Idea generation: Q2 2019 Investment letters

Background:

A few days ago, I posted the link to a Reddit collection of Q2 investment letters. Many of these letters plus some others in my opinion are good inspirations to lok for new ideas.  With less time available for me to create “original” ideas, I mentioned some time ago that I will use these letters much more to find interesting cases than in the past.

Inittially, I wanted to create my private “to do”list of companies that I want to look at. The criteria for selcting ideas is quite subjective.

However in order to leverage my readership, I  decided to create a post with my selected “stolen ideas” and hope for some constructive feedback from my readers. Here is the list what I found interesting and why.

Selected ideas from Q2 letters:

Choice Equities: Par Technology
Interesting case of a “sum-of parts” company with a SaaS business hidden behind other stuff

Tweedy: BASF
One of the better managed German companies. Cyclical but potentially good opportunityin a real economic downturn. Business is hard to disrupt

Alta Fox: Keyword Studios
Interesting business model (outsourcing of Video Game prodcution) and European based company. Expensive but potentially very interesting.

TGV Partners: Computer Modelling Group
My friend Mathias hasn’t given up on Energy yet. This one looks like a very interesting Oil&Gas software  company.

Horizon Kinetics: Braemar & Clarkson
I had looked at Braemar 7 years ago. Maybe time for an update ?

White Brook Capital: Itron
A smart metering company I had looked at competitor Landis&Gyr some time ago

Third Avenue Value: BMW and Bank of Ireland
Classic value stuff. BMW is on my to do list for some time but very difficult to assess with everything that is going on in the automobile space.

Curreen Capital: Kontoor
Spin-off. With my limited success in spin-off investing maybe not top priority

TGV Rubicon: La Française de l’Energie (LFDE)
French Energy company

Palm Valley: Crawford & Co
Another company on my list since a long time. Interesting insurance service company

Spree: Covetrus
Again a spin-off but in the animal health space which I like

Merion: KAR / IAA
Another spin-off. Saw this now in several (good) funds.

Amiral: Boiron
From their Q2 report:

As an example of this contrarian logic, we acquired a position in Boiron in Q2. Over the past 18 months, the world leader in homeopathy saw its share price fall due to possible non-reimbursement of its products in France. Although it is clear that non-reimbursement would be a severe blow to the Lyons-based company, the fall in the share price looked excessive to us, as only one quarter of the group’s sales are concerned by the change. Moreover, non-reimbursement would open the door to free prices –currently very low – and to advertising and promotion of homeopathic products. In addition, Boiron would react by cutting prices in response to lower volumes. The French government ended the suspense in July, when it announced that non-reimbursement would begin in 2021. The company plans to restructure and find growth avenues, and should communicate more in the coming months. Meanwhile, the valuation is very weak even on cautious scenarios.

 

 

17 comments

  • Boiron – ‚the world leader in snake oil‘. Homeopathy is literally sugar water – it deserves to be non reimbursable and if this trend does not continue world wide I’ll be both extremely disappointed and surprised. If you look for dosages on pill packets and so forth they generally don’t even state dosages. For eg. A homeopathic melatonin bottle would likely state each capsule contains ‚6‘. —- 6 what? well just 6 because 6 of nothing is still nothing.
    IMO this is a deservedly dying industry based on completely bunk science and zealotry.
    BTW – love the blog haha.

    • hmm, I have to say I am not convinced. Buying bank stocks because of dividends is often not such a great idea. A lot of their profir seems to come from out of Slovenia but the post doesn’t provide any detailed info on that,

  • Hi, i am a reader from Norway and have followed you for some time now. Thanks for a great blog an good inspiration! I see you we bouth own Bouvet and Handelsbanken. Have you looked at the German company Datron? I have barely looked at it, and the numbers looks good. Insiders own a great majority of the company and are buying more. I may read a couple of reports, but would be nice to hear for someone who lives in the country, and maybe have more insights into the company?

    • GNP-GlobalNosePicking

      In that front I would muuuuuuuch prefer Berthold Hermle. In a similar “metal equipment” environment I would also consider Schindler (if share price would drop 4-5%). While both sport high roce’s, only the latter would be fundmith-proof stock.

    • Sorry, I have no insights and machine tool company are not in my area of expertise

  • AA

    There is a good write up at the 2018 London Sohn contest: https://www.sohnconference.org/wp-content/uploads/2018/12/SohnLondonIdeaContest_IAA_NelsonDong.pdf
    IAA and Copart build a duopoly which is generally an indicator for good businesses. Both operate two sided market places for fatal accident cars, which is another good sign. They sell accident cars for insurances where the estimated repair cost exceeds the value of the car by a wide margin.
    My main concerns are autonomous cars/EVs. The advance of autonomous cars may reduce accidents noteworthy somewhere in the future. This is IMO too unclear to consider today.
    EVs, autonomous or not, have a lot less parts than combustion engine cars. This obviously makes repair cheaper, narrowing the potential sales margin. For the US, EV penetration forecasts reach 50% in around 20 years. So this is less of concern today, in my opinion.
    Conclusion: this seems to be an attractive entry point into a good business.

  • I have discovered Eurotech in one of the TGV letters some days ago: I was really surprised to find such a solid company engaged in a BIG future market (IoT) to such a cheap price (imo), even after the recent rise. Ok, they were not profitable for many years but last year things turned around and they seem to be growing pretty decently.

  • I quickly reviewed most of the companies in the short list and none looks like having a high return on employed capital (maybe I did not look properly). Even BASF has low margins… Hence, I would not buy much in this list. BTW, in one of the letters Tucows was a sold recommendation… conflicting views with your TGV friend….

    • hmm, if ROCE is your only measure…..and yes, tehre are different opinions on Tucows. I haven’t looked at the company too intensive but in doubt I would rather be on the long side.

  • Ben’s Jamin

    Covetrus — 😪 following vet first’s (white label software/storefront developer for vet clinics) merger with Henry Schein’s animal health (distribution vet pharma) spinoff, their value prop is basically: for vets, we’ll build you a digital storefront on our app and you can continue sharing in the high profits you’re worried you’ll lose from filling prescriptions for pet owners once/if DTC prescription e-commerce channels continue to proliferate. For pet owners, you can prescribe directly on our app and see updated medical charts of your pet… convenience. The merger gave them wholesale buying power of pharmaceutical products straight from producers whereas before they were buying from middlemen of sub middlemen at higher cost.

    The $2.7B (mkt cap) Question: based on the foregoing value prop, what can they do that Amazon cannot?

    • Well, I guess Amazon could do maybe the same but maybe the animal health market is too small for Amazon ? amazon is clearly pushing into Health Care but in my understanding,animal health works very different.

      From what you explain, the business model looks interesting to me.

      • GNP-GlobalNosePicking

        In the same pet/vet environment I looked at PetMeds in 2018. Their business was looking great with strong tail winds. Now the share lost ca. 50% of value and perspectives are greyish… I wonder where the story will end, though I won’t bet much.

      • It’s definitely a, prima facie, interesting business, with potential to branch out into adjacent pet supplies.

        Re: Amazon’s interest levels, i wouldn’t be so sure. Apparently nearly 70% of US households own pets (call it 80 million homes). If each owned 1 pet on average and spent $1,000 to maximize said furry little animal’s lifespan (once the kids move out, pets are probably a nice replacement), I think that’s close to a potential $100B market. If households ported over that spend to Amazon’s platform and amazon earned a 20% margin (at scale) on a, let’s say, 20% fraction of that transaction figure (revenue share with vets and distribution share with pharma), that’s a potential $4B addition, growing probably as the Western birth rate declines. Does amazon trade for 100x earnings still? (I can’t keep up anymore). So, no, that animal health market isn’t small fish, no pun intended.

        Let’s not forget, Amazon’s life mission is to be the most consumer-centric force for convenience on the planet. Then again, if all those hypotheticals even smell in the direction of reasonableness, Amazon should be all too happy to pay $2.7B for Covetrus rather than recreating it themselves?

        • Well, I guess the 100 bn is a number for the overallmarket, not the billed amount for Vets. let’s see, I guess if Amazon is really interested, Covetrus could actually be a target for Amazon, maybe similar to Pillpack ?

  • Kontoor: a boring business and a boring company Name – while being cash generating.
    Looks like a good idea for buy and hold for a long time.

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