We love writing about industries with structural concerns, we have done it before and we’ll do it again. But we don’t like investing in them.
Consolidation in a sector often brings share price appreciation but also masks the more worrying long-term reason why it had to occur in the first place. Some consolidation enables companies to marry technologies or geographies to expand the opportunities in a growth market. Those we like.
There was an example this week with international stock Atlassian vending one of its technologies into a competitor’s business and then taking an investment in order to create a better outcome in a fast-growing space. But others occur because companies are getting desperate for growth, or have already run out of growth and cost cutting or taking out a similarly flagging opponent is the only solution remaining. These we don’t like. There may be short-term earnings benefits but long term it’s back to the normal long decline....
Glennon invests in Australian small and micro cap companies, most of which have earnings, prospects of growth and a valuation that makes them attractive. We stick mainly to industrials but will invest in resource stocks but prefer them to have earnings or a clear path to earnings.
For a small portion of the fund we believe there is room for investments of a more speculative nature. As with any equity investing not everything works out, and perhaps the failure rate is higher amongst companies lacking earnings in the short term, but the opportunity to add return through the incubation of strong concepts is something to encourage. Pretty sure Google, Amazon, Apple and Microsoft didn’t make money when they started out.
We’re not talking throwing darts against a wall and hoping to snag a couple of winners … because that option is there based on the enormous number of micro cap opportunities that come through our doors each week. Some of these are directly into listed equities, some via pre-IP...
This week we caught up with Collins Foods post their FY18 profit results announcement and expressed a warning to them to be more vigilant when monitoring the analyst forecasts in the market. We don’t own Collins Foods but have followed it closely for a number of years and it is pretty clear a decent result got a negative share price response because a number of brokers were simply too bullish. Consensus was too high (by 8% - a pretty big error). The shares fell.
One broker was pretty much spot on, suggesting either better analysis or perhaps better communications with management. Probably a bit of both. The others have simply got ahead of themselves in what is a relatively complex story with new acquisitions disrupting the short term.
With the result the company announced improved same-store-sales growth in the final quarter of the year and a positive update on the progress of the newly absorbed assets in Australia and Europe. The share price rebounded from its initial slump.
This week’s S&P/ASX Indices rebalance announcement reminded us how investment trends come and go. Red hot one minute, forgotten the next. Stocks going in and out of the ASX100 over time represent a telling history of the Australian market. It also demonstrates the different dynamic of investing in small caps (ex 100) versus big caps (top 100).
The stock that prompted our thoughts is Whitehaven Coal (WHC). It seems like yesterday that every man and his dog was shutting down or trying to flog their coal operations. Coal prices were hit very hard on the back of weaker economies around the world as far back as 2011 and thermal coal had the added pressure of the move towards cleaner energy sources. The slump, at least as WHC was concerned, lasted more than five years. The company nearly went out the back door.
Whitehaven Coal Share Price Chart
And then, just like that, it’s heading into the ASX100. All is fixed apparently. Thermal coal prices have risen on the back of energy demand out of Chin...
Most industries in Australia have faced some form of disruption with technology being leaned on to increase efficiency, promote competition against dominant incumbents and introduce new concepts.
One group has so far managed to fend off attempts to derail its privileged market position – real estate agents.
Technology has in fact played a part in preserving the status quo. The dominance of REA Group’s realestate.com and to a lesser extent Fairfax’s Domain means pretty much all properties are advertised in just one or two spots, or usually both. Buyers and sellers go to the site by default as there is little viable alternative. It has also created a cosy relationship between the online sites and the estate agents. The agents pay to have the properties listed and the hosts don’t try and compete with them. It’s a powerful combination that has preserved commissions and prevented meaningful competition.
We believe it is only a matter of time until the sector is successfully disrupted. There ha...
Glennon likes companies where management has skin in the game. It also is partial to a roll-up and doesn’t mind some exposure to international expansion where it is reasonably safe. BWX Limited satisfies all of those categories.
We wrote about the stock back in early April when a less than perfect interim profit result (explained poorly at the time by management) saw the share price weaken considerably. Our argument in support of the stock was that it had a stellar history, had recently acquired the number one organic skincare and makeup brands in the US, was rolling its Sukin brand out in Australian supermarkets for the first time and also staked its position in the Australian online market with the purchase of Nourished Life. It has had a lot on its plate, which goes some way to explaining the short term disruption, but which also gives the group multiple growth options in multiple geographic markets.
We had already bought a small position but accumulated more as the share price fell t...
This year I decided I would attend the Berkshire Hathaway Annual meeting in Omaha, having read and studied extensively the history of Warren Buffet and in particular his early investments. From what I could tell there were about 80 People from Australia who made the trek to Omaha. To put it in perspective, its a long way to go. Omaha is in the middle of America and its a relatively uninspiring place.
Prior to going to Omaha we had a pretty full list of companies to visit. We saw the new James Hardy, Hardy plank manufacturing facility. This was an impressive site and while now operating we did see the old plant which is a great cash cow for the company. It produces ~200 million square feet of board a year and supplies 85% of new homes in the region. There is such great demand for the product that the combined output for the two plants will 500 million square feet of plank a year.
We also went to Portland for the day to see Schnizter Steel. This is a US$800m NYSE liste...