NTR plc – Breezin’ Right Along…

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Judging by the emails/comments I’m getting, there’s plenty of current & potential investors out there delighted to see Monday’s announcement from NTR plc, confirming the sale of its US wind farms. [i.e. NTR’s 201 MW Post Rock, KS & 150 MW Lost Creek, MO wind farms – both approx. 3 years old, with 20 yr investment-grade PPAs in place]. Like many corporate releases though, it raises just as many questions as it answers…including the most obvious question:

So, what are the implications now for NTR’s NAV & share price?!

Far be it for me to predict a near-term share price trajectory – let’s see what the next few weeks’ trading brings – but I’m obviously keen to arrive at a fresh NAV estimate, based on this key value-realisation event. First, let’s take a breath & revisit my original NTR investment write-up (from Aug-2014). I won’t recap it here…because I’d suggest (re-)reading that piece is probably essential prep for the rest of this post (it definitely was for me!).

Picking up where I left off, I wrapped up that post with this speculation: ‘…it will be interesting to see if there’s any fireworks at the [September AGM] meeting’ – little did I know how fortuitous, yet prescient, this would prove to be! Preceded by a number of critical press articles (which prompted this pre-AGM response), there were indeed fireworks at the AGM itself…I think it’s fair to say management looked a tad defensive & beleaguered by all the questions and attention!

However, the real AGM highlight was confirmation the board had already requested management (in April-2014, which of course ‘preceded and was entirely independent from any…shareholder discussions’) to consider the strategic options for NTR’s US wind assets. It was also acknowledged (as I’d already argued in my prior post) ‘there could be strong interest in the US wind assets given their quality and operational performance’, and that ‘a successful sale could result in an opportunity for an additional liquidity event for all our shareholders.’ This was capped off with a commitment to appoint expert advisers, and (subject to their report) to potentially move ahead with a sale process.

Shortly after the AGM, the company then confirmed its three main shareholders (representing 71.5% of NTR’s issued share capital) had reached agreement, and had ‘put a proposal to the Board that it initiate a process to sell the NTR US wind assets as soon as possible and that NTR implement a tender offer as soon as possible thereafter for NTR’s issued shares.’ Depending upon the tender price per share, One Fifty One plc & Pageant Holdings informed the board they intended to accept such a tender offer for all their shares, while Woodford Capital (family investment vehicle of Chairman Tom Roche) stated its intention not to sell any shares in such a tender offer. This obviously allayed any lingering investor concerns management wouldn’t follow through on a value-realisation strategy…as evidenced two months later by the appointment of Marathon Capital to formally launch a sale process for the US wind farms.

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Stock Picking…Art, or Science (Part IV)?!

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Continued from here.

Value vs. Growth:

In my last Stock Picking post, I highlighted a common value investor failing – namely, a preference for over-leveraged & illiquid small/micro-cap stocks. All too often, it seems like this kind of preference (& others like it) are simply hard-wired in…maybe you’re born to be a value or growth investor! Now, we could get all touchy-feely here & try to personality-map this out – cautious vs. aggressive, quantitative vs. qualitative, thinker vs. dreamer, and so on – but does it really matter? Far better to recognise & accept what you are – if you haven’t already, just stop reading right now & come out to your wife:

‘Um, darling, it’s time you know…I’m a value investor!’

You may even find out she knew already…

Acceptance is the first & most important step in recognising inherent investing biases, and maybe trying to curb some of the worst excesses of hard-core value investing. [Of course, the same is equally true of growth investing]. This might take years…it definitely took me years! And pride often gets in the way – sometimes it’s nice to feel different, one of a select breed of smart investors who can boast of finding hidden gems in the rubble. But this is just an illusion – true growth investors are equally select. [Yes, most people seem biased towards growth stocks (if they ever mention stocks at all!?) – but in reality, they’re fairly clueless about money & investing. At best, they’re TALT* investors…] For them, genuine growth stocks are equally difficult & just as precious to find. And let’s face it – on average, in the real world, nobody can reliably claim value investing is superior to growth investing, or vice versa.

But accepting your value investing biases, curbing your excesses, and exploiting your natural advantages, is surely the best way to maximise your comfort & your returns as an investor. Except this can ultimately prove a double-edged sword…the world you end up living in may just be a value ghetto. Sure, it may feel large enough, it may even feel comfortable enough, but if that’s as far as your horizons stretch, you’re missing out on a whole other world of opportunity out there. Forget about investment ideology – again, this is about diversification, and it’s about becoming a better investor.

If you choose to ignore growth stocks & investing, you’re voluntarily cutting yourself off from vast swathes of the available investment universe – that’s countless companies, entire sectors, new/disruptive business models & secular trends, even geographies, etc. you’re missing out on, maybe forever…how does that make any sense? And even if you heed everything else I’ve written about diversification, how meaningful will the impact be if your portfolio remains blighted by the absence of growth stocks?

Of course, the classic value objection to growth stocks is that they’re invariably over-valued. But this, my friends, amounts to nothing more than a red herring… A true growth stock always seems to be over-valued, yet its share price can subsequently look astonishingly & ridiculously cheap after the business/stock somehow manages to scale up by hundreds or even thousands of percent. The real complaint here, I suspect, is that growth investing is just too hard!?! And if you’re a value investor, there should be no shame in admitting this – because that’s exactly how it feels: You naturally take a primarily quantitative approach to investing & you always require an adequate margin of safety, but identifying true growth stocks demands a far more qualitative approach & appears to offer little in the way of safety…

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The Four Mystery Horsemen, Revealed…

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Continued from here. A week ago, I set readers a mystery/blind stock challenge – to estimate an intrinsic/fair value for four mystery companies: Conquest, War, Famine & Death. Here’s the data table I provided:

Four Mystery Horsemen

First, let me thank all the readers who participated (by blog comment & email): Congrats, you took the time to stick your neck out & provided me with what I consider a meaningful set of fair value estimates. Second, without further ado, here’s a table of the 4 companies & their actual underlying data:

Four Mystery Horsemen Revealed

[NB: For the challenge, remember I normalised to 1 billion of revenue – i.e. applied factors of 20.8%, 39.4%, 78.5% & 17.4%, respectively, to each company’s revenue & additional data points (except CAGRs).]

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The Four Mystery Horsemen…

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Last week, I published the third post in my Stock Picking series (see Parts I, II & III), and it got me thinking – I haven’t seen a good mystery/blind stock challenge in a long time! There’s obviously tonnes of great investing advice out there to harvest, but the lessons we really take to heart are those we learn via trial & error, and hard won experience…

As I’ve been banging on about, stock picking is really composed of two very distinct processes: Stock Valuation & Stock Selection. But investors often tend to confuse & conflate the two… Just like meeting a person for the first time, stock selection often boils down ultimately to a first impression – a gut feeling Company X is dodgy/above-board, enjoys positive/negative investor sentiment, is well/poorly run, always/never delivers, is high/low growth, is financially weak/bullet-proof, has huge/no business or upside potential, etc. Basically, we’re making a snap decision whether it’s a good or bad company…

Such first impressions often exert a substantial & pernicious influence on our stock valuation process. We cherry-pick data, we discern & extract more favourable or unfavourable trends, valuation multiples contract or expand, inconsistent ratios are conveniently ignored, etc. etc. Given similar financial/operating histories, quite often we (wittingly, or unwittingly) end up arriving at radically different valuations for different stocks/companies.

Of course, their respective prospects may entirely justify wildly different valuations. Sure, but for the majority of companies, they generally don’t experience hockey stick growth out of the blue, nor do they suddenly fall off a cliff… [Novice investors are particularly susceptible to the ‘hockey stick’ assumption, blithely ignoring the fact they/other investors have sometimes been waiting years already for the same exceptional growth surge!] In reality a company’s future tends to reflect its past, good or bad, far more often than investors might credit – its management & culture, for example, can be a powerful institutional imperative ensuring this is true.

Multiply this potential for valuation bias across all investors, and inevitably you tend to end up with a pretty inefficient/irrational market…at least in terms of individual stocks & sectors. [Ooh, the heresy!] But a mystery stock challenge can wonderfully illustrate how under/over-valued individual stocks can actually become in the market. Plus it’s a highly effective way to separate the (quantitative) stock valuation process from the (more qualitative) stock selection process – and when the companies stand  revealed, investors can examine (individually & in aggregate) their stock valuation process & potential biases in a far more detached and objective fashion. Ideally, it also provides some up-close insight into the perspectives & valuation techniques of a broad selection of investors.

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Stock Picking…Art, or Science (Part III)?!

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Well, it’s not ideal publishing another post in this series two months+ after my last post…but I’m obviously no post a day pleaser. And life, Xmas, stocks & markets, and sneaking off to the movies, all tend to get in the way! ;-) A quick (re-)read of Parts I & II might be in order, if you’re so inclined? But to recap, very briefly: In Part I, I stressed stock picking is really two distinct & independent activities:

a) Stock Valuation, and

b) Stock Selection

And all too often, investors confuse & conflate the two…

But presuming your quantitative stock valuation process is nailed down, then stock selection is obviously a far more qualitative process…it’s certainly not about ranking & selecting stocks purely in terms of their upside potential. Fortunately, there’s plenty of stock selection filters you can employ – for example, to help protect against the risks posed by home bias, bottom-up stock picking, and/or a concentrated portfolio. Of course, the overall objective here is to:

i) Ensure stock selection is as much science, as it is art, and

ii) Always strive for greater diversification & superior risk/reward in your portfolio.

Here are some other filters you may find particularly useful. No doubt, as you read, they’ll strike you as perfectly obvious…the trouble is, applying them consistently is easily forgotten when you’re considering individual stock holdings & potential buys, let alone when you’re trying to manage the overall risk/reward of your entire portfolio: Continue reading

The Great Irish Share Valuation Project – 2014 Portfolio Performance (Part II)

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Continued from here.

My commentary & analysis of last year’s TGISVP losers & winners may have been meat & veg for some, but let’s kill the suspense & move on to dessert… How did 2014 performance stack up for the TGISVP Portfolios, vs. our ISEQ benchmark? Let’s take a look at the Beta Portfolios first:

[NB: Here’s a reminder of how they were constructed:

TGISVP – Beta Portfolio:  Assume an investor goes equally long all 27 stocks with positive Upside Potential (e.g. invests EUR 1 in each stock, for a total of EUR 27). The other 54 stocks, identified as neutral (2) or over-valued (52), are ignored. The portfolio return contribution from each stock is simply its Gain/(Loss)%/27.

TGISVP – Smart Beta Portfolio:  Stocks are chosen on the same basis as the Beta Portfolio, with one twist: All 27 stocks are divided into quartiles – assume EUR 4 is invested in each top quartile stock, 3 EUR in the next quartile stocks, down to EUR 1 in the bottom quartile stocks (for a total of EUR 70). This preserves diversification, but focuses the portfolio on stocks with the most Upside Potential.]

TGISVP FY-2014 Beta Performance

[NB: Again, see my last post – the appropriate benchmark return here is 4.7%, reflecting the ISEQ’s performance from March-30th ’til year-end. For reference, calendar year ISEQ performance was 15.1%].

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The Great Irish Share Valuation Project – 2014 Portfolio Performance

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It’s already well over a fortnight into the new year…time to scramble & take a closer look at last year’s portfolio performance! Let’s begin with The Great Irish Share Valuation Project – for reference, here’s my H1-2014 review. First, some notes:

– I managed to cover a grand total of 81 Irish companies, from the beginning of Feb ’til end-May last year – except for NTR plc, a new Wexboy portfolio holding I wrote up last August.

– I obviously referenced the latest share price when assessing each company’s individual valuation & upside potential. And March-30th was an appropriate mid-point date for the entire exercise, so I’ll adjust my benchmark accordingly: Keeping things simple, I’ll use the closing price level on that date as a starting value for my ISEQ Index performance.

– I should highlight the benchmark return was 4.7% (from March-30th ’til year-end). Which is substantially lower than the ISEQ’s actual FY-2014 performance of 15.1%** (the Irish market obviously enjoyed a great Q1 surge), though it’s clearly an appropriate benchmark to use. Sure, doing TGISVP on a nice & neat calendar year basis would be awesome…but that would require me conjuring up six/seven dozen write-ups & valuations, from scratch, on New Year’s Day! It’s never gonna happen…

[**Ireland was a top quintile global performer in 2014. And, of all countries, Argentina topped the charts with a spectacular 54.5% return! Which might well suggest buying Russia today (down 44.9% last year) could ultimately prove to be a very brave & smart decision, eh?!]

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The Obligatory Top Tips For 2015!

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I get asked for stock tips…a lot! So much so, occasionally I’ll pinch myself & check I’m (also) the author of an investment blog – one with dozens of investment write-ups & hundreds of posts at this point, all lovingly hand-typed & all for free. You really have to smile & wonder if they’ve ever actually read an entire post?!

But this is human nature, people always want that little something special, that easy shortcut: Go on, just this once, just for me… I mean, why wade through dozens of posts & tens of thousands of words, when all they crave is a single sure-fire winner of a stock! [Yeah, don’t we all, mate… :-( ] It’s like ringing an online dating firm’s customer service, to politely explain you don’t want to swipe left or right, let alone trawl through hundreds of profiles – ‘cos all you really want is your soul-mate, just the one, preferably right now & for free. C’mon, surely that’s not so much to ask?!

Unfortunately, there’s pretty much zero upside to doling out tips here & there. If you’re the ‘designated’ stock picker in your family, on your street, in your office, you know exactly what I mean… Your winning tips are quickly & seamlessly appropriated as worthy examples of the tippee’s own natural genius – whereas losers rebound & somehow become your personal responsibility, of which you will be bitterly reminded for months & even years to come. And the only thing worse than this burden of blame is the sometimes inevitable bout of self-flagellation over your appalling dereliction of duty! But rest assured, you’re not at fault – those occasional feelings of guilt simply mean you’re too good for this world… ;-)

However, there’s plenty of hacks out there who can’t even spell ‘guilty conscience’, let alone experience such a thing! And this time of year the financial media loves to wheel out its prognosticators & talking heads to opine on the macros, the markets & the best stocks for the coming year. I could describe it as an exercise in arrogance, but just as often it’s a shameless pandering to the cupidity & gullibility of a great many investors.

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TGISVP – One Last Yr-End Snapshot

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Now we have 2014 closing prices, let’s begin the New Year with The Great Irish Share Valuation Project: As you survey your year-end portfolio (and ponder potential 2015 buys & sells), an updated Irish stock ranking might prove useful – in terms of current share price vs. my TGISVP target price (i.e. current Upside Potential).

Since completing my usual valuation phase (as of end-May), I’ve added just one new stock write-up (NTR plc) & updated three stock valuations – Petroneft Resources (PTR:LN), Prime Active Capital (PACC:ID) & Fyffes (FFY:ID) – therefore, please be aware target prices in this post are now up to 11 months old. So while intrinsic valuations mostly tend to change quite gradually, pay close attention to any subsequent news & results (and possible valuation implications) – and, notably, to the potential impact(s) of the H2-2014 collapse in the Brent/WTI oil price. [Though let’s not overestimate this factor…I’m always amused by muppets who fondly entertain the notion a gyrating oil price is somehow relevant to the actual prospects of their favourite (but hopeless) junior resource stock!?]. And while we’re at it, I should also highlight our Irish stock universe is now down to 77 listings, after four H2-2014 market exits:

Kentz Corp (KENZ:LN) was taken out by SNC-Lavalin Group. This acquisition was already locked down by the time the oil price started to slide (Petroceltic International wasn’t so lucky…), so this ultimately turned out to be a beautifully timed deal (and at a beautiful price & premium) for KENZ shareholders.

TVC Holdings (TVCH:ID) distributed its stake in UTV Media (UTV:LN) to shareholders, and delisted shortly thereafter to continue its residual wind-down in private.

REACT Energy (REAC:LN) has been suspended, pending clarification of the company’s financial (i.e. funding) position. That’s a shame – REAC’s yet another potentially good/great business undermined by insufficient funding. [I did see upside potential for REAC, in asset terms, but warned ‘Of course, the big problem here still is funding’]. This is a common hand-to-mouth complaint for many small(er) companies, but unacceptable when it comes to public companies – it seems an obvious fiduciary duty for management to scale (back) operating & capital expenditure plans, if necessary, to match the funding their company actually has available.

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