Happy 7th year birthday for the bull market.

Period 1st half March 2016, written March 11th

Asset Allocation

The stronger equity markets of late has not been the ideal scenario I was looking for. There is a reasonable chance the short trades I placed on the US indices will get stopped out. Whilst they exist at present my cash equivalents weight is marginally lower at 43%. Some small physical buy trades got filled which I will comment further on below.

My commodities exposure has crept up slowly to 3% above my targets when marking my gold stocks at stop levels much lower than present prices. I am fairly comfortable with that as I see this sector as a “depressed” asset class still. I am a little disappointed perhaps that I didn’t pull the trigger on some more investments in the energy sector.

In general, this year I have wrote more on the basis that to be prepared for buying opportunities in a bear market later this year. After the last few weeks I should perhaps give more attention to my strategies if markets resume their uptrend. If my shorts on the US indices get stopped out it is not too disastrous in the sense those losses more or less cancel out the gains I took profits on in January. Likewise, with the currency trades recently which I will touch on below. So in a way I have had protection of the portfolio this year that cost nothing but was not needed. If the stops get triggered my overall weights will be quite close to targets, and my strategy is not to try and outsmart things with market timing too much. So if I haven’t read things too well over the last month the portfolio may stay close to targets for a while. If the market gets frothy again at new highs, I will investigate some opportunities in more market neutral funds that trade at discounts to NTA. In a bull market sometimes these underperform and then the discounts widen again. I would also consider the energy sector as maybe that will have a breather from the very recent bounce. Also if equities race ahead we may well see a breather in the gold price, I think around 1180-1200 it would probably find support. Silver has underperformed gold recently which is a bit unusual and CEF:US may be a way to get some silver exposure also. Despite the great performance of gold this year this surprisingly trades at a discount to NTA of 9%, that is on the large size of a discount for this stock’s history.

 

Currencies

Whilst I have certainly written about and respected the fact that at times it felt like shorting AUD/USD was a “crowded trade”, in the end I got caught up in this recently as it pushed through my stop of 75.10. The shorts were at an average of 72.1 so it could have been worse. They are also in the context of taking profits earlier in the year as initially we moved from 73 to 69 cents. Then later on catching the AUD/JPY move from 86 to 81. I don’t really want to instigate derivative fx trades at the current time. Whilst I am fairly comfortable in the view 75 cents is expensive for the AUD, with so many economist predictions of a declining AUD this year it wouldn’t surprise me if the market made a few more look a bit silly by going up even more. I will be on the lookout for trades that will benefit from a declining AUD still, but will do so slowly and trades where the AUD does not have to fall immediately to benefit. CEF:US just mentioned above even fits that category. So if the AUD falls from this level I don’t particularly gain or lose from that in itself, I am more or less quite close to my longer term targets that I have as of right now. A move though to 80 cents in the next few months to me however would be very painful for the economy and also be an extremely sharp move whereby I would have to look at trades to capitalize on a falling AUD far more urgently if that transpired. My assumption is if such a move occurred without too much gains seen in many commodities. If it moved to 80 cents and was backed by iron ore and coal surging more from current levels for example, my comments may not apply.

 

Individual Stock Decisions

CLT – I have initiated a small position in this small company with a market cap of $10 mill. I purchased at 20 cents and unfortunately I probably could have got my stock at 18 cents easily enough if I waited a few more days. There has been a seller around although recently some of this has been met by director buying which is pleasing. I made more of a lengthy write up on this for another blog so I will copy that here.

Cellnet Group Limited (CLT) is a distributor of flash memory, mobile phone accessories and CE equipment and accessories, and fulfilment services to the mobile telecommunications and retail industries in Australia and New Zealand. They are trading cheap versus their book value of 24 cents. Latest earnings per share is 3 cents placing them on a P/E of just 6. They paid a dividend of 1 cent in September last year so the yield is 5.5% fully franked and I have nothing to suggest they will not do the same again this September, with the dividend payout ratio being quite low.

You can make a case they are operating in a growth sector of the economy, and their earnings history over the last 6 years contains some stability albeit with a slip up in 2014. They have a clean balance sheet with no debt and appear to have addressed the earnings issue. Last year’s earnings were pleasing and they achieved that with some headwinds of a falling AUD and the demise of Dick Smith, whom they sell some product to around the key Christmas shopping period. There is a shareholder buy back in place currently. It is run by the major shareholder with a stake of 55%. Interestingly, Mercantile Investments (Ron Brierley vehicle) has about 7%. It could conceivably be a candidate for a mop up bid and privatisation by the major shareholder if it continues to trade this cheap and with not much volume. So Mercantile may like to push their stake up to 10% to block. Wouldn’t be surprised also if Mercantile like the fact the company has tax losses it can offset in the future. Given I expect the company to be quite profitable I think you can look at this as an asset. If we discount this back that could easily add another 7 cents to the book value making it 31 cents. Regarding the operational aspects of this company they have turned around from the disappointing 2014 result by focusing on the more profitable divisions and brands, reducing costs, and have launched their own specific new brand that has started promisingly and could provide further upside to the stock.

If they just put together a slow and steady few years that build on the profits from last year (which the probability looks high of them doing so), then the stock should get re-rated from these cheap levels. Let’s say they continue to pay a healthy dividend then the market can easily place a P/E of 10, and with earnings per share perhaps climbing to 4 cents then a share price of 40 cents within 3 years is a conservative target I feel. If they can boost their earnings quicker and the market takes the view it is a “growth” stock that would be when the story could get more exciting.

Risks are that management get things wrong which they did make some mistakes a few years ago. Sales to some extent are dependent on the health of the overall economy. The stock can lack liquidity.

NGE – I topped up my holding here at 1.9 cents this week as previously it was relatively small. It’s business is in the energy sector but is more of a cashbox shell company at the moment, with activist Kentgrove capital behind the scenes on the register for about the last year. What has please me since my first purchase was the latest cash flow report where the NTA was actually heading north, which is unusual sometimes in these situations. This is occurring as they recover some loans so it could even creep higher over the year, currently by the way it is around 2.4 cents. The icing on the cake may come in the form of some prospecting licences and optionality on other projects that exists on the balance sheet. Whilst I am no expert with these items I actually think the stock stands up even without these, and there are some handy tax losses on the balance sheet here. If the oil price did surge higher from here I feel this stock could get a re-rating from the market. So it fits two categories for me, being a cashbox shell company that is being run leanly by an activist shareholder with a large stake, but at the same time could benefit from a recovery in the oil price.

WMK – I sold my holding in this market neutral LIC because I believe their performance may not suit the “risk on” market we have seen in the last month or so. This was evident in the latest NTA announcement. I sold at $1 and I feel the NTA might have only been around 1.04 at the time. I purchased later last year at 97 cents and received a 2.5 cents fully franked dividend in between, so it served me well considering the ASX performed poorly over that time. I wasn’t a big fan of them recently doing a share purchase plan either. I still believe they are a very good fund manager though and if ever the NTA discount got to 10-15% again would take another look.

TTS – I haven’t traded this but thought I would add this in this section as I wouldn’t mind buying this in the low 3.50s, I narrowly missed getting filled this week. If you go to the Sandon capital web page, you can find a very detailed analysis on their view of why this stock is undervalued. It is very comprehensive. Last year they put a large research document making the case for BSL, which has moved from $3.20 to past $6 now (which hurts to write as I took profits at $4!). I really should have run a trailing stop loss on BSL! Unfortunately for Sandon they built their position prior to the recent announcement that they were ordered in the courts to repay more than $500 mill to the Vic government. They argue basically the company should be demerged and Tabcorp should bid for the wagering division, and argue against perusing talks with Tabcorp about Tabcorp acquiring the whole company. They look at the lotteries division and compare the earnings profile to other lottery businesses gobally and also infrastructure assets and view the Tatts lotteries business is being priced too cheap on the local market. They saw very good value at $4 before the courts announcement, and most brokers see the effect of that announcement shaving off about 7% of the valuation. So close to $3.50 could be good for my SMSF with the consistent franked dividends and more upside with a potential demerger and spin off.

 

Individual Stock News

KBC – I have mentioned on the blog is a decent holding and were in the press from reporting their earnings late so here is some comments I made regarding that.

Seems to be a combination of Bolton and another director firstly quitting so assuming they are light with staff, changing their auditor to match the aurora auditor they use. They probably left all this too late and now the auditor has some issues about the treatment of a security that represented 8% of one of the aurora funds, possibly the fund reacted too late to suspending redemptions. However, the company involved made things difficult for them given the underlying company’s lack of disclosure. Hence missing the deadline. It’s a relatively small part of the aurora business, and the aurora funds management business is less than 10% of keybridge’s stable anyway. In the meantime one of their more recent buys in CSE is doing nicely. Have to agree if ever there was a time for Wyllie and Wilson to pounce and force a slow wind up it is now. Or Wilson is good at getting control and using the vehicle (which has tax losses to utilise) in a better way for him to manage and use his branding power. The trick is Bolton’s large stake, however not sure if he has many other friends now on the share register to support him?

The Aurora acquisition has been a poor one and wouldn’t shock me if a few sellers get nervous. In the scheme of things though despite taking a hit on Aurora, the current NTA is over 20 cents and if anything should be a tad higher than the accounts say on Dec31, as their holdings have at least held up with CSE doing particularly well. So over that 6 months’ period the NTA has at least not fallen and remember the ASX has probably declined 10 % or so. With current NTA above 20 cents, of that the Aurora business is now probably at the most 4% of that, so if the market gets nervous over this reporting delay and write down it may well be an overreaction given the exposure as mentioned.

I think what needs to happen is Geoff Wilson needs to act to at least get control of the key decision making at KBC, even if he is not very “hands on”.  At the moment with the Bolton situation the company looks to be lacking leadership.

SSM – seeing good director’s buying in this one of late.

 

THINGS I AM WATCHING

 

  • Watching DOW shorts with stops at 17,500, targets of 15,900.
  • If I am wrong on the above and the market resumes its uptrend I suspect gold may have a breather, in that scenario silver is an interesting play. Also the oil sector may pause giving me gradual chances to slowly look at some new positions. It is not inconceivable though that gold rallys together with higher equites because that has been the trend lately. In that scenario I am sure my portfolio can at least match the indices given my gold holdings.
  • If it gaps down be patient with buying until US indices are at least in bear market territory.
  • In regards to the above I may not be looking for a bear market in the US that runs too deep, i.e. 30% plus. One should note that a small number of stocks are making the US stock markets appear better than it seems. So a 20% pullback in their indices would probably mean the average stock is down 30% plus anyway. Also I may look at other markets in the world. If we look at markets globally things have probably been sick since early 2013. One area that might be of interest to me for example is India which has been one of the few places to record some OK growth the last 3 years. There is a Morgan Stanley closed end fund on the US exchange where the discount to NTA you might be able to pick up at close to 15% being wide historically. The share price has already corrected by 30%, I am just not ready to pull the trigger yet but that might be an example of the type of trade to go long in later this year. Another example could be AGF, which as discussed is ripe for activism that can eventually succeed in narrowing the 25% discount to NTA. There is a Singapore closed end fund at a discount and that market has also had a large correction. Likewise, with a Russia closed end fund, this could be a way to play an oil price recovery and also a NTA/wind up play at the same time. I have seen Templeton funds management, a big player in EM winding up their Russia fund recently. I have read books and articles that have back tested going into equity markets in a diversified global manner that have suffered 2 years of declines can be very rewarding. Particularly markets that stand out on “value based” indicators as I am finding with some discussed such as Russia, Singapore, Vietnam. This has influenced my thinking in the “about me” section of the blog where I talk about rebalancing into out of favour markets in a diversified disciplined manner.
  • Oil sector, this is a new discussion I wanted to add since reading recently about Warren Buffett and Kerr Neilson recently have already been tempted to invest in the sector. On the very simplistic analysis as a contrarian that it has fallen 73%, the largest decline ever pricks my ears up. Am still watching thus far and broadly thinking perhaps in June when the Australian market often sees some tax loss selling could be time to start looking seriously. Also prefer to see it bump along sideways more. As I did with the gold sector however, I would only have quite a few exposures once the stocks have and oil price has seen more stabilization, which may take towards the end of this year. June I could put my toes in the water a little. I find it difficult personally commencing buying altogether once the trend has been up for some time, though I acknowledge most “traders” who are successful operate this way. Russia’s stock market is worth having on the watch list also as mentioned above, if you were to get bullish on Oil later this year.

DISCLAIMER

This information should by NO means be taken as financial advice. It does not represent general advice or specific advice, particularly as I am unaware of the personal financial circumstances of readers. It is written purely for the purpose of an investment diary, to look back on, self-reflect and try and improve my own accountability for the investment decisions I make. It is for fun, and I am not a financial advisor. I try to be as accurate as possible but cannot guarantee I avoid mistakes. If making decisions with your own money, please do your own research and seek personal/professional financial advice.

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