Friday Reading

Birds of a feather

While there’s a degree of overlap in the value investing blogosphere, there’s also a degree of distinction, too. That comes from value being so difficult to define; are cigar butts value? Are net-nets where management is splashing money on ‘operational improvements’ value? Does cashflow or earnings define value – indeed, how do you weight all the different factors in deciding when to invest? Entertainingly, there’s also the itchingly contrarian instinct that runs through this value blogger – and while I can’t speak for all of them, the emergence of Dart Group on more than a few of our portfolios has set off a flurry of conversation on Twitter!:

A downside of blogging is you realise you’re not as original as you thought! Sometimes I worry abt value investors herding…


@RichardBeddard is there anyone that doesn’t own it at this stage?

Richard Beddard and John McElligott respectively. Dart is, by a considerable margin, now the most blogged about stock I own; with both Duncan at Kelpie Capital and the aforementioned John McElligott at Valuestockinquisition posting fairly bullish reviews. Both are well worth reading and go into more operational detail than my piece – and both, I also note, pay particular attention to the interesting cash and cash flow situation of the company. They have piles of cash in payments for services not yet rendered and also have the usual business with a large depreciation charge bringing down accounting earnings, but potentially shifting ar0und investment to manipulate cash flow. It’s an interesting company, anyway, and it’s down ~30% since I purchased; and I did think it was rather cheap then.

Back on a theme explored last week, too, Wexboy is continuing his series on catalysts with vigour, with this particular post talking about the catalyst having an activist investor on board can bring. Probably one of the more exciting examples, when I first looked at the markets I found myself somewhat disappointed with the amount of real cutthroat takeovers; and that’s a feeling that continues to this day. Perhaps it’s because I’m new, and my experience is entirely in a time of safety first, but I always assumed that stocks trading at tiny multiples of their cashflow would be snapped up and turned around; and that’s something I haven’t really seen among the stocks I’ve been looking at. I probably understate the difficulty inherent in acquiring meaningful stakes in these fairly illiquid companies at any reasonable price. Either way, I found the following paragraph very Wall Streetesque:

It must be remembered that most activist investors have a value, event-driven and/or distressed investing perspective. They may well invest in a stock for the v same reasons as you, and may even have assessed pretty much the same upside potential. But the big difference from regular private investors is that they’re v impatient, they’re seeking high returns, they’re v aggressive AND they have the necessary fire-power to achieve their goals. Fire-power covers a host of tactics: Sometimes it’s just sheer weight of money (and they become the largest shareholder), but it also includes nominating directors to the board, conducting proxy fights, deposing and/or appointing management, suggesting operational changes and/or asset/business sales, scaring up bidders for a company (or even bidding themselves), demanding strategic reviews or even wind-downs or liquidations, etc. You see, one catalyst can quickly lead to another..!

I hope to see more of that in the coming years in the small-cap value investing universe. It certainly sounds more interesting than the rather more mundane meanderings of my stocks,  who usually shift double digit percentages on report days and then drift around for a while. On that note – it’s been a rather busy week in terms of results and announcements for the portfolio so the weekend is welcome. Have a good one!

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