The Great Investors

Has anything been happening whilst I’ve been away?

Actually my family and I have just returned from a wonderful holiday in sunnier climes, and I’m currently suffering from post holiday blues. Normally I feel ready to return a few days before our holiday is due to end. Not this time though, fabulous hotel with first class facilities and service and the whole family felt that we would have liked to have stayed longer. Not cheap admittedly, but excellent value for money.

During the holiday I did occasionally switch on the TV to catch the BBC world news only to witness our feckless, indolent, and dysfunctional members of society rioting and looting. I haven’t felt quite so ashamed to be British since we regularly had to endure scenes of our football hooligans causing havoc with their moronic drunken behaviour and mindless violence.

However, I did raise a wry smile when the riots appeared to fizzle out due to rain!!!! Probably didn’t want to get their newly acquired designer trainers wet.

I was also acutely aware of the global stock market gyrations. Whilst I am happy with all my current holdings (incidentally, I don’t check their prices or look for news whilst on holiday), I’d be surprised if Mr Market hasn’t thrown up a few bargains during his current negative state of mind. I shall be scouring the market avidly over the weeks and months ahead. Already one or two interesting candidates have made it on to my monitor.

Whilst I was on holiday, I did take a couple of books to read which included “Investing against the tide” by Anthony Bolton and “The Great Investors” by Glen Arnold. Both books provided a fascinating read. Whilst I am very familiar with the ideas of Ben Graham and Warren Buffett (“The intelligent investor” by Ben Graham is a must read), I was less familiar with the likes of Bolton, Soros, Neff, Templeton, Fisher and Lynch. Not surprisingly, although they have all adopted their own particular styles; you can easily pick out a great deal of commonality in their strategies. Although I am a huge fan of Graham and Buffett, it was the chapter about Peter Lynch that may me sit up. I’ve never read anything about Lynch before, but from the relatively brief details in the book I can see more parallels in my investment strategy with Lynch’s than any of the others.

The book “One up on Wall Street” by Peter Lynch has been mentioned before on the ADVFN bulletin boards (possibly by the poster called “Cockney Rebel”?) and it is certainly the next book on my reading list.

When we did return home, I did naturally check the share prices in my portfolio, and although each had suffered a minor retrace there was no new company news either good or bad. Some short term traders may find the thought of not checking share prices and company news for over two weeks unthinkable, but for long/medium term investors like me, I would be questioning my judgment about a share purchase that I was nervous about leaving alone for several days. In fact, before buying into a company I always ask myself: - “Would I be happy to invest and only look at the share price again in two years time?” If the answer is no then I wouldn’t buy it.

One company that did release some news not long before I went away was DCD Media. (Incidentally, my investment here has taught me some invaluable lessons in identifying companies to avoid in future). DCD Media released a trading statement which was quite unique in that the statement didn’t refer to current trading once. In fact it merely stated that the Finance Director had stepped down (not a great sign!), they were looking to recruit further members to the board of directors (for goodness sake please recruit somebody at least half-competent!!) and they are still exploring funding (£1m for working capital).

As mentioned before, DCD is priced to go bust. Whilst I am sure that they have some very talented employees on the creative side, it appears that their management/business skills are somewhat lacking and to be frank I suspect that they couldn’t run a p*ss up in a brewery. The main hope for investors is that TAYA provide the capital and install a team that can provide the necessary business acumen. It is just possible that this could then be a ten bagger or more from here, but I won’t hold my breath waiting.

There was a trading update from Indigovision (a company I no longer hold shares in). This followed on from their recent profit warning and added a bit more meat to the bones. It pretty much confirmed what I suspected, that the company appears to be encountering a difficult period in its evolution from a small scale operation to a far larger concern. As a consequence the SP has now fallen well below the price I sold my remaining holding for after the initial profit warning. Profits should come in at around £1.2m which on a diluted EPS basis gives a current P/E around 14 (share price 205p).

On a p/e basis alone it doesn’t look cheap, and given that margins, operating profit and cash balances have all fallen since the interim period the shares may have further to fall? The balance sheet is strong, but as I mentioned here and on the ADVFN bulletin board, the market may allocate a single digit P/E ratio to this one. Even at 10 times earnings (15p EPS) this gives a share price around 150p. Given the balance sheet I would say that the shares would be extremely cheap again at these levels, but market valuations are often wrong otherwise we’d never be able to find bargains. Indigovision will remain on my monitor, but I’m not in a hurry to repurchase.

Finally, returning to my recent holiday (now that would be nice!) it was interesting to note that the hotel was fully booked and that there were a very high percentage of Russian, Eastern European and Asian guests who were staying at this 5 star hotel. Despite all of the concern about the current state of the global economy, looking further ahead I strongly suspect that any hiccup in global growth will be temporary and that the full scale of growth in Eastern European and Asia is still yet to emerge. Anyway, as an ordinary “Joe Soap”, perhaps I should just leave it to the army of economic experts to get it wrong for me!

 

Sweet and healthy profits ahead?

On Friday I mentioned that I hadn’t added to my portfolio recently, but after some research over the weekend, I did identify an opportunity and bought shares in a company called Zetar early this (Monday) morning.

The idea came from a brief article in the FT weekend, and after some research I decided to take the plunge.

The first thing that caught my attention when researching this company was that it is currently trading on a historic P/E ratio of about 6, and yet results released last week suggest that the company has weathered a storm and is set fair for growth. Surely a P/E of 6 is far too stingy.

Zetar is essentially a producer of confectionary and healthy snacks. In their recent finals, it appears that confectionary grew very well (despite an unseasonably warm Easter), but the snacks division was hit by a very sharp rise in commodity costs in the first half of the year. The overall figures for the year were nevertheless encouraging, and in the second half of the year they have managed to pass the increased costs in their snacks division on to their customers and hence improve margins. In the first 11 weeks of the new financial year, revenues as a whole are some 6% ahead of the same period last year.

They have clearly identified a number of growth opportunities for the short, medium and long term, and have been awarded a “food gifting” license for the London Olympics 2012. They have also formed a strategic partnership with two unidentified major European companies.

The balance sheet looks pretty healthy with a net tangible asset value of about 118p per share, and a NAV of 350p (including intangibles and goodwill). They have over £4m cash on the balance sheet, and banking facilities in place with HSBC until 2014 (recently negotiated on relatively favourable terms). Free cashflow is healthy, and they have also introduced an inaugural dividend of 2.25p (about 1%) covered about 16 times by earnings.

It was a pretty upbeat forward looking statement, despite the headwinds still facing the retail environment, and surely the shares deserve a re-rating. If earnings come in around 40p next year then a P/E ratio of 10-12 gives a value of 400p-480p. This leaves a substantial amount of upside from this mornings opening price of 220.5p.

There is a nice piece written about the company on the Motley Fool where the CEO and FD gave a presentation around January (I think?). Interestingly the company seems to supply most of the major retail outlets, and the management team appear to have set ambitious but achievable targets (see article – there is a link on ADVFN).

There has been plenty of consolidation in this sector in recent times (think Cadbury’s and Uniq). In fact whilst Zetar are looking towards organic growth, they are keeping an eye out for small bolt on acquisitions, although will they inevitably become a target themselves?

All-in-all the investment case is compelling at these levels.

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P.S. Actually the real reason that I’ve bought shares in this outfit is that last Christmas we pretty much depleted our local supermarket of Zetar’s -  Bailey’s chocolates and I’m secretly hoping that, in the future, shareholders may qualify for substantial discounts. They are absolutely delicious!!!!

P.P.S. There are two technical points of interest. Firstly, the shares have been trading in a range for some time, but after this mornings rise there appears to be a positive breakout. Secondly, UBS have been and are a seller of this stock; they have recently offloaded considerable volume, but are now down to their last 3.7%. They don’t seem to be having any trouble selling, and a bit like Zetar’s chocolates, the shares are quickly gobbled up by eager buyers. I expect once UBS have finished (which isn’t taking very long) I am hopeful that the shares will make an even sharper move upwards.

Underperfomer pays dividends

In my last blog at the end of June, I intimated that I am currently scouring the market to identify potential investments. Whilst I have added a number of companies to my watch list, I have yet to take the plunge and add to my current portfolio. Patience is the key.

Meanwhile I thought I’d revisit a couple of companies that I have mentioned in the past.

Firstly Vodafone. Vodafone released a trading statement today which basically stated that trading was in line with market expectations. Of particular interest is that free cash flow is healthy and dividend targets on track. Given that the dividend is currently over 5.5%, it looks an attractive share for income seekers. It’s interesting to note that since Vodafone introduced dividend payments they have increased the payment every year except one.

I have also noted that press speculation in recent months has talked about the possibility of a Special Dividend.

As I mentioned in a previous blog, Vodafone has been an underperformer in terms of capital growth over recent years. Perhaps it will become an outperformer in the next few years?

I tend not to invest in large companies (particularly FTSE-100 companies) simply because they have less potential to multi-bag over short time periods (although the recent recession temporarily threw up one or two opportunities. I seem to remember Barclays Bank was one) and armies of people are watching and analyzing these stocks. However, if I was looking for a relatively safe haven that would provide a nice income stream then Vodafone would certainly merit further research.

Another company that released a trading statement today was the Mission Marketing Group. Again trading is in line with expectations and given that broker forecasts come in at around 4p for 2011 and 5p for 2012, it does appear that the shares are undervalued. If they do hit targets for the year then I can easily imagine the shares doubling or more from here.

 As mentioned in a previous blog, I did notice these at around 10p-11p when they were hovering around my own personal ‘margin of safety’ criteria. Since I am essentially a long term investor, I probably won’t buy shares in TMMG because it’s not the type of business that particularly appeals to me. However, if I had allocated some trading money then it looks good for a short/medium term bet.

Finally, Surgical Innovations released a RNS regarding a 5-year $8m agreement with SI US. This is one that I did own and sold for a five fold profit. As I stated at the time, the future does look bright for this company and I am sure there is further upside in the share price in the short, medium and long term and good luck to shareholders. However, the decision to sell my holding here was the right one for me. Sometimes the right time to sell is a very personal decision which can depend on a whole variety of reasons.