value and opportunity

This is clearly a luxury problem: Imagine you bought a stock and for some reason the stock price goes up very quickly let’s say by +40% or so within a few weeks.

What are you going to do ? Sell, buy or do nothing ?

In my case, this “problem” now hit me with Gaztransport. I reviewed Gaztransport first in January 2016 at a price of around 34 EUR. This is what I said back then:

Under those assumptions my results were the following:

10% discount rate: 20,80 EUR per share

15% discount rate: 14,26 EUR per share

So now one could clearly challenge my “model” and tweak it somehow, but in general it looks like that GTT is not a bargain at current prices (34 EUR). To me it rather looks like that the current valuation already implies a certain value for the LNG ship fuel “option”. Therefore GTT at current prices is not interesting to me as an investment.

But then in February, the stock price dropped significantly, as the Korean authorities opened a probe into GTT’s business practices. At February 9th, I couldn’t resist and bought a small position as mentioned in the comments of the original post:

35 comments

• memyselfandi007

  9. February 2016 13:42 (Edit)

  I couldn’t resist and bought a 1% position at 22 EUR/share
  and another 0,5% at around 21,80 EUR

  Reply

Fast forward 4 weeks and the stock is back at around 31 EUR, ~40% profit. Why did the stock go up ? I think it is a combination of energy stocks going up in general and one specific factor: JPM came out and said the following about the “Korea issue”:

KFTC investigation: As per our understanding, GTT is being investigated for an “abuse of dominant position” in the Korean market. If found guilty, the fine payable is 3% of revenues over the relevant period or around €100m gross (assuming 2006-2025E revenues, and fine paid in 2026) or an NPV of €40m vs. the €320m market cap loss on the day of the news.

This is clearly good news and as we could see, GTT gained pretty strongly afterwards. However according to JPM, overall business expectations slightly deteriorated

The continued deterioration in oil and gas prices along with GTT’s guidance of a weaker 2016 order intake has led us to tone down our 2016/17 order intake expectations. Our 2016/17 earnings forecasts are largely unchanged since they are backed by current secured backlog, but we cut our 2018 earnings estimates by 27%. We still find the total €5.32/share minimum dividend (total yield of 19%) for FY2016-17 attractive and remain a relative OW on the stock.

When I enter the current shareprice (31 EUR) into my cyclical “model”, I get an expected return of ~6% p.a. Even assuming that my assumptions were maybe too conservative, GTT doesn’t look so attractive.

Past mistakes with early selling

One of the biggest mistakes I made in the past was that I sold well performing stocks to early. In many cases I underestimated momentum once the stock started performing well. Some examples were:

Dart Group (2013)

I thought I was a genius when I bought Dart at around 70 pence and sold it at 240 pence, netting me ~230%. Dart Group however continued its climb and recently hit an ATH at 630 pence. This would almost have been a tenbagger if I would have been more patient. Since I sold, GAAP earnings remained pretty much unchanged, but valuation multiples jumped up to a level of 16 times trailing GAAP earnings. Was this something I could have seen ? I don’t think so, the current valuation in my opinion has a lot to do with the low oil price which back then in 2013 was not so obvious. But again, a little patience would have made me a lot of money.

Total Produce (2013)

Total Produce is a similar story,. I bought them cheap at single digit P/Es during the Euro crisis (loooooong time ago) and sold them with a ~70-80% gain. at around 65 cents on average. Fast forward and similar to Dart Group, Total Produce recently hit an ATH at 1,60 EUR, more than doube my sales price. Again, multiple expansion playd the biggest role here, GAAP EPS didn’t really increase the last 3 years. Current shareholders seem to be happy paying 17 times trailing GAAP EPS.

Successful sales

However, I also did some pretty good sales in the past such as:

April SA

I sold April back then at around 18,30 EUR per share, netting around +65%. The reason was that I benefitted from a nice multiple expansion during the EUR crisis recovery although EPS shrank year by year. The decision to sell was pretty good, as April is now back at 11,30 EUR as earnings continued to sink.

So what does that tell us with regard to Gaztransport ?

Fundamentally, things clearly didn’t get better for Gaztransport in the last 4 weeks. My intrinsic value estimation is telling me that the stock is fairly valued and there is no direct link between oil prices and GTT’s business. Of course, there could be additional momentum for the stock and people could get excited about the dividend yield.

Long term however I think there could be better “plays” in the energy market. For me, Gaztransport at the end was a special situation as the stock dropped due to the Korean issue  and the whole market panicked. I am not sure if it is really a great investment for the long term as the business will depend on relative LNG price differentials.

Additionally, I only invested a small amoutn (1,5% originally) into the stock and at the current price I clearly would not buy more.

So my decision is clear: I will harvest the windfall gain which represents already the totoal return I hoped for over my 3-5 year price period. I therefore sold my position yesterday and today at an average price of around 30,75 EUR per share,.

Things would be different, if the underlying business would improve or I would see a bigger upside in total. then I would not sell.

In order not to make this an implict market bet, I increased my Electrica position by a full percentage point. Cash is now at around 15% of the portfolio.