Wednesday, September 24, 2014

Autumn Reading Material

Time flies, we are now in the pivotal September / October time frame when bad corrections usually happen. This year it looks muted. I have been finding more and more reading material that interest me. Calpers, the huge California pension fund, has decided to scrap hedge fund investing. That is not surprising if you read this negative article on the industry.

I also enjoyed this following succinct article that explains what is risk.

I am also starting Silent Investor, Silent Loser by Martin Sosnoff, which is a little-known book written by a money manager's in the 80's. I am not really sure what is the point of the book, but the stories from that time period gives me a very important sense of perspective.

I discovered this thorough analysis of Sears Holding's real estate by Baker Street Capital. It is a must-read for anyone contemplating buying Sears.

Another older book I found is The Go-Go Years: When Prices Went Topless by John Brooks. I read a chapter here and there to get a perspective from the last market excess before the dot-com era.

And finally, I am reading yet another book on Warren Buffett: Of Permanent Value: The Story of Warren Buffett by Andrew Kilpatrick.

My next reading material post will be a list of links to articles about Warren Buffett Partnership investments.  Enjoy this list for now.

Tuesday, September 23, 2014

Globus Martime H1 2014 Resuls

Globus Martime, a Greek microcap shipping company, reported a loss for H1 due to impairment charges. Without the impairment charges, the company would have profited $0.13 per share. Revenue was roughly flat versus a year ago.

The company has shifted five of its seven ships to the spot market. Apparently, this is a strategic move to take advantage of the expected recovery in charter rates. The CEO George Karageorgiou said in the report that by next year, when rates are higher, the company will move the ships to longer term charters. The CEO appears to have a much more positive tone compared to last several years. He even said he intends to grow the fleet in the next few years.

The company reported a $1.7M impairment charge for H1.  This impairment has been fluctuating recently because one of the company's ships is held for sale. And its value changes every quarter due to mark-to-market accounting. The impairment has even been negative in the past.

An investor in Globus Maritime must weight two issues. One is the charter rates, which one can gauge using the benchmark like the Baltic Dry Index (BDI). And the other is the company's debt. BDI right now is above the average of the last few years; see here. But it is still depressed, though the CEO is optimistic. The debt issue looms quite large. The company has $85M in debt and $60M of equity. The company's adjusted EBITDA is 5.5 times the interest expense. However, EBITDA doesn't include depreciation. With depreciation, then the interest coverage is an unacceptable number.

In other news, IEHC's CEO wrote a shareholder letter along with the 2014 annual proxy. In the letter, he summarized the published 2014 results. But more importantly, he stated that, at this point in Q2 FY2015, the company's order backlog is $8M. This is the highest level ever and a $2.1M increase since FY2014 end. The company is buying equipment to increase capacity to meet this demand. The stock jumped 12% to $5.10 per share on the news.

Saturday, September 20, 2014

Putprop Earnings Looks Too Good

Putprop finally came out with the year end results after two pre-annoucements. The company earned 2.48 Rand per share which, on the face of it, is fantastic for a company priced at 7.35 Rand per share.

Putprop is a South African real estate company primarily engaged in renting to businesses. South Africa follows the IFRS accounting standards, as is most of the world but notably not USA. IFRS defines what is the standard regular earnings, but it also allows companies to report a variation called headline earnings. I read that companies use headline earnings to present a more meaningful measure of operations. For Putprop, regular earnings is equal to headline earnings plus its share of associates' earnings plus fair value gains on property. In other words, headline earnings removes the effect of mark-to-market accounting and focuses only on the core company's earnings. But the mark-to-market gains are huge, worth 39% of the regular earnings. The company's gains from the associated companies Belle Isle Investments Proprietary Limited and Pilot Peridot One Proprietary Limited are also large at 26% of the regular earnings.  This leaves headline earnings per share of only 0.86 Rand.

Company management emphasized they have been diversifying away from renting to the bus business which is their largest customer by far. To that end, the company acquired shares in other rental companies. This made a dramatic contribution to the bottom line, adding 19 M Rand to earnings versus 1 M in 2013. This is the bulk of the 0.74 Rand earnings per share increase between 2014 and 2013.

I think the regular earnings per share is the most useful number to gauge the company. But doing so implies the company trades at 3 times earnings! How is that possible? Well, my impression is that the market uses the headline earnings as the gauge. A month ago the company pre-announced that its earnings this year would rise significantly over a year ago. The stock shot up 30%. However, two weeks later the company revised its pre-annoucement. It maintained its regular EPS but removed the associates' income from the headline earnings. The stock then dropped back to its previous levels. See the table below.

Official EPS Headline EPS Subsequent Price
2013 results 1.74 0.877.00
1st Pre-accouncement 2.40 1.509.00
2nd Pre-accouncement 2.400.867.35
2014 final results 2.480.867.35

The company also announced it will maintain its dividend, which is a 5% yield. And the stock trades at 56% of book with no long-term debt. I don't know why this stock hasn't doubled yet.

Tuesday, September 2, 2014

My 3rd Annual Schedule of Investments

I have written my blog for two years (!!) and once a year I list my largest holdings. So the following are my largest 13 holdings. Because I run a relatively concentrated portfolio, these stocks form the vast majority of my portfolio value. As a comparison, my last year holdings are here.

Position Category Business
Wellpoint (WLP) US Large capHealth insurance
McRea Industries (MCRAA) US MicrocapFootwear
Tachibana Eletech (TSE:8159) Japanese Small capElectronic Distributor
Seaboard Corp (SEB) US Mid capFood Conglomerate
Installux SA French microcapManufacturing
AIG (AIG) US Large capInsurance
Investor Title Insurance Company (ITIC) US Small capTitle insurance
Petsmart (PETM) US Large capPet retailer
Bruce Fund (BRUFX) Mutual fundMid-cap value
PutpropSouth African MicrocapReal estate
New Century Hong Kong (HK:0234) Hong Kong Small capHotel, cruise line
Hanover Foods (HNFSA) US Small capProcessed food
Philip Morris International (PM) US Large capTobacco

My largest positions are little changed. But I did trim my WLP and SEB positions, and I added to Tachibana during a dip.  In the last year, I continued my shift from large caps to small and microcaps. My new positions include Hanover Foods, ITIC, New Century HK and Putprop. Since I started moving from large caps to small caps two years ago, I have probably done more trades than the previous decade. I think I have a good mix now and I will trade a lot less in the coming year.

I am sure any reader is curious about my rate of return. My answer has always been: I don't know. Money flows into my accounts from paychecks and dividends. Money flows out for expenses and taxes. I can't keep track of it all. But I am not unhappy with anything on my list. If I was unhappy I would have sold it. And I did sell OiBr. I last sold it around $2 and it is $0.60 today! Whew, that was a close call. But still, OiBr is my biggest mistake of the last six years.

I first bought OiBr 8 years ago and loved the 10% dividends as well as the stock appreciation. But three years ago I failed to follow the stock closely and didn't even notice the drop. It isn't trivial tracking a stock that merges multiple times, pay a 10% dividend and is denominated in Raeis. I also failed to notice the deteriorating economic situation in Brazil and BRIC's in general. Most importantly, I feel now that OiBr has inadequate corporate governance, but I didn't see that early on. This lack of care cost me. Since then, I have identified and corrected my errors in judgment with OiBr.  My investments of the past year reflect this.

I built up this list over many years. The stocks in the list appear to be an eclectic bunch from all corners of the globe. But there is a method to the madness. I focus mainly on profitable companies with great balance sheets; in other words, the best cigar butts. A reader would notice that my company writeups do not emphasize the company's operations or area of business. I purposely do this because I learned my lessons when bought stocks in the tech companies where I used to work. I found that the knowledge I gain about a business' products can easily make me overconfident about the company's future. So I don't spend my time reading too much into it anymore.

My research on a company focuses on the balance sheet and income statement. I use the simplest and most common accounting measurements. I am an engineer by profession, and in my work I always keep in mind a fundamental principle for any task: Keep It Simple and Stupid (KISS). You'd be amazed at how many practitioners in engineering and finance forget that. When an investor reads too much into some trend or data, he can easily put too much weight in conclusions based on information of little or no value.

It is for this reason that my investments and analysis may appear somewhat superficial. For example I compare companies mostly by the PE ratio. I feel no single metric gives so much information for lightly levered companies. And after the OiBr experience I will avoid capital intensive and highly levered companies. Leverage is simply too risky and too complex for me.

The lifetime of my blog has coincided with a raging bull market. But my investing approach isn't all about bull markets. When the next market correction comes, and it will, I think this blog will make even more interesting reading. But of course, I hope for the best, and I ask the market gods to give me another year like the last two!