Rallye SA (ISIN FR0000060618) – another Holding company at a discount ?

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Rallye SA, France is the holding company for 49.97% of Casino Guichard, one of the big French retail chains.

In their annual report they present the company as follows:

Their major assets are:

– 49.93% of Casino Guichard Perrachon SA (ISIN FR0000125585)shares (61.24% of voting rights)
– 72.86% of Groupe Go Sport SA (ISIN FR0000072456)(78.73% of voting rights), another small listed French company
– “investment portfolio”.

There is some qualitative description of the “investment portfolio” on page 19 of the report, it seems to be a quite divers collection of participations and real estate.

Rallye’s investment portfolio was valued at €365 million as of December 31, 2011, compared to €435 million as of December 31,
2010. At the end of 2011, the portfolio consisted of financial investments with a market value(1) of €272 million (vs. €295 million
at end-2010) and real estate developments measured at historical cost(2) of €93 million (vs. €140 million at the end of 2010).

Net external debt stands at 3 bn as of year end 2011. Other than that i did not see major positions.

The trickiest part of Rallye’s balance sheet is the 2.5 bn EUR receivables position the show in their single entity balance sheet.^2.3 bn of that seem to be receivables against Group companies:

The current account advances made by Rallye to its subsidiaries are part of the Group’s centralized cash management system. They are
due within one year.

The point I am struggling with most is the following:

If those receivables are against Casino, then one would add those assets for the Rallye evaluation. If those receivables are against their various subholdings which also hold Casino shares, then one would need to fully eliminate them.

I have quickly checked the 2011 Casino annual report, but didn’t find any liability against Rally SA. So we should assume that those internal Rallye receivables are a technical position which is financing the Casino stack and should therefore not be counted extra. Only the “external” part (~200 mn) should be used).

So with that assumption we can now calculate the “sum of part” or intrinsic value of the Rallye SA share:

EUR mn
Casino Guichard (50%) 4,112.3
Group Go 34.8
Investment Portfolio 365.0
Receivables, other assets 220.0
Sum assets 4,732.1
   
Debt -3,000.0
Other liabilites -110.0
Net Assets at market 1,622.1
   
 
Number of shares 47.2
Value per share 34.37
 
Current market price: 25.80
“Discount” 24.9%

Overall, a 25% “discount” seems to be quite normal for such a slightly in transparent structure including extra financial debt. However if one thinks Casino is a great investment, then investing through Rallye might be a good idea:

Casino Guichard itself is not uninteresting. Although it is not cheap, they are growing pretty strongly. Especially interesting is the fact that 60% or more of their sales are now in LatAm (Brazil and Colombia), two markets which seem to be the most interesting retail markets at the moment.

On the other hand, I am not a big expert on retail chains, so from that point of view I will not analyze Rally/Casino further.

Summary:

If my assumptions are correct, the current “discount” of Rallye vs. its sum-of-parts as a holding of 50% Casino Guichard is only 25%. Considering the extra leverage and the lack of visibility, it does not look greatly undervalued.

Hess AG (DEDE000A0N3EJ6) busted German IPO stock – Could the fraud have been easily detected ?

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Just yesterday, Hess AG, a company which IPOed on the German stock exchange on October 25th 2012, announced that they fired both, their CEO and CFO because of alleged balance sheet manipulations.

The stock price directly crashed some 60% to 6 EUR (IPO price 15,50 EUR):

In some follow up news, the company reported that sales might have been inflated and the financial position might not be as good as stated in the IPO prospectus.

As a value investor, one wouldn’t invest in IPOs anyway.

The Hess AG IPO was priced at levels which one could only assume as “optimistic”, with a trailing P/E ratio of ~50. The price was justified with the supposed “growth” the company was showing in the past and the “story” of the “LED” based business model.

As usual, all parties involved in the IPO (Banks: Landesbank BaWü, Kempen, MM Warburg) will claim that they knew nothing and that you cannot protect against fraudulent management.

The auditors of course will claim the same, in the IPO prospectus they stated explicitly (in German) the follow:

Nicht Gegenstand unseres Auftrags ist die Pr¨ufung der Ausgangszahlen, einschließlich ihrer Anpassung an die Rechnungslegungsgrunds¨atze, Ausweis-,
Bilanzierungs- und Bewertungsmethoden der Gesellschaft sowie der in den Pro-Forma-Erl¨auterungen dargestellten Pro-Forma-Annahmen.

This says they explicitly didn’t check the underlying figures.

The big question of course is: Were there any red flags in the presented numbers ?

How do you “fake” sales anyway ? Well, this is quite simple. You have to organize some kind of “strawman” first, then sell the stuff to him/her and book the proceeds against receivebales. So whenever one sees a large increase in receivables, one should be extremely cautious.

In the case of Hess AG, one does not need to be a Rocket scientist to “smell the rat”. I have extracted the following working capital items from the balance sheet (page 64):

6M 2012 2011 2010 2009
 
Inventories 17.3 14.8 11.7 9.6
receivables 24.1 22 11.5 8.5
 
Payables 9.8 4 2.2 1.3
Net Working cap   32.8 21 16.8
         
“Sales”   68.3 55.7 52.4
 
Inv/sales   21.7% 21.0% 18.3%
Rec/Sales   32.2% 20.6% 16.2%
Payables/Sales   5.9% 3.9% 2.5%
 
NetWC/Sales   48.0% 37.7% 32.1%

So it is pretty easy to see, that receivables compared to sales almost doubled over 2 years. The increase in receivables almost exactly mirrors the actual increase in sales. It looks like that almost all the sales increase were actually generated by sales against receivables.

The next item to check is of course the cash flow statement. Here however we see something strange:

6M 2012 2011 2010 2009 Total
 
Op CF 3.4 -4.6 -1.4 3.6 1.0
inv CF -7.3 -7.9 -1.5 -6.9 -23.6
Fin CF 6.2 14.2 2.3 2.6 25.3

At first it looks that in total, operating CF over the last 3 1/2 years was positive and the company did just invest a lot. But how did they manage the Turnaround ?

In the IPO prospectus they say the following (page 89) about the operating cashflow:

Operativer Cashflow
Vergleich der Halbjahre endend zum 30. Juni 2012 und 2011
Der operative Cashflow erh¨ohte sich von TEUR -3.133 im ersten Halbjahr 2011 um TEUR 6.494 auf TEUR 3.361 im ersten Halbjahr 2012. Wesentliche den operativen Cashflow bestimmende Faktoren waren ein erheblicher Mittelzufluss aus der Position „Veränderungen der Forderungen aus Lieferungen und Leistungen und sonstigen Forderungen und Vermögenswerte’’ in Höhe von TEUR 8.130 gegenüber einem Mittelabfluss im ersten Halbjahr 2011 in Höhe von TEUR 638, der Rückgang des Mittelabflusses aus der Veränderung der Vorräte in Höhe von nur TEUR -652 gegen¨uber TEUR -3.043 im ersten Halbjahr 2011 sowie eine deutliche Erhöhung der Position Abschreibungen in Höhe von TEUR 2.086 gegen¨uber TEUR 1.255 im ersten Halbjahr 2011. Gegenl¨aufig verhielt sich die die Position „Veränderungen der Verbindlichkeiten aus Lieferungen und Leistungen und sonstiger Verbindlichkeiten’’, die zu einem deutlich erh¨ohten Mittelabfluss in Höhe von TEUR -7.976 im ersten Halbjahr 2012 gegen¨uber TEUR -1.719 im ersten Halbjahr 2011 f¨uhrte.

This statement clearly shows that there is something very fishy going on. In the table I extracted above, we can clearly see that there was a NEGATIVE effect from receivables and inventories in the first half year and an unexplained very POSITIVE effect from payable. So why do they state the exact OPPOSITE in their explanation of the cash flow statement ?

Explanation 1: They just mixed up the vocabulary (which would be already a reason to fire the CFO)

Explanation 2: They included other balance sheet item here in order to obscure the fact that they have inflated sales.

Explanation 3: The 6m 2012 cashflow statement is just fabricated and does not fit together with the (fabricated balance sheet)

Just for fun, let’s compare the balance sheet positions with the entries in the operating cashflow statement:

OP CF statement Balance sheet   calculated Op CF Delta stated
  6 M 2012 30.06.2012 31.12.2011    
           
Change in inventory -0.7 17.3 14.8 -2.5 -1.8
Change in receivables 8.1 24.1 22 -2.1 -10.2
Change in short term payables -8.0 9.8 4 5.8 13.8

We can clearly see that the 6m “flow” numbers have absolutely nothing to do with the delta of the respective balance sheet numbers.

At that point in time one could already stop and conclude that there is either total incompetency or already fraud. Even taking into account all the other short term balance sheet figures, one never gets to the stated cash flow numbers.

In my experience, strongly rising receivables combined with an incomprehensible or even wrong operating cashflow calculation are a very reliable “red flag”.

Summary:

Although it sounds like “Monday morning quarterbacking”, a relatively superficial analysis of HEss AG’s IPO prospectus would have discovered some serious issues with receivables and operating cash flows. Whe someone starts to doctor around with fake sales, one usually gets negative operating cashflows. If the cashflow statement then looks incomprehensible or wrong, actual fraud is quite likely.

In cases like Hess, “red flags” in that magnitude could even be a very good indicator for an interesting short opportunity. In cases like Reply, where the inconsistencies are on a smaller scale, it is rather a hint to stay away from investing.

Edit: If someone thinks that Hess is now a good investment, because it is so “cheap”, then forget it. Eevn if there is some “sound” business left in the company, first of all there is no proof that they ever earned money and secondly I will assume that there will be quite some legal action on that one.

TNT Express (NL0009739424) – “post mortem”

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As it is commonly known, free lunches are few and rare in the stock market.

Another proof for this was last week’s termination of the TNT Express takeover by UPS.

I was quite lucky that I didn’t join in the “trade“, despite considering it quite seriously. My final decision was based on the believe that in such a “crowded” market like merger arbitrage, if a situation looks too good to be true, most likely it isn’t true.

Interestingly enough, a lot of “players” must still have believed in the deal. Looking at the chart, we can see that TNT is now trading relatively close to the lower bound of the “undisturbed” price before UPS came up with the bid:

As discussed in the previous post, at the current level, TNT Express is still not cheap, for instance compared to FedEx.

On the other hand, UPS seems to have been better off without TNT Express if we believe in “Mr. Market” as they have outperfomed the Dow Jones by almost 10%:

To me, this looks like that the offered price of 9,50 EUR was way too high and UPS realized this at some point in time and did not really try hard to get the deal through. For a company like UPS, blaming it to the EC is always a “face-saving” possibility.

However that also means that the price tag of UPS might never be reached again, even if FedEx would show up as potential buyer. On the other hand, TNT Express might still benefit by being spun off from POstNL which is crippled by pension liabilities and the terminally declining mail business.

PostNL Was even hit harder, dropping to a new all time low:

This might have to do also with Moody’s recent downgrade.

At the moment, both, PostNl and TNT Express are too much “hot potato” type investments, but it is definitely something for my “special situation” watch list. I think it will be especially interesting to see if TNT Express is able to turn around the business on a standalone basis.

Alsi for the future, I think it is the safest to keep away from Merger Arbitrage situations for my special situation “bucket”, as this requires very special skills which I do not have.

Edit:
It seems that French activist investor Lutetia is trying to start a campaign for PostNL. This could bcaome interesting at some point. Lutetia also showed up (quite succesful so far) in the SIAS Spa case.

Weekly links

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Good example why “ordinary investors can’t copy what Seth Klarman is doing: Earning money with Madoff claims

Herbalife: John Hempton visits a Herbalife Nutrition club and some interesting comments from the “Waren Buffet for shorties”, Jim Chanos on “mulit level marketing” and Herbalife.

Plus the full 30 minutes interview with Jim Chanos.

Great post at Oddball why sometimes less information about a companymight be a good thing

Monish Papray on checklists for investments

Checking the checklist: Maison France Confort (ISIN FR0004159473)

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Looking at other good investors is one of the simplest way to generate investment ideas. I had linked to Ennismore already, which is a very interesting European small cap manager.

In their monthly updates, they always feature one stock. In the most recent December Newsletter, they write about Maisons France Confort (highlights are mine):

Maison France Confort – French housebuilder (1.2% NAV)
Maison France Confort (MFC) is a construction company that designs and builds family homes in France. Unlike many other markets, in France there is virtually no development risk for the company because land is purchased separately by the customer and the house will only be built once it is fully financed. MFC’s model is to provide a service designing the building and sub-contracting its construction. This ties up little capital and has allowed them to generate post-tax returns on net operating assets of 30% over the last 10 years. The company was founded by the Vandromme family five generations ago and they still own over 30%. It is run by brothers Philippe and Patrick Vandromme who have built MFC into the largest player in what remains a very fragmented market, with a 6.6% share of the self-build market in the regions that it operates in (4.0% for France as a whole). MFC has consistently taken share over the last 15 years through organic growth and acquisitions, a trend we expect to continue. MFC benefits from its greater scale: its large number of architects give it a more extensive range of houses (particularly energy efficient homes), it has a more professional and bigger sales force, a strong brand name, greater capabilities to deal with regulations and bargaining power with subcontractors and raw materials suppliers. As a result, revenue grew at a compound annual rate of 15% from 2000 to 2011, of which over half was organic, while the market for single homes was broadly flat in volume terms.

MFC primarily serves the lower end of the market, particularly first time buyers, with the average house costing EUR 100,000 to build (excluding VAT). With general economic weakness in France, tighter lending conditions and uncertainty around the new government’s incentives for homebuyers, housing starts are down 14% year on year for the nine months to September 2012 and MFC’s order book is down a similar percentage on a like for like basis. However the cost base is highly flexible, we estimate around 90% is variable with demand, and this allowed the company to remain profitable even in very weak markets from 2007 to 2010 (we also like the fact that Philippe and Patrick waived their bonuses in each of these years). With net cash of EUR 59m (equivalent to a third of its EUR 174m market cap) MFC is in a good position to take advantage of the weak market and has a proven record of strong capital allocation, buying back shares at depressed levels and making small bolt-on acquisitions that typically have a 3-4 year payback. At the current share price of EUR 25.10 the historic dividend yield is more than 5% and MFC has an enterprise value that is 3.2 times its operating profit over the last year and only six times the trough profit achieved in 2009. This is far too low for a business that has consistently generated a high return on capital and we think the shares have at least 80% upside.

As I am considering France one of the most attractive stock markets (for small caps) anyway, and the write-up is really interesting, lets test my new checklist for Maison France Confort:

1. Market cap between 25-250 mn
market cap 175.7 mn –> Score +1

2. less than 3 analysts following on Bloomberg or very bad sentiment
no, 7 analysts follow, mostly positive outlook, however only small cos. –> Score 0

3. No English annual reports, short quarterly updates etc., no share price on company homepage
I didn’t find recent English reports, only relatively slim intra year updates –> Score +1

4 . Potential special circumstances like Euro crisis, very diverse business activities, complex structure, Spin off etc.
Not really, although “france bashing” seems to increase –> Score 0

5 . Low historical beta /volatility
Beta of 1.0 –> Score 0

6. Dividend yield > 3%
Div. Yield 5.13% –> Score +1

7. P/E < 10
Trailing P/E of 8.7 –> Score +1

8. P/B < 1.2
P/B 1.5 –> neutral

9. EV/EBITDA <= 6
EV/EBITDA = 2.2 !!! –> Score +1

10. 10 Year mean reversion potential > 50%
Yes, Based on EV/EBITDA, mean reversion potential would be 200%

11. Positive 10 year FCF yield
Very solid FCF generation (~10% p.a.) –> Score +1

12. Large acquisitions in the past ?
neutral, no big acquisitions, but series of small ones –> score 0

13. Large share Intangible assets ?
40% of book value intangible —-> Score 0

14. Pension liabilities, operating lease ?
Nothing discovered at first glance —> Score +1

15. Low debt (net debt/equity <0.5)
Significant net cash —> Score +1

16. Family owned / run
Yes, 5th generation —> Score +1

17. Treatment of shareholders in the past ?
looks fair, share buy backs —> Score +1

18. Sharecount stable or decreasing ?
Decreasing —> Score +1

19. Alignment of management and shareholders
Good, CEOs skipped bonuses etc. —> Score +1

20. Insider Share purchases/sales last 12 months ?
No —> Score 0

21. Subjective impression of company management (pictures, speeches, comments)
Good —> Score +1

22. 10 Years of history available ?
Yes, Score +1

23. Industry attractiveness
neutral (“discretionary consumer”) —> Score 0

24. Positive/neutral price momentum ?
positive —-> Score +1

25. high quality investors as share holders ?
Yes, Ennismore, Amiral —> Score +1

26. Do I understand the business model ? Is it attractive
looks like a very capital efficient, attractive business model —> Score +1

27. Potential short/medium catalyst ?
Not really —> Score 0

28. 10 year sales growth above inflation ?
Yes, 10 year growth 11.8% p.a –> Score +1

All in all, this results in a quite good score of 19 (out of 28), which compared to my other stocks looks quite good. So this is definitely a stock to follow up more closely.

I am still considering if I might implement either a higher range (like -3 to +3) or decimals to further differentiate. Like for instance at the moment I would give a +1 score to an entity with 30% debt as well as to one with net cash etc. However I am not sure if this makes the “first step check” to complicated.

Summary:
Based on my checklist, Maison France Confort looks very interesting and definitely a stock to follow up. Cheap on many metrics combined with a very capital efficient business model makes it interesting. Only drawback is the focus on the currently dwindling domestic French housing market, where the portfolio is already exposed to via Poujoulat (chimneys), Installux and even Bouygues.

The Herbalife “Slugfest”

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In my opinion, the most interesting (and entertaining) story in equity markets is the current Herbalife story.

Herbalife is a US based producer and distributor of diet shakes, vitamin pills etc.

Looking at the chart, one can see that until early 2012, Herbalife was one of the “hottest” stocks out there:

Herbalife went public in December 2004 at a price of 14 USD per share. Including a stock split, the stock returned a phenomenal return of ~ 30% p.a. until the end of 2011.

Earnings per share rose more than 10-fold from 0.47 USD per share to more than 4.80 USD in 2011. During the “financial crisis”, the stock suffered but then quickly went back into outperformance mode.

The first “crack” in the success story appeared, when David Einhorn personally dialed into the conference call on May 1st 2012 for the first quarter and started to ask some weird questions.

Two weeks later, when Einhorn spoke at the annual Ira Son conference, the stock bounced back 20% because Einhorn didn’t mention Herbalife. So far I didn’t find out if Einhorn is still short.

The next step in the story is well known, the epic presentation of Bill Ackman why Herbalife is a Pyramid scheme. To reinforce his point, he even set up a dedicated website about his Herbalife short thesis. For Ackman, this is not his first short battle. There is even a book (by the way highly recommended) about his several year long fight against the US mortgage insurers, called “The confidence game”:

However, pretty soon after his presentation, some quite savvy investors and bloggers pointed out some weaknesses in Ackman’s presentation, especially the claim that the Herbalife “scheme” is illegal and the US regulators will have to shut the company down.

One of the first was blogger Kid Dynamite and one of my personal favouritesm, blogger and hedge fund manager John Hempton.

Like sharks smelling blood, some other “famous” hedgefund managers joined the party, most notably Dan Loeb’s Third point which actually took a massive 8% long position in the company. Yesterday, even “activist” legend Carl Icahn came out swinging against Ackman, disclosing a long position in Herbalife.

So this is quite an interesting situation:

On the one side, we have some of the brightest “new generation” HF managers David Einhorn and Bill Ackman against well respected “activists” like Dan Loeb and Carl Icahn as well as extremely clever bloggers like Kid Dynamite and John Hempton.

Last Thursday, Herbalife held an investor day, trying to take on Ackman’s acusations. I found the Herbalife presentation rather unconvincing.

My advice on this:

If you are not a famous investor who can move markets with a presentation, STAY OUT OF THIS !!!!!

Otherwise you will end up like this poor guy, who “joined” Bill Ackman just at the wrong point in time:

The Herbalife story is the proverbial “hot potato” investment one should just enjoy and watch (and learn) instead of joining.

Personally, I think that Loeb and Icahn are only in for the quick rebound and long term Ackman will most likely come out with a nice profit, but I wouldn’t really bet on this, as you might be killed (or squeezed) in the meantime.

So get your popcorn, lean back and enjoy !!!

P.S.: For anyone more deeply interested in “multilevel marketingg companies”, there is a very good detailed post at Seeking Alpha.

Book review: Cable Cowboy: John Malone and the Rise of the Modern Cable Business

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“Inspired” by Gannon’s post about the book and indirectly Whopper, I read the book, partly also to understand why I got the Kabel Deutschland short wrong.

The book is sketching John Malone’s business history from the early 70ties, when he joined the almost bankrupt regional cable company TCI until the early 2000s when he already was a billionaire.

For me, especially the following points stood out:

Malone as CEO/cable operator
+ Malone is rather a “financier” and deal maker than an operator, although he certainly knows his stuff about cable and media

+ very early, even at university he already developed the concept to use maximal leverage for regulated “quasi monopoly” businesses

+ at his time at TCI, he perfected this business model even further. He used depreciation/amortization aggressively in order to be able to “compound” cable assets without paying a single cent of taxes

+ he was one of the first CEOs to convince investors to disregard earnings and focus on cashflow

+ in his first 15-20 years at TCI, he managed to increase the share price by several thousand percent without ever showing a single cent of profit

+ he perfectly understood competitive behaviour, effectively running a “cable cartel” for many years and extracting the maximal gain for shareholders (would be maybe a very good study for the Bruce Greenwald book..)

Malone as an investor

+ as an investor he is being quoted rather as an “asset collector”

+ this implies that he has extremely long time horizon’s, sometimes 20 years and more and no hurry to cash out

+ his “exits” were usually tax optimised stock swaps into more liquid shares of acquirers

+ his first “genius” stroke was the early spin-off of Liberty media which made him rich. This is also one of the very prominent spin offs Joel Greenblatt wrote in his “You can be a stock market genius” about. I think it also explains a lot why such a special spin off worked so well. Malone structured the spin off in a way that people were not really interested in the spun off shares. With a loan of his employer, he then bought up as many shares as he could.

+ some investments he made were either genius or sometimes monopolistic, for instance buying a struggling network and then allowing it to be distributed over his cable systems. One example was the “BET” network, were he invested 500 tsd USD in the early 80ties as the founder was struggling, distributed it via his cable network and then sold the stake for close to 1 bn USD to viacom in 2003. This shows his patience with such investments and might be one of the best “angel investments” in history.

Although the book clearly has some lengths, I found the book very interesting and highly recommendable from many perspectives. It offers good insights into the cable business as well as into “cutting edge” corporate finance and long term investment thinking.

John Malone is also someone you definitely you want to follow. So if John Malone aggressively buys into German cable, it is maybe not the best timing to short Kabel Deutschland at the same time.

I wish I had read this book much much earlier…….

Investment checklist v 0.1 (beta)

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One of my “secondary” goals for 2013 is trying to develop a more “formal” checklist especially for my “boring stock” strategy. As the “Boss Score” is only ment to be a starting point, I usually try to “quick check” certain points in order to find out if a deeper analysis makes sense.

One of the first thing one has to decide is: “what kind of stocks am I looking for” ? I don’t believe that a single check list for all kind of different stocks exists. So please keep in mind, the purpose of this checklist wil be to find stocks that:

– perform consistently well over time but not spectacularily so (no “wide moat” companies)
– have little fundamental downside (low debt, “hard” assets, stable sector)
– can be “left alone” if necessary for a long time because management is trustworthy (“low maintenance”)
– are nevertheless “mispriced” by the market

So far I have come up with the following list and the first 27 items (beta version):

1 . Market cap between 25-250 mn
“sweet spot”, large enough to invest, small enough to deter “large professional” investors

2. Less than 3 analysts following on Bloomberg or very bad sentiment
Unfollowed or “hated” stocks have larger potential to be mispriced

3. “low key” IR. E.g. no English annual reports, short quarterly updates etc., no share price on company homepage
Many investors skip such stocks

4. Potential special circumstances like Euro crisis, very diverse business activities, complex structure, Spin off etc.
increases chance of mispricing

5. Low historical beta /volatility
Good for my nerves, bad for any index oriented investors

6. Dividend yield > 3%
subjective criteria based on experience

7. P/E < 10
For some reasons I prefer “single digits” P/E

8. P/B < 1.2
Maybe anchoring effect, but in my opinion limtis downside risk

9. EV/EBITDA <= 6
in order to detect “special effects”

10. 10 Year mean reversion potential > 50%
Mean reversion potential based on P/E- net margin & EV/EBITDA, EBITDA margin

11. Positive 10 year FCF yield
no FCF generation normally indicates issues with capital allocation efficiency

12. Large acquisitions in the past or serial “acquirer” ?
might severly impact quality of reported numbers

13. Large share of intangible assets ?
again, quality of reported numbers

14. Significant pension liabilities, operating leases ?
Adjust for them accordingly to see if total leverage still acceptable

15. Low financial debt (net debt/equity <0.5)
again to minimize downside risk

16. Family owned / run
better chance for long term strategic management, best with founder still in charge and not too old

17. Treatment of shareholders in the past ?
Any indications of screwing shareholders in the past ?

18. Sharecount stable or decreasing ?
Does company dilute shareholders e.g. via options to management ?

19. Alignment of management and shareholders ?
Does management earn comparably much more than their shareholdings ? Outsized & unwarranted bonuses ?

20. Subjective impression of company management (pictures, speeches, comments)
Might sound stupid, but sometimes a picture says more than 500 pages …. Avoid jet set, sleazy looking guys

21. 10 Years of comparable history available ?
preferably companies with a long term track record as listed companies without major restructurings etc.

22. Industry in general decline
avoid value traps or make sure to understand whats going on

23. Positive/neutral short term (6m-1 year) price momentum ?
only catch the falling knife if you are very very sure

24. high quality investors as share holders ?
Preferable less known but good investors

25. Do I understand the business model ?
Why is the company succesful over the long run ?

26. Potential short/medium catalyst ?
i.e. sale of loss making division, change in shareholder structure etc.

27. 10 year sales growth above inflation
Don’t pay for growth, but if you get it cheap…also trade off with FCF

For each item I will give a score which is either:

+1 for a very positive answer
0 for a neutral position
-1 for a negative aspect

I will then add all the scores, the maximum is then logically the total number of checklist items. Anything which scores above 50% or more will be analysed deeper. In order to “callibrate” the list, I will also calculate scores for all my current holdings.

For a first test I calculated the “sores” for the following positions:

Installux: 18
Total Produce: 16
Hornbach: 16
Tonnelerie: 22
AS Creation: 20
Vetropack: 18
Buzzi: 10

As with any checklist or other “Model”, I don’t think one should follow this like a slave. Rather it should help to look more structured at a stock and also being able to review such a stock periodically on a structured basis.

I would be highly interested if any of the readers has comparable checklists and suggestions for the list.

Weekly links

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John Hempton from Bronte is actually long Herbalife. Fascinating story.

Longtermvalue blog is unhappy with his 2012 performance. He argues that small investors must use their advantages even better.

Eddy Elfenbein has published his 2013 buy list. Great how he beats the S&P 500 year after year with a simple large cap portfolio.

Wexboy too, writes about his favourites for 2013.

Good long story about Dish Network. Being nice to employees seems not to be their main strategy. Nevertheless, the stock has risen 4-fold since 2009.

Economist story of a relatively unknown fraud 200 years ago, involving among others, bonds of a non-existent country called Poyais.

Detailed story on Nokia’s decline from Techcrunch

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