Ann: Revised 2019 earnings guidance, page-46

"With consideration of the business cyclicality, capital intensity and business risk - how much weighting of your portfolio would you allocate to a business like this?"

@jiantan86 ,

That's a bit of a "how-long-is-a-piece-of-string" question, because it depends not only on the quality of the company (as you say, this one has a cyclical business model and quite significant forecast risks [1]) but, more importantly, on the degree of undervaluation that I have assessed.

All things being equal, I would have a bigger portfolio position in a lesser-quality company that I think offers 50% upside, than in a premium-grade one that I think has 10% upside.

It's difficult to be definitive about these sorts of things but - in general terms and for the "average" company (which is what I think ABC is) - I feel that 20% undervaluation is where I would normally consider it acceptable to start building a position.

Which is where I think ABC is presently.

And usually, my starting position is 2% (don't ask me for the science behind that figure... there isn't any; it simply "feels" right to me and suits my investing temperament.)

Of course, I very seldom buy shares right at their cheapest point, so what I invariably find myself doing is adding to my holdings as the share price falls after I have first acquired it.

And, while I don't actively monitor or measure it, I suspect that for every 10% a stock price falls (or if my assessed valuation of the stock rises by 10% for whatever reason), I will add to my exposure by, maybe 1%.

So, as a rough rule of thumb, I reckon that every 10% of potential share price upside warrants a 1% portfolio weighting. [2]

Accordingly, I currently have about 2% of my investable capital in ABC, predicated on the stock offering, I think, around 15% - 20% upside.



[1] I actually don't consider ABC to be that capital-intensive, despite its asset-heavy perception: Capex-to-Revenue averages a little over 5%, which is not above-average for companies, and Operating Cash Flow-to-Capex is around 3 times, which is above-average by some margin,

[2] Stressing, again, that being more indicative, than prescriptive, and dependent on the sort of company involved.