Category: Stock Ideas

  • Hogg Robinson: Waiting for the Smoke to Clear

    Disclosure: I have an interest in Hogg Robinson shares

    Introduction

    I classify investments into ‘themes’ in my head. The theme explains why or how the market is mispricing a security. It might be that the asset is in a sector or geography which is particularly unattractive for whatever reason, but the company involved is more insulated than a casual glance would betray. It might be that the company has a number of very valuable assets which are obscured by fluff, by investment in the future (opex as capex), or by loss making divisions which drag down the group picture while allowing management a clear remedy, should they choose to take it. Either way, it helps me if I can see why smarter people than me might be unable to see the attractiveness of an asset.

    Hogg Robinson, thematically, fits in with Quarto in my mind. Every investment is different, but the premise is similar:

    The business is being attributed a very high cost of equity – similarly a very low P/E – because the market thinks that the business has a combination of declining cashflows from a dying business and substantial cash obligations. One of these factors alone is a cause for concern. Both, together, raise fundamental questions about the value of the equity.

    In Quarto’s case, their supposed millstone is the debt pile. In Hogg Robinson’s case there is also a touch of debt, but a much more sizeable pension deficit. In both cases, the black mark – QRT’s debt and HRG’s pension deficit – in combination with one’s inner reaction to the business they’re in – is prominent enough to turn the vast majority of investors off before getting to know the company.

    The market view

    To set up the mental model before we knock it down, then, here is what the market sees when it looks at Hogg Robinson:

    HRG_Revnue (more…)

  • Judges Scientific: A Textbook on Value Creation

    Disclosure: I have an interest in Judges Scientific shares  

    History

    Judges Scientific - in your author's humble opinion - is one of the best companies on AIM. How do we define 'best'?

    Here's the share price performance over the last 10 years, overlayed with the normalised diluted earnings-per-share. The first measure shows how the market perceives the company. The second shows their delivery in growing shareholder wealth in a more tangible way.

    JDG_SP_EPS

    As the caption at the bottom shows you, Judges has a phenomenal track record. I spend most of my waking hours looking for companies that compound wealth in this way, and I don't find many. Assuming that the history of the company has whetted your appetite, we'll go a step deeper. (more…)

  • Berkeley Group: A builder, but not as we know it

    Last time, I laid out my framework for thinking about housebuilders. It was convoluted and a bit mixed, frankly, but in that it did quite a good job of reflecting my thinking. I suspect it also captured some of the market's struggle to value these assets. I left by saying that Berkeley Group and Bovis were particularly interesting to me, for different reasons. Bovis is a volume housebuilder - I'll cover them in a separate post - but Berkeley is a law unto itself.

    So for this post: welcome to London!

    Berkeley Group (more…)

  • Valuing housebuilders

    I have a warm affection for housebuilders. This is unusual among value investors, who (if the blogs I read and the people I talk to are anything to go by) typically tend to see them as horribly cyclical, commoditised land banks run by executives with an uncanny knack for leveraging into recessions and mis-timing the market. There is certainly some truth in this.

    I'd probably hate them too, if it wasn't for the good they've done me. My first ever investment was in Barratt Developments in the depths of the recession when, armed with only a notebook of valuation metrics and the sort of blind confidence only a true rookie could muster, I stuck the vast majority of my (admittedly meagre!) savings on the beleaguered builder. Sure enough, it was a blow-out bet, and probably has a small part in me being here today. Had the coinflip come up tails, I'd probably have quit and become a dentist. I'm thankful for my early fortune - 'Expecting Dentures' doesn't have quite the same ring to it.

    But let me lay out the discussion in this post. This is that, in my eyes, housebuilding is one of the few sectors the market understands well. It values housebuilders in a way fairly consistent with what I've highlighted in the first paragraph above. How is this? Typically, it is on a book value basis. A book value basis makes sense in a commoditised industry where your biggest input is capital; because the capital you employ in your operations will be the best guide to how much profit you make. It is difficult to see how any one player could earn a supernormal return on capital - the biggest chunk of your cost base (land) is subject to intense competition from other builders, and the margins on your finished project are inherently constrained by the availability of other houses nearby... which is doubtless the basis on which the acquired land was priced. Consider that Bovis called the biggest challenge in 2014 'the availability and cost of subcontract labour'. This bears all the hallmarks of a commoditised sector, where the economic profits flow through to the inputs.

    Homebuilders (more…)

  • Quarto – cheap, leveraged & the sole survivor

    When I 'cleaned up' my portfolio at the start of the year - after 8 months of it being basically inactive - I liquidated everything except Quarto. Quarto stays on, partly for nostalgia's sake, and partly because it's the only one of the portfolio I still hold personally. The rest were long gone.

    I still think Quarto represents good value at the current price. Some background on the company, courtesy of my first post on Quarto three years ago:

    Quarto are in publishing, but with a few key differences from firms that may immediately spring to mind. The most important one is probably the type of books they are producing. Instead of focusing on fiction, a rather hit & miss affair that hopes to churn out a few bestsellers every year to compensate for some of the flops, Quarto have a varied portfolio of books with very narrow remits and niche audiences. Perhaps I could best illustrate this with their best selling book in 2010: ‘Complete Guide to Wiring’. By focusing on books for such small groups of people and keeping such a wide portfolio, Quarto remain fairly insulated from the more brutal swings in consumer spending.

    It's coffee table books and other niche stuff, basically. Lots of 'gifting' sort of books, too; ones you wouldn't necessarily buy for yourself. They do a good trade at Christmas. Here's what the past looked like:

    QRT_Headline3 (more…)

  • Tivoli A/S: Punchy price, pleasant perks

    Tivoli is a lovely place; unusually for one as poorly travelled as me, I've been there. It's a little amusement park - though the phrase doesn't really do it justice and they call it 'Tivoli Gardens' - in the middle of Copenhagen. If you ever get a chance, definitely pay it a visit - the entry price is a steal, the atmosphere is lovely, and there's a big swing carousel which you can ride on that gives you a great view of the city.

    Tivoligardens2 (more…)