I’m still very much in the process of filling up the 21st-century net-net portfolio with mostly small companies trading at a discount to book value and sometimes tangible book value. Because these companies are often not what I’d call ‘global superstars’, there is probably more risk involved in owning these things.
That’s why I also insist on net cash and a price-to-sales ratio of less than one to help rule out overly indebted companies that aren’t selling anything.
In the case of Molins, it’s an international business designing and making machinery for high-volume consumer goods like food and tobacco. It also supplies related services as well.
It’s a small-cap with a market value of just over £20m.
The company has borrowings of about £6m and cash of about £12m.
Sales are over £80m, which is almost four times the market cap.
There’s also a reasonable history of dividend payments, and the yield is currently almost 5%.
But I’m a system addict, so I can’t get ahead of myself with excitement. Let’s fill in those simple numbers first:
The numbers, step-by-step:
Price to book = 0.43
price to tangible book = 0.6
Price to Sales = 0.25
Net cash = £6m
Are they about to go bust?
Not that I can see. The latest news and annual report just seem to confirm that the company is bumping their way through the economic landscape, just as they have since 1912.
A toe in the water
I’m not much of a stock picker. One of the things that differentiates me from most value investors is that I have little faith in the benefits of extremely deep analysis.
Other than in rare cases, I think it’s almost impossible to beat the market by working harder and analysing deeper than everyone else. There are just too many smart people working long hours across the globe for me and my little 3lb brain to have any chance of success by being BETTER or SMARTER than everyone else.
However, I think it is possible to beat the market if you are DIFFERENT from everyone else (or at least from the vast majority of market participants).
In my case, that primarily means buying out-of-favour stocks (the central theme of value investing) and holding them longer than most other investors, a process known as time arbitrage.
For these small-cap stocks, I have a fixed holding period of 5 years because that seems to be the time horizon over which the most outperformance can be had for the smallest amount of effort.
And on that note, Molins has joined the 21st century net-net portfolio with a 1.7% weighting (1/60th). You can see the existing holdings below and how some of them have already jumped up in value.
The difficult part is to fight the urge to do something, to be clever and make a quick 25% in a month. Short-term trading is so alluring, and that’s why so many stock pickers do it because the gains can look fantastic. However, in the longer term, it almost never works out, and many short-term investors find themselves on the road to day trading hell.