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Sold, rejected but not forgotten: Tracking 2nd level and 3rd Level investing mistakes

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:

Stock Reason sold /not bought Date Perf Perf BM Delta
KPN Special situation expired 10.05.13 34.2% 3.3% -31.0%
IVG Conv ESUG 21.05.13 16.1% 1.1% -15.0%
Bouygues Portf. Mgt. 28.06.13 21.7% 7.1% -14.6%
Total Prod dissapointing CI 08.03.13 21.3% 7.1% -14.2%
Mapfre Autumn cleaning 31.10.12 30.1% 19.9% -10.2%
Dart Too expensive 18.07.13 7.1% 2.7% -4.3%
Total Prod dissapointing CI 10.04.13 12.1% 9.0% -3.2%
OMV Autumn cleaning 30.10.12 22.6% 19.5% -3.0%
Dart Too expensive 26.07.13 4.5% 2.8% -1.7%
Buzzi business model problems 23.05.13 2.8% 2.7% -0.1%
WMF too expensive 11.04.13 5.0% 8.1% 3.1%
Fortum Autumn cleaning 30.10.12 6.4% 19.5% 13.2%
Piquadro Sold because of business problems 08.08.12 2.7% 24.5% 21.8%
Nestle Sold because of Pfizer acquisition 23.04.12 11.8% 35.0% 23.3%
EVN Autumn cleaning 31.10.12 -9.9% 19.9% 29.8%
Praktiker Sold because of Anchorage 04.07.12 -81.3% 30.6% 111.9%
        avg 6.6%

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:

Stock Reason sold /not bought Date Perf Perf BM Delta
Reply Cashflow red flag 31.08.2012 140.6% 24.5% -116.1%
Banknordik forgot to follow up 26.11.2012 70.1% 19.5% -50.5%
Curanum not really interested 05.09.2012 66.7% 25.0% -41.7%
Severfield Too expensive stand alone 21.03.2013 47.7% 7.9% -39.8%
Walgreen M&A 04.07.2012 62.7% 30.6% -32.1%
Osram Target of 23 EUR not hit 08.07.2013 35.7% 6.1% -29.7%
M6 only short analysis, issue with CI 26.11.2012 43.0% 19.5% -23.5%
Cairo undecided 27.06.2012 58.1% 38.9% -19.2%
Halfords Negative momentum 06.06.2012 55.1% 40.5% -14.6%
Hankook could not buy privately 29.10.2012 31.0% 21.0% -10.0%
Astaldi too much debt 23.07.2013 11.2% 3.0% -8.2%
Porsche still don’t like them 29.11.2012 24.3% 17.7% -6.6%
CIR no margin of safety 17.07.2013 7.3% 4.0% -3.3%
EAC Watch only 29.07.2013 2.8% 2.6% -0.2%
Canal+ no real upside 19.09.2012 19.1% 19.6% 0.5%
Rallye leverage 25.01.2013 8.4% 9.3% 0.9%
Bongrain Doesn’t earn coc 26.11.2012 17.0% 19.5% 2.5%
Greek GDP linker   10.06.2013 -2.6% 3.7% 6.3%
Accell low FCF, insider selling 26.10.2012 12.3% 20.5% 8.1%
Solvac not cheap enough 13.12.2012 4.4% 14.9% 10.4%
Mr. Bricolage Too much debt 13.09.2012 9.4% 20.9% 11.5%
Viel Underlying busienss 18.12.2012 2.4% 14.0% 11.6%
Morgan Sindall no mean reversion potential 23.10.2012 1.0% 21.6% 20.6%
WSU because of US problems, not cheap 19.04.2012 10.6% 31.9% 21.2%
Maisons France Cycle 29.01.2013 -12.5% 9.4% 21.9%
Energiedienst Business model 04.02.2013 -12.3% 12.5% 24.8%
TNT Express Too expensive stand alone 21.11.2012 -5.2% 20.8% 26.0%
KHD insiders 30.07.2012 -0.7% 27.7% 28.4%
Fabasoft track record 25.06.2012 -2.7% 40.3% 43.0%
        avg -5.4%

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.


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.

Missed opportunities: Osram, Praktiker, Powerland


Good idea, bad execution is my summary for this one. The main mistake was clearly some kind of “anchoring”, because I wanted to see a price below 23 in order to buy. ANother question would be if you should, as a true value investor, do such “trades” at all.

Clearly, I am not yet convinced of Osram’s long term potential, but to me it was clear that this looked very similar to Lanxess’ first day on the stock market. A friend told me that “if you miss the limit by a few cents, then the margin of safety was too small anyway”. That is a good point. On the other hand, I think one can also add “alpha” if one does those kind of trades consequently (like the KPN trade), if the odds are in one’s favour.

I mean this is the whole idea of “special situation” investing. It might not be a pure “Margin of safety trade” each time, but if the chances are 55:45 on average instead of 50/50, over time this strategy will also produce good results.

For the time being, I will however remain on the sidelines with Osram.


Almost exactly a year ago after I sold the Praktiker Bond, the Insolvency now seems to be unavoidable.

Looking back, the sale at ~44% in July looked like really bad timing in the beginning:

Clearly, this was a missed opportunity as well, as the price even doubled after I sold July 2012. But after the “restructuring”, the Praktiker bond in my opinion was a pure speculation, the odds were at most 50/50 or worse. Clearly, I did not forecast the bad weather, but overall this whole affair looked just too bad. So I do not regret this missed opportunity as the fundamental decision was clearly correct.

Just as a remark: I assume that the recovery for the bond will be very low, maybe even single digit percentage points. Everything valuable has been pledged away and I don’t think they will get any fresh money into the capital structure “below” the bond.


2 years ago, I looked at Powerland, a “German-Chinese” IPO. Already a superficial look at the company showed a lot of inconsistencies. Now it looks like that the game is over.

I am not sure why I didn’t short the company. This was clearly a case with a very big chance of being a fraud. There would have been even a second good chance when the CFO in November 2012 surprisingly left the company. So clearly a missed opportunity as I didn’t follow up on that one.

Short cuts: Kabel Deutschland, Rhoen Klinikum, Greek GDP linker, Royal Imtech

Kabel Deutschland

Man, this looks like I got it really wrong. According to some press articles, now Liberty wants to buy Kabel as well for 85 EUR a share. So there seems to be a bidding war before even the first official bid has been announced.

The interesting point of this “red-hot” news is that Liberty has already once tried to buy the former Telekom Cable network in 2002 but this was not approved by the German Kartellamt.

How realistic is this ? I am not sure. Just in February, the German Kartellamt blocked the takeover of the smaller rival Telecolumbus by Kabel Deutschland itself because even the combination of KAbel Deutschland and the smaller rival was a problem for them.

So what is going on here ? I have no idea, but to a certain extent it looks like one of the best “stock promotions” ever. What kind of M&A process is this when everything “leaks” to the market ?

For some market participants, this doesn’t matter anyway. My “favourite bad research provider” Makor (yes, those guys who use the wrong formula to calculate fair prices after right issues) has the following recommendation viea Bloomberg:

We recommend initiating positions in Kabel shares, as we consider the shares trading about fair value in the context of a possible offer. However, given the strategic interests for the potential buyers (Vodafone, Liberty Media), a premium is probably justified and notwithstanding regulatory issues, a price above Eur 90/sh could easily be justified.

Wow, sometimes the stock market is so simple.

Rhoen Klinikum

Unfortunately, the “Rhoen surprise” did not last very long. Some more details were emerging . It looks like that the boss of the supervisory board (and the guy who wants to sell to Fresenius) decided, that the 5% votes of one of the blocking shareholders were not valid. The result will most likely be a court battle over up to 18 months. So lets wait and see what happens.

Greek GDP linkers

The most recent jump in the GDP linker seems to come from a “research piece” of Deutsche bank which several readers forwarded to me (thank you guys !!!).

Let’s look how the look at the nominal hurdle:

Based on the latest IMF forecasts, the 2011 level of GDP is expected to be re-attained in 2017. By fixing this point, we can then solve for the nominal growth rate required in order to exceed the nominal GDP threshold in a given year. We find that in order to exceed the threshold in 2022 (for warrant payment in 2023) would require a YoY nominal growth rate of 5.0%. A growth rate of 3.6% would be required to meet the threshold in 2024. If recovery to the 2011 level is achieved a year earlier than expected (in 2016) then the required growth rate for the first payment to be in 2023 falls to 4.2%, or rises to 6.3% assuming a year delay. These sensitivities are illustrated in the chart to the right.
Although it is far from certain, it seems reasonable to assume 2023 to be the year when payments commence on the warrants.

Ok, so the basic assumption is that the new IMF forecast from 2012 is now correct, after the initial forecast was completely wrong. Hmm, one might call this “positive thinking” if one wants to be nice.

Their final conclusion (after some “nonsense funky doodle” modeling) is as follows:

The combination of more stable macro-economic assumptions, and reduced default probability now mean that we find the current valuation of the warrants as being broadly justified (relative to the GGBs). Considering our constructive view, the additional beta of the warrants and also the additional ‘yield’, we now find the GDP warrants to be more attractive than the GGBs themselves as a means to take exposure to an eventual Greek recovery. We caveat that such a recovery remains uncertain and will likely be lengthy; implying that any anticipated outperformance of the warrants should be seen as a medium to long-term expectation.

So this conforms my view, that the GDP linker is more like a short-term “beta” play than an intrinsic value” investment as the Deutsche Bank “analysts” only take the IMF projection as fundamental basis and do not add anything new here.

Royal Imtech

Royal Imtech has released a quite bad Q1 report. It looks more and more that larger parts of the company are in real trouble and that the fraud might have been just the “top of the iceberg”. Time to take them of the “rights issue watch list”. As I am not a “fraud-turn around” investor, this seems to be the not the situations I am looking for.

Performance review May 2013 – Comment “Position sizing”


May has been s surprisingly good month for the portfolio. Despite ~15-20% cash, the portfolio gained +4.9% against +4.5% for the benchmark (50% Eurostoxx, 30% Dax, 20% MDax). YTD this results in +19.6% against +12.0% for the Benchmark. Since inception (Jan 1st 2011), the score is now +57.7% against 22.1%. As I have said many times, this is still highly unusual if the portfolio outperforms in such a strong month, especially now with the high cash percentage.

Main drivers were: EMAK (+27%), Dart Group (+22%), April (+16%) and Tonnellerie (+13%)

Portfolio activity

May has been an unusual active month. As discussed, the following transactions took place:

– sale of IVG convertible with a total loss of -16,3%
– sale of Buzzi with a total gain of +34% (incl. dividends)
– Sale of KPN shares & rights with a gain of 11.1%
– Purchase of IGE & XAO
– Purchase of EGIS
Edit: – Short Position Focus Media has actually been bough, exit with a loss -11.9%

Portfolio as of May 31st 2013:

EDIT: Buy out of Focus Media updated

Name Weight Perf. Incl. Div
Hornbach Baumarkt 3.7% 3.4%
AS Creation Tapeten 4.3% 49.3%
Tonnellerie Frere Paris 5.7% 83.3%
Vetropack 4.1% 9.7%
Installux 2.7% 10.1%
Poujoulat 0.8% 6.4%
Dart Group 4.7% 171.2%
Cranswick 5.4% 33.8%
April SA 3.6% 19.4%
SOL Spa 2.7% 35.8%
Gronlandsbanken 2.1% 23.2%
G. Perrier 3.0% 11.3%
IGE & XAO 2.0% 4.1%
EGIS 2.5% 0.4%
KAS Bank NV 4.6% 27.6%
SIAS 5.5% 59.5%
Bouygues 2.4% 7.0%
Drägerwerk Genüsse D 9.2% 186.2%
DEPFA LT2 2015 2.7% 64.1%
HT1 Funding 4.6% 58.2%
EMAK SPA 5.2% 64.9%
Rhoen Klinikum 2.2% 10.8%
Short: Prada -1.0% -20.4%
Short Kabel Deutschland -1.0% -5.7%
Short Lyxor Cac40 -1.2% -15.5%
Short Ishares FTSE MIB -2.0% -14.0%
Terminverkauf CHF EUR 0.2% 7.9%
Cash 21.0%  
Value 47.5%  
Opportunity 36.4%  
Short+ Hedges -4.9%  
Cash 21.0%  

Comment “Position sizing”

One topic which constantly bugs me is how to size positions.

There are two extremes:

On the one side, Modern Portfolio Theory (MPT) says that the only kind of “free lunch” available is diversification. Adding additional positions means more or less the same returns but with lower risk.

On the other side are very succesful investors, including of course our heroes, Warren and Charlie, argue that one should concentrate on the big ideas only as those are the ones which drive the returns. Similar results come out of the “Kelly criterion” which says that you should bet overp proportionally more if the odds ar in your favour.

Personally, as a “part time” investor, I have the following problems:

1) I can oversee only a limited amount of companies&investments, my max is around 25-30 based on experience. So further diversification on a single investment level does not make sense

2) As I am in general very sceptical and commit only a limited time per day on research, I never really came to a stage where I was 100% sure about any investment. Even if I am 95% sure I have the nagging feeling that I missed something

3) I usually find my “edges” only in small cap stocks or smaller special situations. Small companies have much more unique risk factors than large caps. It is a real difference in risk if you invest lets say 40% into a small French software company than investing 40% of your portfolio into an international company like American Express

Point 2) is really the major issue why I hesitate to commit more than 10% of my portfolio into a single stock. I am just not confident enough in any company or investment to do so.

Looking back, my historical best investments, like for instance German bank hybrid in 2009 was made under a lot of uncertainty and I didn’t really know for sure if it plays out the way it did. The same goes for Draeger. Yes it was a multi bagger, but at least for me I was never really sure about it.

On the other hand, some small ideas where I didn’t really have a lot of conviction, performed outstanding, like Dart Group which was rather a kind of “mechanical” buy. Also sometimes a basket approach to risky or very illiquid small caps (France) makes sense.

In general, I think that there is no single optimal strategy for postion sizes. As every part of the investment process, this has to fit with the overall character of the investor, including risk tolerance, investment style and time available. With regard to the “kelly formula”, I have the fundamental problem that I neither determine the payouts nor the probabilities, so this is not a big help eithet.

For the time being, I do not have a better system for my personal situation than my current one which looks like this:

–> Full positions at 5% (increase via peformance until 10%)
–> half positions at 2.5% if I buy into a stock
–> plus a basket approach for my illiquid French small caps.
–> occasionally small position for “half baked” ideas
IMPORTANT: Weed out weak conviction positions if overall numbers of investments get close to 30 single stock investments (long & short, ex index hedges)

So far it has worked quite well, but there is always room for improvement.

Performance April 2013 & comment: “All time highs”

Performance April 2013:

Performance for the month April was +0.5% against +2.1%, an underperformance of -1.6% vs. the Benchmark (50% Eurostoxx, 30% Dax, 20% Dax). YTD, the portfolio is up 14.0% against 4.9% for the Benchmark.

For some reason, the underperformance in April reassures me that my strategy is working. I would assume in “up months” a weaker performance than the benchmark, in down months a significant better relative performance. However, in the first 3 months of 2013, the portfolio strongly outperformed although we had seen 3 “up months” in a row and I ran at ~15% net cash in the portfolio. Despite the nice developement, one has to ask if there isn’t a lot of “hidden beta” in the portfolio.

However the current month shows that the stocks do have “their own life” versus the benchmark. For instance Tonnellerie, which acted like a high beta stock in the beginning of the year came down to earth with a -17,7% performance in April. As a reader asked me for it, here is the graphical performance since Inception:

Portfolio as of 30.04.2013:

Name Weight Perf. Incl. Div
Hornbach Baumarkt 3.8% 2.8%
AS Creation Tapeten 4.7% 55.2%
Tonnellerie Frere Paris 5.3% 62.2%
Vetropack 4.4% 7.4%
Installux 2.8% 8.7%
Poujoulat 0.9% 6.4%
Dart Group 4.1% 124.0%
Cranswick 5.4% 26.6%
April SA 3.3% 4.2%
SOL Spa 2.7% 25.4%
Gronlandsbanken 2.2% 23.2%
G. Perrier 3.0% 4.8%
KAS Bank NV 4.7% 23.0%
SIAS 5.4% 48.6%
Bouygues 2.6% 10.2%
Drägerwerk Genüsse D 10.1% 193.0%
IVG Wandler 4.1% -17.7%
DEPFA LT2 2015 2.7% 58.8%
HT1 Funding 4.7% 56.4%
EMAK SPA 4.3% 31.2%
Rhoen Klinikum 2.2% 8.4%
KPN shares 0.6% 0.2%
KPN rights 0.4% -1.0%
Short: Focus Media Group -0.9% -8.5%
Short: Prada -1.0% -13.7%
Short Kabel Deutschland -1.0% -5.0%
Short Lyxor Cac40 -1.2% -11.7%
Short Ishares FTSE MIB -2.0% -10.3%
Terminverkauf CHF EUR 0.2% 6.4%
Cash 16.4%  
Value 42.5%  
Opportunity 47.0%  
Short+ Hedges -5.9%  
Cash 16.4%  

Major changes were: Increase in Perrier to now 3%, sale of Total Produce and WMF pref shares, increase in IVG convertible plus 1% KPN as a new share. For my portfolio, this was a very active month.

Comment: All time highs

A lot of newspaper articles are concerned with the current “all time highs”, both in the DAX and the S&P 500 as well as the Dow Jones. Many people argue that level is of very high significance, either as an upper boundary or support.

In my opinion this is one of the most prominent cases of “Anchoring”, a well documented behavioural finance bias. Yes, the Dax already 2 times bounced back from the 8000 point level, in 2000 and 2007 as this chart clearly shows:

However if you look at the composition of the DAX in those years one can quickly see that the Dax is a very different animal now than in the past.

Those are the Top 5 stocks now:

BASF SE 9.9%
Bayer AG 9.8%
Siemens AG 9.0%
SAP AG 8.1%
Allianz SE 7.6%

Compare this to the top 5 a mere 5 years ago on December 2007:

E.ON SE 10.1%
Siemens AG 9.9%
Allianz SE 8.4%
Daimler AG 8.2%
BASF SE 6.2%

Yes, 3 stocks are still in the Top 5 (Allianz, BASF and Siemens) but 2 out of 5 are new and the weights are significantly different.

Even if we compare the top 5 based on their P/Es, we can see that even those shares which remained in the top 5 trade at quite different P/Es:

PE 2007     PE 2013
E.ON SE 15.6   BASF SE 14.6
Siemens AG 26.3   Bayer AG 26.3
Allianz SE 7.5   Siemens AG 14.1
Daimler AG 23.3   SAP AG 25.4
BASF SE 12.4   Allianz SE 10.4

So what does that mean ?

In my opinion, the current absolute level of the DAX compared to the past is totally irrelevant. Any investment decision on such an arbitrary basis is a clear “anchoring bias”. Investment decisions should be made irrespective of index levels. If you find a cheap stock buy it, when a stock is too expensive, sell it. It doesn’t matter where the Index is compared to its past.

How to raise capital – Deutsche Bank edition

In a surprise move, yesterday after the close of the stock market, Deutsche Bank announced that the increase their capital by ~2.8 bn.

For this they used the possibility of selling up to 10% of new shares without granting rights to the old shareholders.

So this would be the perfect case for the “formula” I mentioned yesterday:

Equilibrium Price = (price pre-cap raising announcement x # shares + price cap raising x # shares) / total # shares

The closing price of Deutsch Bank was 33.60 EUR. The price for the new shares 32.90 EUR. Outstanding shares were 929 mn, new shares 90 mn.

So the “Equilibrium Price” should have been:

(33.60 * 929 + 32.90 * 90)/ 1019 = 33.53 EUR per share.

Reality check: The stock actually opened around 33.50 but is now up +7.5% at ~35.40 EUR.

Learning experience:

The stock market is full of surprises. For some reason, the capital market considers it as extremely positive that Deutsche Bank increases its share count by 10%. I don’t know why.

And: Don’t rely on formulas…….

Weekly links

Prem Watsa’s Fairfax annual meeting notes from Cove Street Capital

Good interview with Peter Cundill disciple and Deep Value investor Jeroen Boes

Some simple but very good thoughts about Apple from the Brooklyn investor. By the way: This is one of the best value investment blogs in my opinion !!

Recommended: Entertaining post about the investment process at Eastcoast Management

Interesting special situation from Wexboy: EIIB (Ex-Bank)

Longish but very interesting interview script with Markel’s Tom Gayner

Rare interview with Cable Cowboy John Malone

Via Gurufocus: A KPN analysis with lots of data.

Royal Imtech update: Higher loss & Rights issue

After last qeek’s first look at Royal Imtech, Imtech came out today with a press release:

The highlights were as follows:

Rights issue will be completely used for debt reduction
Measures to make financial structure more robust
Write-off of 150 million euro for Polish projects
Write-off of 150 million euro for German projects

So this means that the write offs are a lot higher than initially communciated. Back then, they only said “100 mn EUR in Poland”, now we are at 300 mn EUR in Poland and Germany.

In parallel they also reported a change in the CEO positon:

Gouda, the Netherlands – The Supervisory Board of Royal Imtech N.V. (IM-AE, technical services provision within and outside Europe) confirms that in good consultation and in line with the original plan, René van der Bruggen (65) has decided to retire as of 3 April 2013. He will remain a member of the Board of Management until 3 April. He will hand over as Chairman with immediate effect. Gerard van de Aast (55), who is already a member of the Board of Management, is as of now appointed CEO of Royal Imtech and Chairman of the Board of Management

So this could be an interesiting situation. The new CEO will most likely go for a “kitchen sink” approach and write off as much as possible in order to have some “cushion” in the future.

Another aspect is what they say in the first press release:

Royal Imtech N.V. (IM-AE, technical services provider in and outside Europe) announces that the company will strengthen its equity through a rights issue of 500 million euro. The proceeds of the rights issue will be completely used for debt reduction. As a result of this the balance sheet of Imtech will be reinforced

This looks like that the banks have Imtech “by the balls” and could push through the rights issue in their interest. So it is not really a surprise that the share price of Imtech dropped to a new low:

Again, as in the KPN case I would wait until the details of the rights issue are known. With a current market cap of 800 mn EUR, a 500 mn EUR rights issue will require a significant discount.

Imploding Dutch stock of the week: Royal Imtech (ISIN NL0006055329)

After KPN and TNT Express, we highly welcome another Dutch company with an imploding stock price, Royal Imtech.

The company:

Royal Imtech seems to be active mostly in everything which on can install into buildings, such as heating, securities, electrical equipments etc. although the company profile on its website sounds like a perfect score at “bullshit bingo”:

Imtech offers added value with integrated and multidisciplinary total solutions that lead to better business processes and more efficiency for customers and the customers they, in their turn, serve. Imtech also offers solutions that contribute towards a sustainable society – for example, in the areas of energy, the environment, water and traffic.

Nevertheless, until recently (November 2011) Imtech was highly coveted by analysts as “clean tech” super star , with a 100% buy rating and price targets of 30 EUR per share and more.

The problem

In beginning of February, Imtech came out with a “bombshell” press release.

Not only did they have to postpone their earnings release, but they also indicated that they have a loss of min. 100 mn EUR in their fast growing Polish business. The press release contains this “gem” of potential accounting fraud:

The Board of Management has also determined that a promissory note and pledged accounts related to the Adventure World Warsaw project – amounting to around 200 million euro – that had been recognised in the half-yearly 2012 financial statements under cash and cash equivalents must, according to IFRS, be reclassified under current financial assets. Most of this amount was recognised as an advance payment under work in progress for the four projects concerned. This advance payment was considerably higher than the incurred costs. As stated above, the advance payments have not become available to Imtech. The effect of this is incorporated in the expected write-off of at least 100 million euro

This potential fraud leads to another problem: As net cash is part of their loan covenants, the company already indicates that all of a sudden, they are now in breach with their loan covenants:

The consequence of the expected write-off will be that, when its 2012 financial statements are drawn-up, Imtech will no longer fulfil its covenants with lenders – average ratios of 3.0 maximum for net debt/EBITDA and 4.0 minimum for interest coverage. As a result Imtech will begin consultations with its lenders. Imtech has retained Rabobank as its financial advisor for these consultations.

The share price fell of course like a stone following this announcements:

One interesting aspect about Imtech is the fact that some rumours about aggressive accounting were circulating already late last year. Of course management denied all allegations at that time.

Interestingly, Imtech had already a quite high short interest at that time, almost 10% of the market cap was short at the end of the year. Thanks to the new regulations about short disclosure one could see that the “smart money” like Dan Loeb’s Third Point is short the share.

Why bother at all ?

One of the reasons I looked at Imtech is that based on many metrics, Imtech looked like a great stock and even more now at the current price levels. I am sure, Imtech will show up now on many “value screens”. Even in my BOSS model, Imtech looks quite compelling.

If we look at some measures, Imtech really looks like a great company:

31.12.2002 0.61 0.42 17.4% 21.9%
31.12.2003 0.57 0.36 14.5% 41.7%
31.12.2004 0.58 0.36 12.5% 17.1%
30.12.2005 0.69 0.36 18.4% 18.6%
29.12.2006 0.86 0.36 21.9% 19.5%
31.12.2007 1.17 0.36 26.4% 21.4%
31.12.2008 1.46 0.47 29.7% 18.3%
31.12.2009 1.62 0.59 28.2% 16.3%
31.12.2010 1.70 0.64 21.4% #WERT!
30.12.2011 1.72 0.65 17.3% 11.4%

One can see growing earnings, growing dividends, nice free cashflow and double digit ROIC and ROEs. So what is not to like ?

The big question

So the question is: Is Imtech a great company which has just facing a bump on its road to further success or is there a real problem with the company ?

There are some examples of great companies with similar problems, for instance Hugo Boss AG, the German luxury Group. In 2002, they detected fraud in their US subsidiary (“channel stuffing”) and had to restate their 2001 balance sheet significantly. I just found this research note from Commerzbank in 2002 where they downgraded the stock from 16 to 9 EUR per share. Looking back, this would have been the perfect entry point for Hugo Boss. The stock since then performed ~30 p.a. until now (a 15-bagger so to say) against 7.7% of the CDAX.

However with Imtech, I have some doubts due to the following reasons:

Imtech more or less looks like a typical “roll up”. On the “acquisitions” page of their homepage one can see that they have done like 10–15 acquisitions per year. With roll ups, it is very difficult to asses the reported numbers of such a company because of the large leeway available for accounting for acquisition. Even cash flows can be “massaged” quite significantly as we have seen many times before.
As a result, Imtech carries significant goodwill. This in itself is not necessarily a problem, but together with significant accounting problems, this might become a problem quite soon.

Type of fraud
As mentioned above, this fraud was not “only” about faking sales but also about faking on-balance sheet cash. As we know now, Imtech has quite tight credit covenants. So in my opinion this implies that the fraud has some connection to the whole group and is not only a result of some renegade employees in a subsidiary. Imtech seemed to have general problems with cash and fulfilling its covenants before.


In theory, Imtech could be a great company which had bad luck with management in a subsidiary. This would be a good entry point to buy a great business at rock bottom prices.

However, at least in my opinion, the history of the company as a “roll up” as well as the type of fraud makes me cautious. So for the time being this will be just sit back and watch what is going to happen (and trying to learn more…).

Maybe if they really go the way of a big rights issue as indicated in this Bloomberg story might be an interesting entry point, but only if the issues regarding the fraud have been clarified in the meantime and the business is viable. Otherwise, the good parts of the business will most likely go to the creditors and the shareholders might get nothing (but the blues).

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