(warning: long and boring analytical post)
Firstly thank you Giz for your polite and thoughtful question. I would say on most occasions the stock market is fairly efficient and therefore the price action of a security usually accurately represents the information about which the market knows . However when a stock is misunderstood, stigmatised or undergoing transformation the price very rarely represents its actual or intrinsic value hence the massive opportunity.
In regards to your intelligent and plausible theory involving the controlling interest Seven Group acting as a handbrake on the stock price, that is one possible idea however I think that it is unlikely to be the root cause of the significant mispricing. Why is that? Well during the Covid-19 pandemic Seven Group also led a majority takeover of Boral Group (of which they now own 70+ percent of the listed company). Yet in the case of Boral because the construction materials industry is well understood and not structurally challenged or in the midst of an industry transformation there is actually the complete opposite effect from Seven Groups controlling interest and the BLD stock has now rallied to what I would consider a fully priced multiple that already reflects most of the upside from its planned multi-year turnaround.
Simply put if Seven Group holding 40% of SWM was the reason the market didn't want to buy the stock then you would expect that when Seven Group holds 70%+ of Boral the market would be even more reluctant to purchase shares. They clearly aren't as evidenced by the pricey multiple being paid on market for BLD shares.
Now the last time I saw a similar example of this sort of indiscriminate, non-stop selling was in ASX:OMN securities after the company demerged. One Market was a tech startup spun off from Westfield and it had very little to do with the core business of Westfield which was that of a shopping centre REIT. Westfield shareholders that received shares in ASX:OMN had very little reason to hold them as the type of shareholder that buys Westfield is not the type of shareholder that is necessarily interested in a tech startup. Hence as soon as the demerger listed there was non-stop selling -OMN started its listed life with over $200m USD in cash and whilst continuing to burn through cash as most startups do the stock eventually reached a 50%+ discount to its cash in bank. Why was this and what does it have to do with SWM? Simply put the ongoing selling irrespective of fundamentals was caused by an underlying mismatch between the type of shareholders in the company and the nature of the company itself. In the case of SWM it has a shareholder register that is largely made up of retail shareholders who expected dividend payments with many having been shareholders for years whilst the business struggled under the previously substantial debt load and shrinking linear tv market before BVOD took off.
I don't know if you managed to watch the 2023 SWM AGM webcast but there was a shareholder who asked a question that I think personified this example of the shareholder to company mismatch. He was elderly gentleman who had been holding SWM since the WAN merger- during this time the stock had cratered some 80+ per cent and the dividend had been placed on hold for 4+ years. He was clearly frustrated with the Board and I understand why this sort of shareholder would have no interest in holding SWM stock despite the transformation taking place, simply because you can only go through so much pain as a shareholder before you consider selling out at any cost.
Right now SWM 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 on their hands with an unpopular stock whilst everyone else gets rich around them.However if you are a student of the Stanley Druckenmiller philosophy you would identify that this is exactly when you want to take a position in a stock and to take the seasoned view that you are not buying the stock of today but rather you are buying the stock as it will be in 18 months time. The pertinent advice to investors from Druckenmiller is as follows
“I learned this way back in the 70s from my mentor [Speros] Drelles. I was a chemical analyst. When should you buy chemical companies? Traditional Wall Street is when earnings are great. Well, you don't want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there's overcapacity and they're losing money. What about when they're losing money? Well, then they’ve stopped building capacity. So three or four years later, 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 single fad every single moment. Whereas if you envision the future, you're trying to imagine how that might be reflected differently in security prices.
As a practical example imagine that I could through the magic of time travel send you 18 months into the future and you then got the opportunity to observe what the business of Seven West Media was like.
Here is some things I think you would likely observe in this future time travel expedition
1. The current ad market recession would be well and truly finished.(We have as of February 2024 already gone through 14 months of steep ad market recession conditions and as per page 21 of the 2023 Macquarie Conference Presentation, TV market declines and recoveries have historically resulted in higher 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 in length followed by 2 years of strong ad market growth leading to revenues higher 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 detailed by 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 market recovery and new digital sports rights (Cricket and AFL) will have generated some very, very juicy profit figures being reported by SWM and therefore in light of this the share price will likely trade at a much,much higher price than 24.5 cents per share.
4. SWM will have reinstated dividends thereby bringing a whole new cohort of dividend investors into the buyers pool. Currently due to the significant franking credit balance held by SWM and also the tax law concerning franking credit refunds, it makes tremendous sense for investors particularly self funded retirees to buy stocks that pay fully franked dividends. Even a modest dividend of 4 cents per year (being a payout ratio of less than 40% of underlying NPAT) would cause the stock to trade at a price north of 80 cents per share.
When you consider this future picture of SWM, the current opportunity to buy SWM shares at the ridiculous price of 24.5 cents becomes an absolute no brainer.
As an investor I consider that the first and foremost duty you have is to protect your Capital. It matters little if you hit the lights out on one investment only to lose it on the next one. What SWM offers in spades and what I will discuss more in later posts is the substantial capital protection offered by current market prices whilst still allowing for multi-bagger upside.
Sometimes great stock buys really are as obvious as SWM currently is.
“Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble” Warren Buffett
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