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Decision Journal
galumay:
We have 3 months of power cuts coming up while the power network is being upgraded, decided to get a proper switch and outlet added so we can run a genset to keep the house powered up. Can buy a cheap genset for $1100 but will probably get the more expensive yamaha at $1700 because of better resale value.
galumay:
Guys of Gove.
Cons- cant find someone to manage business, then 1 of us have to run. (at any time)
- Opportunity cost, if we do this we cant do much else.
- Create debt
- catostrophic risk - one of us dies, town closes, cyclone.
- more work/involvement/stress
- Negative impact on family
- Working with staff
-
Pros - Potential passive income stream
- High return on invested capital
- Possibility of active engagement in both the business & community.
- Providing employment opportunity
- Leverages the line of credit in our IO loan while its still IO.
Alternatives - Do nothing
- Buy more property
- buy commercial property
- potential investment with Putty
- do nothing now, something later
- Buy Phil's business
- Start a similar business from scratch after they leave.
- Invest similar amount in share market.
OTHER THINGS,
- Follow up lease
- Talk to Jess
- Decide on a structure
galumay:
I am starting to come to the view that one of the biggest errors in my investing history has been failing to sell my positions in businesses that have failed to execute in the way I had hoped. My strength has probably been not selling the positions in businesses that have executed as well or better than I hoped.
As part of this thought process I am looking at my personal portfolio and considering how to adjust for this error. In alphabetical order,
AHZ - Should have sold when I realised management interests were not aligned with the business or shareholders. I actually specifically identified this point in time and failed to act. I cant sell now as they are suspended.
CDA - best performer in the portfolio, a multibagger. Should have put more into the position as management executed the turnaround, I did average down a little, but should also have averaged up.
ICU - a stupid exercise in trying to short term trade, something I since came to accept was outside my circle of competence. SELL
KPT - although price has dropped, management executing as planned and remains a long term high conviction postition. HOLD
LPE - ditto, next 4C very important for conviction on postion HOLD
MOC - I have held because of the yield and more recently because of the belief that the financial services sector may be a growth area for the business. SELL
NWH - My big mistake was not averaging down when NWH went to 20c, as I did in the SMSF. Still a strong HOLD
SND - Should have sold when the business failed to execute, still possible its able to turn around and need to look at H1 report when it comes out.
VRS - bought too early, position size is so small its probably not even worth exiting.
galumay:
Thinking I should sell ADA, they released a profit guidance for the FY with a projected drop in profit of around 25%, management are abjectly failing to execute and in the past I have held businesses like this waiting for them to turn around. This time I think its time to sell, can always buy back in later if they do manage to start running the business profitably. The adjusted IV based on drop in EPS would be at or below current price.
Well missed out on the sell, tryed to get out at $1.45 this morning but the bottom dropped out of the market, they are now under $1. Now my inclination has flipped to thinking they may be worth averaging down at below $1. $1 would be around the IV if EPS drops by 30% this year. The choice is between selling and losing $15k now, or averaging down with another $5k which would leave me with a $32k investment worth $15k, or holding at an average of $2.25
Averaging down doesnt make sense, doesnt reduce the average price much and just commits more capital. So its sell or hold!
Well the price keeps dropping and the averaging down is starting to become a consideration, on a value point of view, if I assume a drop in EPS of 35% this year, i get an EPS based IV of around 90c, given that its trading at under 80c now, that is a further 10% margin of safety.
In terms of averaging down, it brings the average price down to $1.78
Can now average down at 68c and bring the price to $1.65. That means they would still have to more than double for it to be profitable.
galumay:
Looking at starting to build a position in a new business, Global International (GLB). It is an Australian company, that is a global producer and distributor specializing in purpose-built apparel, footwear and skateboard hardgoods (decks, wheels, trucks, etc.) for the boardsports, street fashion and workwear markets with products sold in more than 100 countries worldwide. Founded in 1985 by three Australian brothers, Globe International�s core business is divided between proprietary brands, licensed brands and distributed brands.
It meets many of my investing criteria, it has a superior ROE, strong free cash flow, no debt, owner run and managed with the 3 brothers holding about 70% and the top 20 holding 90%, growing revenue and earnings, stable share count with no issues since float, an executive management scheme based on cash payments which i prefer to issuing shares, or even worse options. (the brothers took no salary at all for many years after floating in 2001) Its also cheap by any metric, trading around $1.75 i have a range of intrinsic value between $2.70 and $2.90. Its on a p/e of 8.5 and E/EV of 12.75. NTA is over $1 ROE is around 20%.
Its an easy business to understand, and while fashion is not a popular industry these days, good businesses with good management can prosper in this space.
So why is it so cheap? The long standing chairman passed away suddenly, he had been with the company for 14 years and as a older and very experienced businessman, was a contrast to the young entrepreneurial founders of the business, but that event didnt seem to impact the price much. Also his replacement would appear to be equally qualified, experienced and competent. The main drop in the last 12 months was after the � yearly report which showed growth in earnings and revenue, but extrapolating those results would see less top line growth for the full year after a stellar 2017-18. So maybe its cheap because the market doubts its ability to continue to grow at the historical rate of the last 5 years. The illiquid nature of the company also means its more volatile and this would explain the sharp fall on the HY1 results.
No doubt operating in the retail clothing sector also makes it out of favour in the current climate, add youth fashion as a sector and there is probably even more (deserved) nervousness about the business.
So what can go wrong? The biggest risk seems to me to be simply the capricious nature of youth fashion, they could quickly find themselves just as uncool as they have been cool historically. Also a severe economic downturn probably effects this end of the clothing market more as its more discretionary than basic clothing. Poor capital allocation or management missteps is another risk, but both look unlikely based on the track record and amount of skin in the game. There is also some FX risks and exposure to economic circumstances in their global markets - but equally there are not insignificant opportunities from the same.
One thing to look at was what has gone wrong in the past, 2013-14 were tough years with losses recorded, looking back it was a less diversified business and there were substantial costs with growing the business and some heavy impairment charges that made marginal earnings report as significant losses. Its worth noting that even though profit was marginal and revenue base was 33% less than today, the share price was still over $1.35.
An interesting insight out of researching the old reports, in 2014 management had 2 strikes in voting on renumeration, management as holders of over 70% of the votes couldnt vote in the second renumeration vote and subsequent spill motion! So a tiny minority of shareholders were able to force a spill of the board! Of course the subsequent vote where management were able to exercise their votes, they were basically unanimously re-elected. Only 6 shareholders voted against it. It seems that Solomon Lew might have been the activist fiddler! He held about 6% It does highlight an issue I had never considered with companies where the directors hold most of the shares - activist shareholders have the potential to cause significant annoyance!
That leads to a probalitic consideration, it seems not unreasonable to assume the downside for the share price would be at worst the previous lows when it was a smaller business making a loss - around $1-35, which represents a drop of around 25% from current price. On the other hand a move towards the range of IV i have for the business sees an upside of at least 50% - and thats without any meaninful growth in revenue, profits or cash flow. So whats the liklihood we might assign to things going tits up? In such a well run business with no debt and hands on, skin in the game management I would have thought maybe 30% chance, so 30% * $1.35 = 0.41c + the chance that the business will at least tick along as is and no bad news seeing a close on the IV, I would think that is a 60% chance, so 60% * $2.80 = $1.68 and maybe a 10% chance of a strong increase in metrics and the IV being exceeded, so 10% * $3.00 = 0.30c for a price expectancy of $2.40 which makes $1.75 look reasonably cheap.
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