Bristlemouth

A Value Investing Blog

Posted on 21 Mar 2017 by Steve Johnson

B&C Speakers Shows What Makes a Real Successful Investment

B&C Speakers Shows What Makes a Real Successful Investment

 

I presented a webinar for Netwealth last week on value investing in small and mid cap stocks. Even after a couple of decades practising value investing, going back to basics gets me thinking about the fundamentals of what we do. And it helps, a lot.

The value of any financial security is the present value of the cashflows it is going to deliver to its owner.

That is the fundamental principle of value investing. How much am I going to get? When am I going to get it? How certain am I? Answer these three questions accurately, buy with an appropriate margin of safety and you don’t need to worry about anything else. The share price can go up down or sideways. It doesn’t even matter where the shares trade at all. The business you own is going to provide you with the return you require.

Despite knowing this, despite repeating it ad nauseam to investors and potential investors alike, I still get lured into letting share prices define our success. Sotheby’s (NYSE: BID) share price has doubled since we bought it, therefore we were right. Countrywide (LSE: CWD) is down 60% over the past few years, therefore we stuffed it up. Continue reading “B&C Speakers Shows What Makes a Real Successful Investment”

Posted on 09 Feb 2017 by Steve Johnson

GTN and Webjet Don’t Compare Well

GTN and Webjet Don’t Compare Well

 

The FT Alphachat Podcasts serve two purposes on our holiday travels. They let me catch up on some engaging content. And they put my mildly insomnolent wife into a deep sleep.

Hence I found myself listening to an interview with Michael Mauboussin on a recent slow, end-of-a-long-weekend drive from the NSW South Coast to Sydney. Mauboussin was speaking with the FT’s Cardiff Garcia about the implications of his experience writing his recent paper titled 30 Years: Reflections on the Ten Attributes of Great Investors.

Continue reading “GTN and Webjet Don’t Compare Well”

Posted on 01 Feb 2017 by Daniel Mueller

Be Alert to Directors’ Interests

Be Alert to Directors' Interests

 

There are many rules of thumb an investor learns early in their journey. One of these is that directors buying stock ought to be positive for the share price and directors selling stock is a red flag.

The theory goes that directors are insiders and should have a better feel for how a company is travelling than us outside investors.

Sure, there could be valid reasons for directors selling stock. But after years of hearing these reasons, they tend to become repetitive and sound more like excuses. “I have a big tax bill this year,” “I’m buying a property,” and “I’m going through a divorce” come to mind.

If a company’s prospects are as bright as many annual reports would lead us to believe, surely these directors could borrow money to hold on to their shares. There seems to be no shortage of money around when directors purchase stock. I’ve never heard one say “I wanted to buy stock but couldn’t cough up the cash.”

With that said, let’s test the theory with some examples from 2016.

Continue reading “Be Alert to Directors’ Interests”

Posted on 30 Jan 2017 by Steve Johnson

CIMIC Bid Underwrites Value for Macmahon Shareholders

CIMIC Bid Underwrites Value for Macmahon Shareholders

 

It has been expected for a long time. If the AFR is to be believed, it isn’t the first bid CIMIC Group has lobbed on the table. But CIMIC’s early 2017 bid for the 80% of Macmahon it doesn’t already own is the first serious attempt to relieve minority shareholders of their holdings.

The Australian quotes us this morning as being “angry” at CIMIC for the bid. Quite the contrary, the bid is excellent news and we are happy it has finally arrived. Continue reading “CIMIC Bid Underwrites Value for Macmahon Shareholders”

Posted on 19 Jan 2017 by Alvise Peggion

Cardno Back into Shape

Cardno Back into Shape

 

Over the past few months the Forager Australian Shares Fund has been buying shares in Cardno (CDD), an engineering consultancy company. Gerry Cardno and Harold Davies started the business in Brisbane in 1945. The company thrived during the post-war boom years through to the 1970s, designing bridges, sewage systems, dams and roads throughout Queensland.

After listing on the ASX in 2004, Cardno expanded across Australia and internationally. A buoyant mining sector and 44 acquisitions saw revenue rise from $94m to $1.3bn over the period to 2014. By then it was valued at nearly $1.2bn, up from $35m when it floated.

Then commodity prices slumped. Mining and oil related investment evaporated and there weren’t enough infrastructure projects to pick up the slack. Engineering firms competed fiercely for what work there was and the industry’s profitability crumbled. Cardno’s EBIT margin, a measure of its operating profitability as a percentage of net revenue, fell from around 15% in the boom years to less than 5% now.

Continue reading “Cardno Back into Shape”

Posted on 18 Jan 2017 by Daniel Mueller

Value Traps, the Media Sector and the Fund’s Newest Investment, NZME

Value Traps, the Media Sector and the Fund's Newest Investment, NZME

 

The Australian media sector has wrecked the careers of many fund managers over the past decade. First were the growth investors — those prepared to pay high multiples for a business they think can grow. A decade ago high earnings multiples (around 20 times profit) were supposedly justified as deregulation was meant to lead to a wave of consolidation. Media moguls like the Packers, Stokeses and Murdochs were supposed to mop up the sector at premium prices. Fairfax (FXJ) was the most prized target, and APN News and Media (APN) wasn’t far behind.

Continue reading “Value Traps, the Media Sector and the Fund’s Newest Investment, NZME”

Posted on 19 Dec 2016 by Alvise Peggion

Crescent Shows Value at Cardno AGM

Crescent Shows Value at Cardno AGM

 

Annual General Meetings (AGMs) generally aren’t much fun. But they can provide valuable insights for those who attend. The best AGM that I attended in 2016 was that of Cardno (CDD), an engineering consultancy whose share price had fallen almost 90% since 2014.

Gerry Cardno and Harold Davies started the business in Brisbane in 1945. The company thrived during the post-war boom years through to the 1970s, designing bridges, sewage systems, dams and roads throughout Queensland.

After listing on the ASX in 2004, Cardno expanded across Australia and internationally. A buoyant mining sector and 44 acquisitions saw revenue rise from $94m to $1.3bn over the period to 2014. By then it was valued at nearly $1.2bn, up from $35m when it floated.

Then commodity prices slumped. Mining-related investment evaporated and there weren’t enough infrastructure projects to pick up the slack. Engineering firms competed fiercely for what work there was and the industry’s profitability crumbled. Cardno’s EBITDA margin, a measure of operating profitability as a percentage of net revenue, fell from more than 15% in the boom years to around 10% in 2015.

This shouldn’t have been a large problem. In a cyclical industry like Cardno’s, wild fluctuations in profitability are to be expected. But Cardno was carrying a lot of debt. In June 2015, gross debt stood at $400m (net debt was $320m), while the business had less than $700m in net tangible assets.

With lenders increasingly likely to ask for their money back and mounting evidence that Cardno had overpaid for many of its acquisitions, investors dumped the stock. Cardno’s market capitalisation fell to $250m in June 2016 (it has recently recovered to around $500m).

Continue reading “Crescent Shows Value at Cardno AGM”

Posted on 12 Dec 2016 by Steve Johnson

Bellamy’s Lesson on Loyalty in China

Bellamy's Lesson on Loyalty in China

 

Just six months ago, organic baby-food company Bellamy’s was flying the flag for a new Australian economy. Australia’s reputation for healthy, clean food was going to pick up the resources slack as China’s growth transitioned from infrastructure to consumption, 

No stock encompassed the opportunity better than Bellamy’s, where sales grew from less than $30m in 2013 to $245m in the most recent financial year.

The stock is in a trading halt this morning. Another downgrade is likely, just a few weeks after the company’s first profit downgrade caused the share price to halve.

Knives will be out. The company’s lack of infrastructure will be scrutinised. Its lack of marketing expenditure will be blamed. But the cause of its woes is much simpler. Continue reading “Bellamy’s Lesson on Loyalty in China”

Posted on 08 Dec 2016 by Kevin Rose

Harley Rides on Without Us

Harley Rides on Without Us

 

Deciding to sell a stock is often harder than deciding to buy it. Selling our shares in Harley-Davidson (NYSE:HOG) provides a good example.

Since the US election, investors have rewarded companies with a nationalist bent. It doesn’t get more flag waving than Harley. Indeed, the company’s share price has risen almost twice as much as the overall market since Donald Trump’s election.

Sentiment that Harley’s core customer base will fare better under the new administration, combined with optimism around its new engine redesign, has pushed Harley’s share price to a level that reflects fair value. Continue reading “Harley Rides on Without Us”

Posted on 22 Nov 2016 by Gareth Brown

Fevertree Mixer Fever

Fevertree Mixer Fever

Fevertree Drinks (AIM:FEVR) is a UK-listed company that makes very high priced soft drinks specifically for mixing with alcohol. It’s Schweppes for people with too much money.

I looked at the stock a few years ago, just after it listed on the Aim, London’s junior market. Fevertree’s drinks had grabbed a disproportionate share of real estate on Viennese supermarket shelves, piquing my interest.

Drinks manufacturers can make outstanding investments when you get the right one at the right time—Monster Beverage Corporation stock appreciated more than 100-fold after it took off in the early 2000s. Red Bull clearly did something similar for its private investors in Austria and Thailand. And let’s not forget Coca-Cola, which made rich just about anyone who bought and held the stock in its first 100 years of existence. Continue reading “Fevertree Mixer Fever”

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