value and opportunity

Some 15 months ago, I had a post about stocks I had either sold or not bought after analyzing them.

This time I want to update that list plus provide some “theoretical” background why I think this is an important part of any investment process.

Types of investment mistakes

Of course there are many mistakes to be made in investing. Nevertheless, for this exercise I would categorize “investment mistakes” into 3 general categories along the typical process of most “stock pickers”. The process normally looks something like this

A) Stock screening & quick analysis
B) Deeper Analysis
C) Buy decision (or not buy)
D) Sell at some point in time

At all stages, mistakes are easy to be made. Nevertheless I would argue that most analysis goes into what I would call Level I mistakes:

Level 1 mistake: Buying a stock which performs badly.

This is quite easy to identify, because if one looks at most investment reports, one will see the performance of the current portfolio with the bad performers “jumping out of the report”. I guess most of the efforts in many investment firms goes into finding out the reasons for those underperformers and then trying to improve.

A lot less effort usually goes in what I would call “level II” mistakes:

Level 2 mistake: Selling a stock which outperforms strongly after selling.

This is a little bit more tricky. There is a lot less literature of “when to sell” compared to “when to buy”. Once you have bought a stock, there should be already a fair amount of time and effort been made to analyse the stock. So in my opinion it makes a lot of sense to keep stocks on one’s radar screen even after selling. Nevertheless it is of course much more fun to look at new stocks and forgetting about the old stuff. Especially if sold stocks systematically outperform, one should check if one is not a prisoner to some well known investment biases

In my opinion, it also makes a lot of sense to systematically track the performance of sold stocks in order to find out if one could (and should) improve the investment process

Finally, there is a third systematic family of mistakes:

Level 3 mistake: Stocks analysed intensively but not bought

This is one of the advantages of blogging: Whenever I write a longer post, I already have invested quite some time on the specific stock. So it is quite easy for me to track those posts where I did for any reason not buy such a stock.

Again, I think one should look at this closely in order to identify potential biases etc. in one’s investment process.

From theory to practice: The last 17 months

So let’s look first at all the stocks I sold since the March 2012 post:

Explanation: a negative number means that the stock has outperformed my BM since I sold it, a positive number means the Benchmark outperformed vs. the stock.

On (unweighted) average, the stocks I sold underperformed the benchmark, so this looks OK. This is clearly driven by the Praktiker bonds, where I am very happy that I sold them. On the other hand, I missed out some nice gains as well. With KPN for instance, I think I was a little bit too quick with the trigger finger. My “autumn cleaning” exercise was on average also positive. So this is a good encouragement to follow-up on this exercise.

Next come all the stocks I have analysed but not bought in the same format:

Here unfortunately, the average doesn’t look so good. On average, the stocks I analysed but did not buy outperformed the BM as well. The most obvious miss is Reply SpA. However here, I still think that in the long run it pays to avoid companies with questionable accounting. In this case, clearly at least for now I was wrong to discard it.

A little bit more bothers me that 2 of my potential special situations, Osram and Severfield outperformed. Both were pretty clear-cut cases (Osram, classical spin-off, Severfield classical rights issue), but somehow I was lacking conviction to follow through on the idea. I think I have to be more careful to separate my careful market view and focus on quality from the special situation area.

Summary:

Looking at sold stocks and stocks rejected lat e in the investment process makes a lot of sense. In my case, I think selling looks OK, whereas I will have to work on my “special situation” investments.

In my MIKO BV post a few days ago, Winter commented correctly, that the plastics division of MIKO looks similar to what a French company called Groupe Guillin SA is doing.

At a first glance, Group Guillin looks even more interesting with the following valuation metrics (in brackets MIKO):

P/B 1.0 [1.24]
P/E 6.8 [11.8]
P/S 0.3 [0.5]
EV/EBITDA 3.6 [5.5]

So Guillin does almost the same but is much cheaper. Cheaper is always better for value investors, isn’t it ?

Guillin looks also quite OK in my Boss model and even shows better free cashflow so what is not to like ? ROEs look Ok as well as this table shows:

However, ROICs don’t look so great as Guillin especially since 2006, when they grew quite quickly after 3-4 years without growth but ROIC suffered significantly

Lets compare this with MIKO’s plastic segment numbers:

So we can clearly see that MIKO consistently generates significantly higher ROICs than Guillin (in some years 5-6% more) than Guillin. Guillin uses leverage to achieve OK ROEs, while Miko doesn’t use leverage. Also net margins are on average 2-4% higher for MIKO plastics than for Guillin.

So in my view, the MIKO plastics business looks much better quality than Guillin, despite the fact that the MIKO plastics division is only 15% of Guillins sales. So scale doesn’t seem to be the deciding factor, it looks like that MIKO has found a more profitable niche than the larger Groupe Guillin. As far as I understand, Guillin sells direct to supermarkets while MIKO’s clients in the plastics division are consumer product manufacturers.

I have been looking at Groupe Guillin actually quite often, but the low return on invested capital kept me away. Although one has to say that the stock performed quite well over the past years, also compared to MIKO:

So Guillin is clealry not a bad company, but in direct comparison I think MIKO has greater potential (and a better downside protection) than Guillin.

The future of Utilities is very uncertain says a CEO of an US utility company

Great stock analysis about Melco, a HK listed company from Sahara blog

Expecting value looks at Albermarle

Indonesia is struggling too…

Must read: The traditional free summer issue of Grant’s oberver

Punchcard looks at Weight Watchers

I bet that many people could not point out on a map where Slovenia actually is located. Many people also don’t really know the difference to Slovakia.

So lets look at Wikipedia:

Slovenia is a small part of Ex-Yugoslavia. It has a population of around 2 mn and covers 20 thsd square kilometer. The history can be read extensively via Wikipedia. Most importantly, Slovenia was the first part of Yugoslavia which became independent. The next few years, Slovenia was seen as one of the big success stories in Europe, which resulted in Slovenia joining the EU and adopting the Euro already in 2007.

Last year however, Slovenia joined the European countries hit hard by the recession. The prior EUR fueled construction boom resulted in shaky loans, declining GDP, Rating agency downgrades, increase in interest rates etc. Starting last year, there was big fear that Slovenia was headed towards a “Greek style” restructuring.

Lately however, things look better. SLovenia has presented a restructuring plan which among others, includes the sale of a couple of state-owned companies. One should also note, that debt to GDP looks rather manageable:

On top of that, Slovenia’s economy is good at exports, but still, they are struggling in 2013. Nevertheless, Slovenia got 2 years “probation” in order to fix their problems, which they hopefully use.

The latest export vs. import data looks OK, nevertheless, 2013 will show a deficit of around -8% for the Government including bail out costs.

Slovenian stock market

From Bloomberg, one gets ~45 stocks from Slovenia with a market cap larger than 1 mn EUR, and 24 with a market cap bigger than 10 mn EUR. The major Slovenian stock market index only consist out of 7 stocks which are the following:

Quick check of the companies:

Krka

I have written about Krka already, a generic drug company similar to EGIS. I think this is a very interesting company,. Minimal home country exposure, consistently profitable. Not “extremely cheap” but good value for money. I would buy this company directly (if I could).

Petrol Ljublijana

This is the national refinery plus gas stations owner. Also active in Croatia and Bosnia. High “mean reversion” potential in my model.

Telekom Slovenije

Local telephone company. P/E 15 looks expensive, but company pays 15% dividend and has a 20% FCF yield. Significant debt reduction

Mercator

Supermarkets, Shopping centers. High debt load, large loss in 2012. However major shareholders sold out to Croatian company Agrokor in June.

Zavarovalnica Triglav

Major Slovenian insurance company, interesting, as valuation is really low for an insurer. 10.5% dividend yield. I would buy this stock if I could.

Gorenje

Household appliances. Has made losses but very cheap (P/B 0.2).

Nova Kreditna

One of the 3 problem banks, the only listed one. Most likely insolvent without Government support

The problem:

There is almost no way to directly buy Slovenian stocks. Only Krka and Nova Kreditna have secondary listings in Poland, but even there it is difficult to trade them. I asked several retail brokers in Germany and only SBroker (where I don’t have an account) told me I could trade the 2 stocks in Poland.

The alternative:

Although I usually do not like certificates issued by banks, in this case this would be the only alternative. I found several of them:

1. RCB7J9 / AT0000A038L9 from Raiffeisen International
2. AA0DMM / NL0000762557 from RBS
3. HV2AXY / DE000HV2AXY3 from Unicredit

The RBS paper seems to have the lowest bid/ask spread. As far as I have seen, they are all without maturity and track the SBI.

The opportunity /upside

For me the Slovenian index is quite interesting due to the following points:

+ there is almost no banking exposure left in the index. the only remaining financial is a cheap insurance company which i would buy outright
+ the Government has to sell some of their stakes, including among others the Telephone company. I am pretty sure that for the time being they will do nothing to punish the TelCo in order to get a price as high as possible
+ the largest stock in the index is Krka with ~30% which I want to buy anyway
+ once the Euro recovery story gets played more seriously (Goldman is already starting to “promote” European stocks), markets like Slovenia will follow with a certain delay.
+ Slovenia did never piss off other countries like Cyprus which supported tax dodging or Hungary which runs on a political amok course. In my opinion, they will be “well” treated by the ECB, EU and IMF.

Nevertheless for the time being I will not invest but look a little bit more into the other large index constituents, especially the TelCo and Oil company.

During a short holiday break I read that book. It is written by Charlie Gasparino, a quite famous Wall Street reporter.

The book is about the recently uncovered insider trading activity including among others, the infamous Galleon founder Raj Rajaratnam and many people connected with Steve Cohen’s SAC capital.

Those insider cases have been the biggest since Ivan Boesky in the 80ties and many people went to jail. Some trades were “simple” insider tips, others were conducted much more clever via so-called “expert networks”.

The book itself is strong on details about the lw enforcement process. It reads rather like a crime investigation story than a finance book. The author also shows a little bit the history of insider trading which was not illegal until the great depression.

The author several times calls insider trading the “victimless crime”and one does get the impression that he doesn’t consider it such a serious crime. He also stresses that the strict enforcement in these cases might have something to do with both, the financial crisis and the Bernie Madoff crime and the desire to please the public with some high-profile arrests.

Although I agree that a lot of criminal transaction before or during the financial crisis have not been really prosecuted (John Corzine, Dick Fuld etc.), I do not think that insider trading is a victimless crime. Victims are clearly many retail investors esp. mutual fund investors. Although insider trading might nt explain everything, a part of the fact that so many mutual funds underperform might lie in the lack of insider trading compared to unregulated hedge funds.

As a summary I would say the book is not bad but not half as well written as for instance a Michael Lewis book. If you are really interested in how the SEC examines insider trading, you might buy it, otherwise save the money for the next Michael Lewis book.

Red has some very good comments on Dart Group.

Must read: Michael Pettis on China

Punchcardblog is writing a fictitious letter to Jeff Bezos about the newspaper business

Expecting value looks at pawn broker H&T Group

Wilbur Ross is looking at Spanish and European banks.

Interesting table: Cable TV vs internet

Interesting study: Defined benefit pension plans (DBO) seem to perform siginficantly better than defined contribution plans