Wednesday, 15 November 2017

Divested Valuetronics for 106% annualized returns

Summary

I have decided to divest my position in Valuetronics as my initial investment thesis of a turnaround  made in April (here) has been realized.

All divestments made in 2017 by Author, price includes transaction costs

As the table shows, the divestment of Valuetronics represent my largest realized gain till date.

Divestment Rationale

1) Turnaround is Complete

The key investment rationale was that Valuetronics' twin engines of Consumer Electronics (CE) and Industrial and Commercial Electronics (ICE) were finally both firing concurrently. This had indeed played out perfectly with the firm recording between 7%-10% q-o-q growth in revenue for both segments in the 2 quarterly results since my investment.

However, every party must come to an end and the latest Q2'18 results indicate that momentum for Valuetronics' ICE segment might be stuttering. Revenue from the ICE segment fell q-o-q for the first time since Q4'16.

Source: Valuetronics' Financial Statements

I take the q-o-q fall in revenue for ICE as a sign that the turnaround had been complete. Upon further assessment that the rich y-o-y growth figures are coming to an end with the higher base figures achieved since 2Q'16,  I have decided to realize my gains and exit in accordance to the initial investment thesis.

I would like to add that no one can be certain as to whether this q-o-q result is a mere blip or if this is the start of something more serious. Indeed, I can be wrong but I have simply decided to take the safer option and stick to my original investment thesis.

2) Asset Play

Another investment thesis that I discussed in April was Valuetronics as an asset play. 

When I purchased Valuetronics, cash and cash equivalent made up 41% of its market capitalization. Today, Valuetronics' share price has increased to the extent where cash and cash equivalent are only worth 25% of its market capitalization. From a PE of 12 (net of cash, 7.07), Valuetronics is now trading at a PE of 13 (net of cash, 9.71). 

I consider the current valuations more indicative of Valuetronics' fair value and am pleased that the market is perhaps now taking into greater account the unproductive cash sitting on Valuetronics' balance sheet. 

Conclusion

In truth, this divestment is also partially triggered by my desire to reduce my portfolio's exposure to the electronics sector and take some profit off the table on the back of the recent electronics boom. 

With increased cash on hand, I am currently considering between a few different investment ideas. I anticipate that the next investment should take place before the close of the year and hope that it will prove as fruitful as this one.

This is neither a recommendation to purchase or sell any of the shares, securities or other instruments mentioned in this document or referred to; nor can this blog post be treated as professional advice to buy, sell or take a position in any shares, securities or other instruments. The information contained herein is based on the study and research of Dan O (“the Author”); is merely the written opinions and ideas of the Author, and is as such strictly for educational purposes and/or for study or research only. This information should not and cannot be construed as or relied on and (for all intents and purposes) does not constitute financial, investment or any other form of advice. Any investment involves the taking of substantial risks, including (but not limited to) complete loss of capital. Every investor has different strategies, risk tolerances and time frames. You are advised to perform your own independent checks, research or study; and you should contact a licensed professional before making any investment decisions. The Author make it unequivocally clear that there are no warranties, express or implied, as to the accuracy, completeness, or results obtained from any statement, information and/or data set forth herein. The Author, its related and affiliate companies and/or their directors, executives and employees shall in no event be held liable to any party for any direct, indirect, punitive, special, incidental, or consequential damages arising directly or indirectly from the use of any of this material.

Saturday, 11 November 2017

Book Review: 5 takeaways from Edgar Wachenheim's Common Stocks & Common Sense


About the Author:

Edgar Wachenheim is the founder, chairman and chief portfolio manager of Greenhaven Associates. The fund currently manages over US$6 billion. In the 25 years since the founding of the fund in 1987, Greenhaven Associates had produced market beating returns of 19% per annum on average.

About the Book:

Unlike other books which discuss theories on stock pickings, investment principles or even investing psychology, this book adopts a case-based pedagogy. 

Edgar shares details of several investments made by Greenhaven. He illustrates methodologically how each investment thesis surfaced before detailing the probabilistic approach towards assessing these theses and finally discusses how he appraises the target price of each firm in question. 

Here goes the 5 takeaways:

1) The first goal of investing is to control the risks of permanent loss

Edgar shares his belief that a shareholder makes money off the income statement, but survives off the balance sheet. Because of his keen desire to minimize risks of permanent loss, the balance sheet becomes a good place to start efforts to understand a company.

Debt-to-equity ratios, liquidity, depreciation rates, accounting practices, pension and health care liabilities, and "hidden" assets and liabilities are all among common considerations of Edgar.

2) We cannot completely eliminate large risks

Investors have to accept that relatively unpredictable outlier developments can sometimes quickly derail otherwise attractive investments. 

Investors must be prepared and willing to change their analyses and minds when presented with new developments that adversely alter the fundamentals of an industry or company. In practice, when one becomes aware of adverse changes, one should then sell shares before any loss becomes too large.

3) Other great investors' purchases provide for a good source of investment ideas

Edgar admits a liking towards following sound and successful investors who are particularly knowledgeable about a company or industry they are investing in.

4) High growth rates are unsustainable over time

Over time, the growth rates of almost all technologies, products, and services slow because of saturation, obsolescence, or competition. 

It is therefore not advisable to project high growth rates far into the future.

5) Remain fully invested

Edgar advises for investors to remain fully invested as long as their holdings remain reasonably priced and free from large risks of permanent loss. 

Sometimes holdings that initially appear to be less exciting eventually benefit from positive unforeseen events and unexpectedly turn out to be a complete winner. The only way to benefit from these events is to remain fully invested.

However, Edgar clarifies that in situations where investors are unable to find a sufficient number of attractive securities to remain fully invested, investors should be willing to hold cash. 

This is neither a recommendation to purchase or sell any of the shares, securities or other instruments mentioned in this document or referred to; nor can this blog post be treated as professional advice to buy, sell or take a position in any shares, securities or other instruments. The information contained herein is based on the study and research of Dan O (“the Author”); is merely the written opinions and ideas of the Author, and is as such strictly for educational purposes and/or for study or research only. This information should not and cannot be construed as or relied on and (for all intents and purposes) does not constitute financial, investment or any other form of advice. Any investment involves the taking of substantial risks, including (but not limited to) complete loss of capital. Every investor has different strategies, risk tolerances and time frames. You are advised to perform your own independent checks, research or study; and you should contact a licensed professional before making any investment decisions. The Author make it unequivocally clear that there are no warranties, express or implied, as to the accuracy, completeness, or results obtained from any statement, information and/or data set forth herein. The Author, its related and affiliate companies and/or their directors, executives and employees shall in no event be held liable to any party for any direct, indirect, punitive, special, incidental, or consequential damages arising directly or indirectly from the use of any of this material.

Saturday, 4 November 2017

Cogent buyout offer - thoughts and (lack of) options

The spate of buyouts targeting logistics companies on SGX has continued with the latest target - Cogent Holdings. Cogent received a buyout offer from COSCO shipping, another company listed on SGX. Interested investors can read more about the buyout offer here.

Investors would normally thank their lucky stars upon buyout offers as these offers often represent a significant premium over the target company's most recent share price. Unfortunately, I cannot say the same for myself as Cogent's offer packs only a miserly premium. 

A comparison with other logistics buyout offer this year illustrates the point. Cogent's offer is by far the smallest premium over the firms' 1 month volume-weighted average price (VWAP):


This is a double whammy as Cogent has consistently provided the best returns among these 4 logistics companies being bought out:


While the motivations of COSCO shipping are clear, I struggle to comprehend the Tan family's decision to sell out on Cogent. Apart from strong returns, the company also boasts of high net profit margins. Cogent has been growing steadily and appears to have a clear strategy for further growth. They should also benefit from PSA's eventual move to Tuas.

Regardless of the reasons behind this decision, the unfortunate truth is that the Tan family had provided irrevocable undertaking to sell all their shares amounting to 84.33% of Cogent Holdings. COSCO has the right to compulsorily acquire all shares once they receive valid acceptances amounting to not less than 90% of total shares.

My personal valuation of Cogent is in excess of $1.03 per share. Philips securities (the only research house currently following Cogent) had also placed a price target of $1.12 (here). 

While I am therefore tempted to be a "dissenting shareholder", fact remains that COSCO only requires a mere 5.67% more shares to compulsorily acquire my shares. In that case, I would have lost time value of money putting up what is likely to be a futile resistance.

It therefore appears that as a minor retail shareholder, I do not have much alternatives apart from cashing out on Cogent. Nevertheless, I shall look to delay the inevitable while I hold on to hope for the outside chance of a competing offer.

This is neither a recommendation to purchase or sell any of the shares, securities or other instruments mentioned in this document or referred to; nor can this blog post be treated as professional advice to buy, sell or take a position in any shares, securities or other instruments. The information contained herein is based on the study and research of Dan O (“the Author”); is merely the written opinions and ideas of the Author, and is as such strictly for educational purposes and/or for study or research only. This information should not and cannot be construed as or relied on and (for all intents and purposes) does not constitute financial, investment or any other form of advice. Any investment involves the taking of substantial risks, including (but not limited to) complete loss of capital. Every investor has different strategies, risk tolerances and time frames. You are advised to perform your own independent checks, research or study; and you should contact a licensed professional before making any investment decisions. The Author make it unequivocally clear that there are no warranties, express or implied, as to the accuracy, completeness, or results obtained from any statement, information and/or data set forth herein. The Author, its related and affiliate companies and/or their directors, executives and employees shall in no event be held liable to any party for any direct, indirect, punitive, special, incidental, or consequential damages arising directly or indirectly from the use of any of this material.