(warning: long and boring analytical post)
Firstlythank you Giz for your polite and thoughtful question. I would say on mostoccasions the stock market is fairly efficient and therefore the price actionof a security usually accurately represents the information about which themarket knows . However when a stock is misunderstood, stigmatised or undergoingtransformation the price very rarely represents its actual or intrinsic valuehence the massive opportunity.
In regardsto your intelligent and plausible theory involving the controlling interestSeven Group acting as a handbrake on the stock price, that is one possible ideahowever I think that it is unlikely to be the root cause of the significantmispricing. Why is that? Well during the Covid-19 pandemic Seven Group also leda majority takeover of Boral Group (of which they now own 70+ percent of thelisted company). Yet in the case of Boral because the construction materialsindustry is well understood and not structurally challenged or in the midst ofan industry transformation there is actually the complete opposite effect fromSeven Groups controlling interest and the BLD stock has now rallied to what Iwould consider a fully priced multiple that already reflects most of the upsidefrom its planned multi-year turnaround.
Simply putif Seven Group holding 40% of SWM was the reason the market didn't want to buythe stock then you would expect that when Seven Group holds 70%+ of Boral themarket would be even more reluctant to purchase shares. They clearly aren't asevidenced by the pricey multiple being paid on market for BLD shares.
Now thelast time I saw a similar example of this sort of indiscriminate, non-stopselling was in ASX:OMN securities after the company demerged. One Market was atech startup spun off from Westfield and it had very little to do with the corebusiness of Westfield which was that of a shopping centre REIT. Westfieldshareholders that received shares in ASX:OMN had very little reason to hold them as the type ofshareholder that buys Westfield is not the type of shareholder that isnecessarily interested in a tech startup. Hence as soon as the demerger listedthere was non-stop selling -OMN started its listed life with over $200m USD incash and whilst continuing to burn through cash as most startups do the stockeventually reached a 50%+ discount to its cash in bank. Why was this and whatdoes it have to do with SWM? Simply put the ongoing selling irrespective offundamentals was caused by an underlying mismatch between the type ofshareholders in the company and the nature of the company itself. In the caseof SWM it has a shareholder register that is largely made up of retailshareholders who expected dividend payments with many having been shareholdersfor years whilst the business struggled under the previously substantial debtload and shrinking linear tv market before BVOD took off.
I dont knowif you managed to watch the 2023 SWM AGM webcast but there was a shareholder whoasked a question that I think personified this example of the shareholder tocompany mismatch. He was elderly gentleman who had been holding SWM since theWAN merger- during this time the stock had cratered some 80+ per cent and thedividend had been placed on hold for 4+ years. He was clearly frustrated withthe Board and I understand why this sort of shareholder would have no interestin holding SWM stock despite the transformation taking place, simply becauseyou can only go through so much pain as a shareholder before you considerselling out at any cost.
Right nowSWM is a painful stock to hold- it has no dividend, the industry isn't popular,it's undergoing a massive corporate transformation and no one likes to sit ontheir hands with an unpopular stock whilst everyone else gets rich around them.However if you are a student of the Stanley Druckenmiller philosophy you wouldidentify that this is exactly when you want to take a position in a stock andto take the seasoned view that you are not buying the stock of today but ratheryou are buying the stock as it will be in 18 months time. The pertinent adviceto investors from Druckenmiller is as follows
“I learned this way back in the 70s from mymentor [Speros] Drelles. I was a chemical analyst. When should you buy chemicalcompanies? Traditional Wall Street is when earnings are great. Well, you don'twant to buy them when earnings are great, because what are they doing whentheir earnings are great? They go out and expand capacity. Three or four yearslater, there's overcapacity and they're losing money. What about when they'relosing money? Well, then they’ve stopped building capacity. So three or four yearslater, capacity will have shrunk and their profit margins will be way up. So,you always have to sort of imagine the world the way it's going to be in 18 to24 months as opposed to now. If you buy it now, you're buying into every singlefad every single moment. Whereas if you envision the future, you're trying toimagine how that might be reflected differently in security prices.
As a practical exampleimagine that I could through the magic of time travel send you 18 months intothe future and you then got the opportunity to observe what the business ofSeven West Media was like.
Here is some things I think you would likely observe in this future timetravel expedition
1. The current ad market recession would be well and truly finished.(Wehave as of February 2024 already gone through 14 months of steep ad marketrecession conditions and as per page 21 of the 2023 Macquarie ConferencePresentation, TV market declines and recoveries have historically resulted inhigher revenue within two years. Think Dotcom Crash, GFC, 1990's Recession andCovid-19 - All the exact same outcome - A sharp ad recession of about 1 year inlength followed by 2 years of strong ad market growth leading to revenueshigher than before the ad market recession.
https://clients3.weblink.com.au/pdf/SWM/02661331.pdf
2. The Cost base of SWM would have been cut by another $60m as detailedby management at the 2023 AGM https://clients3.weblink.com.au/pdf/SWM/02737713.pdf.
3. This cost cutting coupled with surging revenue from the ad marketrecovery and new digital sports rights (Cricket and AFL) will have generatedsome very, very juicy profit figures being reported by SWM and therefore inlight of this the share price will likely trade at a much,much higher pricethan 24.5 cents per share.
4. SWM will have reinstated dividends thereby bringing a whole new cohort ofdividend investors into the buyers pool. Currently due to the significantfranking credit balance held by SWM and also the tax law concerning frankingcredit refunds, it makes tremendous sense for investors particularly selffunded retirees to buy stocks that pay fully franked dividends. Even amodest dividend of 4 cents per year (being a payout ratio of less than 40% ofunderlying NPAT) would cause the stock to trade at a price north of 80 centsper share.
When you consider this future picture of SWM, the current opportunityto buy SWM shares at the ridiculous price of 24.5 cents becomes an absolute nobrainer.
As an investor I consider that the first and foremost duty you have is toprotect your Capital. It matters little if you hit the lights out on oneinvestment only to lose it on the next one. What SWM offers in spades and whatI will discuss more in later posts is the substantial capitalprotection offered by current market prices whilst still allowing for multi-baggerupside.
Sometimes great stock buys really are as obvious as SWM currently is.
“Opportunities come infrequently. When it rains gold, put out the bucket, notthe thimble” Warren Buffett
(20min delay)