28 Mar 2010
Goodbye EDP, hello Luminar
Following on from my thoughts in the last post I've added Luminar to the portfolio. Luminar run popular venues where people can meet, eat, drink and dance. This is the first new holding in almost five months and it feels good to have a change at last. Instead of funding this purchase with the dividend from Waterman as originally intended, I sold my holdings of Electronic Data Processing (EDP) and used the proceeds plus some cash. The affect on the portfolio is to add about £20k to its book value since Luminar is so much cheaper, although as I said before I'd be surprised if that didn't come down again.
Sale review of EDP
Electronic Data Processing is the largest IT solution provider to the UK independent builders and timber merchants market place. I bought shares in EDP on the 28th of August 2009. At that time I thought the book value was about £14 million, which put the price/book ratio at under 0.5 and well within my target range. The rest of the structure of the balance sheet was good, current and quick ratios were fine and the company had net cash. However, I failed to spot that a recent share buy-back had been used to return some £6 million of excess cash back to shareholders. So in fact the price/book ratio was about 0.8, far above what I'm after and only with a 25% expected upside.
The sale of EDP had been on my mind for a while and really I was just waiting for something better to come along. Recently the share price had climbed back in to profit so that was enough to make me back Luminar instead. In terms of results, I made 6.6% after fees for an annual rate of about 12%.
Purchase review of Luminar
Luminar is very different to EDP. The price to book is worryingly less than 0.2, although the price to tangible book is still cheap but more reasonable 0.4. These will change soon though as one of Luminar's holdings has gone bust which is expected to wipe about £17 million from the book value. Even with that factored in the valuations are good. Less good is the tangible gearing which is right around my limit of 100%, but given that the margin of safety is so wide I think I can accept somewhat more gearing than I'd like.
I've limited the amount invested in Luminar so that the target sale value isn't too large. In other words, if I put 10% (~£6,000) into Luminar and the price went up to give a price/book of 1, then the holding would be valued at about £35,000, which would be about 40% of the total portfolio. Far more than I'd like in a single company... especially one as highly geared as Luminar.
Mallett Final Results
Mallett, one of the largest and most exclusive antique dealers in the world and one of my holdings since 2008, have produced their final results for the year. While they still made a loss the general mood is more upbeat as the cash position has improved, turnover is up and the loss is smaller than last year. As the chairman says, "we are only part of the way through the task of re-engineering Mallett's business model and cost base in order to align them with the demands of a rapidly evolving marketplace", which is becoming a familiar phrase around here.
Sale review of EDP
The sale of EDP had been on my mind for a while and really I was just waiting for something better to come along. Recently the share price had climbed back in to profit so that was enough to make me back Luminar instead. In terms of results, I made 6.6% after fees for an annual rate of about 12%.
Purchase review of Luminar
Luminar is very different to EDP. The price to book is worryingly less than 0.2, although the price to tangible book is still cheap but more reasonable 0.4. These will change soon though as one of Luminar's holdings has gone bust which is expected to wipe about £17 million from the book value. Even with that factored in the valuations are good. Less good is the tangible gearing which is right around my limit of 100%, but given that the margin of safety is so wide I think I can accept somewhat more gearing than I'd like.
I've limited the amount invested in Luminar so that the target sale value isn't too large. In other words, if I put 10% (~£6,000) into Luminar and the price went up to give a price/book of 1, then the holding would be valued at about £35,000, which would be about 40% of the total portfolio. Far more than I'd like in a single company... especially one as highly geared as Luminar.
Mallett Final Results
Mallett, one of the largest and most exclusive antique dealers in the world and one of my holdings since 2008, have produced their final results for the year. While they still made a loss the general mood is more upbeat as the cash position has improved, turnover is up and the loss is smaller than last year. As the chairman says, "we are only part of the way through the task of re-engineering Mallett's business model and cost base in order to align them with the demands of a rapidly evolving marketplace", which is becoming a familiar phrase around here.
21 Mar 2010
Luminar, bond allocation and checklists
With the impending dividend payout from MJ Gleeson, I've been thinking about what to do with it. I mentioned at some point in the past that I wanted to hold more cash and bonds, using the CAPE10 based function I've posted about before. That function calculates my cash or bond holdings using the value of the FTSE 100 and is therefore suitable for portfolios where the stock holding is an index tracker following the FTSE 100. In fact that's exactly what I've used it for so far when annually re-balancing my wife's pension and currently the bond allocation is about 30%.
However, the value investing portfolio which is the focus of this blog is most definitely not a FTSE 100 tracker. The shares in my portfolio live in a dark little corner of the size and value grid where academia says out-performance is most easily had. On that basis I don't think I should hold cash or bonds based on the value of the FTSE 100. What I've decided to do instead is to be as fully invested as is sensible (i.e. if I have £100 cash there's no point investing it since the trade commission will be about £10).
Once I get my hands on the MJ Gleeson dividend and sell my bond holdings I'll have about £3,000 cash to invest; and Luminar is looking like a high risk high reward place to put it. This big nightclub operator is very cheap, both tangibly and intangibly. It doesn't have quite the low debt levels I typically like, but it doesn't seem to be drowning in debt. On the downside, they've just lost the founder and chief executive; and one of their major investments has just gone into administration probably wiping its ~£17 million value from the balance sheet. Further to the downside the company has lost over 50% of its tangible assets over the last 5 years which, although bad, pales next to the 90+% paper losses of shareholders.
This is as good an example of why value investors are a rare breed as you are likely to find. Only the maddest or hardiest of souls would give money to a company with such a poor record. Will I become one of them?
For those of you who are interested in this sort of thing, I've added a Checklist page to list the (semi) mechanical steps I take when investing. The whole area of checklists and why we need them is very interesting in itself and I'd recommend both The Checklist Manifesto
and Work the System
as an introduction.
and Work the System as an introduction.15 Mar 2010
French Connection's strategic review
With a report titled "Restructuring to return French Connection to Profitability", the team at French Connection have start the real work of turning their fortunes around. I'm not really a details sort of person, so the main points are that they are selling the Nicole Farhi brand and loss making stores internationally. I hate to speculate about the future, but generally I'd say this is a good thing and the markets seem to agree as it's been up by over 10% today.
More importantly for me, the report comes attached to the preliminary results for the year ended 31 Jan 2010. The sole point of interest here is that the book value of the company has changed from £83.2 million at the interim report to £72.3 million now. The market cap is currently £43 million so it's still cheap by my simple metrics. All in all I've lost a little book value but gained some market value, neither of which should make me jump for joy nor cry into my tea. I wonder if they'll give me a discount on a new shirt?
More importantly for me, the report comes attached to the preliminary results for the year ended 31 Jan 2010. The sole point of interest here is that the book value of the company has changed from £83.2 million at the interim report to £72.3 million now. The market cap is currently £43 million so it's still cheap by my simple metrics. All in all I've lost a little book value but gained some market value, neither of which should make me jump for joy nor cry into my tea. I wonder if they'll give me a discount on a new shirt?
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