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26 Jul 2011
SOLD – Creston Returns 22.2% in Only 237 Days
This small media company has been doing pretty well recently
and after the latest annual report at the end of June it was time for a
revaluation. I originally bought Creston
back in November last year and only barely mentioned it in the 2010
performance review, so I’ll go into more detail here.
Entry criteria
Back in November I was in the process of adjusting my
investing system to put more weight on long term returns on equity, since
companies that have a higher return on equity are often ‘better’ companies in
many ways. At the time Creston had an
average return on equity of 10% and the company was priced at only half its
equity, or book value.
In this case the equity value was 164p and the earnings had
averaged 10p over the last decade and over 15p more recently. Since the shares were valued around 90p the
earnings yield on that price is close to 20%, which is not bad at all. The cash dividend had been cut from almost 3p
in 2008 to 1p in 2010, but sometimes this can produce an attractive entry point
if the dividend is likely to go back up in a year or two.
A safe investment?
The company had and has very little debt and a sound balance
sheet so they didn’t seem to be at risk of falling over. Although I wouldn’t class Creston as an
‘above average’ company like those I’m typically investing in at the moment, it
was still a reasonably good company and the price was definitely good.
The main reason for the low share price seemed to be the
recession which typically means a hard time for media companies as advertising
is a cyclical business. A cyclical
business is one where they tend to do well in boom times and poorly in tough
times since advertising is an easy expense to cut.
So when I bought Creston it looked like a sound business
that might have a tough time in the short term through the recession, so the
route to profits was going to be buying when things looked bad and just having
a longer investment horizon than the typical investor/trader.
Holding the unpopular
Most people can’t get their head around the idea that it’s a
good idea to buy when things look bad in the short term. People hate to hold shares that are going
down or companies that might miss profit targets or be affected by downturns or
whatever.
Unfortunately for them this is often the exact time an
investor should be getting in.
When to sell
Go forwards 7 or 8 months and the Creston shares have headed
northwards, largely due to the reintroduction of the 3p dividend, after it was
cut it to 1p in 2010.
The annual report showed that profits had been slightly
ahead of market expectations and this sort of good news is often a good
time to get out as everybody else piles in.
After filling in my spreadsheets with data on earnings,
dividends, growth rates and so on my projection looked like this (based on a
current price of 107p):
|
Year
|
2012
|
2013
|
2014
|
2015
|
2016
|
|
Earnings
|
17.56
|
18.04
|
18.53
|
19.04
|
19.57
|
|
Dividend
|
3.47
|
3.56
|
3.66
|
3.76
|
3.87
|
|
Share price
|
150.80
|
154.95
|
159.21
|
163.59
|
168.09
|
|
Total Return
|
44%
|
51%
|
59%
|
66%
|
74%
|
An estimated 74% return in 5 years doesn’t seem too bad but
it was the lowest projected return from any of my holdings.
The system of buying and selling that I use (once a month
sell the company with the lowest expected returns and replace it with something
new that has higher expected returns) is designed to reduce discretion in my
decision making. Discretion in investing
is one of the many routes to the poor house in investing, so I stuck to my rules and sold.
All in all a good
trade
This trade is a pretty good example of the sort of thing I
like to see over and over again. It was
a good company (but not necessarily above average) at a good price and the realised gains
of 22.2% arrived in just over half a year which must make for an annualised
return of around 40%.
Roll on the next profitable trade.
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2 comments:
Entertaining - just as I was thinking of picking these guys up!
Still unsure myself, but I admire your commitment to selling your least future profitable one - will be keeping track as always.
Well they might still be a good investment, it's just that with my system they are the least attractive.
For example, my projected returns for Creston to 2012 are 44%. If there was a change in investor sentiment to return the shares to their average price to earnings ratio then you'd get that 44% return in a single year, which is fantastic.
Of course, what the share price does in any given year is anybody's guess, but people who look for catalysts (i.e. something that's about to change or is changing which might cause investor sentiment to improve) might be interested in that sort of shorter time scale.
For me, I take a 5 year view as I'm not very good with catalysts.
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