Performance review November 2014

Performance November:

In November, the portfolio gained 1,2% against 5,4% for the benchmark ((Eurostoxx50 (25%), Eurostoxx small 200 (25%), DAX (30%),MDAX (20%)). This is a quite significant underperformance of -4,2%. YTD, the performance is up 5,4% against 4,1% for the BM.

Positive contributors were Koc (10,2%), Hornbach (+9,0%), NN Group (+7,2%) and Cranswick. However, quite a lot of positions had actually negative performance like Admiral (-7,1%), Trilogiq (-6,7%), Ashmore (-3,4%), Thermador (-2,4%), Gronlandsbanken (-1,8%) etc.

On risk management:

With TGS Nopec and Romgaz, I do have two direct oil/commodity positions in my portfolio. However there are also some “indirect” exposures. Gronlandsbanken (my investment case assumes development of natural resources in Greenland) is such an “indirect” exposure as well as Bouvet (biggest client Statoil) and Sberbank. Overall, around 12,5% of the portfolio are oil/commodity “exposed”. There is a kind of off-set from Koc and the TRY Zerobond, as Turkey, a major net oil importer gains from lower oil prices. But overall I will need to make sure that I don’t expose the portfolio too much to commodity price fluctuations unless I would be bullish on that sector.

As I have mentioned in the past, the portfolio will not look good in months with strong benchmark performance. During the 47 months since I run the portfolio, there were 9 months with a performance of 5% or more for the benchmark. This is how the portfolio did perform in those 9 months:

Start Bench Portfolio Perf BM Perf Portf. Delta
Jul 11 6486,69 99,03 14,9% 3,9% -11,0%
Okt 11 5667,92 95,46 10,0% 2,9% -7,0%
Jan 12 5972,48 99,27 8,4% 3,5% -4,9%
Feb 12 6275,00 105,9 5,1% 6,7% 1,6%
Jul 13 7844,96 160,0 5,0% 3,1% -1,9%
Sep 13 8193,80 166,9 5,6% 4,9% -0,7%
Okt 13 8676,38 172,0 5,9% 3,1% -2,8%
Feb 14 9.306,80 186,3 5,2% 2,7% -2,5%
Nov 14 9.389,96 184,5 5,4% 1,2% -4,2%

We can easily see that the portfolio did only beat once, eight times the performance was worse, in some months much worse than the benchmark. The interesting thing is that over the total 47 months, the portfolio has still a lead of +37,7%. I think there are several factors at play here, among other a lower beta, time lags and individual issues. Nevertheless, this gives me confidence that my strategy will work over time although it involves some pain in the short time, mostly in months with big up moves.

Running a portfolio with a lot of individual, uncorrelated risk clearly cannot outperform in any kind of market, especially at the moment when “Beta” is king.

Portfolio transactions:

The only transaction was the 2,5% initial position in Romgaz. The current portfolio can be seen as always on the portfolio page.

Outright cash is now at 10,8% plus ~7,5% of positions which I would consider “cash like” (Depfa LT2, MAN).

SNGR Romgaz (ISIN US83367U2050) – A chance to participate in a Romanian revival at a large discount ?

As this turned out to be a quite long post, a quick summary upfront:

Romgaz, the recently privatized Romanian Natural gas producer looks like a pretty cheap play on the success of privatisation in Romania. Additional tail winds could come from the recently elected ethnic German President who wants to fight corruption and intends to repeat the business friendly and succesful model of his hometown Sibiu where he was mayor for 14 years.

Depending on the underlying value of the natural gas resources, the stock could have a potential upside between +50% in a pesimistic case and 200% in an otimistic one.

Disclosure & Risk: The stock presented is clearly risky and quite illiquid. The author might have bought shares before publishing this. Please do your own research !!!

On Romania

Romania is part of the European union, however it is the second poorest member, only trailed by neighbouring Bulgaria. The country never really recovered from the financial crisis and many Romanians left the country to work all over Europe.

Last week, something quite interesting happened in Romania: An ethnic German was elected as new President of Romania.

Klaus Johannis became major in Sibiu, a mid size town in Romania in 2000 despite representing only 1% remaining ethnic Germans who live there since the 12th century. He was reelected 3 times and managed to attract a lot of German companies to his hometown Sibiu. As a consequence, Sibiu is the Romanian city with one of the lowest unemployment rates and the highest standards of living. By the way it is a really beautiful city very close to the Carpathian Mountains. In my opinion a very attractive yet undiscovered travel destination:

In Romania, the President has a lot more power and influence than for instance in Germany, I think one can compare it to France. Clearly, this election alone will no be enough, as for instance his opponent for the President’s job is still prime minister. nevertheless the vote should be a huge plus for Romania going forward, both as the new president seems to be trustworthy and anti-corruption as well a pro business and economy.

So how did the Romanian stock market react ? Ummm, if we look at the BET index, it didn’t react at all. Actually Romanian stocks are down since the election, so no “Modi Mania” for Romania it seems. One can speculate why this is the case, but in my opinion the Romanian Stock market is too small and so off-the-beaten-track that just no one bothered with it. And Romanians themselves do not really invest in stocks.

Romgaz

Why Romgaz ? Well that one is easy: This is the only Romanian stock you are able to invest if you don’t have access to the Bukarest Stock Exchange. There are no ETFs on Romania either.

Romgaz is a Natural Gas producer (“upstream”) with around 50% market share in Romania. Romania produces most of its own natural gas. In contrast to OMV-Petrom, its domestic rival, Romgaz only does “on shore” production,.

Romgaz has been IPOed one year ago and placed shares on the Bukarest stock exchange as well as on the LSE in the form of GDRs. Since then when the stock was sold at 30 Lei per share, not much happened with the stock price:

The great thing about a recent IPO is, that one usually gets the best information about the company and the sector through the IPO prospectus, which is normally much more comprehensive than any annual report.

The Romgaz IPO prospectus is actually very good and comprehensive

This is a summary of my pro’s and con’s after reading the prospectus

+ no debt, significant net cash
+ only one share class
+ further scheduled price increases due to deregulation, mostly independent of market prices
+ many additional assets like gas storage (90% of total storage capacity), smaller distribution networks, power plant etc.
+ dividend payout ratio ~90%, resulting in a current dividend yield of ~8% (withholding tax “only” 16%)
+ High quality reporting (English)
+ privatised Government company with modern management -> lots of potential to be more efficient

- windfall tax applied in 2013 & 2014
– “royalty payments” on natural resources to Government which could increase (Nat gas & storage)
– “donations” to Government in the past
– government clients defaulted on receivables (that’s how they became owner of a power plant in 2013)
– government influence remains with 70% share
– proven reserves for only 10 years at current production rate
– reserve replacement rate very weak in the past (better in 2012/2013)

This is on the reserves from the IPO prospectus:

Owing predominantly to the re-evaluation of existing reserves, Romgaz has recorded an increasing replacement ratio, reaching 298% in 2012 (2011: 152%, 2010: 92%, 2009: 49%, 2008: 57%), with proved reserves being 71% of its total reserves. Romgaz believes that further increases of Romgaz’s reserves base can be achieved by improving its recovery rates through utilisation of well-established technologies. Romgaz’s size, longevity and market position has also helped it to enter into partnerships with major international natural gas companies including Lukoil, ExxonMobil and Schlumberger to develop other opportunities to increase reserves both inside Romania and internationally

On the upside, until 2012, Romgaz had to deliver their natural gas at “far below market” prices to their customers. Following the deregulation, prices can be adjusted to reach the market price in some years. Again from the prospectus:

Price Liberalisation
In addition, Romania has undertaken to fully liberalise the gas price for domestic production as well as the end-customer prices. In February 2013, the Romanian government started to implement a plan to deregulate natural gas prices by raising gas prices by 5% for non-household customers. It has planned to achieve the
complete price deregulation by 1 October 2014 for regulated customers and by 1 October 2018 for non-regulated customers. For non-household customers, the price of domestic gas is to increase from 49 RON/MWh, as of 1 February 2013 to 119 RON/MWh, by 1 October 2014, and for household customers, the price is to increase from 45.7 RON/MWh, in 31 December 2012 to 119 RON/MWh, by 1 October 2018.

Despite a windfall tax applied by the government, this development has been clearly positive for Romgaz with a 40% profit increase so far in 2014 against the prior year.

Valuation:

Valuing commodity producers by “standard” metrics like P/E or P/B often misses the point. The main value of a commodity producer is clealy “the stuff in the ground” minus the costs to get it out. However normally it is quite difficult to value the “stuff in the ground”. In the Romgaz case however we are again quite lucky. Part of the IPO information package was an independent “resources report” carried out by a large and well known US specialist company.

In this report, they calculate future “net revenue” including all costs taxes etc. and then come up with an NPV. In the Romgaz case, they actually created 3 scenarios: A base case, a low case and a high case. Addionally they provide NPVs for different discount rates, ranging from 8-15% p.a.

So in order to fully value Romgaz we can do a relatively simple asset-based valuation: Using the value of the reserves from the report plus any “extra assets” like the storage facilities and the power plant.

This is what I came up with for Romgaz:

Some comments:

- for the net cash I used the most recent quarterly report 09/2014
– I assumed a valuation of 6x EBITDA for the gas storage in all cases (one could argue for a much higher valuation as “infrastructure asset”)
– I assumed the original “purchase price” of the power plant form early 2013 as the market price
– for the “resources worst case”, I used the lowest value from the report (low case, only proven reserves, 15% discount)
– for the mid case I used base case, proved plus provable resources discounted at 12%

I think it is important to mention that this valuation does not give any credit to a potential exploration of new reserves, this is pure “run-off” only.

In any case, even in the worst case, the stock would have a 50% upside to “fair” value, although the fair value would still imply that you make ~15% p.a. after this value has been achieved. In the more optimistic cases, the current stock price seems to represent an even higher upside. Clearly, there is no guarantee that this value will be realized within a short time frame, but it clearly should limit the downside and create a relatively attractive risk/return relationship.

Why is the stock cheap ?

To me, this could be the combination of different factors, Mostly in my opinion:

- natural resource companies/commodities are out of favour anyway
– Emerging Markets and especially Eastern Europe are unpopular and Romania is even further away from the “Beaten track”
– there is no local shareholder base for Romanian stocks

A few words on Russian companies (Lukoil, Gazprom)

P/E wise, Russian natural resource companies look a lot cheaper and I expect some readers to comment that I should rather buy Gazprom at a P/E of 2 or so instead of Romgaz at 10. For me, despite the higher multiple, Romgaz looks more attractive to me because:

1. there is less uncertainty with regard to property right etc. in Romania. Despite obvious issues with corruption, Romania has proven that Democracy works and it is full member of the European union. This should significantly lower the risk of any “Sistema scenario”.
2. Due to the privatization story, Romgaz is less exposed in the next years to overall market price fluctuations.
3. Despite the low P/Es shown, you never know what actually happens with all those Russian profits. Dividend payout ratios are very low and the companies issue debt like crazy. Romgaz in comparison pays out a large amount of earnings and runs a big cash surplus

Summary:

In my opinion, Romgaz offers a compelling combination between a recently privatized company at a large discount to its underlying value and a potential “macro trigger” for Romania following the surprise election of an ethnic German as new President.

As Romania is so “off the beaten track” for stocks, it might take some time to realize this value, but in between one is paid quite handsomely with a 7-8% dividend yield.

As a result, I will enter into a 2,5% position as part of my “Emerging Markets” bucket at current prices (34 RON / 7,60 EUR per share).

Overall, I expect to make ~100% over a 3-5 year horizon. 30-40% should come through dividends, the rest with price appreciation, mostly based on increased earnings. Downside factors to watch are clearly any government interventions (additional taxes, royalties), further upside could be realized if reserve replacement ratios develop better than expected.

Some links

Great article on the problems at Mc Donalds

Joel Greenblatt talks about his “new” strategy

Great analysis (part 1) of German Online tire company Delticom from Frenzel & Herzing

Damodaran looks at Brazilian Vale and Russian Lukoil.

Alphavulture has analyzed Clark Inc. which seems to be the Canadian version of Carl Icahn

Interesting analysis on the US shale oil industry and the 75 USD oil price (spoiler: Capex will go down A LOT)

The performance of companies, whose CEOs play a lot of golf, does not look so good. What about money managers ?

Don’t miss: Blogging luminaries on Charlie Rose (Josh Brown, Joe Weisenthal, Felix Salmon, Megan Murphy)

Harvesting the archives (1): AS Creation, Medtronic, Netflix

Introduction:

Keeping track of all the companies one has ever looked at is pretty hard. It is pretty easy to update the companies which are in the current portfolio, but in my case, I often forget about the companies which I have looked a couple of years ago but didn’t buy for one reason or another or sold them. One of the great things of blogging is that you can easily look at everything you have ever written. Especially in the current environment, where good value investing ideas are pretty hard to find, it might make sense to look back at companies one has researched sometimes ago and either sold or not bought. Maybe they have become interesting again ? For me it is a lot easier to update myself on a stock I have looked 3-4 years ago compared to looking (and digging) into a completely new stock.

So in this new series, I will look into stocks I have written about and either sold or rejected and try to find out if something has changed or if some lessons could be learned.

AS Creation

AS Creation was the first detailed stock analysis on the blog in December 2010 (in German). The company back then looked cheap: Single Digit P/E, historically a single digit p.a. grower, 30% market share in Germany and the potential upside of a Russian JV (Russia was supposed to be a growth market back then). After some quite significant ups and downs, the stock was sold in August 2013 because the margins didn’t mean revert and the Russian JV was already in some trouble under “non crisis” conditions.

Looking back, the decision to sell in June 2013 at ~34 EUR looks smart if we consider the chart although in between the stock went up to 40 EUR again:

Operationally, AS Creation was hit by several negative events: First, the bankruptcy of Praktiker impacted them in the German core business, secondly, their French subsidiaries suffered and finally, the Russian JV which had to suffer from delays has been clearly hit by by the current crisis. With regard to the German business I have the impression that they never really rebounded to their historical average, maybe they did profit from some kind of anticompetition arrangements, for which they were fined. An interesting detail: They were convicted to pay 10,5 mn EUR in 2014, but they seem to have appealed the decision. To my knowledge, no appeal was ever succesful.

In any case, I don’t think AS Creation is interesting at the current level of 30 EUR. At a 2014 P/E of 15-20 (before any extra write-offs on Russia) there seems to be quite some turn around fantasy being priced in.

From my side there were 2 important lessons:
1. Mean reversion on single stock basis is nit guaranteed
2. If you buy cheap enough, you don’t lose much if things go wrong.

Medtronic

Medtronic was introduced (in German) on December 31st 2010 and then kicked out in August 2011 because I didn’t feel comfortable with a large cap US stock.

Looking back, this clearly doesn’t look like the smartest decision I ever made. Back then, I sold Medtronic at a loss of around -19%. Since then, the stock showed a total return of 167% in EUR. One of the interesting things about Medtronic is that a lot of the performance came from multiple expansion.

When I sold the stock at around 32 USD, the stock was trading around 10 times trailing earnings (3,27 USD per share 2010). 4 years later, reported earnings 2013/2014 have been ~20% higher per share at 3,80 USD, but Medtronic is now trading at around 18,5 times trailing earnings.

What is even more interesting than that is the fact that in absolute terms, 2013/14 earnings are at exactly the same levels as 2010/2011. Profit margins are even lower than back then. What happened ? Well, as in many cases for US stocks, the company bought back shares aggressively. Still, both ROE and ROIC declined but shareholders don’t seem to bother.

So despite the big run up of the share price, I don’t think that selling the shares has been a mistake. From a fundamental view the company looks worse than back then, however investors seem to be so happy about buyback driven EPS gains that they are willing to pay a pretty high valuation for this.

You could have speculated on such an outcome but as a fundamental investor, this would not have been in line with my investment philosophy. And clearly, You cannot increase the value of the company forever just by reducing the share count.

Stand-alone I would argue that Medtronic is clearly overvalued, based on the stagnating profit and deteriorating profitability. However with the current Healthcare “merger mania” I would not want to short the stock either.

Netflix

I briefly considered to skip the whole Netflix episode but then decided against it. Looking back, this clearly shows that one can do stupid things and still make money….

I shorted Netflix in January 2011 after a short thesis from Whitney Tilson. Luckily I was able to cover the short with a gain in September 2011.

Looking at the chart, we can see that despite extreme volatility, Netflix is now trading 3 times higher than when I covered the position:

The lessons here were pretty simple:

1. Don’t short “hot stocks” based on fundamentals. It is too volatile and just not worth it-
2. Stay away from whatever Whitney Tilson is recommending

Fundamentally, Netflix is on my “too hard” pile. I do think streaming is a big thing and will be even bigger in the future. However I have no idea how much money Netflix will actually be able to make.

Book review: “Built to Last: Successful Habits of Visionary Companies” – Jim Collins

“Built to last” is a managment literature classic, first published in 1994. It has been reviewed and critized many times already,so I just want to provide a very short summary:

The author analyzes 18 companies which were succesfull for a very long time and compares them to less succesful companies in order to find out what set them apart. The most important point seems to be that the company is a “visionary company”, meaning that the company has a clear mission which is not only earning as much money as possible but somthing in the way of “We want to make people happy” (Disney). Combined with “core values” and “really big goals”, this, according to the author is the secret sauce for a long term succesfull organization.

Looking at those 18 companies clearly shows that since the book was written, not all the companies were great successes for their shareholders. Citigroup, Ford, Motorola were clearly not performance stars, on the other hand, a couple of o the companies (AMEX, Wal-Mart, IBM) are long-term successes and core holding of our value investing Hero Warren Buffett.

Is the book relevant for investing and if yes how ?

I think the answer is clearly “YES” and those are the 3 major points in my opinion:

1. Many current CEOs have read this book (and many future CEOs will read it) and try to act accordingly

For instance the “3G story” of the Brazilians who now run Ambev, Heinz and Burger King seem to have clearly taken this book as blueprint for their strategy. “Dream Big”, core values such as meritocracy, honesty etc. were clearly inspired by this. Edit: And yes, Jim Collins has actually written the foreword to “dream Big” and he seems to have worked with “mastermind” Leman for a long time.

Interestingly, in the book it is clearly said that just writing down those statements is clearly not enough, you have to live them every day which is not easy to achieve. So just when you see something like this written on an annual report, you know that they have read the book but you cannot be sure if a company actually follows those vision and values.

2. A strong vision and core values compared with a good alignment of management and investors might result in great shareholder returns

Many critics use the failed companies of the book as a proof, that success is more depending on luck than on any vision and core values. I would argue that they are missing one point: In many of the failed cases, there happened a serious disconnect between shareholders and management. The most obvious case is Citigroup, which at least since the 2000s was run to the benefits of the employees rather than for all stakeholders. The same could be said of Ford, where the Ford family did not really exercise the owner’s influence as it would have been necessary.

I think it is not random, that especially the companies which were held for instance by Berkshire (Amex, Procter) or where the founder / founding family has a strong tie to the business (Wal-Mart) did well. Both, the influence of a significant investor or a founder with a large ownership can ensure that a visionary company can be also a big success for shareholders. It is clearly not a 100% “hit ratio” but I think the chances for long-term success are clearly above 50%.

For me, Google for instance is a fantastic “visionary company”, but in Google’s case I am not fully convinced that their goals are fully aligned with me as potential minority shareholder.

3. Non-visionary companies can be very good investments as well but it might be harder to sustain success in the long run

The prime example for a non-visionary company in my opinion is Berkshire Hathaway. Buffett’s target has always been to compound shareholder’s wealth. That the company did this for so long and so successful in my opinion is clearly the result of Warren’s and Charlie’s genius and their long and healthy lives. Interestingly, now close to the end of their careers, they seem to be on the “Vision” and “core value” track. At least that is how I interpret the rebranding of many subsidiaries as “Berkshire Energy” and Buffett’s speeches about Berkshire core values which at least to my knowledge were not so prominent years ago.

I think it has become clear to Buffett, that a conglomerate formed by two geniuses might be hard to sustain when those two are not around anymore.Additionally it will be interesting to see how the interests of a future Berkshire CEO who will not own half of the company, will be aligned with the shareholders.

Summary:

Despite having some lengths, I think the book is a good and relevant read for investors who want to look a little bit outside typical investment literature. Some people might say that the book is too old to be relevant, but I personally think that the content of the book is pretty timeless.

Management / shareholder disconnect- E.ON SE edition

Normally, I don’t care that much about quarterly results, but in the case of German utilities I sometimes make an exception simply because often they are too entertaining to miss.

Yesterday, for instance E.ON the German utility company reported Q3 figures. The press release reads pretty “upbeat”:

E.ON affirms 2014 forecast
11/12/14 | Posted in: Finance
Adjusted for portfolio and currency-translation effects, EDITDA above prior-year level
Renewables’ share of earnings rises to 17 percent
Economic net debt reduced by €1.2 billion
E.ON today reported nine-month earnings that were in line with its expectations. It therefore continues to anticipate full-year 2014 EBITDA of €8 to 8.6 billion and underlying net income of €1.5 to €1.9 billion. Nine-month EBITDA declined by seven percent year on year to €6.6 billion. The absence of earnings streams from divested companies and adverse currency-translation effects were the main factors. On a like-for-like basis—that is, adjusted for portfolio changes and currency-translation effects—E.ON’s EBITDA was above the prior-year level.

I would call this kind of disclosure “Level 1″: How the company wants to be seen

So with “adjustments” things look better than last year. However this time even a relatively “mainstream” German magazine remarked that the earnings disclosure of EON is relatively difficult to understand.

Level 2: P&L – Some kind of truth

In their quarterly report, EON has to use Accounting standards at some point. After 15 pages of useless “Management report” the first “real” accounting number shows up on page 16.

In fat type you can see the following:
Net income 255
for YTD 2014, which is around 90% lower than 2014. Then in small print they show the following:

Attributable to shareholders of E.ON SE -14
Attributable to non-controlling interests 269

So under IFRS, EON actually lost 14 mn EUR in the first 9 months.But anyone who is reading this blog regularily knows that this is still only “half of the truth”:

Level 3: What really happened – Comprehensive income

Only on page 25 we see the comprehensive income statement of EON for the first 9 months. And this looks really ugly.

-1,7 bn losses from the increase in pension liability
-0,6 bn FX and hedging losses

then lead to a total loss of 2,2 bn EUR or -1,1 EUR per share for E.ON’s shareholders for the first 9 months.

If we look at the stock price, we see that the positive “spin” only lasted for around 20 minutes before the stock price started to drop.

Why are they doing this ?

Well, this is pretty easy and straight forward: This allows the Management to award them nice bonuses independent of what the total result for the shareholder looks like.

Total comp in 2013 according to the annual report for management was 18,5 mn, thereof around 13 mn “bonus”. And this in a year where the were only able to generate a comprehensive income o ~600 mn EUR or 2% ROE.

EON’s target achievement is measured the following way according to the annual report:

As under the old plan, the metric used for the operating-
earnings target is EBITDA. The EBITDA target for a particular
financial year is the plan figure approved by the Supervisory
Board. If E.ON’s actual EBITDA is equal to the EBITDA target,
this constitutes 100 percent attainment. If it is 30 percentage
points or more below the target, this constitutes zero percent
achievement. If it is 30 percentage points or more above the
target, this constitutes 200 percent attainment. Linear inter-
polation is used to translate intermediate EBITDA figures
into percentage

For a capital-intensive business like a utility, EBITDA in absolute is pretty useless. However it is pretty easy to achieve or beat for Management. As a shareholder you can be sure that your interests are not aligned well with those of the management. In my opinion, that whole mess at EON has a lot to do with this pretty obvious “detachment” between management and shareholders and only to a smaller extent with German energy policy.

Finally some other stuff

The most interesting item in the whole Q3 report for me was the fact that Electrical Power generation was actually 50% better (EBITDA) than in 2013 and more than 100% better on EBIT basis. The biggest drop yoy actually came from the natural gas business.

Summary:

EON’s Q3 report for me is a prime example for a badly managed company. The disconnect between management incentives and shareholders leads to nonsense reporting, mostly in order to avoid the hard truth of losses to shareholders. For instance anyone who wondered why they bought crappy assets in Brazil and Turkey instead of paying back debt should understand that this actually increased the bonuses of management irrespective of FX losses, write-offs etc. As an investor, one should stay as far away as possible from such companies, no matter how cheap they are because at some point in the future they will “hit the brick wall”.

Short cuts: Sky Deutschland, Rhoen Klinikum, Bilfinger, Vossloh

Sky Deutschland

A short quiz: Can you spot the day when the 6,75 EUR offer expired ?

My initial strategy obviously didn’t work out. Now however I am wondering why I didn’t short Sky Deutschland instead before the offer expired. It seems to be clear now that the price didn’t move above 6,75 EUR during the offer period, because most people attach a fundamental value of less than 6,75 EUR to the shares. That would have been second level thinking, but I missed it.

I read somewhere that you should only sell a stock from a portfolio if you are ready to short it. That would have been the best approach here.

Rhoen Klinikum

Looking at the chart, my decision to take a profit at 23,15 EUR looks stupid:

The mechanics of the current “listed transferable tender rights” are the following: The less people who want to actually sell there shares, the lower the price of the tender rights and the higher the share price. As for now, it seems that not so many people want to sell. I have to confess that I got nervous when the price of Rhoen dropped after I bought on the first day ex rights.

In the future, I think it makes sense to wait longer and see how these special situation plays out. I think I waisted some “intrinsic optionality” by taking the small profit much too early.

Bilfinger

In August I looked at Bilfinger for the first time. My arguments against an investment back then were the following:

– some of the many acquisitions could lead to further write downs, especially if a new CEO comes in and goes for the “kitchen sink” approach
– especially the energy business has some structural problems
– fundamentally the company is cheap but not super cheap
– often, when the bad news start to hit, the really bad news only comes out later like for instance Royal Imtech, which was in a very similar business. I don’t think that we will see actual fraud issues at Bilfinger, but who knows ?

Yesterday, Bilfinger released Q3 numbers.

For me, it was therefore no big surprise that they had to write down in total of ~230 mn EUR. The market however seems to have been expecting other things as the extreme drop in the share price shows:

I think Bilfinger is now approaching the “very cheap” area and I will look at them a little closer in the next weeks.

Vossloh

Vossloh, another potential “turn around” story also released Q3 numbers a few days ago. Similar to Bilfinger, investors seemed to have been spooked by the numbers.

In my opinion, two issues might have irritated investors:

- new orders in Q3 were very weak (new orders in the first 6 months were very strong)
– management basically said that a “full” recovery can only be expected for 2017

Interestingly, the whole press release had a very negative tone, they make no attempt to strip out the one offs etc. etc. Maybe it is coincidence, but if I would want to talk the stock down in order to maybe buy the company cheaply, I would do it exactly that way…..

This is what I said in September:

Looking at the chart, this might not be unrealistic as the stock price is still in free fall and any “technical” support levels would be somewhere around 39 EUR per share if one would be into chart analysis. In any of those “falling knife” cases, patience is essential anyway.

Vossloh will therefore be “only” on my watch list with a limit of 42 EUR where I would start to buy if no adverse developments arise.

So we are now very close to my potential entry point. I will watch this as closely as Bilfinger. Both for Bilfinger and Vossloh, Iit will be interesting to see if there will be some year end tax loss selling.

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