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In my last post, I was delighted to see the TGISVP Alpha & Beta Portfolios continue to expand their level of out-performance vs. their ISEQ benchmark. Particularly pleasing was the sight of my favourite, the Smart Alpha portfolio, far outpacing the others with a 21.1% YTD absolute return. But we’re still only 9 months into the experiment, so clearly we need a far longer horizon to confirm if this performance edge is sustainable.

It also makes me wonder if there’s a lesson to be learned here..? No, not whether value investing out-performs in the long run – I’m fully convinced of that already! [And if you're not, please please read some of the numerous papers published on the topic]. But whether a mechanical approach is perhaps better?

Ha! No, I’m certainly not planning on becoming a stock screening convert..! But I wonder: Even if you’re a v competent & disciplined value analyst, even if you’ve conquered much of the fear & greed involved in investing, perhaps that demon mind still trips you up at that v last hurdle, or two..? When you’ve a nice stack of portfolio candidates lined up, why do you then take a shine to some & not to others? Why does one special stock really get your heart racing, far out of proportion to its obvious prospects? Why do you end up triple invested in one stock vs. another, when they both lined up pretty much even-stevens in terms of risk/reward?

Yes, even when you have a v disciplined & analytical framework for your investing, there’s still a lot of mystery attached to the end-result: The actual composition of your portfolio. Does that mystery add, or subtract, value? Perhaps a more mechanical portfolio approach, such as the TGISVP Beta (or even Alpha) portfolios, actually adds more value? Perhaps it may even be the logical & ultimate extension to a value investing approach? I really don’t have the answer. Thoughts..?!

Anyway, now we’ve got TGISVP performance up-to-date, I thought it would be interesting (and even useful!) for readers to see the latest snapshot of potential Irish Winner & Loser stocks. For this, I’m using a slightly different version of my TGISVP performance file:

- All share prices are as of Sep-30th

- The vast majority of target valuations are unchanged** from Q1 – I haven’t seen fit to change them, even for stocks I hold

- All FX rates are updated, so this will affect the actual target prices for a significant percentage of stocks

** Trinity Biotech (TRIB:US) was updated in June (but only amounted to a 2% increase in intrinsic value), and target valuations were recently added in Sep for US Oil & Gas (USOP) and Fastnet Oil & Gas (FAST:LN).

As you can see, this mostly boils down to an exercise in ranking stocks based on comparing current share prices vs. my original target valuations. Therefore, it’s only right to warn you to perform your own research & analytical update if any stock(s) happen to catch your eye. Subsequent news flow & results can, on occasion, radically (& abruptly) change the intrinsic value of a company – which is unlikely to be factored into a valuation that dates back to, for example, February.

So…why don’t I just update all valuations once a quarter, or so?! Erm, right – because i) I just don’t have the time, we’re talking 70+ stocks here, and ii) I really don’t need to – this is a screening/ranking exercise, after all! Broadly speaking, most intrinsic valuations should & do evolve slowly over time. Therefore, once the heavy lifting of the initial valuation phase is done, we then have a framework to quickly & easily keep track of a large number of companies, and the most likely under/over-valued stocks. Even with no input/updates to intrinsic valuation, I think it’s reasonable to expect this exercise to be still making a valuable contribution up to 12-18 months later. Of course, if you’re actually contemplating a fresh purchase (or sale) of one of these stocks, that would obviously demand a deeper dive first.

But maybe you disagree with my assertion that most intrinsic valuations only evolve slowly? In your opinion, or experience, perhaps they change much more frequently & violently..? If so, can I make a suggestion (gained from my own long & bitter experience) – take a long, hard look in the mirror, it might be you:

i) Do you regularly change intrinsic valuations, sometimes radically, based on exactly the same facts & figures, or on a v incremental change in results or news flow?

ii) Do you own too many stocks that actually experience radical changes in their share price and intrinsic valuation, often overnight?

If i) is proving a problem, it’s possible you’re being somewhat inconsistent, and/or less than rigorous, in your valuation analyses. You may also be allowing greed & fear to influence you too much. Developing an overall (reasonably rigid) analytical framework & a related set of metrics, and constantly challenging yourself to value large & varied lists of stocks, is a great path to better analytical rigour, and less emotion.

If ii) is hurting, you may be picking too many risky and/or difficult stocks. They’re likely to have poor management/governance, a bad/volatile business model, and/or they’re simply over-leveraged (and/or cash-flow negative). Or maybe they’re just outright gambles (‘oh God, if they hit oil…we’re all rich – if they don’t…ah, just shut the fuck up!’). These are exactly the kind of stocks which love to surprise you in the worst way possible… Yeah, sure, difficult stocks might present an intriguing challenge, and pure gambles are so enticing – but really, why bloody bother?

You’ve absolutely nothing to prove, to anybody, in your investing! Big talk, and all those usual coulda/woulda/shouldas, just means sweet f***-all… ‘Cos all that matters, in the end, is your actual (long-term) portfolio return. And that matters to you, and nobody else – they don’t get rich if you do, and they definitely don’t care if you lose it all! And I can assure you there’s always far easier & safer stocks to invest in, offering just as much upside potential. OK, perhaps you might have to look a little harder… And sleep a little easier… ;-)

And so, let’s begin with the current Bottom 15 in TGISVP:

Good God..! Just look at this lot – pretty much a bunch of tawdry junior resource stocks. I imagine buying these would feel like signing up for a daily kick in the bollocks… Any day your tender gonads were miraculously left unmolested would feel like a winner, eh? I’m not suggesting you short any of these losers (if that’s even possible?), but if you own (or are actively buying) any of them, I’d recommend you think v long & hard about the risks involved. I certainly wouldn’t want to own them…

And you could definitely have your money in something better, anyway – what..? Yeah, sure, maybe even lottery tickets..! But failing that, you might even think about truffle hunting in this patch instead – the TGISVP Top 15:

Of course, this isn’t an invitation to dive wholesale into these stocks either! While I think the target prices fairly balance the risks/rewards involved, some of these stocks present corporate governance risks/issues. Or they’re simply over-leveraged, which tends to lead to a v binary outcome ultimately (success, and the stock price doubles/triples, or failure, and you get wiped out). Personally I’m happy to see three out of my four Irish holdings on the list, and pretty content with them also! Write-ups here: FBD/Total Produce, and Petroneft.

I’m also happy to see my next (well, potentially!) Irish stock lurking on the list. ;-) But I’d probably want to sell/lighten up an existing Irish holding before buying it. That could prove a blessing, I’ve a feeling it might come a little cheaper first…

Finally, my other Irish stock, Trinity Biotech (TRIB:US), actually missed the cut. Not exactly a source of complaint though – it’s due to the continued rally in the TRIB share price. In fact, a recent Barron’s article gave it the oomph this week to blow past my latest intrinsic value target of $13.41, and close up +11% this week at $13.99. However, rather unusually, I also specified a secondary price target of $16.69 which still beckons. This was actually surpassed by an $18.50 price target cited by Barron’s, which may prove tempting to many US investors now that TRIB’s finally back on their radar with a good growth story & stock performance.

Good luck!

And just email me if you want to discuss/compare notes on any of the above stocks, or the implications of any news flow, or results, since my original valuation target. I’m also attaching the relevant Excel file that supports the above tables, for your reference – feel free, of course, to refresh share prices and to revise/completely alter valuations as you see fit for your own analysis.

The Great Irish Share Valuation Project (end-Sep-12)     (xlsx file)

The Great Irish Share Valuation Project (end-Sep-12)     (xls file)

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