Alternative Asset Opportunities, Argo Group, Donegal Investment Group, favourite stock, Fortress Investment Group, KWG Kommunale Wohnen, luxury goods, Newmark Security, portfolio allocation, Saga Furs, smartphone revolution, stock tips, Tetragon Financial Group, VinaCapital Vietnam Opportunity Fund, Zamano
Yeah, it’s January, the most miserable time of the year. And already half of us regret we made no New Year’s resolutions…while the other half regrets they did. The market’s no help either, with many investors ending a frustrating 2015 in the red, and greeted in 2016 by another global dump. [Let’s discard the odd notion the Chinese market’s global impact is simply due to its hyper-volatility. It’s not…the market’s only the tip of the spear for the entire Chinese economy, which has obviously evolved into the key marginal driver now of the global economy. So for 2016, a great resolution is to pay far less attention to the US & far more attention to China!]. But still, there’s a whole bunch of new tips out there to inspire us… 🙂
Trouble is, I don’t necessarily have much faith in them, ‘less I know the tipster’s got his money where his mouth is. Which offers no guarantees, but it means I’ll tackle the 2016 tips season just like I did last year – inevitably, my top holdings are also my top tips! [And judging by my traffic, people definitely want tips first & performance later…so I bow to the vox populi, my FY-2015 performance post will have to wait a little longer!] And so, without further ado, here’s my Top Holdings as of Year-End 2015:
Hang on a minute, isn’t this s’posed to be a Top 14 Tips? You’re bloody well short-changing us here, mate!? Well, sort of, I’ll explain later… 😉 Now, let’s start pulling together a few different elements here… First, you might want to check out this July post, which includes my last (brief) updates on most of these stocks (& hopefully offers a taste of my upcoming performance post!):
Next, let’s tackle each stock individually – I’ll provide website & Bloomberg links, links to relevant posts/write-ups (remember, good investment theses tend to evolve slowly), the closing share price & market cap, and a fresh (& relatively brief) update for each company:
‘Zamano…So, What Now?!’ (NB: First link = most recent post/write-up)
Share Price: EUR 0.15
Market Cap: EUR 14.9 Million
The begrudgers will have you believe Zamano’s a value trap… If so, it’s a bloody impressive one, offering attractive exposure to the UK & Irish consumer, revenue (now at €23.3 million) growth of 24% in 2014 & a likely repeat for 2015, an annual €2.7 million of free cash flow, and net cash of €5.4 million…all priced on a 3.1 EV/EBITDA multiple. Unfortunately, management’s obviously neglected shareholder value to date, but this will change as: i) inevitably, its three major shareholders (who own 52%) become increasingly frustrated & seek (new) buyers for the company, and/or ii) management wises up (self-preservation’s as good a reason as any), starts talking up the stock, and gets serious about enhancing & realising shareholder value (a tender offer is the ideal solution, while a dividend’s an obvious first step, as I recently proposed). Meanwhile, based on its current market cap, ZMNO offers new investors an effective 18% RoE (escalating to a 35% RoE, on an ex-net cash basis).
Share Price: GBP 42p
Market Cap: GBP 30.2 Million (USD 43.9 Million)
Sometimes I wake at night & I see dead people…but I just smile & drift right off to sleep again. ‘Cos what’s more comforting & uncorrelated an investment than a bunch of codgers popping their clogs?! Especially one trading at a 17% discount to NAV (adjusting the Nov-2015 NAV for today’s £/$ rate, all else being equal). Granted, over the years, TLI had to revise up its LE estimates significantly (as did the industry), but it’s had none of the legal risks/issues we’ve seen elsewhere. And its portfolio is far older, with a weighted average age of 92 yrs & a 4 yr LE, leaving the old dears with v little room for error… After a $10 million policy windfall in just 5 months, TLI’s got another $122 million (£84 million) of maturities ahead (primarily, within 1.5-5.5 yrs) – albeit, premiums will cost $8.8 million pa. Meanwhile, shareholders enjoy a 12% IRR (embedded in TLI’s valuation) & some inevitable discount compression. And as in FY-2015, potentially we’ll see another 4p in distributions (an effective 9.5% yield)…of course, the board will cite ongoing premium payments, but net cash already stands at $8.2 million (i.e. 7.8p cash per share).
Share Price: GBP 3.08p
Market Cap: GBP 14.4 Million
NWT’s a classic dirt-cheap UK micro-cap. Which is undeserved…it spends heavily on R&D, it’s carved out a valuable niche with its electronic & physical security systems, it punches above its weight with customers, and has a globetrotting sales-oriented CEO. [See this recent interview – interesting to see Dwek’s subtle criticism of the company’s previous sales effort (under her father)]. More importantly, revenue’s grown 75% in just three years (& the dividend’s tripled in just two years). Not surprisingly, the shares rallied 50%+ since my write-up 15 months ago, but are now being held back by Newmark’s FY-2016 (ending April) outlook…a transition year, as longer-term sales & development projects gestate. Based on her record to date, the CEO deserves our trust & shareholders should look ahead to the ‘rewards’ to come in FY-2017 & later years. [And historically, the company’s tended to be overly-conservative in its outlook]. Fortunately, NWT has £3.9 million of net cash on hand, and it trades on a historic 7.2 P/E ratio, a 3.0 EV/EBITDA multiple, and a 0.6 P/S ratio (vs. a 10% operating margin), which should offer useful support as FY-2016 figures are reported (end-Jan & early-Aug).
Share Price: EUR 16.64
Market Cap: EUR 60 Million
Saga’s a perfect quad-play…on fur, luxury goods, China & Russia! Sweet Jesus, can you imagine anything worse? Yeah, but buried in that kind of reaction’s where you find the real bargains. In the last decade, fur’s again become integral to fashion & luxury collections. And the industry’s unique – Europe has a controlled & vastly superior product to China, in terms of quality & animal welfare, and Saga Furs & Kopenhagen Fur (its unlisted rival) are the primary auction house conduit between breeders & global luxury/fashion buyers. [A moat & a toll-bridge..!?] Despite its own premium luxury Saga Furs brand, trade buyers make for an inherently volatile business model. Which makes Saga a cyclical growth company, with auction sales last peaking at €889 million in FY-2013 (almost 120% higher vs. the prior FY-2006 peak). Coupled with economic/anti-corruption issues in Russia & China, for example, this obviously presents a real investing challenge. [Though longer-term, I still anticipate relatively untapped demand for fur, esp. in emerging markets]. But the stock’s priced accordingly: Trading on an 8.1 P/E ratio, a 1.0 P/S ratio (vs. a 26% long-term average adj. operating margin), a 6.0% yield (a €1.00 dividend is proposed), and a 0.6 P/B multiple (for the pessimistic, I’m confident this would be more than realised in a wind-down/liquidation scenario).
Share Price: EUR 5.902
Market Cap: EUR 59 Million
2016 should be a make or break year: The key event’s an April court date to appeal the €26.2 million valuation (pretty substantial vs. DCP’s current market cap) of its 30% stake in Monaghan Middlebrook Mushrooms. Presuming this approx. valuation is determined to be reasonable (& I think it is), MMM/Ronnie Wilson will need to comply with the court order to buy out Donegal. Resulting proceeds should obviously be returned to shareholders via a tender offer (debt pay-down’s no longer necessary, or sensible). The logic of the strategy is compelling, noting DCP’s NAV & earnings have stagnated for 5 years now. And with earnings averaging an adjusted 50 cents pa, the current share price (at 1.0 times Book) makes sense. But ultimately, Donegal’s value isn’t found in its earnings, its diversification, or even its core Produce division (whose operating margin has declined from 10% five years ago, to losses today) – it’s found in its intrinsic value (a EUR 9.46 Base Case NAV still looks reasonable on a Sum-of-the-Parts basis), and more importantly, it’s in the potential to wind-down its entire portfolio & progressively cannibalise its outstanding shares (thereby transforming DCP into a multi-bagger investment).
Share Price: USD 2.38
Market Cap: USD 511 Million
The long-term logic of investing in frontier markets hasn’t changed, in terms of growth or value, but I can’t deny it’s a tough proposition these days for investors..! For me, cherry-picking markets is the best solution, and Vietnam offers one of the more compelling country bets in the world. I could quote you all the fundamentals, but I won’t…because I prefer to look back to the last 30-40 years of history. And based on that perspective, I believe Vietnam’s now ideally positioned to leap-frog ahead & become the Next China. Now, Vietnam Holding (VNH:LN) might be the more obvious (listed) equity play, and it’s out-performed more recently. But in frontier markets, investors have little clue how the major asset classes might perform in relative terms, so VOF’s more diversified equity, real estate & unlisted/private equity portfolio is attractive & it’s actually delivered a superior long-term performance. VOF also offers a 26% discount to NAV & a board that’s committed to closing this discount (they’ve already spent $227 million on buybacks, in just over 4 years).
Share Price: USD 9.61
Market Cap: USD 999 Million
Mention Tetragon, and somebody inevitably complains what greedy bastards management are… Perhaps, but if you’re a shareholder, I’d argue they’re now your greedy bastards! When you look at the company today, it seems obvious chiseling shareholders is ultimately worth far less than the accretive impact of continued buybacks & the potential average/peak valuations which can be attained if/when TFG transforms itself into a top tier/global alternative asset manager. [Granted, US hedge fund/private equity valuations are collapsing…so if they’re the canary in the coal mine, we may have a much bigger S&P collapse on our hands! Otherwise, the sector should manage to stabilise/rebound]. TFG has a strong balance sheet, its portfolio is increasingly diversified (while the core CLO portfolio remains a substantial cash generator), a tougher market makes it a more attractive ‘home’ for potential hedge fund stars, it pays a 6.8% yield (which can be reinvested via a DRIP), and after the recent $60 million tender offer it now trades for about 50 cents on the dollar.
Share Price: EUR 10.03
Market Cap: EUR 161 Million
KWG Kommunale’s become a bit of an orphan company since Conwert Immobilien (CWI:AV) became its majority (80%) stakeholder – its website’s now German-only, and its two former key executives have both departed. And with CWI’s share price now climbing slowly but surely, and nearing a premium to book value, its interest in potentially obtaining a higher valuation for its German property portfolio via KWG diminishes accordingly. On the other hand, German residential property remains a compelling investment theme, esp. in the current European environment, and KWG still offers investors one of the cheapest high quality residential portfolios available. Vacancies continue to decline, rents are rising steadily, its 54% Loan-to-Value ratio is very reasonable, and despite a significant revaluation to date the company still trades on a 0.9 P/B ratio (& a 17% discount to NNNAV). By comparison, KWG’s largest peers now trade on an average 1.4 P/B ratio.
Share Price: GBP 9p
Market Cap: GBP 6.1 Million (USD 8.8 Million)
Management has right-sized the business again to match Argo’s declining revenue, but has had zero success raising new AUM, while wilfully continuing to neglect the stock price & shareholder value. And personally, I’ve seen little willingness on management’s part to engage with & advance any kind of serious discussion with potentially interested acquirers (of its business, or assets). On the other hand, I believe my ongoing activist pressure has helped push management to finally reach an agreement & dispose of its major fund(s) stake in TPPI. This frees up cash to settle $5.8 million in outstanding management fees (in addition to $1 million of net cash on hand), and should permit a significant redemption from its $14 million of fund investments. [For now, let’s ignore any incremental value in other net loans/receivables & the asset management business itself]. Which leaves Argo trading on a near-60% discount to net cash & investments (& a mere 30% premium to net cash), with management finally committed to considering an annual dividend, and/or a return of capital via a buyback. Unfortunately, we mightn’t hear anything further ’til March (or even June), when final results are reported – at that point, a strategic review/sale is obviously up for consideration again.
Share Price: USD 4.65
Market Cap: USD 1,844 Million (post-Novogratz buyback)
Again, the alternative asset management sector’s proved how volatile it can be…who’d have predicted Fortress, for example, would collapse almost 50% in just 9 months?! And the lack of bad news was particularly dangerous – FIG’s a stock I might have added all the way down. Except sentiment was lousy all the way down too… Fortunately, I chose to limit/reduce my position substantially, a useful reminder even value purists should pay close attention to the technicals! After a v accretive Novogratz buyback, I calculate FIG has a little over $1.1 billion, or $2.85 per share of net cash & investments. Which implies you’re actually getting FIG’s $71 billion of AUM (exc. the Macro Funds, and ignoring $9 billion of ‘dry powder’) for 1.0% of AUM, ex-net cash & investments – even when you factor in $33 billion of Logan Circle fixed income AUM (which investors may be under-estimating as a potential natural hedge in the current environment), that’s an incredibly cheap valuation for an alternative asset manager. And on a P/S basis, it looks even more ridiculous…ex-net cash & investments, FIG trades on a 0.7 P/S ratio (or a 1.2 P/S ratio, if you choose to assume zero incentive income). Obviously it’s a real love/hate stock now – time to start betting big, or going home…
[NB: As of year-end, I increased my Fortress Investment Group holding from 2.8% to 3.4% of my portfolio.]
And finally, I really did intend to offer a Top 14 here…’cept for the fact it inconveniently included four new holdings, which must remain undisclosed for the moment (but should hopefully make for some interesting reading in 2016). So, apologies, that’s why it became a Top 10 Tips in the end…
But you know what – as a final teaser – why don’t we wrap up with a few tantalisingly brief summaries of these new holdings:
Undisclosed Company A:
Shared a little whisper about this one already on Twitter – it’s a luxury goods company with a 20-30% (current) growth rate, a sub-15 P/E ratio, and a minimal (but fast-growing) exposure to China.
Undisclosed Company B:
A large-cap company which boasts a leading/dominant local market position & offers investors a high growth economic pure-play – based on core/underlying earnings, it only trades on a 10.2 P/E ratio (or an even lower 9.6 P/E ratio, on an IFRS basis).
Undisclosed Company C:
A mid-cap European company – presumed by many to be a classic cyclical stock, but is in fact a classic secular growth stock which also offers attractive contra-cyclical characteristics. Has actually enjoyed a (primarily organic) 20%+ CAGR in revenue for 15 years+ now, but currently trades on an ex-net cash 12.8 P/E ratio.
Undisclosed Company D:
A small hat-tip here – while I consider Zamano a deep value/special situation investment, it also provided me with the original inspiration for an in-depth investigation of a particularly compelling secular investment theme. I’m talking about the global smartphone revolution – which may now be even more exciting in the far larger emerging/frontier market populations, where people are leap-frogging the personal computer age…they simply aspire to owning a smartphone instead. Equally exciting is the global transition of advertising, commerce, media, etc. to mobile, as they frantically chase this revolution. [Check out a16z’s ‘Mobile Is Eating The World’].
Moving on from the last portfolio allocation I shared with readers, I’m now occupied carving out two new sector/investment theme allocations (including stocks both old & new), which at this point already comprise nearly a third of my portfolio! [I’ll publish a new portfolio allocation in due course]. One of them is obviously MOBILE…and I specifically chose the word ‘Mobile’ because this investment theme’s far bigger than the smartphone revolution. It obviously includes wireless hardware/software/infrastructure/providers, communication, search, social networking, music & video streaming, mobile gaming, cloud computing, etc…and will ultimately move on to the Internet of Things (IoT) (which most people, in their daily lives, will experience primarily via wired homes & driver-less cars). [NB: I don’t necessarily like the competitive positioning, or the stratospheric valuations, in some of these areas!] In 2016, I hope I’ll have an opportunity to post more about this, and/or a relevant stock or two.
And meanwhile, my apologies, but all I’m revealing now about Company D is that…surprise, it’s a large-cap MOBILE play.
OK, that’s it. Now, let me just wish each reader the Best of Luck in 2016!
[What? OK, while we’re at it: The other new sector/investment theme is actually…da-dah, LUXURY GOODS! Again, I hope I’ll be able to return to this theme, and/or some relevant stock(s), in due course.]