Culling my watchlist

School Speciality (SCOO)

Sells furniture, supplies and learning models to schools (link). This idea went on my watchlist on Feb 23, 2018 because Alluvial Capital discussed it in their Q4, 2017 letter (link).

School Specialty is as about close to an ideal Alluvial holding as a stock can be. The company is small, with a market capitalization of just under $120 million. Trading liquidity is minimal, with a handful of funds controlling the large majority of shares outstanding. And the company is boring, operating in the lowgrowth school supply industry. Scissors and glue, dodgeballs and desks. School Specialty went through bankruptcy and emerged in 2013. Since its emergence, the company has focused on maintaining sales, improving efficiency, and controlling costs as school district budgets remain constrained. The company has also focused on improving its working capital management, freeing up millions from inventory and net receivables.

The company has an operating margin of < 3%, long term debt of $128 million, $7.9 million in cash and $105 million in equity. A low margin business with high debt is not something I would like to dig into.

Cimpress N.V. (CMPR)

Cimpress does “mass customized” printing (businesses) i.e., customized printing at mass produced prices. They claim to do this by “sophisticated software and carefully architected configuration options”.

While reading on the business I kept asking myself this one question: will I know if the business became uncompetitive? I don’t think so. Pass.

Carrols Restaurant Group (TAST)

The largest Burger King franchisee in the world. Owns and operates more than 800 locations under the Burger King brand.

The company has paper thin margins. Looking at Q1-3’2018 results (9 months), the company had net income of $8.2 million on sales of $871 million. This is < 1%. The company seems to be taking on debt to acquire more and more Burger king shops. The long term debt went from $160 million in 2013 to $281 million in 2017.

Too much debt, thin margins and a debt fueled expansion is not my idea of a good investment.

Coty Inc (COTY)

Coty has the entire gamut of personal care and beauty brands. It is the third largest beauty brand in the world by sales.

Our three divisions – Luxury, Professional Beauty and Consumer Beauty – are home to iconic global brands and much loved regional brands. Luxury is focused on prestige fragrances and skincare; Professional Beauty is focused on servicing salon owners and professionals in both hair and nail; and Consumer Beauty is focused on mass color cosmetics, mass retail hair coloring and styling products, body care and mass fragrances.

The company has grown revenue at a healthy clip. It went from a revenue of $4b in 2011 to $9.3b in 2018. Long term debt, on the other hand, has also grown from $2.5 billion in 2011 to $7.3 billion in 2018.

We anticipate that we will incur a total of approximately $1.3 billion of operating expenses and capital expenditures of approximately $500 million in connection with the acquisition of the P&G Beauty Business.  — annual report 2018

Coty merged with P&G beauty and in the acquisition press release things were quite a bit rosier.

Coty expects to achieve total cost savings of approximately $750, million or 16% of acquired revenues, through the transaction composed of: initial synergies, reflecting P&G costs that will not transfer, of approximately $350 million; and incremental cost synergies, to be recognized over four years, of approximately $400 million, achieved through a range of efficiency opportunities that the combination of the two businesses create.

It is questionable if being big helps you in selling more products or selling them at higher prices. Maybe there is some cost savings on the manufacturing and the supply side. You may also be able to squeeze some margin out of the outlets that sell your product. But, none of this creates much value in the end. Is it a win-win for customers and the business? Probably not. I don’t think the “synergies” are passed down to the consumers. Actually, cost saving in manufacturing may reduce quality. PASS.

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Review: 2018

This is what my portfolio looked like at the beginning of 2018.

chart

This is what it looks like at the end of 2018.

chart (1)

A few changes that immediately jump out are:

  • I am completely invested at the end of 2018. Since I started dabbling with investments, I almost always had ~ 25% cash. I liked to keep cash because I thought of using it when the markets crashed. I was completely invested in 2012. And, crash or not, I am completely invested now.
  • I went from holding 14 stocks to only 7. I like to think that this is a by product of discipline and not buying things I do not understand. A lot of companies that I was holding at the beginning of 2018, I will never invest now. For example: Silverchef, LSL Properties, Rolls-Royce etc.

At the end of the year, I am holding the following companies.

  • GOOG: I can’t add to what has already been said many times about the significant moat Google has. In my opinion, YouTube is a significantly undervalued business and cloud/self-driving are some bets which might pay hugely. On top of this, Google sells cheaply for a cash adjusted forward PE multiple of 19 and grows at ~ 20%. If you compare Netflix & YouTube, you can ballpark how much YT is worth. People watch ~ 1b hours of YouTube per day! I estimate the value of YouTube to be at least $200b.
  • Facebook: Lots of bad news this year. The stock got hammered and I was able to correct my mistake of not buying FB at ~ $25. On the plus side, now they have a proven business model, make a lot of money, have $40b in cash and grow at ~ 40% YoY. Currently, FB sells at cash adjusted 18 times forwards PE. This is even cheaper than Google & FB grows more quickly.
  • Hikma Pharmaceuticals: I bought Hikma in March after it got kicked out of FTSE250. This is an owner operator and the family owns ~ 25% of the shares. They have three equal sized businesses: Branded Generics, Generics & Injectables. The bad news coming from the Generic segment drowned out the performance/moat they have in Injectables. The company just became too cheap to pass up. I invested big and luckily the stock appreciated by over 50% in the next few months.
  • Apple: Started buying again when the stock sold off in December. I bought it one day before the China sales warning. The thinking here is simple. They have a great eco-system. Their position wrt privacy is a source of moat which no other Software/Hardware companies offer and the products they design & sell are well thought out and a joy to use. The Watch 4 is getting rave reviews and I am not going to pass off a company like this selling for < 12 times earnings.
  • Booking: Booking has built an OK moat in hotel bookings in Europe. I started with AirBnB but have found myself using Booking more and more. One of the major reasons is that you get an immediate confirmation of your booking. Furthermore, the app/website is quite intuitive and easy to use. Unfortunately, Booking still competes on price and face significant competition from Google/AirBnB and also meta search engines like Trivago. This will never be a > 5% position for me.
  • BRK: Berkshire should be able to return 10% a year. And, I plan to keep this position as a safe holding.
  • DNOW: A well run company selling cheaply. This is the only company in the portfolio that I understand the least. But, I like the management and I like the numbers. It is a marvel to see how they manage working capital during downturns!

In order of things I would sell, if push came to shove, are: BRK, DNOW, BKNG.

Changing the process (2017)

In the last few years, I have suffered from one major problem: too many positions. The average number of positions that I have held is approximately 15, while my ideal number is 8 — twice as much! My dissonance arises chiefly from the oversight that this was not a number I was overly concerned about. My guiding philosophy was more akin to a collector. Once I decided that I want to own a stock, I would justify buying it and pay no attention to the relative valuation of the stock compared to the stuff I already own.

I have decided to change.

Interestingly, the motivation to change comes from the travel vloggers that espouse minimalist living. One of the actionable advice is to only buy things as a replacement for something you have. In particular, if you want to buy something, you need to throw out something else that you already own. I don’t want to be that dramatic but I would like to have more discipline when buying stocks.

In particular: the maximum number of positions that I will allow myself to have is 10, ideally aiming for 7.

I currently hold: Google, Hikma plc, Berkshire, Facebook, Distribution Now, Altius Minerals, Silver Chef, and Cheesecake Factory.

Monthly update: April 2014

April End - Cash report

I sold all of my Lancashire position at a small loss. It was not clear to me why Mr. Brindle resigned as the CEO of the company. I did not like the level of uncertainty when the stock is selling at 1.5 times book. I am sure that the Mr Brindle must have incorporated a value based philosophy in the entire organisation — but without him, I would never buy at these prices. The inevitable conclusion is that I should hold or sell. I felt more comfortable selling.

I added to Kinder Morgan (KMI) and Tesco (TSCO.L), while getting rid of my Land’s End (LE) holdings. All in all, a very subdued month.

2013: Year in review

This post will be updated again later.

This was a transformational year for the way I think about investing. This had some drastic effects on my portfolio. In particular, I sold almost everything I did not have a good grasp on.

This year I started with 50% cash in my portfolio and it has built up through the year. I now have 70% of my portfolio in cash.

Meanwhile, the portfolio value has gone from 75,000 at the beginning of the year to 115,000 at the end. Taking out the 20,000 cash which I put inside the portfolio, the performance has been close to 20%. Interestingly, given that I was only 50% in stock, the performance has been more like 40%. But this probably is cheating.

Mental dissonance

I had ended up owning stocks which I did not necessarily believe in but stayed invested because of several reasons — which can be likely be grouped under the term “bullshit”. I was coat-tailing in some (BAC, SAN) and hoping for a turnaround in others (FTE, EOAN).

I was reading this excellent blog by Prof. Sanjay Bakshi and came across the case of “three legged stool” [read it here]. I have suffered from this fallacy for a while now.

Today I decided to sell every company in my portfolio that I did not understand or had done insufficient research on to justify an investment. Bank of America, Banco Santander, Orange and E.On for example are too big and convoluted to get a clear picture of. In case of E.On and Orange — the management does not seem focussed on creating shareholder value.

I now own the following companies: Fortress, Tesco, Altius, Weight Watchers, Nam Tai, ArcelorMittal, Intel, Bouygues, CAF and PostNL.

I have decided to add an item on my investment checklist. Draw a line, which if crossed will qualify the position to be sold.

I also sold PostNL, mainly because they have decided to sell their TNT stake to shore up their balance sheet. This destroys the margin of safety for which I invested.