
Given that, it's no surprise Greggs interests me. Companies with defensible niches can earn better returns than companies buffeted by the winds of competition, and large companies which fall into this category are doubly beneficial - a small, well-run company can be muscled out - a big, dominant player which is operating efficiently can only be taken on at great cost. See Howden Joinery for an example of where, while returns are strong, the barriers to competition still appear to make them well protected.
All isn't rosy, though, otherwise Greggs wouldn't be cheap. While I don't think they were ever particularly expensive, their shareprice recently took a hit with a less-than-positive trading statement. Like-for-like sales are down quite substantially, and management noted that they believed profits would be to the 'lower end' of market expectations. Helpfully (and coincidentally something Howden also do) they actually state what they think market expectations are - in this case, in the range of £47.5m to £55.2m. Frankly, these forecasts seem rather bullish in the first place, which makes me wonder which measure of profit they're talking about - operating/PBT/net. Still, it's mostly an irrelevance, and flavour for discussion, since there's nothing particularly dramatic in there.
A note on fallibility
A short piece I've been meaning to write for a while now is less on the specifics of investing, but is still very relevant to the practice.
Hindsight bias is the way in which, when things have already happened, they appear to be obvious - or, at least, more obvious than before. Most of us are guilty of it; I often find myself saying things were obvious when looking back, while at the same time being all too aware that when needing to make a firm decision - perhaps on a potential new buy - I'm rather edgy. To say this is very relevant to investing is an understatement; if someone asked me to outline how I think about the markets, I'd probably start by scrapping most of the assumptions underlying classical economics and EMH - that of rational economic man. Investing, to me, is like other games; a constant struggle with, firstly, your mental capacity to assimilate and correctly analyse information, and the more nuanced side of whether you correctly apply your knowledge. I don't think splitting them up is too granular. The famous economist, Keynes, spent much of his life rewriting the economic rulebook and talking about the unpredictability and inherent humanness of markets - only to almost blow up in the 1929 stock market crash by ignoring his own wisdom and trying to, essentially, speculate.
In short - I think careful self-analysis and the ability to be honest with onself is absolutely crucial. I don't think it's a secondary factor in investing, I think it is the primary factor - being an excellent stock picker is precisely like being a fantastic mathematical poker player, with the ability to analyse and compute probabilities in any situation - it is entirely worthless if your emotional and mental control means you never correctly apply it. I guess that's part of the reason why, while you'll struggle to find anyone who doesn't think 'buying low and selling high' is smart - come on, it's obvious! - history tends to suggest that most people don't actually do it. Momentum would seem to refute that.Continue reading
The pendulum swings
I remember Molins as a perennial stalwart of the value investing screens I peruse - it's been almost a year and a half now since I took a first look at them. Of the three thematic investing variables I've handily coined solely for the purpose of this explanation - the company, the economy, and the investor (rather neat, I hope you'll agree) - two have certainly markedly changed. I approach companies differently and, I think, with a good deal more logic and clarity now. The economy also looks rosier - though it could hardly look bleaker than it did then. Things seem to be muddling along with a more positive slant than they did when we were bombarded with news on the imminent collapse of Europe. The quick-witted among you will have deduced that the variable that's stayed constant, then, is the company. They still do what they did when I first looked at them - produce machinery and other related services and equipment to be used in the tobacco industry - with a good deal of success.
If a 'good deal of success' seems too vague, to quantify it, they've earned returns on capital of 12% for each of the last two years - and that's without backing any of their cashpile out of the calculation, as if to assume all their cash is needed for the day-to-day operations of the business. Removing all of that cash out of the calculation leaves returns at 16%. In lieu of any particular knowledge either way on the topic (how seasonal are cash requirements, for instance?) I can't comment much further. Going further back, returns pre-recession were stronger, and the company has earnt a profit for each of the last 6 years post a major restructuring.
Momentum looks good, too; in the company's first interim management statement of the year they note both profits and the order book are ahead of the same period last year. In short - it looks like a recovery story. It's a decent, if unspectacular, business with an ostensibly safe operating balance sheet and, I would think, a reasonable chance of continuity of returns and business. It doesn't look like a flash-in-the-pan business, in short, which we like as investors.Continue reading
A missed opportunity
It's always difficult looking back and trying to glean lessons for things in the future - the past is so inherently noisy that I wonder if many over-rationalise their losses and their wins. Any one investment has a plethora of movers, some of which one might not have identified, and in totality almost certainly one weighted wrong. That's not to do down on stockpicking, obviously - I'm a stock picker - there's just lots of company specific noise. I do think there's a danger in losing your money in, say, HMV, and concluding that stocks like Thornton's (I used this example after Thornton's rather spectacular rally) don't look attractive because they share some of the same characteristics. I sometimes get that impression, and I do feel it a little myself.
With that proviso; that I might be over-thinking it; I reckon I missed a trick on Albermarle & Bond Holdings and H&T Group. Both of these companies are pawnbrokers - indeed, both are very similar companies. The main difference, though, is the best type of difference for investors - they were trading at pretty divergent valuations last year. See the graph below, taken from Google Finance, which shows the price movement since the first of my posts:
Synergy and strategy
Call with management
It's not often I speak with the management of the small cap companies I cover on my blog, but last week I was contacted by Tricorn IR and scheduled a call with CEO Mike Wellburn and Finance Director Phil Lee. As readers might guess, I'm still undecided about whether speaking to management adds much value in most cases - they are inherently biased parties - but in this case, given how much has happened at Tricorn since their last annual report - and my self-professed ignorance of what it was exactly that Tricorn did - it seemed like a good opportunity to hear straight from the horses' mouths what was going on.
A quick recap on what I've written and what has happened so far, then: my first post on Tricorn was back in January. I was rather in two minds - the company had fairly recently lost a large contract with Rolls-Royce (representing 11% of group revenues), which struck me as particularly bad timing given that the rolling stone of international expansion was picking up pace - the group had long had links with suppliers in China, but was going a step further and setting up a separate company and factory there. I also posted a couple of weeks ago, after the announcement that the group was acquiring some US assets at a discount to net asset value. The size of this acquisition was clearly materially significant for the group, at ~£2m, and explained my queries about the cash pile in the original post. Since that post, we've had one more bit of news - a trading update from the company, and it's notably positive - the Chinese factory is up and running, the US acquisition seems to be moving quickly and management say full year (pre-exceptional) PBT will be roughly the same as last year.
Mike first explained the finer details of what it is they actually do, then, with a few examples for my rather nontechnical mind. Essentially, they sit in the supply chain of OEMs (in which they aim at the larger companies), mostly producing pipes used in engines for the transferal of air/water/fuel. He was keen to stress the elements that make their business less commoditised than one might expect - some proprietary equipment for producing pipes that don't require welding, for instance, and the general principle of working with the supplier that enables Tricorn to embed itself in a supply chain by adding value to its customers. It might sound like box ticking, but Tricorn do indeed earn better returns than one might expect from a commoditised manufacturer. Having good relationships with suppliers because they add value might be a reason for that. He also noted that historically the market was geographically rather fragmented, with smaller regional suppliers. That leads us neatly on to strategy.Continue reading