“Ride your winners and sell your losers” is one of many stock market sayings that are not particularly useful. Were it true, RNY Property Trust would have been one of 2016’s best performers rather than the worst. And Macmahon Holdings, one of the Fund’s best performers for two years running, would have been sold long ago.
Proponents of the idea will find plenty of evidence in our 2017 performance report, though.
The top three contributors to performance were all in the top five from last year’s report. And the worst four performers this year were all in the dog house in 2016. Let’s start with the losers that kept on losing.
Despite its unit price falling a whopping 57% the previous financial year, RNY Property Trust (RNY) managed to take the gong for worst contribution again in 2017. The unit price fell a further 59% between 30 June last year and our fortuitous exit in February, knocking 2.7% off the Fund’s return for the year.
Charlie Munger once referred to the valuations of some insurance company assets as “good until reached for”. So it has been with RNY. The Trust’s net tangible assets – $0.56 per unit as at 30 June 2015 – evaporated as soon as the properties were put up for sale.
Located in suburban areas of the New York tri-state area, RNY’s properties have proven unappealing as tenants migrate to the boroughs and to alternate offices with easy access to public transport. Combined with high operating and financial leverage, property values have been decimated.
Management is now anticipating net proceeds to unit holders of between $0.04 and $0.10 per security, suggesting the previous estimates were wildly optimistic.
Some investors are understandably irate at both the trust’s manager, RXR Realty, and valuers CBRE who are responsible for verifying the asset values. We are irate at ourselves. It is our job to know when balance sheet values are overstating reality and not taking money off the table when the unit price was north of $0.30 was clearly a mistake.
The other stock sharing the dog-house with RNY is Hughes Drilling. The risks section of our research into Hughes was unfortunately prescient. A lack of cashflow and a growing debt pile were highlighted as potentially existential risks.
You may rightfully question why we invested in a stock where such risks had been identified. The answer was that, given he had tens of millions of dollars on the line, we thought founder Bob Hughes would come to his senses and temper his reckless expansion plans. Instead he doubled down and doubled down again, with two acquisitions and tens of millions of dollars of expenditure on new equipment. In September 2016 the directors declared the company insolvent and shareholders are unlikely to see anything from the wind-up.
Rereading the initial investment case, we would probably make the decision to invest again. We knew fairly early on that Bob wasn’t going to see the error of his ways, though, and still bought more shares as the share price fell. The mistake here was not that we lost money, but that we lost more than we should have. Most of the damage was done the previous financial year but Hughes subtracted a further 1.9% from returns in 2017.
Logicamms (LCM) could join Hughes in the listed-company graveyard if management don’t rectify its woeful performance in a hurry. The share price fell another 56% in 2017 as its financial performance fell well short of management forecasts and that same management team jumped ship. While the engineering services company doesn’t currently have much debt, Logicamms isn’t making money either. After a number of capital raisings in recent years it is hard to see shareholders throwing more good money after bad.
At less than a 1% portfolio weighting, failure won’t be catastrophic for the portfolio but the stock lopped 0.9% off 2017’s return and we are seriously concerned about its future.
The final negative contributor of note was financial services software company GBST (GBT), which reduced the Fund return by 1% thanks to a 28% share price fall. GBST, too, was one of last year’s worst performers. That was largely outside the company’s control as Brexit cut the Australian dollar value of its UK revenues (roughly half GBST’s revenues are generated in pounds).
This year its wounds were self-inflicted. Founder and managing director Stephen Lake sold shares prior to a downgrade and then resigned. After his departure new management announced that it had been under-investing in recent years and that the next few years’ profits are going to be severely curtailed by the costs of catching up to the competition. With sticky customers and plenty of cash in the bank, GBST’s future is secure. There is work to be done to make it a prosperous one.