Please note that my new blog is at www.market-swings.com
True to his word Uber-investor Warren Buffett increased his stake in Tesco from 3.21% to 5.08% the day after the supermarket issued its profit warning.
Todays RNS announcement only mentioned the Tesco holdings of Berkshire Hathaway, Buffett’s own holding company, up to and including the 13th of January.
Given that the Tesco share price fell another 5% since the 13th, and the fact that Buffett has had 4 extra business days to purchase Tesco shares, it would not be surprising if Buffett added more shares since then.
In my calculation berkshire could be holding as much as a 10% stake in the supermarket giant.
Time will tell.
I’d like to wax a little lyrical on holding private companies in a portfolio.
As a small cap value investor it’s mostly impossible to know how or when value will be extracted. Personally I have found that either value comes through very quickly or it takes ages ( and then some ). There seems to be no middle ground!
Sometimes it happens that other companies spot the same value that you saw in one of your holdings. A bid for your company may be made resulting in a variety of scenarios such as being given shares in the new company, taking profits as the share price is normally 30-50% higher than the level they were trading earlier that day or being offered a mixture of cash and stock.
Management also have been know to enter the fray and take the company that they manage private ( sometimes at horrendously unfair prices for the private investor ).
Being someone that hunts for extreme value some of my holdings have been taken private. I must admit that each time I purposely bought in because the company was being taken private.
My first example is Jetion Holdings ( JHL.L ). JHL made a tender offer for stock at around 82p ( from memory ). In such situations I have a neat little trick which allows me to pick up cheap stock – the profit margin is usually small so volume is the name of the game with the exchange rate being the main risk factor. Anyhow I managed to pick up a batch of shares at around 77p. The company delisted and a few months later handed back 82p per share.
Then there was China Shoto ( CHNS.L ). In my opinion the market was too excited about the company and when sentiment turned the share price fell a long way – to about 150p from memory. I think net working capital was around 140p which I set as my buy target. The share price hovered just over my target before shooting back north to around 300p.
Then the shares were tendered at 380p which set the price for the shares. Then for some reason I can’t remember the share price fell back and I acquired a few shares at around 310p partially because the company mentioned relisting on the Asian markets ( and if CHNS were paying 380p for their own shares then the new offer price must be north of that ) and partially because I stood to make a minimum gain of 22.5%.
The shares delisted and a downbeat trading statement was issued explaining that the company would not relist for many years due to market conditions and that all shares would be bought back for 380p each. So I ended up with a 22.5% profit.
The final company, which I am still holding, is Just Car Clinics ( JCR.L ) as explained in an earlier post. Something should happen in the next five years or so and in the meantime I receive a 12%+ dividend. I bought JCR near the bottom of the fall after the company released their delisting statement. There is a matched bargain facility available in case anyone may wish the buy or sell stock. Rather than placing a sell order through this facility I am happy to wait for value to be outed and to treat my JCR holding like a perpetual bond.
Investing in private companies seems to be part and parcel of my profitable investment strategy these days. As long as these special situations remain profitable I intend to reinvest in them if the opportunities are right.
Happy Investing. :O)
Such should be the introduction at Traders Anonomous. Sadly most traders belong to this group whether they realise it or not.
During meetings with clients I often see the excitement in their eyes when I explain asset based value investing. Usually I give out plenty of examples to explain what I am saying and just as often clients ask me if they should buy all those stocks at once.
Apart from freak market conditions I don’t believe that they should.Personally I aim to add about one value share per month. Ok market conditions vary so I may purchase more shares one month than in others.
Looking back through my trading diary I made trades in the following months:
October: I purchased 3 lots but in 2 companies ( Caza.L = 1 purchase, JCR.L = 2 purchases ). I sold half my Caza stake for a near 70% profit in 2 weeks. I continue to run the other half to this day.
November: I purchased one lot in a new company ( SEA.L ) and sold it a week later for a near 10% gain. I sold a little JCR for a 17% profit in just over 2 weeks. JCR has since delisted, I bought after the delisting announcement, and I am happy to run the remaining lot as it pays a dividend of over 12%.
December: I bought small initial stakes in 3 companies.
January: Nothing thus far.
This is about the most active that I am. Those trades occured because I found undervalued opportunities. Sometimes these opportunities surface often, most notably in bear(ish) markets, and sometimes you can’t find anything suitable to invest in for month on end. When the fish are biting fish otherwise just lie back and get a tan. :O)
JCR actually is the ultimate value investment. There is no ticker to remind me how fickle the herd is, I can’t sell at a whim ( there is a matched bargain facility ) and I just have to hold the business and it will pay me a 12%+ dividend per year. I bought it on something like just over 2 times 5 year average pre-tax profits. After the delisting announcement everyone ran for the door, so the share price fell massively,but I started buying the shares because the value was so clear.
I think of JCR like a perpetual bond although I am fairly sure something will happen in the next 5 years. If it doesn’t then that’s fine too.
Anyhow getting back on topic: research has shown that those who turn their portfolio over frequently don’t beat the market. Those that trade rarely, often outperform the market. There’s an excellent write up on this by Jason Zweig in the newer edition of The Intelligent Investor by Benjamin Graham.
So I ask each of you to look at your portfolio and see how often you turn it over on an annual basis.
On a final note my trades above were all winners this is because I wait for deep value and for everything to be in my favour. This takes patience and discipline which can be acquired by practise. I, too, was a hyper trader once until I learned my lesson.
Stockbrokers depend on activity to make money, a value investor depends on inactivity.
The Union Street Railway was a stock that Warren Buffett purchased during the mid 1950’s. The lead for this stock was given to Buffett by his mentor and friend ‘The Dean of Wall Street’ Benjamin Graham.
Despite the name Union Street Railway was actually a bus company situated in New Bedford, Massachusetts. The company had around $800,000 in treasury bonds, just under $200,000 cash plus outstanding bus tickets of $96,000. This equalled to around $60 per share but the share price was trading between $30 and $35.
The company was aware of this discrepancy and was buying back its own stock. Buffett, not to be out done, placed his own advertisement in newspapers in order to buy as much stock as possible. Union Street Railway was a regulated utility and so Buffett got the largest shareholder list from the public utility commision and worked that to get extra stock.
Next Buffett wanted to meet up with management which was something Ben Graham did not do on a regular basis. At the meeting Mark Duffy, CEO, mentioned to Buffett that the company was thinking about having a return of capital distribution. Par value of the stock was $25 and the company was thinking about returning two units to shareholders!
You can see how Buffett did well in the early years. Buying a stock for $35 and receiving $50 in a capital return plus still holding the stock and having value in it.
Buffett made around $20,000 on this transaction whilst his capital was still less than $100,000.
A copy of the accounts can be seen below:
I have been looking into Airea ( AIEA.L ) and ran into Richard Beddards posts about the company here: http://blog.iii.co.uk/airea-falls-at-last-hurdle/ ( make sure you read the articles in the links too ).
Immediately I thought of Airsprung Group ( APG.L ) which succumed to a takeover bid and delisted last December.
The figures are roughly similar for both companies but with some large differences.
Freehold Property £ 6.42m
Inventory £ 4.33m + Receivables £ 9.35m + Cash £ 1.73m = Current assets £ 15.41m less total liabilities £ 14.32m = Net working capital of £1.09m
Airsprung was taken over at £ 7.4m and you’ll notice that the property assets plus NWC equals £ 7.51m. Therefore the succesfull bid equalled NTBV ( except plant & equipment ).
Freehold Property £ 3.87m
Inventory £ 8.72m + Receivables £ 4.47m + Cash £ 3.05m = Current assets £ 16.24m less total liabilities £ 8.11m = Net working capital of 8.13m.
AIEA is capitalised at £ 5.78m so qualifies as a net net company as it trades at a near 30% discount to net working capital. Add in the property and the take over price should be around £ 12m. Nice upside from the current market cap.
Not so fast however. APG actually had a larger pension deficit ( £ 2.45m ) than AIEA ( £ 1.27m ) plus APG had financial liabs of £ 1.62 whilst AIEA is debt free. So far all the points are for AIEA.
Taking a closer look though AIEA actually had their pension deficit reduced due to a technicality as you will see in Richards article. Additionally even though the APG deficit was larger than that of AIEA APG’s annual contributions were half the size than those of AIEA ( £ 350K vs £ 712K ). APG’s fair value of assets came to £ 22.29m which is just over half of AIEA’s assets ( £ 38.47m ).
Where did that leave my investment decision ? Well, frankly, it’s still up in the air. :O)
So next I compared like for like and placed Crex Carpets ( figures from the 1920’s !! ) against AIEA. Ben Graham illustrated Crex in an article in 1923. In another article, this one from 1924, Graham showed how the stock had risen 79% since the previous article!
Crex sold at $29 and boasted cash assets of $17 ( 58.6% of share price ). Further current assets less total liabs came to a further $23. Fixed property came to $73 but it is not clear if any of this was in the form of freehold property or other longer term cash investments. In short the price traded at a discount of 27.5% to net working capital. Crex had a market cap of $870,000 and total liabilities only came to $45,000. Net profits in 1923 were $ 3.72 p/s so the company traded on a multiple of 8.87.
Against this AIEA sells for £ 5.78m and has cash of £ 3.05m ( 52.8% of price ). The remaining current assets less all liabs equals 5.08m for a total discount of 28.9% to net working capital plus there’s an extra £ 3.87m of property on top. Of course total liabilities equals £ 8.11m which dwarfs the current market cap. Net profits were noticably lower in 2011 leaving AIEA trading on a multiple of 19.53.
Both companies sport irregular earnings and dividend payments. In this case Crex looks the more attractive company.
It’s back to the drawing board with AIEA.
Well here we are. It’s new years eve and I am starting my first blog. The idea of this blog is to highlight very, very cheap stocks usually, though not always, of the net net variety. Often these stocks are micro caps however I will also cover larger companies from time to time.
Other bloggers are picking their stocks for 2012 and while I usually avoid exercises of this kind it certainly makes for an interesting first post.
Of course my two picks are net nets currently found on the UK market.
French Connection ( FCUK.L ) currently available to purchase at 40p is capitalised at just under £40m and sports £30.9m cash, or 31.83p per share, on its balance sheet which is debt free. Other net current assets ( current assets less all liabilities ) equals 24p per share. Therefore working capital, or a proxy for liquidation value, comes in at 55.83p per share. The FCUK brand in itself is worth something and this brand as well as other fixed assets and the going concern value are currently valued at minus!
Titon Holdings ( TON.L ) is a micro cap worth just under £3.5m at an offer price of 33p per share. Trading has been tough as is the outlook. Obviously this, as well as poor business economics, has driven the price south. TON holds 26.81p per share cash on its balance sheet and very minimal debt ( a £17,000 overdraft ). Other net current assets come to 26.57p for a working capital figure of 53.38p. Cheap isn’t it ? But there’s more: under the fixed assets there’s depreciated freehold property worth 23.4p per share!
Both companies pay a dividend as well.