Just about everybody who has ever owned a car must know what a Haynes Manual is.Continue reading “Haynes Publishing–On the road to nowhere?”
It’s time I got back to the task of building up my portfolio of small-cap, low-debt, deep-value investments.Continue reading “Promethean World: Investing in high-tech education”
There are lots of different ways to be a value investor. When I’m investing in large companies, I look for stability and strength above all, followed by the potential for growth and a low price, of course; but with small caps, I’m looking for something else entirely.Continue reading “Fiberweb – With the turnaround almost complete, are the good times about to begin?”
Just last week, I wrote about how investing in large and successful businesses is generally a happier affair than messing with sickly small-caps, and to prove the point, I offer Exhibit A: Northamber.Continue reading “Northamber – A Berkshire Hathaway clone?”
This small-cap media company can be yours today for only 39p a share. It has a long history of (adjusted) profitability and dividend payments, and the yield is currently about 5%. That may not sound like much, but the dividend is currently in ‘recession mode’ at 2p per share, down from over 4p in 2008.
Those are interesting numbers but far from exceptional, so what is it that drew this outfit to my attention?Continue reading “Centaur Media – Do Intangibles Have Value?”
Flybe is the next candidate for my small-cap value fund, which is based on a variation of the net-net investment strategy.Continue reading “Flybe – A low-cost airline in every sense”
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.Continue reading “Molins – Another brick in the net-net wall”
Digging around at the small-cap end of the market can be a dangerous activity, especially if you’re investing like a loose cannon by buying without a plan or strategy.
Despite these dangers, value investors do love their small caps, so it’s worth spending some time drawing up a repeatable and systematic plan for uncovering value.
This is the critical first step in becoming a successful investor because study after study shows that investors are generally very bad indeed at stock picking.
Most recently, Professor Greenblatt outlined how individual investors have wiped out the magic formula advantage by making poor stock picks.
Look for companies with little debt and lots of cash
The reason for wanting little debt and lots of cash is that the future is uncertain. In fact, it’s so uncertain that there are no meaningful ways to work out the probability that any particular economic event will happen.
If the future is uncertain, then the earnings of any company are uncertain, so it’s probably better to have the adaptability that being debt-free and cash-rich brings.
Looking for net cash is a simple way to find companies with a good balance of debt and cash. Psion has net cash with around £27m cash in the bank and only around £2m in debt, compared to £6m operating profit last year.
The current and quick ratios are also favourites of many value investors, and for Psion, the current ratio is 1.6, and the quick ratio is 1.3. Both of these are reasonably healthy figures, especially the quick ratio of more than one.
Buy companies that are cheap (this is value investing, after all)
This is a ‘deep value’ strategy, based on Ben Graham’s net-net strategy, so value is measured against assets. Psion’s price-to-book ratio is 0.35, which is way down in the bottom 10% of companies by price-to-book.
The price-to-tangible-book ratio is 1.2 because the company has £118m of intangible assets, which might scare off some hardcore ‘asset’ value investors, but for this strategy, intangibles are not automatically a problem.
The company has enough current assets to pay off all its liabilities, so it does have a positive net-net ratio. However, the net-net value is about £32m while the market cap is £59m, so the net-net ratio is over 1, while Ben Graham required it to be below 0.66.
This isn’t a problem, though. Instead, it actually highlights why the 21st Century Net-Net strategy was created, which was to overcome the overly limiting nature of the original formula.
Buy companies that are cheap relative to their economic activity
It’s all well and good buying companies that are cheap relative to assets, and many academic studies have found it to be a successful – if difficult – strategy to follow. In practice, a pure focus on assets can lead a portfolio to hold many companies that don’t really do very much.
For example, pharmaceutical companies that are still testing their new products and don’t actually sell anything in meaningful amounts, or property companies that have a lot of assets (houses) which don’t generate a great deal of money.
A quick and easy way to check for a reasonable amount of economic activity is the price-to-sales ratio. For Psion, the ratio is about 0.33, so last year’s sales were about three times the market cap of the company at £180m.
A final sanity check
Despite the wall of evidence which shows that investors are terrible stock pickers, most people aren’t happy to invest purely on the numbers, no matter how compelling they may be. So it makes sense to have a final sanity check once all the number boxes have been ticked.
The idea is just to see if the company is facing some immediate threat to its survival or if its key economic engine is about to become obsolete or illegal.
In Psion’s case, after reading through the latest reports and searching recent news articles about the company, I cannot find any obvious evidence that it is about to go broke or be taken over at a price significantly below the current price.
Nor can I find any evidence that the company’s products (robust mobile computing devices) are about to become obsolete or un-sellable for any reason.
Diversity – The final defence against the unknown
The future is uncertain, and the capitalist system is brutal for the companies within it (unlike banks, for example, which don’t really exist in the normal capitalist system).
Since the future is so harsh and non-deterministic, it makes sense to be honest with yourself and admit that even with the best will in the world, you will likely be wrong about most of the things you think will happen.
In that case, it’s probably best to keep your eggs in many baskets and hold as many companies as your funds will allow without harming returns with excessive trading costs.
For the 21st-century net-net model portfolio, the number of holdings is 60, so only 1.7% of the fund is allocated to each stock.
I’ve added Psion at 45p today, so now the model portfolio looks like this:
Cash is still about 92% of the total, and filling the portfolio with stocks will take the rest of the year, but this is a long-term project which I hope will generate a lot of practical insights into many aspects of investing.
P.S. One final point to mention is that Psion pays a dividend which, as far as I can see, is sustainable for the moment. The current yield is just under 10%.
If you run a net-net screen of some kind, it’s likely that you’ll have come across this (very) small-cap stock. Titon Holdings is a Ben Graham net-net in almost every way.Continue reading “Titon – A Classic Ben Graham Net-Net”
AGA Rangemaster, owner of a truly iconic kitchen brand, could well turn out to be an incredible bargain. In fact, investors can buy the company today for little more than the cash it holds in the bank.Continue reading “3 Signs that AGA Rangemaster Could be a Bargain”
The doom and gloom that surrounds retailers continues, and it’s thrown Argos and Homebase into my sights.Continue reading “21st Century Net-Net #2 – Home Retail”
The first lucky recipient of the 21st-century net-net badge of honour is PV Crystalox Solar, one of the world’s leading providers of photovoltaic silicon wafers.Continue reading “21st Century Net-Net #1 – PV Crystalox Solar”
One of the most enduring investment strategies for ‘deep value’ investors was defined by Ben Graham way back in (at least) the 1940’s. The approach was to buy shares in companies where the market cap was less than the value of its current assets minus all of its liabilities.Continue reading “21st Century Net-Nets”