Monthly Archives: September 2012

Publishing the Boss Score -Top 25 France

Following the Top 25 Germany post, let’s look at the next big Euro stock market, France:

Top 25 France 10 Year Boss Score:

Top 25 France 5 Year Boss Score

Those lists are based on a sub set of ~ 400 french stocks.

The most fascinating aspect about the French market for me is the fact that French companies look much much cheaper than their German counterparts. Of course, both list contain some “deep value” stocks like Toupargel, where a “terminal decline” might be possible.

On the other hand, there are still enough cheap “quality” companies. For instance, if we include an additional criteria like Stock Price > 1.25x book value, we still get a nice list of cheap “higher quality” companies:

For me, France is currently one of the most interesting markets for Value investments. Despite the bad press, there are many interesting and cheap companies. It reminds me a little bit about Germany and German companies 10-15 years ago, when Germany had to suffer the “reunification hangover”.

Looking back it is hard to understand why German quality companies were so cheap. I think there is a good chance that France will do its homework. One shouldn’t forget that most of the tough reforms in Germany (Hartz 4, work flexibility etc.) were actiaslly implemented under a Socialist government.

Publishing the Boss Score – Top 25 Germany

As announced in the last post, until I find a nicer solution for the whole file, I will publish selected lists.

As there are many German readers, I start with German stocks.

First the Top 25 German stocks based on the 10 year Boss Score:

and then the German Top 25 stocks based on the 5 year Boss Score

This is based on ~400 German stocks, so it is not a complete list.

Not surprisingly, a couple of stocks are in my Portfolio (Hornbach, AS Creation, Rhoen) or were in the portfolio at some point (Frosta, Einhell, Bijou). Interestingly, one can see that in the 10 year Top 25, there is a mixture of cyclical stocks (Salzgitter, Aurubis, H&R, Bauer), Holding Co’s (Indus, Gesco), port operators (Eurokai, Bremer Lagerhaus) and Nanocaps (Nucletron)

One of the stocks I really have to check out is Mühlbauer, I always considered it as a “neue Mark” stock but maybe it is worth a second look. Also I find interesting how well the expensive “quality stocks” like Sixt and Grenke are scoring.

From the 5 year list, I find IVU and Bechtle most interesting. Eurokai might be worth a second look as well.

All in all however, German stocks look relatively expensive in my model. Other countries like France yield a lot mmore interesting companies.

All tables will be posted on the Boss Score page.

Publishing the Boss Score – call for technical help

A few month ago I described my Scoring model which tries to identify potentially interesting stocks which show low fundamental volatility at attractive valuations and ROEs above cost of capital (“Boss” for “Boring sexy stocks”).

Part 1
Part 2
Part 3
Part 4

In the meantime I have built up a Excel database of around 1.500 stocks (and growing…). As I am a big fan of sharing information, I tried to come up with a convenient and cheap way to publish the results.

Ideally I would like to have something like an “Online database” where one could search & filter by certain categories, like Name, Score, Volatility, ROE and then get the results. And of course this should be easy to implement (no programming, easy update and free of charge).

So far I managed only to embed a google spreadsheet into WordPress. I imported the first 50 stocks in the database starting with A in a test page on the blog. The page is online already since a couple of weeks but so far no one has noticed (or no one is interested anyway). The result looks like this:

(By the way, Accell really looks good in the model…..)

Google Docs is a great way to do this. As soon as I update the Google sheet, it updates automatically in the blog. However, embedding the sheet in WordPress does not allow to use the search function or similar things

So here is the question:

Does anyone have an idea how to make the embedded google sheet more user friendly, i.e. searchable through something like a drop down menue ? I don’t really want people to access the underlying sheet.

Or is there another way to put a searchable Excel sheet online without programming and costs ?

In the meantime alternative I would just publish selected subsets like Top 10 per country or something like that.

So if you know how to do this, please send me a mail or comment on the page.

Weekly links

New German language blog for small cap stock picking including a model portfolio

Interesting paper on how and if individual investors learn from mistakes

Post mortem analysis of a capital structure arbitrage gone wrong from Valueprax. I think analyzing such trades and writing down the reasons is the most important part for any investor to improve his skills.

Lululemon and the Einhorn effect

Q2 letter summary of the interesting TCI hedge fund. Concentrated activist portfolio. (Mental note: Check Lloyds TSB bonds)

August newsletter from Ennismore, always worth reading. Featured stock: Duni

A bond camouflaged as stock: Societé D’Edition de Canal+ (ISIN FR0000125460) – Part 2

Following the first post about Societé D’Edition de Canal+ (“SECP”), let’s look how our “camouflaged” bond trades before we move to the valuation:

It is quite amazing to see this security trading so close to the CAC 40. For me it seems clear that not many are aware of the “special” characteristics of this security. Statistically, this translates “only” into a correlation of 0.48 and a beta of ~0.66 in this period but just from the graph one can see this is a very close relationship.

Compared to “parent” Vivendi, we can clearly see that SECP was the better investment:

Over the past 5 years, SECP and Vivendi moved closer together, but correlation is still much higher with the CAC40.

My valuation approach

So to summarize the results from the first post, for valuing the security, I will:

a) use only 90% of the guaranteed after tax result as coupon (plus the 2.5% growth rate)
b) expect so “sell out” at the end at NAV (incl. the 10% retained guaranteed profits)
c) will use discount rates as mentioned between 4.7% and 5.7% representing long duration hybrid high grade corporates
d) deduct a 0.25% from the discount rate for the “inflation protection”

Results:

Based on a current value of 4.525 EUR per share, my estimated cashflows represent an IRR of 8.2% p.a.

On a discounted basis, we get a fair value range of 6.87 EUR to 8.23 EUR per share, so quite a nice upside to the current share price but lower than the author determined in his analysis. The reason is simply the assumption of only using 90% payout ratio and not counting the cash upfront but the NAV “back ended” in year 2050.

Due to the long duration of the cashflows minor changes in those assumptions change the value significantly.

Opportunity / Special situation: Investor constraints

In principle, SECP would be a highly attractive high yielding long duration corporate investment for any pension fund or life insurance company. Due to the fact that this is officially a stock and it also behaves like a stock, many of those institutions will no be allowed to buy it as listed equity is a quite unpopular asset class these days.

On the other hand, for a typical equity investor, the stock is too boring, as a growth rate of 2.5% is not very sexy.

The characteristic of a long duration corporate exposure itself is relatively attractive as there is only very limited supply in the market. Most of the long dated (hybrid) stuff is financial which no one wants to buy these days. Long dated corporate exposure, especially to high quality corporate is very very scarce.

Catalyst

In the original research from the Value investor Club, the author says the following:

To review the corporate structure, C+ is 49.5% owned by C+ France, which is 80% owned by Vivendi and 20% owned by Lagardere. Lagardere has been trying to simplify its business and raise cash to repay debt over the past few years. It has been trying to sell its 20% interest in C+ France for a while, either as an IPO or to Vivendi, but has not been happy with the available prices. Lagardere has recently re-committed to sell its 20% interest one way or another in 2012. Vivendi has had an active policy of purchasing its French minority interests but has not yet agreed with Lagardere on price. Two weeks ago Bloomberg News reported that Vivendi will consider breaking itself up and will perhaps separate C+ Group from the rest of its businesses.

I am not sure how all this plays out, but I think that within 1-2 years C+’s parent company C+ France will be 100% owned by someone, and that there is a pretty good chance that party will want to acquire the 51.5% public float of C+’s shares. I believe that purchase will make economic sense at prices well above today’s €4.05 since at today’s price C+ is receiving a payment implying a 12.3% FCF yield. At €8/share the implied FCF yield is close to 5% and I think an acquirer would still want to purchase C+ at that level to avoid the cash payment, simplify ownership and eliminate any duplicated costs/public listing costs and tax inefficiencies. Vivendi can borrow short-term money at around 0.5% and long term below 5% so it has leeway to make a purchase at €8 that is EPS-enhancing.

I agree, that it is not totally unlikely that at one point in time Vivendi will repurchase the minorities. However one has to be careful not to overestimate the price they are paying. At the moment, the minority share costs them 6% dividend yield but has the advantage that it does not count as debt.

If Vivendi really would issue debt to repurchase minorities, their debt will increase, even if they could then consolidate the cash in SECP. At S&P, Vivendi has a BBB with negative outlook and more importantly a A-2 Short term rating with negative outlook. So even if its good for EPS, I think Vivendi does not have a lot of leeway to increase debt at the moment, especially if they would buy the Lagardere stake first.

Nevertheless, there is a relatively high probability that something might happen in the next 2-3 years.

How to tackle the stock volatility

So the problem is: SECP has a nice “special situation” angle, but for the time being it behaves like a CAC 40 index tracker without having a fundamental stock upside. It is a bond with an equity volatility. Normally I am rather looking for equity with bond volatility.

There are 2 potential ways to “mitigate” this:

1. Wait for the Stock to follow the CAC down in a correction and buy really really cheap.

2. Try to implement a long/short or hedge strategy in order to take out some volatility

The nice thing about SECP is that the dividend yield with 6% is higher than the CAC 40 yield with 4%, so we do have in principle a “positive carry” against the index (all other things equal).

In theory, one would implement a short position according to the beta of the stock to the CAC 40. Adjusted Beta has been quite stable to the CAC with 0.67, Raw Beta is at around 0.48.

I have run a quick simulation (30.07.2010-31.08.2012, daily basis) with some interesting results:

Standalone, the CAC 40 returned -6.3% against -5.2% for SECP for this period. Volatility was 10.2% for the CAC and 9.7% for SECP.

A static long / short (funding through the effective sale short position as an ETF) with a 0.67 short CAC position returned -2% ROI with a Vol of 10.9%, however a 0.5 CAC 40 short position returned -4% with a Vol of 8%.

A Long stock / short future (Ratio 0.5:1) strategy, despite requiring a higher capital investment shows almost “bond like” characteristics with a vol of 3.6% and a performance (before forward discount) of -1%.

Graphically we can clearly see that the index hedge (purple) creates a much less volatile pattern than the stock alone (green) and the long/short strategy (blue):

So this strategy could basically achieve the following:

– lower volatility to a “bond like” profile
– generating a small positive carry
– “extract” the special situation aspect

The result would be an “ok yielding” position with some small remaining market exposure and the “special situation” upside option.

Summary:

I was rarely so unsure about an investment as in this case.

On the one hand, it is clearly a misunderstood security with a potential catalyst trading at a quite attractive discount. So in the beginning I thought this really will be the next special situation investment.

On the other hand, I am usually looking for stocks which trade like bonds not vice versa. Also for a bond alone, the 8.33% IRR is OK but not spectacular. And for a bond you normally have a “hard” catalyst in form of a maturity or call date.

Also I don’t think we see a “gradual” revaluation, as there are just no natural buyers for this security. Maybe “yield hogs” will warm up to that at some point in time but I am not sure. They will rather buy crappy high yield bonds because this is the “right” asset class.

Combined with a CAC 40 hedge, Canal+ might be an interesting “special situation”. Although I am also not totally convinced that we see a short term buyout offer from Vivendi yet, so for the time being “no action”.

I would go long the security if prices come back to like 4 EUR or we see some action on the Vivendi buyout front.

Edit & lessons learned

This was again a good learning experience. If you invest a lot of time into analysing such a security, one is sometimes tempted to “make it look good” in order to justify the effort. I really felt this effect myself a couple of times. I think this is one of the typical mistakes made by many fundamental investors and something one has to monitor closely.

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