Venture Life Share Discussion Threads

[apad] 30/9/2016 07:46

Dropped PER altogether FreeCashFlowYield from now on.

LLOY might follow Deutsche into red's buying territory this morning.

Not going to follow PTSG down, but I do think it is overdone.

apad

[valustar1] 30/9/2016 01:22

Made my last top up on BVXP the other day. Now my largest holding by a margin. The combination of growth, strong cash flow and yield is compelling.

Challenge now is to find a similar stock. Does anyone have any suggestions. Up until now I have not found anything to match BVXP.

[apad] 29/9/2016 23:16

FreeCashFlow
Yield
BVXP 1143 3.54%
ABC 843 1.87%
FEVR 999 0.85%
BOO 104 0.39%
HLMA 1047 2.85%

apad

[apad] 29/9/2016 22:37

Fundsmith, my fund management business, celebrated its fifth anniversary in the past month. What have I learnt over the past five years of running the fund?
One thing I have observed is the obsession of market commentators, investors and advisers with macroeconomics, interest rates, quantitative easing, asset allocation, regional geographic allocation, currencies, developed markets versus emerging markets — whereas they almost never talk about investing in good companies.
It seems to me that most of these subjects pose questions to which no one can reliably forecast the answers, and even if you could the connection to asset prices is tenuous at best. Take GDP growth — few things seem to obsess commentators more, yet no one has ever managed to demonstrate a positive correlation between GDP growth and stock market performance.
Invest in something good
What has continued to amaze me throughout the past five years is not just this largely pointless obsession with factors which are unknowable, largely irrelevant, or both, but how infrequently I hear fund managers or investors talk about investing in something which is good. Like a good company with good products or services, strong market share, good profitability, cash flow and product development.
I suppose I had assumed that the credit crisis might have taught them that you will struggle to make a good return from poor-quality assets. No amount of CLOs, CDOs and the other alphabet soup of structured finance managed to turn subprime loans into a good investment. When the credit cycle turned down, even the triple-A rated tranches of these instruments turned out to be triple-Z. There’s a saying involving silk purses and a sow’s ears which encapsulates the problem.
I am not suggesting that there is no other way of making money other than to invest in good companies, but investing in poor or even average companies presents problems. One is that over time they tend to destroy rather than create value for shareholders, so a long-term buy and hold strategy is not going to work for them.
A more active trading strategy also has its drawbacks. Apart from the drag on performance from trading costs, it is evident from the performance of most funds that very few active managers are sufficiently skilled to buy shares in poor companies when their performance and share prices are depressed, and then sell them close to their cyclical peak.
Another obsession I have been surprised about is that with “cheap” shares. I have been asked whether a share is cheap many more times than I have been asked whether the company is a good business.
This obsession often manifests itself in the critique of our strategy which goes something like, “These companies may be high-quality, but the shares are too expensively rated.” This is almost certain to be true, as from time to time the share prices are sure to decline, but it misses the point. If you are a long-term investor, owning shares in a good company is a much larger determinant of your investment performance than whether the shares were cheap when you bought them.
Ignore the siren song
A fairly obvious lesson, but one I have re-learnt, is to stick to your guns and ignore popular opinion. I lost count of the number of times I was asked why we didn’t own Tesco shares, or was told that I had to own Tesco shares when our analysis showed quite clearly that its earnings-per-share growth had been achieved at the expense of returns on capital. In fact, its return on capital had deteriorated in a manner which pointed to serious problems in Tesco’s new investment in areas such as China and California.

How investors ignored the warning signs at Tesco

Since starting Fundsmith the stock which I have most frequently been asked about, and implored to buy, is Tesco.
Similarly, it is important to ignore the siren song of those who have views on stocks which you hold, particularly if they are based on prejudices about their products. I also lost count of the number of comments I read about how Microsoft was finished as it “wasn’t Apple”. This included one investor who rang us to ask if we had seen the quarterly numbers from Microsoft which were not good. (It was tempting to respond saying No, of course we had not seen the quarterly results for one of our largest holdings and thank him for pointing this revelation out to us.)
He said we would face questions at our AGM if we still held the stock then. It was of course just one quarter and the stock more or less doubled in price after that. Sadly no question was raised at the AGM.
Stick to the facts
Another of my observations is that impressions about stocks are often formed erroneously because people do not check the simplest facts. Sometimes they simply relate to the wrong company.
We topped up our stake in Del Monte, a processed food and pet food business, on some share price weakness which resulted when a news service carried an article that dock workers in Galveston had gone on strike and so had stopped Del Monte’s ships being unloaded. The company it was actually referring to was Del Monte Fresh Foods, which imports tropical fruits like bananas and pineapples, not the one we were invested in. Or the client who contacted us to say how concerned he was about our large holding in Domino’s Pizza since the chief executive and chief financial officer had left. They had left the UK company, but we owned the US master franchiser.
I would be hard pressed to name the least well-understood subject in investment given the wide choice available, but I suspect that currencies is among the leaders. Over the past five years I have heard lots of people talk or ask about the impact of currencies in a manner which betrays a complete lack of understanding of the subject. The commonest question or assumption about our fund is the impact of the US dollar, since the majority of the companies we have owned since inception are headquartered and listed in the US.
This makes little or no sense. A company’s currency exposure is not determined by where it is headquartered, listed or which currency it denominates its accounts in. Yet this does not seem to stop people assuming that it does and making statements about the exposure of our fund to the US dollar, based on where the companies are listed.
We own one company which is headquartered and listed in the US, but which has no revenues there at all. Clearly this assumption would not work very well for that company, any more than it would work for the UK listed company we own which has the US as its biggest market and which, perhaps unsurprisingly, reports its accounts in US dollars.
Nor could we understand the reasoning of the commentators who wrote that our holding in Nestlé had benefited from the rise in the Swiss franc. How? Ninety-eight per cent of Nestlé’s revenues are outside Switzerland. It may be headquartered and listed in Switzerland and report in Swiss francs, but the fact is that a company’s currency exposure is mainly determined by where it does business. In Nestlé’s case the Indian rupee is a bigger exposure than the Swiss franc.
Does anyone read accounts?
I have also discovered that hardly anyone reads company accounts any more. Instead they rely upon management presentations of figures which often present “underlying221;, “core” or “adjusted̶1; numbers. Not coincidentally, the adjustments to get to the core or underlying numbers almost always seem to remove negative items. Reading the actual accounts bypasses this accounting legerdemain.
We have also discovered mistakes in accounts which no one else seems to have noticed. Like the $1.8bn mistake in the IBM cash flow. This alone did not prevent us investing in IBM, but it helped to support our conclusion that hardly anyone reads its accounts thoroughly.
Don’t sell good companies
I have also learnt that selling a stake in a good company is almost always a mistake. Take Sigma-Aldrich, a US chemical company based in St Louis. It supplies pots of chemicals to scientists around the world who use them in tests and experiments. Its financial performance fitted our criteria, as did its operational characteristics — supplying 170,000 products to more than a million customers at an average price of $400 per product. It fitted our mantra of making its money from a large number of everyday repeat transactions, as well as having a base of loyal scientists who relied on its service.
It was a predictable company of exactly the type we seek. That was until it was revealed that it was trying to acquire Life Technologies, a much larger company which supplies lab equipment. Given the execution risk involved, we sold our stake. As it happens, Sigma-Aldrich did not acquire Life Technologies as it was outbid. But having gone public on its willingness to combine with another business, it was in no position to defend its independence and succumbed to a bid itself from Merck at a price about 40 per cent above the price we has sold at.
Selling good companies is rarely a good move. The good news is that we don’t do it very often.
Our best share
The best performing share contributing to Fundsmith’s performance over the past five years was Domino’s Pizza Inc, with a return of over 600 per cent from the initial stake purchased on the day the fund opened. What might we learn from this?
● People often assume that for an investment to make a high return it must be esoteric, obscure, difficult to understand and undiscovered by other investors. On the contrary — the best investments are often the most obvious.
● Run your winners. Too often investors talk about “taking a profit”. If you have a profit on an investment it might be an indication that you own a share in a business which is worth holding on to. Conversely, we are all prone to run our losers, hoping they will get back to what we paid for them. Gardeners nurture flowers and pull up weeds, not the other way around.
● Domino’s is a franchiser. If you regard a high return on capital as the most important sign of a good business, few are better than businesses which operate through franchises, as most of the capital is supplied by them. The franchiser get a royalty from revenues generated by other people’s capital.
● Domino’s has focused on the most important item for success in its sector — the food. This is in sharp contrast to other fast food providers, such as McDonald’s, which are struggling.
● Domino’s is mostly a delivery business. This means that it can operate from cheaper premises in secondary locations, and so cut the capital required to operate compared with fast food operators who need high street restaurant premises.
● Domino’s was owned by Bain Capital. Like a lot of private equity firms, Bain leveraged up the business by taking on debt to pay themselves a dividend before IPO, so it started life as a public company with high leverage. This can enhance equity returns. In a business which can service the debt there is a transfer of value to the equity holders as the debt is paid down and the equity is de-risked. Please note — this does NOT indicate that leverage always enhances returns.

[apad] 29/9/2016 21:26

I see that they have a contract with RSW and a recent director sale. Good timing mod.
apad

[modform] 29/9/2016 20:48

Red, it looks like my punt on SOLI post brexit was a snip.Do you know what happened to that guy whom you went to SOLI agm, Matier I think

[apad] 29/9/2016 17:09

Good point, janeann.

Terry Smith "Accounting for Growth" now reading. Very well worthwhile.

apad

[janeann] 29/9/2016 15:41

Popularity of sage is waning especially amongst smaller companies as there are a range of good rival cheaper software packages around - many being recommended by local accountants

[petersinthemarket] 29/9/2016 15:32

Q: what is black and white and read all over?

Questor, 28 Sept 2016, Wednesday Column, has changed approach to stock tips. Now only going for investment professionals who have significant skin in the game. Key features: Quality of management, effective and sustainable barriers to competition, return on capital, profits in hard cash rather than derived from accounting tricks, low debt. In effect, high incoming cash flow internally invested at high rate of return. The valuation yardstick will be PE ratio. Recommended professional investors: Terry Smith of Fundsmith, Nick Train of Lindsell Train, Sebastion Lyon of Troy Asset Management, Hugh Yarrow of Evenlode. Nick Train has a large personal holding in Finsbury Growth & Income Investment Trust, Terry Smith has a holding in Fundsmith Equity Fund, Sebastion Lyon has a holding in Personal Assets Investment Trust, Hugh Yarrow and family members have holdings in Evenlode Income Fund. As an aside, all above funds have stakes in Sage Group.

[apad] 29/9/2016 14:39

From a Paul Scott comment:

"bobo 1:24pm
(show/hide) 11 of 14
Filtronic. I once x8 my money on this and then halved it. Too many massive orders, operating in technology on the borderline (I know I worked for them and looked at their processes) , best avoided."

[apad] 29/9/2016 14:35

"“Weir: Consensus Underestimating Recovery Potential – OW”, within Capital
Goods, US oil services exposed Weir is our top pick as we are 11%/33% ahead of
consensus estimates in 2017/18. This is on the back of a recovery in mining
replacement capex but also an inflection in 2017/18 in US oil rig count, to which
Weir is 88% correlated. Oil prices drive rig count, rig count drives Weir’s O&G
growth and margins track growth. We see today’s announcement as a clear
positive catalyst for Weir’s O&G business. Our US Oil Services team forecasts rig
count growth of 71.6%/58.9% for 2017/18, which supports our above consensus
recovery in O&G division orders."

apad

[apad] 29/9/2016 13:44

Long and winding road, mod.
I like the language, but couldn't find it on Fiercepharma.
Good luck.
apad

[modform] 29/9/2016 12:29

Apad, I have a small holding in REDX from 38p, and bought it on (as usual) increased volume and a rise in share price The company had a rns out a few days ago regarding "a breakthrough", which may pay off in the long term, or just disappear in thin air. I have taken a gamble on it, highly speculative imo....

[apad] 29/9/2016 10:51

CLLN in sympathy with Capita warning (how are the mighty fallen!), so a sector issue. Buy if looking for income and can take the pensions issue.
I used to own Capita but decided it was too UK centric at just the wrong time.

Only interested in FTC as a nostalgia issue - it bought me a house!
I appreciate your research dacian. Ta.

Sold my last tranche of MCON. Good company but still under the sector cosh and lightly traded. Like watching paint dry so switched into BVXP for excitement.

I see GDWN has slumped back into the planet Moribund. I'm starting to dislike this company that I know is a class act!

apad

[petersinthemarket] 29/9/2016 10:47

sold ftc at a small profit - seems solid enough, but a bit too slow for me. pete

[petersinthemarket] 29/9/2016 10:14

tstl is away again this morning

[apad] 29/9/2016 09:15

Increased BVXP.
apad

[apad] 29/9/2016 08:06

Or too much director ownership, H. e.g. PTSG :-)

My point about TSTL, H, was that it is not necessarily overcooked (doesn't mean that the share price won't be volatile) it has a lot about it that is hard to value, but management are on their best behaviour. My average buying price is 99p so I get a 3.3% Yield. The current yield is 2.05%, which is great for a tiddler with potential and support from a major shareholder.

Artificial, oil price inexplicably boosts the like of WEIR and ROR, as expected!

apad

[hydrus] 29/9/2016 07:37

CRAW agreed - shockingly bad performance in LFL. My error there, cost me 25% of my overall investment before I got out. Lessons learnt:1) stick to my principle of high director ownership - CEO never bought a share which always bothered me2) try to keep to a level of ongoing research even when busy - tricky but important and could have helped with CRAW3) accept I will make mistakes - not possible to avoid them

[hydrus] 29/9/2016 07:20

Lauders I have no idea about the markets but I always keep some cash available for bargains should they arise. PVG is different from the other companies in that it makes no profits and hasn't been re-rated. It is speculative and is not yet a high quality company with multiple years of growth behind it. The price increase at PVG has been news driven. It's very illiquid so if there is bad news or the market crashes it would be hard to sell. However, equally if there is good news it's hard to buy.

[lauders] 29/9/2016 01:59

Hydrus - I am interested in PVG and have been keeping an eye on it. Do you have the same view of them as per the other companies mentioned in post 6638? There is a prediction of a huge crash coming anytime now and it may be wise to have cash ready IF such a thing becomes fact. On another board (Ag BB I think it was) someone posted a bit about Warren Buffett having so much cash on the sidelines now that he must be convinced we are in for a big fall soon. I would like to think I might have the funds and bravery to buy some or all of these in such a scenario: TSTL, PVG, BVXP, AMS at least. Doubt I will have funds though!

[hydrus] 28/9/2016 22:32

It's a good company, I hold. Doesn't mean it's a good investment at any price. It's not 90p - if it was I would have a different view.

[apad] 28/9/2016 22:19

I wouldn't bet the farm on that one H.

There are more than the US initiative and the firm is innovative.

TSTL is up 10% YTD and has been working through the reaction to the hyped rns scam.

Plenty of support around 140p.

Sudden share moves like July's 90p are startling but inexplicable and I view them as an increase opportunity.

apad