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 

Elon Musk

This post isn't exactly a cigar-butt idea, nor is it timely but nevertheless I thought you might find it interesting. I enjoy reading about truly successful people - and I don't mean the Bondi hipster types. Elon Musk is one such person. A true super star. He walked away with $180m from his share of PayPal and proceeded to invest in not one, but three incredibly risky but potentially humanity improving start-ups: SolarCity, Tesla, and SpaceX. 

What I find even more incredible about this story is that he stood behind the companies with his own and it got to the point where all of his PayPal money was committed to these projects and ended up having to borrow money from friends to pay rent.  That's true grit.

A good interview can be seen here (around the 9.30 mark):

https://www.youtube.com/watch?v=uegOUmgKB4E

Kristian 

Disclosure: no position in the above companies. 

Medibank Private Health Insurance

Medibank has been put up for sale by the Australian government. 

Medibank is Australia's largest private health insurer by Premium Revenue, however it has the second highest Management Expense Ratio (MER) just behind HBF (source: Morningstar). The prospectus has not been published however in my opinion some of the salient points are: 

• Potentially massive opportunity for cost-cutting in the hands of private operators
• Private health insurance is a growing and stable market
• Potential for the IPO pricing to be very reasonable

We need to wait and see what is contained in the prospectus before worrying about things too much. The main purpose of this post is to flag with interested eligible readers to pre-register their interest at the following address: 

https://www.medibankprivateshareoffer.com.au

Pre-registration closes 15 October. 

I will write some follow-up analysis when the prospectus is released. 

As an aside... 

Perhaps this is wishful thinking, but it could be a superb catalyst to help draw retail investors back to the share market. Previous floats such as Telstra and Commonwealth Bank created an army of share investors and it was a great shame to see so many people burned through the GFC process. The government gives out hand outs to entice people into the property market, so why not do the same for share investors. Handing Medibank out at a big fat discount would do the job! 

Kristian

Disclosure: no position in Medibank (but hold a policy)

VIX revisited

I did a very quick post back in June noting the very low VIX level. Since then, VIX has remained very compressed and at very low levels: 

That chart (source: Yahoo Finance) goes back to 1990 and shows that current VIX levels are bouncing along at all time lows. VIX is seen by many as the canary in the coal mine: low VIX = low volatility = high investor complacency = time to be really scared. This has plenty of people worried, including famed deep value investor Seth Klarman who in a recent letter noted the 'bubble in complacency' and cited worrying tell-tale signs of investor behaviour. 

The last time when VIX was ultra cheap for a sustained period was 2004 to early 2007 during the great stock market boom. Shortly after VIX started moving high in lock-step with the stock market wobbling then crashing. The low VIX period before that was roughly 1992 to the early 1996. VIX then moved aggressively higher, so you would guess that the stock market tanked, right? Let's take November 1995 as a data point: VIX 12, S&P500 630. Fastforward to November 1999: VIX has through some savage peaks and troughs moved to 25 and S&P500 has actually moved up to 1400. 

That's almost a two and a half-fold increase in the market (excluding dividends) during a period of rapidly increasing volatility. And that's even after the S&P500 had already risen substantially. 

These are only a few points in history, so it's difficult to make assumptions. I don't work at Renaissance after all. I do however think it's fair to say that low volatility does not automatically mean tough times ahead. Interesting, anyway.    

Kristian 

Boom Logistics (BOL)

Just a short note to say well done to Iona Mcpherson, the outgoing CFO at BOL. Incredibly tough job in an industry experiencing a cyclical down-turn. 

Kristian 

Disclosure: own BOL

RNY Property Trust (RNY): Scuttlebutt Edition

Acknowledgement: this trade idea was presented to me by various colleagues, and is very well documented by Forager Funds. I've honestly no idea who came up with this idea first - however for ethical purposes I want to disclose it is not my original idea. It does however fit my cigar-butt style, and therefore I am an owner of the stock. 

With a stock price of ~28c and NTA of AUD 51c (30 June) the discount-to-value is straightforward to see. There are however issues namely a flat suburban commercial office market in the US, no distributions (and none likely until 2016), restrictive debt covenants and CAPEX requirements  to reduce the vacancy rate. Some of my colleagues think it is a value-trap, and they are potentially correct. I have been a buyer given the big discount, and expecting the discount should close when conditions improve at the fund and a way to get some USD exposure.

I visited RNY following a visit management (RXR Realty) in Long Island November last year, and I also just visited New York / Long Island - not to meet management but to snoop around a bit more to get some scuttlebutt.

Here is some of the information I found:

As background, RNY owns commercial office properties in the suburban markets of Long Island, Connecticut, New Jersey and Westchester. The problem with this geographical spread is that it is still dormant despite inner New York such as Manhattan and Brooklyn performing well (both residential and commercial). The ripple effect for commercial offie hasn't spread out to the suburbs. This appears to be the case across the US, as it appears to be for Australia (I suspect true of many countries).

On the flip side, minimal new supply is coming on-line and developers simply don't build commercial property without securing committed sales or leases. Incentives are still aggressive - even up to 1 year in the case of 5-6 year leases. The consistent message was the commercial suburban leasing market is recovering, but ever so slowly. You're not going to make a ton of money quickly from RNY in the short term due to an influx of new tenants to soak up vacant stock.

RXR have a great reputation on Long Island according to the people I spoke to (who have been dealing with RXR for years). My own observation is that while they appear to be good operators, they have bigger fish to fry (Manhattan) for the time being and RNY is not a high priority until vacancies drastically reduce and/or the re-financing is complete (long story: debt covenants restrict distributions and spending on CAPEX which in-turn is holding back attracting good tenants - a catch 22 that is not easily solved in the short term).

The average cap rate across the RNY portfolio is 8%, however anecdotally I heard that cap rates are starting to compress to less than 8%, although I did not receive firm data to back this view up.

In summary, I didn't find information that was in conflict with RXRs position. This situation could take a while (18 months) to work out, however the share price allows for that. If we do happen to get a strengthening USD and/or improved property prices then the upside is even bigger (or reverse).

Kristian 

Disclosure: own RNY