Australasian Wealth Investments (AWI)

I noted today that Andrew Barnes resigned as a Director of AWI. Mr Barnes was Chairman of AWI when the company bought van Eyk Research, which subsequently went bust. It is very rare for management to admit to mistakes, so it is commendable that Mr. Barnes has chosen to do so publicly. 

Kristian 

Disclosure: no position in AWI

Hastings High Yield Fund (HHY)

As noted a few times, one of the mandates I gave myself in this blog was to examine previous trades, including trades not taken. As a stock market investor, I see my job simply as to produce low-risk alpa as cheaply as possible; just like a German car manufacturer aims to produce quality cars while always minimising cost. So to do that, part of my process is to analyse past decisions and see what could be done better.  

The purpose of this post is to conduct a postmortem of my decision on HHY. 

I bought and sold HHY last year and made zero profit. 

My last note on HHY was September 2013 and the price was then 37.5c, so let's use that as the base line for analysis. 

HHY is now 17.5c, however there have a been further capital repayment of 3.59c (ex 24 September 13) and 25.8c (29 July 2014). The Internal Rate of Return (IRR) of what I have left on the table is 27.4% p.a. That's huge!

HHY has performed has a lot better than expected: it has chunked out lots of capital return quickly, thanks to the repayment of the Maher Terminals investment which I may or may not have determined might occur if I did more homework. So while I knowingly left money on the table, I had no idea I was leaving 27.4% p.a. behind. 

Anyway, from a return perspective, I made a mistake. 

From a risk perspective, I feel a little better about my decision. Looking back at that last post, my decision to exit was based on not being comfortable I would not get the return I want if everything did not work out fine and not having a big enough position to warrant the time to get to know the underlying investments better. 

To minimise risk, one approach that has worked very for well me has been to pyramid into positions... I buy a bit if my initial research stacks up, a bit more as I get more comfortable and keep buying all the way up to my target allocation. This has the dual benefit of helping to overcome paralysis by analysis (I actually tend to get on with my decision a bit quicker now as I'm only starting with a smaller stake) and if I realise I am wrong after doing further research, the overall % damage to my portfolio is very small. The flexibility of fluidity in my decisions has been a fantastic addition to my investment process. 

So I was clearly wrong to dump HHY on the basis of having a small position. This ought to have been the trigger point to do more research and buy more stock if I believed the story was sound, and not just flippantly say I can spend my time better elsewhere. 

This is not the first time I have left a stock because I didn't think the upside was enough only to be surprised by how well the stock performs. AIX and GPG come to mind immediately. So perhaps, I need to get a little better at trust, which also means doing more homework. Often cigar-butts are not massively underpriced, but underpriced just enough to be of little interest to people yet actually provide solid returns. 

And to be honest, one of my personal problems is I get bored with situations. Often, the better thing to do is be patient and just walk away and let competent management do it's thing. 

Kristian 

Disclosure: no position in HHY

Harness Asset Management - HAM!!!

It is with pleasure I can announce the launch of Harness Asset Management today (Friday 7 November).

Harness is being founded by my friend and fellow value sleuth, Nigel Littlewood. The investment committee is made up of Nigel, me, Matthew Kidman and Paul Hinds. A bunch of pretty hard headed value guys with our own money in the game.

The business is founded on value investing principles and a culture of prioritising the interests of clients ahead of our own. 

The fee structure is focussed on being rewarded for performance. Harness is open to investors who qualify as wholesale investors only. Please see the website for more details www.harnessam.com.au

Have a great weekend... 

Kristian 

Devine (DVN)

I own DVN and was doing well until the recent volatility caused me some sweaty moments. With small-caps, every now and again you see a monster sell-down in price on almost no volume. I'm getting better at buying very aggressively when a stock I know well does this, although in the case of DVN I already had my full allocation. I can think of 4-5 stocks straight off the top of my head that have dropped 20%+ when the price was already cheap and then watch the stock rebound sharply. 

We think DVN has been volatile thanks to no news flow about the sale of the company since August. During that time, we understand a lot of parties have expressed interest in the business and a tender process has been underway. But without any actual news from the company itself, investors would understandably be flighty. 

The profit guidance was on balance positive and is consistent with improved conditions. Note, my reason for buying in the first place was a big discount to NTA and a turn-around in positive news. The proposed sale of the business was good fortune. But the main driver for the share price in the short term now is a potential sale and the company anticipates a result, if any, will be completed by the end of the CY. So not long now. 

Should the sale fall over, DVN is still trading well below NTA and conditions look okay. So while the price will probably fall, I don't anticipate it being a disaster. On the upside, there could be as much as 30-40c. So on a current price of $1, that continues to look pretty attractive to me. 

Kristian 

Disclosure: own DVN

Noni B (NBL)

NBL was a trade I was hoping to make a return of 3-4 times. I came out break-even! Pictured above, NBL is a struggling woman's clothing retailer with sliding sales and an even greater sliding share price. See the share price graph below from 2010 to now:

The stock has been dirt cheap on a historical basis (e.g. at 50c, the market cap is $16m v 2014 sales of $112m), but in my opinion quite rightly so - the company has just not 'got it right' and as revenues have slipped, the effect on the P&L has been magnified thanks to a high fixed cost base. Feedback I have received is that introducing the more expensive but brand-equity devoid name Liz Jordan into the stores has not worked, the company still uses local (and therefore far more expensive suppliers ) and poor inventory purchasing. So couple that with a deteriorating balance sheet, it was/is conceivable the company could go bust.

I got interested in NBL when some opposing white knights came on to the scene, namely Alceon and Gannet Capital. Gannet is run by Glen Poswell who I have met previously and strikes me as a seriously smart operator. Alceon made a takeover bid for all of the company while Gannett subsequently bought a blocking stake and proposed that the company stay listed so shareholders could choose to participate in the turnaround of the company, touch wood.

I wanted to hold-on to NBL to hopefully earn a multi-bag return through the turnaround of the business. In simplistic terms, take the market cap of $16m plus a capital raise of ~$10m would bring the effective entry price to $26m. Conceivably, with some inventory cost cutting and a turnaround in sales, EBITDA could be ~$8m and applying a multiple of 10* could see the market cap eventually move up to $80m excluding any dividends paid along the way. Yes, the company could go bust however with at least one of the white knights likely to win the day, I didn't judge that probability as high.

And I personally think the Noni-B brand name is actually pretty strong with middle(ish) age women in Australia: it has been around for a long time, has been fairly consistent in its model and has high brand name recognition. We visited some stores around the Sydney region and concluded the stores looked clean, appropriate and respectable. It reminded me a little of visiting Coles in 2007 (when Wesfarmers was in the process of taking them over): they just need to put some more of the right stuff on the shelves!

Anyway, the original condition of the Alceon bid had a minimum acceptance of 90%. Gannett had managed to get ~11% of the share register and therefore enough to block the original bid. However that condition was waived by Alceon which basically removed hopes that Gannett could win the takeover. So where we now stand is that Alceon has an offer of 51c and has 62% of the register. Sure, a higher bid might come along but I don't think that's likely (read the bidders statement...). A bit annoying, but the main point was that risk was managed. I recently sold.

Kristian 

Disclosure: no position in NBL