random investment thinking aloud, page-14

@vindin,


In response to your post on the RIO thread, namely...

"So what I was wondering was if you consider these companies you have listed in these posts to still be worth investing in or have factors changed your mind on any of them.
And if there are any new stocks that you have now added to your list, such as RIO which certainly wasn't on any of your lists before ! !"


....I thought it best to reply on this to the original post made by the "Camden55" guy in September 2013.

The best way to answer your question is to start by showing you my portfolio as it sits today, and then to talk about some of the stocks I have been buying during the current market ructions.

>7% Portfolio Position:
CTX
DLX

5% to 7% Position
ARB
CSL
REH
RHC
TCL
WFD

2% to 5% Position
ANZ
AUB
AZJ
BRG
CBA
CGF
DTL
IFL
RIO
RMD
TCL
WES
WOW

<2%
BOL
FLT
IAG
LYL
MQG
ONT
PRG
SDI


The major changes between 2013 and today are the following:

By stock number, I have gone from owning 39 stocks 3 years ago (which is a bit too much of a zoo) to 29 stocks today (even 29 stocks is too many).


14 stocks have been disposed:

- COF, CRH, SGN, SKE ....due to being taken over

- ALQ, CRZ, PMP, PRT, SAI, SFH... became overvalued (most of these were picked up in the GFC as deep value plays, but aren't great quality businesses to own long-term... with the exception of CRZ; I'm still not sure if I made the right decision to sell it)

- GWA, KOV, TPI, VRT ... these were companies whose businesses underwent fundamental changes that were different to what initially thought I bought into. I had owned GWA and KOV for many years. VRT I simply got wrong.

4 stocks have been added:

- BOL and LYL (deep value situations. Been sitting on these for more than 6 months with no reward, but like many of these situations, the timing of the delivery of value is indeterminate.)

- RIO (Yes, this was certainly not on my original list of prospective investment companies, but that’s simply because I had always thought the entire resource sector was so dramatically over-hyped that it never warranted a mention. I began acquiring in earnest recently and having just finished listening to the result webcast I have greater conviction in my investment.)

- PRG (just bought this week... a bout of cigar butt investing. )


In terms of major portfolio moves:

Of my bigger holdings (>5%), ARB, CSL, and REH (which were large positions in 2013 and still are today) have been joined by CTX, DLX, RHC, and WFD. As I always do, whenever of any one of these fine businesses fall in price for whatever reason, I add to my holdings if I have the funds available.

By far the biggest change to my holdings has been CTX. As mentioned in 2013, I had started building a position in CTX ahead of the refinery shutdown and what it would mean for the free cash generating ability of the company and the way it would be valued by the market. Because CTX was a high conviction investment for me, I had a big swing at the stock, and it turned out very well for me, at one stage representing over 20% of my invested capital.

Trouble is, CTX is now relatively fully-valued, in my view, so I am no longer buying any more.

ARB, DLX, RHC, TCL and WDC have become big positions due to good performance in recent years, which is always a nice thing to have happen.
But none of these stocks is now cheap enough to buy, I don't think.

Of the stocks that I already hold large positions, the only one I will be buying at current prices when I receive dividends in coming weeks, is REH.
But even then, it isn’t exactly a steal, but more a case of buying a great business at a reasonable – but not cheap – price.

Of the mid-tier portfolio holdings that I own, the ones I am currently actively buying are CBA, IFL, MQG and, as mentioned, RIO.
And AUB too, but it, too, is quite an illiquid stock.

Of the rats and mice, PRG and LYL I am happy to continue buying (I commenced buying PRG last week), but the last two are notoriously illiquid.



I have to say, despite the pullback in the market in recent months, I don’t find that too much has been thrown up in a way of investment opportunities.

All I see having happened that the rubbish in the market – which was already “cheap” – simply got cheaper, but high-quality businesses (the ones I want to own) simply went from very expensive, to somewhat expensive.


Outside of my current holdings, I am looking at market-derivative companies, such as ASX and CPU (although the latest results for these was uninspiring, I thought, and their stock is still too expensive) or the fund managers: AMP, BTT, PPT, PTM, MFG, and HHG.
Of these fund managers, HHG is the one I like most.

Another stock that I think looks interesting from a valuation standpoint is ORG. Like so many businesses these guys over-invested in their business and are now sitting with a mountain of debt (~$10bn). But, unlike most commodity companies, ORG has a utility business that generates $1.bn pa in EBIT from which the debt can easily be serviced. Even valuing ORG’s LNG interest in APLNG at zero, the current Electricity and Gas Retailing businesses look deeply undervalued. On a Free Cash Flow basis, from 2017 you have somewhere around $0.9bn to $1.2bn of FCF justifying an Enterprise Value of $14.0bn (i.e. 7% FCF yield). On the Market Cap, the FCF yield is 25%. (For what it's worth, I have just started buying ORG today.)

A few months ago I undertook a bit of a study on the aged care operators that have listed in recent years, namely EHE, JHC, and REG but I stopped at the regulatory framework, which I’m not sure is entirely set in stone, and well as the lofty valuations. Besides, the mechanics of the accommodation bonds make these things look like they are part derivatives of the health of the residential property markets.

I tend to like healthcare stocks, but there is a big dichotomy between the high-quality businesses (which are all expensive and have been for years) and their cheap poor quality cousins (CAJ, PRY, ANN, SHL)

And the contrarian in me makes me sniff around the bombed out mining services sector, but every time I look at something like ORI, or BKN, or ALQ I just want to take a shower afterwards to clean up. And having heard what RIO is going to do over the next two years in terms of an unrelenting grind out of its cost base (and RIO won’t be alone in this), a shudder goes down my spine as I feel a sense of ongoing dread for anyone who sells stuff or provides a service to the mining industry.

Then I look at other cyclical businesses such as retail or construction materials and all I see are challenged business models or structural headwinds

I hate media stocks of almost all shapes and hues, because their strategies seem to me to be conducted on the basis of megalomania and ego. There is also way too much fast-moving technological change in this space which is impossible for an old-ish geyser like myself to comprehend all the time.


It has always struck me that – of the 2,000-odd stocks listed on the ASX – how few of them are what can considered to be “investment grade”, i.e. stocks that one can invest in on the basis that one can form a half-decent view of what the intrinsic value is and – importantly - how much of that intrinsic value is at risk (i.e., dimensioning the potential downside). For investing without an assessment of intrinsic value (using nothing other than Free Cash Flow as its principal determinant), is nothing other than guessing.

So below follows is a listing of stocks I would consider researching for investment opportunities (i.e., stocks that I would consider to be investment grade, to varying degrees):

[For added clarity, I have classified each stock with parenthesised numbers 1, 2, and 3, which is how I intuitively rank each stock in terms of business model durability, management (to the extent one can have a view) and the quality of the financial statements, and hence how I would approach investing in each company, if ever:

“1” = Premium quality business in most respects. One should be content to pay a reasonably full valuation for these companies
“2” = Middle-of-the-Road companies. Need to purchase these at clear discounts to fundamental value.
“3” = Inferior quality businesses. Require very deep discounts to fundamental value before an investment need be considered.


Note:

1 Because it is clearly both subjective and unscientific, these crude “stock quality” ratings this can only ever be treated as being indicative, rather than prescriptive.

2. This is not an exhaustive list; it is merely a list of stocks I happen to follow (with varying degrees of effort and diligence… keeping abreast of over 100 stocks is nigh on impossible)

3. denotes current ownership



LARGE CAPS
APA (1)
AZJ (1) [*]
CAR (1)
CBA (1) [*]
COH (1)
CSL (1) [*]
CTX (1) [*]
DLX (1) [*]
MPL (1)
REG (1)
RHC (1) [*]
RMD (1) [*]
SYD (1)
TCL (1) [*]
WFD (1) [*]
AGL (2)
ALL (2)
ALQ (2)
AMC (2)
AMP (2)
ANZ (2) [*]
AST (2)
ASX (2)
BOQ (2)
BXB (2)
CCL (2)
CGF (2) [*]
DMP (2)
FLT (2) [*]
GMA (2)
GNC (2)
HSO (2)
HVN (2)
IAG (2) [*]
JHX (2)
MQG (2) [*]
NAB (2)
ORG (2)
ORI (2)
PPT (2)
REA (2)
REC (2)
SEK (2)
SRX (2)
TAH (2)
TLS (2)
TTS (2)
VRT (2)
WBC (2)
WES (2) [*]
WOW (2) [*]
ABC (3)
ANN (3)
BLD (3)
CPU (3)
CWN (3)
IPL (3)
LLC (3)
MRG (3)
MTS (3)
PRY (3)
QBE (3)
RIO (3) [*]
SHL (3)
TWE (3)

SMALL CAPS
ARB (1) [*]
EHE (1)
HGG (1)
IVC (1)
REH (1) [*]
AAD (2)
ADH (2)
APO (2)
AUB (2) [*]
BAP (2)
BRG (2) [*]
BTT (2)
CVO (2)
DTL (2) [*]
FXJ (2)
FXL (2)
GTY 2)
GUD (2)
GXL (2)
IFL (2) [*]
IFM (2)
ISD (2)
JBH (2)
JHC (2)
MND (2)
MTR (2)
MTU (2)
MYX (2)
NVT (2)
NXT (2)
ORA (2)
PBG (2)
RFG (2)
SAI (2)
TNE (2)
AHG (3)
APN (3)
BRS (3)
CWY (3)
GWA (3)
MYO (3)
NEC (3)
NUF (3)
ORL (3)
PGH (3)
PRG (3) [*]
QUB (3)
SMS (3)
SPO (3)
SUL (3)