Cheap Shares This Week: Listed Investment Companies

Welcome to another edition of Cheap Shares This Week - a summary of the week's events in the world of value investing and some other stuff.

It always amazes me how many Listed Investment Companies trade at steep discounts to their net tangible assets.  At the end of August 2013 there were 7 companies trading at a discount of greater than 20% to after tax net tangible assets.  They were:

• Orion Equities Limited (ASX:OEQ) - 60% discount
• Sunvest Corporation Limited (ASX:SVS) - 58% discount
• Bentley Capital Limited (ASX:BEL) - 39% discount
• AMP Capital China Growth (ASX:AGF) - 24% discount
• Ozgrowth Limited (ASX:OZG) - 24% discount
• Katana Capital (ASX:KAT) - 23% discount
• Hastings High Yield Fund (ASX:HHY) - 23% discount

While I've found LIC's to be a relatively profitable place to prospect for bargains, it can be frustrating how long the discount to NTA can persist.

I'll let you do your own research into the companies above.

Reading For This Week

This week's reading is a booklet published by the renowned value investors at Tweedy Browne.  It's called What Has Worked In Investing (you can find links to more publications from Tweedy Browne on the Investment Resources page).

You will need to set aside some time to read it though.  The booklet runs to a substantial 49 pages, however I think you find it time well spent.  The document provides a some great ideas on where value might be hiding in the stock market.

Interesting Investment Ideas

Each week I rummage through the basement of the ASX in the hope of finding some hidden treasure.  Mostly the shares to be found here have ended up in the basement for good reason and should be left undisturbed.  But occasionally there is treasure to be found among the trash.

Please don't take any of the stocks listed here as recommendations.  You should always do your own research and obtain independent advice.

I know I've already mentioned Hastings High Yield Fund (ASX:HHY) in the Listed Investment Companies at the beginning of this article.  However HHY had already popped up onto my radar for other reasons.  First, it touched a 52 week low this week.  Second, as I've already mentioned, it's trading at a discount to its net tangible assets.  Third - it looks like the company is being wound up.  This was the kicker for me.  It provides a timeline for when the value embedded in the shares will be realized.  I still want to do some more research though.  I need to determine how much investors are realistically likely to receive when the company is actually wound up.

Real Estate Capital Partners USA Property Trust (ASX:RCU) is also trading at a substantial discount to net tangible assets.  I'm still trying to wrap my head around this one, but here are some of the more interesting facts.  A debt restructure announced on 30 August this year resulted in NTA increasing from 7 cent to 68 cents per share.  Then this week the company issued another 1,601,940 shares at a price of 36.5 cents to "professional investors" (this was at a discount of 15% to the prevailing market price).  The NTA per share will have decreased now due to the dilutive nature of the share placement (and just to rub salt into the wound, it looks like there will be no shares offered to existing shareholders).  So, with issued shares having increased by about 15%, RCU might still be worth further investigation

Listed Investment Companies or Exchange Traded Funds?

While researching the LIC's listed at the beginning of this article, I came across another interesting fact.

As at the end of August this year, all ETFs listed on the Australian Stock Exchange were only capitized at about $8.8 billion.  This compares to LIC's which are worth a total of $21.4 billion.

And eclipsing both of these categories was Real Estate Investment Trusts (REITs) capitalized at almost $93 billion.

That's it for this week.  Happy investing!

Cheap Shares This Week: The Bulls Are Back

Welcome to another edition of Cheap Shares This Week - a summary of the week's events in the world of value investing and some other stuff.

After six weeks of gains, the ASX200 index hit a new 5 year high this week.  While that might make us all feel good as we watch our share portfolios swell with recent stock price gains, it makes it harder for the value investors lurking among us.  It is becoming harder and harder to find value in the stock market at the right now.  And with dividend season upon us, I have more and more cash looking for a home.

Well, enough bad news for now...

Reading For This Week

This week you need to read An Hour With Mr. Graham.

For those who don't know, Benjamin Graham is probably one of the greatest minds in investing.  In the wake of the great depression, he brought a level of rigor to investing which until that time had been missing.  He also taught and inspired a generation of some of the most successful value investors of the 20th century.

In this 1976 interview Hartman L. Butler quizzes Benjamin Graham on a number of topics, but the one I found most interesting was the idea of applying a "group approach" to buying undervalued shares.

Graham advocates keeping things simple when it comes to investments.

Interesting Investment Ideas

Each week I rummage through the basement of the ASX in the hope of finding some hidden treasure.  Mostly the shares to be found here have ended up in the basement for good reason and should be left undisturbed.  But occasionally there is treasure to be found among the trash.

Please don't take any of the stocks listed here as recommendations.  You should always do your own research and obtain independent advice.

Only one idea this week.  The lack of cheap shares on offer might have something to do with record stock market prices...

John Shearer Holdings (ASX:SHR) reached a multi-year low of $1.26 this week.  In fact it's the lowest price the company's shares have traded at in more than a decade.  And when you look at the earnings history, you can understand why. Net Profit After Tax (NPAT) averaged about $3m - $4m between 2004 and 2009. However, over the last 4 years things have taken a turn for the worse. In 2010, NPAT was $0.7m, 2011 was $0.4m, 2012 a $1.4m loss and 2013 a $1.5m loss.  Profits are heading in the wrong direction.

But what attracted me to John Shearer Holdings was a note in the financial statements this year.  While the "Steel Shelving and Storage Systems" division is losing money, the "Agricultural Machinery and Transport Equipment" division is making a profit.  What this means is that the company could sell off or shut down the unprofitable part of the business and return to profitability.

And just to add to comfort levels, John Shearer Holdings has net tangible assets of over $3.00 per share and cash of about 75 cents per share.  That gives the company some room to breath.

I should say at this point that selling the unprofitable division is purely speculation on my part.  I don't know whether it's practical or even possible.  More importantly, I don't know whether it is something directors would seriously consider.  It would make the company considerably smaller.

Definitely one for further research though.

Who Reads Cheap Shares?

I got a surprise this week when I checked what countries readers of Cheap Shares come from.  The following is a list of the top 10 countries in order of page views.

1. Australia
2. United States
3. China
4. South Korea
5. Serbia 
6. France
7. Russia
8. Taiwan
9. Germany
10. United Kingdom

Australia being number one is no surprise.  And I can even understand the US and UK being in the list.  It's the non-English speaking countries which surprised me.  I may have to consider publishing content which is more global in nature.

That's it for this week.  Happy investing!

Cheap Shares This Week: Back Where We Started

Welcome to the inaugural edition of Cheap Shares This Week - a summary of the week's events in the world of value investing and some other stuff.

Rumor has it the All Ordinaries Accumulation Index finally reached levels not seen since before the onset of the global financial crisis.  The accumulation index includes dividends, so while the All Ordinaries Index (the one you normally see on the news and hear in finance reports) is still well below pre-GFC levels, if you look at the total return including dividends, we are finally back to where we were in November 2007 - nearly 6 years ago.

So much for buy and hold.

Reading For This Week

This week's article is a seminar by legendary value investor Walter Schloss.

Columbia Business School Upper Level Seminar In Value Investing - in this 1993 seminar Schloss recalls his investing adventures including experiences with both Benjamin Graham and Warren Buffett.  It's 12 pages, but well worth reading.

Interesting Investment Ideas

Each week I rummage through the basement of the ASX in the hope of finding some hidden treasure.  Mostly the shares to be found here end up in the basement for a reason and should be left undisturbed.  But occasionally there is treasure to be found among the trash.

Please don't take any of the stocks listed here as recommendations.  You should always do your own research and obtain independent advice.

Hudson Investment Group Limited (ASX:HGL) fell 33% this week.  HGL is a mixed bag of assets and operating businesses.  I couldn't find any company announcements or other news to explain the fall.  What piqued my interest in HGL was the share price falling below 7 cents against net tangible assets of 11 cents.  I'm putting this one aside for further research.

Orbital Corporation Limited (ASX:OEC) fell almost 20% as well.  The company operates in the Automobiles & Components sector, specializing in engine technology. Like HGL, OEC is trading at a discount to NTA.  However, I have concerns about OEC's debt and its ability to generate positive cash flow.

Other News

Cheap Shares quietly celebrated being in existence for a whole month this week.  And what better way to celebrate than to entertain our very first unsolicited visitor.  Cheap Shares this week received its first ever visitor. While they didn't stay long (they only viewed 1 page) it was a start.

That's it for this week.  Happy investing!

Share Price Performance History - The October Effect?

With October just around the corner, I thought it might be a good time to investigate the stock market phenomenon known as the October Effect.

October and Share Price Performance

There is a theory held by some (many?) investors that share prices have a habit of falling during the month of October. Both the 1929 and 1987 crashes happened in October.

This is known as the October Effect or the Mark Twain effect.  This name comes from the 19th century novel Pudd'nhead Wilson in which Mark Twain wrote:

"October. This is one of the peculiarly dangerous months to speculate in stocks."

He then went on to say:

"The others are July, January, September, April, November, May, March, June, December, August, and February."

Do Share Prices Really Fall In October?

While the October effect is considered to be a psychological effect only, what interests me is whether the collective nervousness of investors will push prices down temporarily and create a buying opportunity. I wonder whether investors fear of the month of October can become a self-fulfilling prophecy.  Do nervous investors start selling at the start of October thereby adding to the legend of the October Effect?

So with that in mind I did some research on how the All Ordinaries (a broad based share price index for stocks traded on the Australian Stock Exchange) performed during October for each of the last 29 years.  (29 years was as much data as I could find on Yahoo Finance)

The first graph shows yearly share price performance for each of the past 29 years, in monthly intervals.  In this graph, I was looking for a consistent decline in October of each year, or failing that a fall in enough of the years for there to be a discernible trend.

All Ordinaries Share Price Comparison - Percentage Change Per Year

While there were certainly a few years in which prices dropped in October (1987 - I'm looking at you), there seem to be many more trending up.

So next I tried looking at the data in a slightly different way.

The next graph is a little harder to understand.  It is the monthly change in share prices.  So rather than each line representing the performance over the entire year, the line tracks the change in share prices from the beginning to the end of each month.  Once again I was looking for an obvious pattern.

All Ordinaries Share Price Comparison - Percentage Change Per Month

And once again, while 1987, 2008 and 1997 stand out, the rest are just a jumble.

The last thing I did was to summarize the best, worst and average share price gains or declines for each month over the past 29 years (sorry no fancy standard deviations or the like - what do you expect for free?).

All Ordinaries Monthly Share Price Summary - 1994 to 2013

This tells me that the worst month over the past 29 years was definitely October.  It also tells me that average performance in October is -0.6%, which is equal worst of the averages.

Conclusion

None of this causes me to think it's worthwhile selling up at the start of October while hoping to buy in again more cheaply as the month unfolds.

I suspect that October should be treated as any other month.  Keep my eye out for bargains and buy them when they appear.  And sell any holdings which have reached my estimate of full value.

Averaging Down - Should You Buy More Shares When The Price Drops?

It happens to all investors sooner or later (usually sooner). What should you do when your shares fall in price?  Should you average down?

Averaging Down

What does average down mean? It simply means to buy more shares after the price has fallen below what you initially paid for the shares.  It means that your average purchase price will be lower.

For example, if you bought $5,000 worth of Telstra shares back in May at $5.00 per share, you would have 1,000 shares at an average purchase price of $5,000.

Then when the Telstra share price fell to $4.50 a month later, if you decided to buy another $5,000 worth, you would have averaged down. You lowered your average purchase price.  You would have bought 1,111 additional shares and you average purchase price (across both lots of shares) would now be about $4.74.

Buy, Sell or Hold?

At the risk of stating the obvious, there are 3 options available to you.

1. Sell
2. Hold on
3. Buy more

Unfortunately, choice is rarely clear cut.

When should you sell?

In my experience, you should not sell just because the share price has fallen.  This will just crystallize the loss.

However, if you realize you have made a mistake and the shares are not worth as much as you originally thought, that might be a reason to sell.  Or if there has been an unexpected development which now causes you to believe the shares are worth less than originally anticipated, that may also be a reason to sell.

When to hold

Take another look at your investment.  Does it still make sense?  Are the reasons you first bought the shares still valid?  If your investment still looks sound, then there is no need to panic just because the market disagrees with you.

When to buy more

If, after taking a good look at the reasons you bought the shares, you are still convinced of the merits of your investment then a fall in share price could be an opportunity to buy some more shares at a lower price.

Any decision to buy more should also take into account any portfolio limits you normally adhere to.  Would a further investment make your investment portfolio too concentrated in a single stock or industry?

When dealing with the vagaries of shares prices, I try to keep in mind the following quote from Warren Buffett - "You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right".

Investment Newsletters - Wry and Dry from First Samuel

I recently came across the website of First Samuel Limited, an Australian wealth management company.

The reason I found First Samuel was because we share a number of common shareholdings.  I normally check out each of the substantial shareholders in any of the companies in which I own shares.  I like to know who my co-owners are.

Also, the types of shareholders on the register can sometimes give me a feel for how the market perceives the prospects for a particular investment.  I normally find myself on the register along-side a bunch of value-oriented fund managers.

While I don't know much about First Samuel (apart from what you can read on their website) I have enjoyed reading their weekly email newsletter called Wry and Dry.

You can find an archive of the Wry and Dry investment newsletter here.  I've also added a link to the investment resources page.

How To Find Cheap Shares - Ask Benjamin Graham

A couple of days ago I read the transcript of a speech given by Chris Browne (of Tweedy Browne fame) to the Columbia Business School back in 2000.  The speech was called Value Investing and Behavioral Finance (you can find a link to it on the Investing Resources page). While the title is a little dry, the ideas presented were very interesting.

The main message of the speech (for me at least) is that despite overwhelming evidence that value investing produces better results over the long term than other investment styles, very few investors (professionals and non-professionals alike) choose to apply the principles of value investing to their own investments.

He than concludes that one of the reasons could be the herd mentality. It hurts far less to be wrong about an investment if everyone else is wrong as well. It feels worse if you're the only one who gets it wrong.

But the main thing that struck me about the speech was the following description of Benjamin Graham's approach (considered by most to be the father of value investing) to investing:

He found that buying stocks below net current assets (current assets less all liabilities), buying stocks where the earnings yield was greater than the long-term bond yield by a margin of 50% or 100%, and buying stocks at two-thirds of tangible book value when stockholders’ equity was greater than all liabilities, produced better than market returns.

There are 3 very simple approaches to value investing described succinctly in that quote.  Despite the sophisticated and complex investment strategies being taught and practiced today, Graham found that a simple yet disciplined approach worked best.