Dejavoo, Investment-wise, little has changed for me over the...

Dejavoo,

Investment-wise, little has changed for me over the past 12 months and I have not been doing very much in terms of active investing.

I am struggling to find much in the way of gross undervaluation that presents limited downside (although, truth be told, I haven't been looking too hard).

The only big positions I have taken have been CTX, at around October last year (the thesis for that one you might know, and it has largely run its course for the time being, I sense... although I haven't sold any), and AZJ (in December 2013)

I also established a modest (1.5% of my investment capital) position in BOL earlier this year, which - like most "turnaround, deep value" plays - looks like it is going to take years, not months, to pay off.

Other than that, the only other meaningful buying I have done is to add to existing positions in:

• RMD, as it got sold off earlier in the year due to the distribution chain disruptions caused by competitive bidding
• Westfield (WFD) during December 2013, ahead of the demerger of the Australian assets [I still hold both legs; I like the growth prospects of WFD, but I’m a bit agnostic about the Australian business (SCG)]
• CSL, when it fell into the $60’s in early August on “heightened competition” fears
• AZJ, as the market scepticism about their foray into developing an iron ore business in WA coincides with increasingly negative sentiment about global coal markets

And I have added modestly to my existing holdings in:

• RHC, as it got sold off by investors, presumably liquidating positions to participate in the HSO IPO,
• WES, after the sale of the underwriting business to IAG,
• CBA, a few weeks ago when the market tumbled due to one of its periodic bouts of jitters concerning global growth, and
• REH.

On the sell side, I have disposed of most of my holdings in:

• TPI, where the investment story changed in my mind from one of the returning of surplus capital to shareholders (which I liked), to one of a resumption of acquisitions (which I don’t like, as I have explained before)
• COF, where the performance I had expected has been largely delivered

One share I have sold out of completely over the past few months and that is SGN, starting the day after the DH result which saw the balance sheet having deteriorated far worse than I expected.

What I have been doing in recent weeks is trawling around some of the bombed out mining service stocks, only those few that have a durable franchise, mind you. But there is nothing that stands out at me.

I have done some modelling on the types of companies in this space that are able to generate free cash flow right through the cycle, such as UGL, TSE, LYL, LCM, ALQ, BKN, but for each of these I have found too many warts or have come to the view that it is not possible to say with any degree of certainty whether the downgrade cycle for them has ended yet (of these, I think LYL is the most interesting, because I think the earnings are horribly understated, but revenue pressures are making that academic, anyway)


I have also been spending some time looking at some of the businesses that have IPO’d over the past 12 months, such as ISU, SDF, the aged care companies (JHC and REG), the fertility specialists (VRT and MVF), and also those spun out of larger companies, namely REC and ORA.

Of these, I think:

• ISU looks interesting, but I don’t think I fully understand the revenue model yet
• SDF I like, but I am already heavily invested in this space through my long-standing position in AUB
• JHC and REG I like a lot as business models, but they are too expensive, and
• VRT and MVF I think are just so-so businesses, but are quite cheap given their recent underperformance. I do worry, though, that their earnings forecasts are still cum- further downgrade
• ORA and RCL are poor quality companies that I would only care to own at much, much lower valuations.

So, as you can see, I haven’t been finding very much at all this year that has given me cause to pin back my ears and make a big acquisition.

But, hey, that’s prudent and conservative investing for you: 90% of it involves letting them pass straight through to the keeper while waiting for the rare loose delivery rising to waist height outside of off stump!

Rgrds