Apologies: I have been madly setting up a private business of late and have not been blogging much.
I'm wrapped with the progress at APW, despite admittedly being a big critic over the last year.
The share price has been given a decent boost thanks to the court victory, which on paper is worth ~3c per share, lifting the NTA to over 15c (compared to the current price of 10c). I had no idea who would win the case: I bought APW at a massive discount to NTA when everyone hated it and assuming there was no value in the case, meaning the legal action was a free option. Free is my favourite word. The main trick has been to hold, let the story unfold and wait for the market to get more comfortable with it. Even if the court case falls over, it is still trading at a discount to NTA.
Now just need to find some more stocks like this...
Kristian
Disclosure: own APW
Yes. Good news indeed. Will be interesting to see PXTs release on how they intend to make the settlement.
ReplyDeleteHi Kristian,
ReplyDeleteStumbled across your blog today and enjoyed it. Well written, honest and to the point.
I am a long time professional stock market trader. One of my strategies (and my first serious one) is similar to the approach you outline here. I still practice it to some extent (e.g. hold a fair few HHY.) but I have more funds of my own and manage my extended family's stuff so have to trade/invest in more liquid stuff as well.
Be interested in co-operating a bit with you as it's motivating and 2 heads are better than one. Also it can be a fairly isolating profession so it's good to have someone to talk to now and then. My last collaborator lived beyond his means and reduced his capital to the point he was better off working so at the moment I have no one I regularly collaborate on shares stuff.
I don't blog any more but did a bit during the GFC when the finance/macro stuff I'm interested in was more exciting. Feel free to check out my blog if you want some background on me. I live just out of Melbourne.
I'll do some scans and post a few "Cigar Butt" possibilities on here. If you can suggest a more private way of communicating that would be even better.
Anyway let me know what you think, feel free to google me and get intouch etc
Cheers
Steve.
Hi Steve and Kristian, I am also a happy holder in APW and only recently stumbled on this blog. My approach is similar. Steve your idea to discuss thoughts on the market sounds interesting. I will write a bit more about my background later also.
ReplyDeleteI am also based in Melbourne , not quite a full time investor but transitioning to that over the next few years. I did almost get started on takeover plays when getting Rene rivkin s report the first few years it came out. Via physical post then a out 20 years ago! I have focused a lot on NTA plays, wind ups and takeovers. To list a few in the last few years, LICs like MFF, TGG and the Geoff Wilson funds when they were all at discounts of 20-30 %, some 30% plus. Wind ups like AYT, AIQ, HHY, PAG, KBC. Older investment companies recently re capitalized or branded MVT and TOP (can't remember the older codes of those 2). Am just trying to give you a feel for my style. I might post some potential buys here if I have enough stock. One that I probably have enough of is still KBC which I feel is good value. I think I remember you Kristian taking a previous look at this but gave it a miss. Would be interested if you have any updated thoughts on KBC. I believe since Geoff Wilson may have bought into this and the Wylie group since you last posted. To me that is significant.
ReplyDeleteHi Browny,
ReplyDeleteKBC looks OK. See it attracted a bidder. Probably not a huge upside unless the new Chairman takes it in a new direction and does something that the market is excited about. He reads like an M&A guy so that maybe possible. IF you have a fair few it might be worth calling him regarding his intentions.
In my experience the biggest gains come not from the full wind up or takeover type plays but more from a huge change in sentiment when either:
a. The company has changes from more or less a cashbox into something that is flavour of the month and off the price goes off OR
b. The company has some cash and some significant assets that are hard to value and some larger outside party comes in and they have a JV or something similar with the assets and the market (over)recognises the value of the assets. A great example here is BRU from 17 cents to $3.50 in a couple of years. The chairman or MD tried to take it private at around cash backing which was a bit of a clue. Sadly I sold waaaayyyyyyyyy to early.
I find it hard to hold when it looks to me like the stock is overvalued but if you can hold and trust the chart rather than the fundamental analysis then clearly you have potential for returns in the thousands of percent rather than the 10's of percent which are the usual returns with wind ups etc.
The stocks in category b are harder to find than those in a as you need some feel of what people may get excited about in the future rather than straight analysis of balance sheets etc.
Clearly most of the returns in wither of these categories depend on sentiment and sentiment towards small cap spec stocks is very bad at the moment so probably not a bad time to be looking for small stocks with large potential who aren't about to go broke. Should be plenty around. But on the other hand those that change direction or get into JV's in the short term aren't likely to rocket to the moon either.
The pure windup and takeover plays are more plentiful and trade at bigger discounts to fair value when the market as a whole has been weak for an extended period. Not the current situation so probably not that many around although there will be some. I did a quick scan of the market for these and then a look at a few that came up and was frankly a bit disappointed at the quantity and quality I found.
Will post back a few possible in the more category b ones.
On KBC, just thinking out loud, not the reason I bought but could Geoff Wilson make a bid? Am no tax expert but there are big losses on the balance sheet maybe they could be utilized this way. Also WAA needs to grow as it's costs are high. Maybe make a scrip bid at 24 cents the NTA so holders get NTA equivalent of WAA stock. With WAA trading at a big premium that could mean nearly a 50% return from 18.5 cents now. He has past form of this with his bid for PRV a couple of years back. Anyway if nothing happens he attractiveness is more the limited downside. With 50% of the NTA in cash it trades at a large discount. Nicolas Bolton surely can't muck it up with Wylie and Wilson tapping him on the shoulder. Major capital return or bigger buyback at 20 plus cents also quite possible.
ReplyDeleteBrowny,
ReplyDeleteI stand corrected, but typically LIC's don't look to buy tax-losses. They may not be able to be used, and more typically they hunt for franking credits. The likes of WAM and CDM need to hoover up franking credits where possible to maintain their dividends to investors. I don't think a capital return or buy-back is particularly likely given the small size of KBC: they need to grow, not shrink. I agree he probably won't stuff it up, but not enough upside at this stage for me.
Thanks for the feedback Kristian good points. True about the preference for franking credits. The tax losses came to my mind as I remember WAM acquiring PRV I think it helped their post tax NTA figure because PRV had some deferred tax losses. KBC does need to grow but Wylie and Wilson I think have 30% versus Bolton 20%. Wilson has prior form in stripping costs out and shrinking companies if he feels shareholders will benefit so although not likely would not surprise me. I agree the upside may not be huge here, I suppose I am attracted to it in part because after a 5 year bull market it is not so easy right now to find opportunities with large upside and limited downside.
ReplyDeleteFair point. And perhaps the NTA may grow over time. More and more I am restricting myself to big return investments and skipping the little arbs. Saves time and money. I can't tell you how much money I have lost chasing a quick buck.
ReplyDeleteGood points Browny and Kristian. That’s a pretty high quality exchange of views.
ReplyDeleteFew ones where it's hard to value but potential is high. i.e. category b in my comment above. Be interested in any thoughts positive or negative.
Goldies. The underlying reasoning here is simply that it is extremely hard to predict what the price of gold will be in a few years. The developed world is basically printing money so if history is any guide there may well come a time when gold rockets. IF this happens explorers with marginal deposits will clearly be worth many multiples of current prices. A few that have reasonable deposits, a fair amount of cash and low market caps. You wouldn’t want a whole portfolio of these but as a hedge against bad times with large upside I think worth having some.
GRY - market cap $50m. Cash $38 mill. Listed investments $4m. West African resources around 2-3mill ounces depending on the cut off grade used. Lots of larger resources in the same geology surrounding. Lots of exploration upside.
AZM - market cap $12.5m. Cash $4.8m. 2 separate large shareholders are buying in at a significant premium - (5 cps versus 3.5 cps on market). West Africa. Again lots of large resources around and lots of exploration potential. Has 1.5- 2 mill ounces.
TRY - market cap $191m. Net Cash $12 mill. Solid cashflow from operations. New project in Guyana looks lucrative and in geology which hosts large deposits. Very good track record of successfully starting up and running mines and paying dividends.
CHN - market cap $40m. Cash $50m. Reasonable deposit in Canada but not super exciting at current gold prices. Various shareholdings in other companies. Actively looking to acquire assets.
Oilers
PPP - Market cap $47m. Cash was $64m. Owns both producing and non producing assets. Had a lot of cash but spent some on a well that was successful but cost twice as much as expected plus will need to spend some more to tie the well back in for production - all up $25m. It should get this cash back through production but this will take years. The non producing assets it holds have significant resources and are definately worth something as others have bought in before successful wells that proved up more resources. Currently drilling a medium risk (25% chance success) well in NZ near current production. Most likely will use up much of remaining cash so a large risk/reward currently.
MEO - Market cap $14m. Cash $12m. Collection of permits with oil and gas offshore WA and Timor sea of most value. Evans Shoal plan for LNG, Methanol plant could be worth nothing or could be worth a lot in the right circumstances..
Any others you know of similar category to above?
A colleague has suggested MTN as a similar play. I haven't done any work on it.
ReplyDeleteI'm possibly far too conservative / just plain wrong on this view however I'd prefer stable/growing NTA plays. This pretty much rules out resources stocks for me.
This space has temped me recently as sentiment is very depressed. I lean towards Kristian's style in that I am very reluctant to dip my toes in the resources sector based on companies trading at discounts to their assets. The reason is I just find that they are not run in the interest of shareholders. Often seen them trading at discount to cash in bank only to see management waste the cash on a stupid acquisition! Do have a few on a watch list though. Would like to see some activist shareholders build sizeable stakes before I commit. From those listed above have held PPP before, they at least have made some capital returns back to shareholders in the last. But I basically bought and sold around 10 cents, don't hold now. June could be volatile with these as they might be subject to tax loss selling if they have performed poorly. Some others on my watch list but bear in mind I do not own were BAU. FZR, GLL, HGO. IRN, MPO, MTN, RMS. I want to do some more work on many in case they fall a lot in price. Have my doubts I will get involved though as these types can often burn sizeable cash balances quickly.
ReplyDeleteKristian and Browny understand where you guys are coming from. I was the same many years ago.
ReplyDeleteMy overall approach is that different market conditions throw up different possibilities. I want to be able to assess these possibilities and take the ones I think are best.
Kristian - MTN is one that trades at a discount to cash but if the amount of cash is under 5 mill and they don't have any other assets of value then often the admin expenses just fritter away the cash and the upside is more limited than something with an asset that maybe valuable. So a possible one. I hold some. There was a takeover bid that failed.
Browny good point re tax loss selling. These stock generally face selling in May June with more of a chance of rebound afterwards. This is a good time of year to buy, all other things being equal. The selling is often of the fairly indiscriminate - get me out now at any price as I just want the tax loss. So you can sit in depth and wait to get hit.
Yes management often make acquisitions that we might think are stupid. i.e. they are not buying a stable cash generating business. However sentiment changes over time and what may seem a stupid acquisition may turn out to be a market darling with values many multiples of current market value. If we're talking cash burning acquisitions as being automatically stupid and not in shareholders interests then that would count out most of the world's large companies at that point when they started out. Google? Apple? That's not to say most acquisitions will succeed in terms of profits - simply that for most stocks at some point enough people have faith to push the price of the stock up significantly.
Closer to home in the mining space what about FMG (I bought in at the equivalent of 2 cents a share and sold for a small profit leaving literally a fortune on the table), PDN (I remember that being a 2 cent stock trading under cash backing despite a big uranium deposit) or the many companies taken over during the boom. Even in a mining space which is currently depressed PIR had a takeover offer yesterday - it acquired it's assets 4-5 years ago for very little - just ground with a few drill holes that teh PDZ directors found but weren't interested in so they passed it over to their mates - completely stupid acquisition if you think in terms of profitability - was a 2-3 cent stock - now 157. How many 50 baggers have you had?
The point is not that most of the companies will succeed but simply that if you have a reasonable number and can have the patience to hold when sentiment turns then the overall portfolio of these stocks will most likely far outperform the market. In addition you get diversification in your portfolio.
The money to be made in this space is not from activist shareholders winding up companies. If this is the approach you take here you will be frustrated and will fail to make significant money. Money is made from sentiment turning and holding while share prices zoom. You do have to be able to live with uncertainty - when will the zoom - who knows, what will be the top - who knows, what's it really worth - who knows, will the company eventually go broke - who knows but less likely if they have cash?
I would doubt that many companies are run mainly in the interests of most shareholders - Westfield anyone? Why don't we outsource top management and directors to low wage countries - plenty of smarter and harder working Chinese, Indians, Indonesians, Vietnamese etc then the people running our companies and they could do it a 70-90% cheaper. Obviously not in managements interests to outsource themselves so it never happens.
Anyway enough of my rant - I've convinced myself it's time to go shopping! I'll check out the ones you listed Browny - am familiar with some of them.
Cheers
Steve
I certainly agree this sector is not one to play for an activist shareholder to wind up. Ideally my reference to an activist shareholder getting on the register would be mainly to have some influence at board level. So for instance we find a gold company with a history of poor management and poor acquisitions, high salaries to management but sitting on lots of cash, and the market cap is well below the cash at bank. Also the underlying resource assets have upside potential. I simply would like some activists with a decent stake on the register to try to make sure they do not waste the cash. So in this example maybe they would replace management, make a capital return for some of the cash if the big balance is not necessary, then let the market re rate the company. Yet not wind it up so I still get upside from the underlying resource assets which previously the market attached negative value. Not so easy to find but you never know.
ReplyDeleteAnother in the watch list category I forgot to mention above is CFE. Depends a bit on an outstanding court case which might boost their cash balance. Though I think iron ore prices could still fall a lot more. Also prefer goldies as a portfolio diversifier. Everything is booming aside from gold so I think if we get a decent correction in risk appetitie gold may do well again.
Hi Browny and Steve,
ReplyDeleteHope things are well. I've been re-thinking the cigar-butt mining sector idea. Some of the stocks have mode pretty well, and there appear to be some still trading less than cash.
I caught up with some fund manager colleagues recently - who tell me a listed shell is worth ~$500k just as a shell, so plenty of optionality with cash, the listing and oh- if they actually do something.
My main concern is the potential for a declining NTA. I guess the best way to address that in the mining space is to just buy a portfolio of these and treat them as one stock in the overall portfolio.
I thought I would touch base to see if you were interested in discussing some ideas further in private? If so, let me know on kristianrdibble@gmail.com. I will remove this post at some point to avoid my email getting carpet-bombed.
Hi Kristian,
DeleteAPW has been a great one. Re other ideas along the same lines, I thought PXT, now BWR would be an obvious candidate. Got a few during their capital raising - thought there would be more selling. Any thoughts?
GC