Monday, November 25, 2013

Installux Reports Good Q3

Installux SA continues the string of good news from my small caps. I had mentioned that the company had 10% less revenue yoy in Q1 and Q2. However, Q3 revenue was flat compared to a year ago. I hope this is a sign of a turnaround for the company. However to counter this, recent news suggest France is still struggling to get out of recession. I suppose this is why the stock jumped 13% on the revenue numbers and then gave it all back the next day. I think Installux is still a work in progress. That is, the stock is still depressed due to uncertainty, but I am betting when the uncertainty is over the stock will jump, as has happened with my other smallcaps.

In other portfolio news, I sold about 15% of my WLP holding. I had held it since the days when it was still called Anthem. I don't remember ever selling through last 7 years. But I have bought it regularly in that time. Now the stock is at an all time high of $93 and at around 10 times earnings. At this multiple I no longer regard see WLP as seriously undervalued anymore. The Obamacare discount of a year ago — which I mentioned here — is gone. So it is time for me to finally take some off the table. In addition I also sold some Berkshire Hathaway. Berkshire is a fine company run by the best CEO in the world. However, it is a huge holding company. I just don't believe it has much growth opportunity above the market as a whole anymore.

And finally, I recommend this great tutorial on basic valuation metrics. I believe the first thing a beginner value investors should learn is the set of basic valuation metrics. However, although they are mentioned a lot in the media, there are very few knowledgeable people who have explained them well. And not only does this article explain them well, the author also compares the pros and cons of each in a table, which I have never seen before.  

Thursday, November 21, 2013

IEHC Jumps on Q2 Earnings

IEHC stocked jumped two quarters in a row on positive earnings. I am not totally clear on the exact reason for the rise though. Revenue and income was flat quarter over quarter. However, last quarter was an exceptional quarter and maybe the stock jumped on confirmation that the current rate of income is sustainable. At the current pace, IEHC will have its best year ever. I did not find anything worthy of note in the report. The report wording was almost exactly the same as last quarter (other than the actual numbers). The company reiterated that they have new products in the pipeline. It isn't clear to me whether the company has generated revenue yet from the new products, but it appears that sales will ramp up in the coming quarters. I am eager to see how much of an impact this will have on the overall revenue, and the market is anxious too, I am sure. But right now, my margin of safety lies in the stock price which still trades at 7 times my projected earnings.

The following chart shows the revenue, earnings and the stock price. As you can see, the stock only moves four times a year, when he earnings reports come out. I find that is the case for all the small and microcaps that I follow. This is great for the small time investor, there is little room for manipulation and hype such as what happens with the more universally followed stocks (for an recent example, think Tesla!). The small cap stock price is more likely to follow fundamentals.

Revenue and Earnings (mil) and Share Price (dollar) over last 12 months

Friday, November 15, 2013

McRae Industries Income Up 55% in 2013

McRea Industries reported great earnings for the fiscal year 2013. Net income was up 55%. Their first paragraph says it all:

Consolidated net revenues for fiscal 2013 amounted to approximately $97.1 million as compared to $75.7 million for fiscal 2012. This 28% increase in net revenues was primarily attributable to strong performance in both of our boot product segments. Our western/lifestyle products business grew from $52.5 million for fiscal 2012 to $62.8 million for fiscal 2013 as demand for both men and women's products continued to be heavy.

The report also mentioned the fourth quarter was the biggest contributor to the year's results. This could be a good holiday shopping season in US overall

I originally bought McRea as a simple value play (see my original post here). In the following 1¼ year, its operations have also grown beyond expectations. And the stock is up 65%. That's the beauty of a margin of safety, low expectations means any surprise will most likely be on the upside.

I have read or heard many great investors say that when you score in investing it isn't all your doing. A lot of luck plays into it. And the converse is also true, when you lose, it isn't always your fault. In the case of McRea, the company is doing well now because it is riding a mature bull market. Consumer confidence has risen in the last few years as housing and employment have stabilized. This has meant more demand for the luxury and fashionable items such as women's cowboy boots. This is definitely a cyclical event.

McRea also is doing well in the military boots department. McRea is has focused on this for fifty years and that is still its bread and butter. The stock jumped 13% yesterday on the earnings. However, it is still trading at 6 times earnings! I am drooling at the potential 33% gain if the stock were to go to just 8 times earnings!

Thursday, November 14, 2013

My Japanese Holdings in H1

In February this year, I documented my initial purchases of two Japanese small caps here and here. The initial reason was 1. the Japanese market is oversold, 2. the economy was due for a rebound. I think a lot of investors under-estimate how often the market will revert to the mean. I think Japan will rebound, maybe not to its 1989 glory, but it will get its day soon. And even if I am wrong, I have a big margin of safety with my two particular stocks.

At the time, I did not really know Abenomics, but Shinzo Abe the Japanese prime minister has had a great effect on the economy. The market has been up about 66% during his tenure — in local currency. However it is still a lot even in US currency terms. But whether Abenomics will help Japan in the long term is still unknown.

Abenomics has directly pushed the Japanese Yen from 80 yen per USD to 100 per USD. This dramatic change has made many big Japanese exporting companies profitable, such as Hitachi and Toyota. I have read, however, that the lower yen has not resulted in more export volumes. This is somewhat worrisome, as greater volume is what will drive growth for the longer term. Furthermore, many Japanese companies are repatriating money and assets from overseas because of the increased value of foreign currencies. This can dramatically effect profitability but only temporarily.

If I had time I would analyze the financial reports of major Japanese exporting companies to carefully analyze the recent effect of the lower yen. But I don't, so instead I just analysed the results my Japanese holdings in the first half year.

Firstly, Tachibana Eletech reported increased earnings for both quarters. Tachibana is a factory automation company that exports about 20% of sales, based on my estimates. The following shows their results for the first half fiscal year. The results were much better in the second quarter compared to the first. This may be a delayed reaction to Abenomics. Operationally the company is doing better although management is still concerned about the slowdown in China and rest of Asia. But a big chunk of the delta was non-core earnings. I grouped them as non-operational earnings and extraordinary earnings.

Secondly, Riken Keiki reported similar results for the two quarters; with the second quarter better than the first. Riken Keiki must export a large percentage of their products. I even see their products on ebay.

So operationally, both are better and the same period last year but Tachibana's results were greatly affected by non-core income. The operational aspect could be both directly the result of Abenomics or indirectly, such as a more positive economic outlook.

These two companies are up around 35% since I first wrote about them, in local currency terms. But I think they are still way undervalued, if one simply looks at the books. However, I do understand that they are at their current price mostly because of the Japanese economic climate. My biggest concern is the huge Japanese debt. This debt is owned by the Japanese people and Japanese companies. I am still figuring out how this will all play out. If the Japanese cannot service the debt, then Japanese will default to themselves, or the Japanese can depreciate their currency so that they can afford to service it. In the latter, more realistic case, the resulting inflation will cause their goods to be more competitive in the world. The key difference between Japan and other countries with high debt is that the world wants Japanese goods! This, in my opinion, will allow for stable calm devaluation of the Japanese Yen, if it does happen.

The conclusion is, I am still very much long my Japanese holdings. In fact, I even bought a new Japanese microcap: Fujimak (TSE:5965). I hope to post a about it soon.