Trusty Tahr – first impressions

The latest incarnation of Ubuntu appeared a few days ago, and I’ve had the chance to do a little playing around. I seem to keep referring to it as Tasty Tahr, rather than Trusty Tahr. Hopefully I’ve now lodged the correct version in my mind.

What’s nice is that Tahr is available for my Cubietruck, so I did a nice distribution upgrade. The process was smooth enough, and I am very happy with the transition so far. I like to let the upgrade process trash whatever configuration files I had before, so as to make the files fresh and syntax-compliant. Inevitably, some hand-crafted configuration gets trashed in the process. Personally, I’m happy with that. I generally keep good records and backups, so I count it as an opportunity to tighten up my procedures. The services that were damaged during the upgrade process were, for me, dovecot (pop3 server), samba, and Apache. I haven’t delved into fixing dovecot yet, but I’m sure it is no biggie. Samba was relatively easy to fix. I created my own config file, which is now included from the main Samba startup configuration. Reinstallations of Samba should be a breeze in future upgrades. Apache had only a minor configuration wonk, in that it couldn’t determine my ServerName. I couldn’t remember where the setting should be, so I took the radical step of uninstalling Apache and installing Nginx in its stead. it was an easy decision to make, as I was itching to try Nginx in any event. I hear that it’s better for low-resource machines.

So, I’m very happy with the upgrade process. I don’t really mind configuration problems, I expect it as par for the course. As long as I can still ssh into the box, I’m good.

I also installed Xubuntu as a desktop as my main machine. I had given their Unity desktop a fair crack of the whip in 13.10. It’s a very attractive desktop, I’ll give them that. I think it’s a retrograde step in terms of productivity.  Having an application panel down the bottom is very useful. In fact, I gave up on 13.10 and went back to Windows 7 with cygwin. I do have my cubietruck to fall back on as a Linux box, but I now, when I write coding projects or use software, I try to maintain compatability between my server and cygwin. This arrangement is proving satisfactory, and I think I will be reluctant to use Linux as a desktop environment.

My dislike of Unity led me to try Xubuntu directly, instead. I may try Unity in Ubuntu’s next release, we shall see. One thing I hate about the *buntus is that they download language packs when you install them. Why now include the packs on the DVD? It makes things feel a bit “Microsofty”. If you make a hash of the installation, or want to install on several machines, it means that you have to download the pack each time.

Xubuntu looks quite nice as a desktop. I notice that the icons have been given a bit of a spring clean, and the whole look of it is much more “modern” and aesthetic. I’m glad that the open-source community is taking aesthetics seriously. It even looks a little more polished than Win 7 and OSX in some instances. Linux had a tendency to have dreadful fonts, and theming that was visually grating. A lot of those problems have been fixed. Aesthetics is a fine balancing act. Not enough, and you end up with terrible fonts, a system that looks like it was stuck in the 90′s, and a colour scheme that looks like it was inspired from playing with faeces (yeah, you know what I’m talking about). Too much, and you get windows that catch on fire when you close them, cubic desktops, and bling that can be just too annoying.

One thing annoying about Xfce is that I wish they would turn off virtual window scrolling by default, and enable aerosnap by default. I finally worked out how to do that. It should still be a default. I also think the panel should be on the bottom by default. Just stick with Windows conventions. There’s no need to make gratuitous design deviations.

I think Ubuntu is the best Linux for general desktop usage. I’m quite a fan of apt-get package management systems. Ubuntu archives seem modern when I compare it to something like Debian. Although I played with rolling-release systems like Manjaro and Arch, I now don’t like them. They have a tendency to break too frequently. You also have to pull a lot of stuff from the servers sometimes. It sometimes looks like you’re effectively downloading the distribution again. So, I think point releases are the way to go.

Anyway, those are just my thoughts. Undoubtedly, people will disagree with some of my points and come up with their own “yes but” arguments. And they will be right. But also wrong.

Happy computing.

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The dangers of tinkering

Interesting extract from the AAII Journal April 2014:

Incorrect modifications to the model outnumber correct modifications. Humans can create modifications to a model that can create value. A popular concept in psychology is the “broken leg theory”. Say a human expert develops a model to predict when people will go to the movie theater. The human expert identifies that someone has a broken leg and is able to update the quantative model and outperform the model. The issue is that humans are unable to limit their “tinkering” with the model. The evidence from academic research suggests that the number of incorrect modificationsexperts impose on a model outnumbers the number of correct modifications.

That’s something for me to chew over as I do my Magic Hat portfolio updates.

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The market’s doubled. So what?

The MCX (FTSE250) is up 117% over a 5-year period. Less spectacularly, the UKX (FTSE100) is up 62% over the same period.

So we must be way overdue for a correction, right? Obviously it would be foolish of me to categorically rule out a correction or bear market. Anything can happen.

But consider this:
1. The market was at a very very low point 5 years ago,
so any recovery is bound to look dramatic. That 117% may therefore be less meaningful than is first supposed, as you are starting from a very low base.
2. 2011 was a down year, so the rise hasn’t been “inexorable”. Stockopedia reports that, over 3 years, the FTSE350 rose 13.03%. That’s a mere 4.2% pa. The drama was in the first 2 of those 5 years, not the last 3.
3. Stockopedia reports that the median forecast PE is 14.6. Earnings growth is estimated to be 14.7% – which admittedly is probably too high. It seems unlikely that corporate earnings will, in aggregate, rise by that high amount. Even if I factor out that growth, I get a PE of 16.7. That’s above historical norm, but not wildly so – especially if we do get strong economic growth.

So, it looks like the current market it its perfectly normal, uncertain self. The crystal ball into the future isn’t particularly cloudy, it’s just its normal cloudy self.

Everyone is predicting a correction. In fact, there *will* be a correction. We know that with certainty. What we don’t know is when that correction will be, and if now is a good time to get off the merry-go-round.

There’s the rub.

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$SAL.L – SpaceAndPeople – so what’s it worth?

Advertisers SAL (SpaceAndPeople) issued a trading statement today, sending the share price down nearly 40% to 81p. Yikes. I own some of these shares, too. I’m not happy.

Obviously, the trading statement was poorly received. Paul Scott wrote about it over on Stockopedia:
http://www.stockopedia.com/content/small-cap-value-report-17-apr-2014-blur-stt-sal-82732 concluding “Personally I shall be sitting tight on my SAL shares, as the price has now fallen to such an extent that there’s really no point in selling now.”

So, what’s it worth? I have done some very very rough prelim calcs using a DCF that I’m learning by following Damodaran’s work, and I reckon that the company is worth about £29m. That’s a little over where the share closed yesterday, based on 132.5p, 19.5m shares, for a market cap of £26m.

At 81p, the market cap is £15.8m. So the shares are worth about double the current valuation. Not that anyone will believe me, of course.

My valuation is only preliminary, it doesn’t take into account net cash, and full dilution; it was just and dirty. I’ll try to post my numbers in the near’ish future, and check my calculations.

EBIT to Revenues for 2013 for SAL were about 15.6%, down from 18.4% in 2008. The median for the advertising industry is about 11.77%, if I use Damodaran’s spreadsheet for the US. So, I have used a margin of 15.6%, tapering to 11.77% over a decade. Confidence in these margins has been crushed by the latest RNS. However, I’ll continue to use the numbers, because they do look sane to me. I might ultimately be proved wrong, of course, because everything is an assumption, always.

I have also used a corporation tax rate of 28%, tapering to 21% over a decade. Hopefully this will be the least contentious assumption I make.

A big assumption is that the company will increase revenues by about 19%pa over the next 5 years, which I then have tapering down to the risk-free rate. Is a 19%pa growth rate reasonable? Well, 2015 revenues are forecast to be £21.4m, implying a doubling over a 4 year period. The company is still small, so there should still be plenty of opportunities to expand.

The way the DCF model works is to calculate free cash-flows from revenues given sales to capital ratios. So I can assume whatever sales growth I want, and the free cash flows will come out correctly. Alternatively, it would be possible to work out revenues given an earnings retention rate. I haven’t built my model that way, though. It might be an interesting cross-check.

Over the last 5 years, the mean sales to capital employed was 1.31. Damodaran’s spreadsheet has a value for the advertising industry as being 1.40. So, again, my numbers look sane.

All told, I don’t think I’m making lunatic, pie-in-the-sky assumptions. They look mostly pretty reasonable to me.

But, like I say, I doubt anyone will actually believe the valuation I’ve come up with. I’ll try to give some specific calcs over the next few days. The calcs are done using Python rather than a traditional spreadsheet, which makes them less accessible to most people. Sorry about that.

Update 17-Apr-2014 Looking at a “non-Stockopedia” site, I see that the updated stats have an EV/Sales of 0.95, against a media agency average of 2.05. The price to free cashflow is 9.3. So the company is looking cheap from some additional angles.

Update 22-Apr-2014 For informational purposes, share price was 79.5p at time of writing, and estimate of intrinsic value is 147p.

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Magic Hat portfolio: RM in, MRW out

Time for me to do some swapping in the Magic Hat portfolio.

Over 1 month, the portfolio is up 0.48%, compared to the comparative index that I chose of MCX (FTSE 350); although the ASX (FTSE All-Share) would have been a better choice in hindsight. I am actually quite pleased with this performance, as two shares in the portfolio – MJW (Majestic Wine) and MRW (Morrisons) – issued trading statements that saw their share prices decline substantially.

Furthermore, Stockopedia highlighted both companies as Earnings Downgrades, so I was determined to give one or the other the chop.

MRW is on a cheaper valuation, but MJW has better growth prospects. Supermarkets seems to be going down the road of Mutually Assured Destruction at the moment. MRW reported on 13 March that turnover was down 2%, like-for-like sales were down 2.8%, and underlying PBT was down 13%. MRW’s share price seems to be reacting in much the same way as TSCO (Tesco) did at the beginning of 2012. TSCO actually beat the indices over a 1-year period, assuming you bought after the crash, of course. The recovery was erratic, and timing would have been key.

MJW disappointed the market with its trading statement that it issued on 20 March. It expects to announce that PBT will be broadly in line (which is likely to be code for “slightly worse”) than the previous year. Like-foe-like was up 2.8%, but sales are expected to be flat for the year as a whole. MJW is currently on a PE of 15.8, which is not unreasonable, and it does have room to grow. “Furthermore, as part of our longer term growth strategy to increase the store footprint to over 300 and expand our e-commerce operations, the Board has decided to invest in the necessary infrastructure enhancements to underpin our future growth plans.”

In the portfolio I sold MRW at a price of 204.8p, for a loss of 28.4%. It’s a reminder that “safe” or “cheap” doesn’t necessarily mean you will make money. As I say, MRW could now go on to beat the Footsie, and undergo a valuation correction.

There’s a few companies in Stockopedia’s Greenblatt screen that caught my attention and I though was worthy of mention.

FLYB (Flybe) is at the top of the Greenblatt rankings, with a ROC of 114% and an EY (Earnings Yield) of 62.1%. I own shares in this. The calculations look a bit skew-whiff to me, though. I think Stockopedia is basing its calcs on what it thinks is TTM. Those figures look wrong to me, and are totally out of line with full-year reports, and projected reports. It’s a little difficult to tell. Digital Look estimates around a £30m AVERAGE PBT over the next 2 years. It net interest is say 2m, that gives an estimated EBIT of £32m. If I take Stockopedia’s EV of £400.8m as a given, then the EY is more like 8% (=32/400) – way below their calculation of 62.1%.

The Magic Hat portfolio already has an airline in it, so I’ll pass on FLYB. FLYB issued a trading update on 4 April: “The Group performed in line with management expectations … Despite a 4% capacity
reduction in Flybe’s UK scheduled airline in Q4 2013/14 … passenger volumes grew 6% year-on-year to 1.6m, with load factors increasing by 6ppt to 70%. ” The market reacted enthusiastically to the results, which is a good sign.

Another share that looked interesting is NPT (Netplay TV), which provides “interactive casino services to customers in the United Kingdom”. They operate SuperCasino.com, and you can watch and play live every night on Channel 5. NPT passed the Earnings Surprise screen, which caught my attention. Its trading update on 9 Jan was upbeat: “33% increase in total net revenue … Mobile and tablet net revenue increased 121% on prior year now accounting for 30% of total net revenue”. The market reacted well to the news.

NPT has an earnings yield of 8.6%, which isn’t great; but they do earn fantastic returns on capital, and a lot of growth is expected. As ever, gambling is still the subject of much government tinkering. It seems that governments will NEVER settle whether these internet companies should be legal or illegal, and how much tax they should pay. The big uncertainties surrounding NPT are:
1. the new POC (Point Of Consumption) tax. This means that the company will have to pay tax based on where the punter is, rather than the company’s tax domicile. Big chunks of profit could be taken out NPT as a result
2. there may be a ban or restrictions on advertising the kind of sites that NPT offers.

Digital Look also shows that directors did some heavy offloading of shares in Sep 2013.

The fact that there are
many uncertainties, heavy director selling, and a valuation that isn’t compelling puts me off, though, and I think it’s better not to risk money on it. NPT reports its finals tomorrow, so I’ll guess we’ll see if I was right, or not, to omit it from the portfolio. You should note that I do actually have a small position in NPT in my own portfolio, though.

So that leaves me with what I did actually add to the Magic Hat portfolio: RM. “RM plc is a United Kingdom-based company engaged in the provision of products and services to the United Kingdom and international education markets. It operates in four segments: Education Technology, Managed Services, Education Resources and Education Software. Education Technology, includes information technology (IT) hardware, network, Internet services and related installation and support.”

RM has a ROC of 94.2%. Its EY is 17.0%, which is nice. It has a stock rank of 100 (Value 91, Quality 99, Momentum 99), which is nice to see. RM is “restructuring” its Education Tech division, which will have a big negative impact on the forthcoming results, although should result in improved margins thereafter. RM has an EV/EBITDA of 4.05, which is undoubtedly less than half of the market. Stockopedia puts the market median EV/EBITDA at 27.0. The last time I checked, which was admittedly some time ago, the figure was around 8. That figure has likely increased since then, but I sincerely doubt it is as high as 27. I generally look at shares at over about £100m, so maybe Stockopedia is getting the high figure by including many micro-sized companies. I wouldn’t take a figure of 27.0 to be representative of the pool of investments most people are likely to consider.

RM as a PV50 of 6.6% (Price vs 50dma), which should mean that the share price isn’t over-extended. RM issued an IMS on 19 March, which was reasonably non-descript: trading was in-line with expectations, the restructuring of the Education Technology division was going according to plan, and the cash position went from £39.4m to £60.7m. The market reacted to well to the news, sending the share price up 2.74%, on a day that the ASX actually went down 0.41%.

So overall, RM looks like a good bet, and was added to the Magic Hat portfolio at 154.75p. I do own shares in RM.

Happy and prosperous investing to you all.

Update 08-Apr-2014 : NPT released their final year results today (8 April). They showed a 31% increase in net revenue and 32% in adjusted EPS. Despite this increase and a positive outlook (“I am confident that we will continue to improve performance year on year), shares traded down 8% at 9am. The potential impact of the POC seems to be weighing heavily on the minds of investors. CantEatValue has posted on The Motley Fool with an estimate of the impact.

Update 09-Apr-2014 El1te Trader posted on his blog, quantifying the likely effect of the POC. He sees good value at current levels (17.8p), but he doesn’t like the chart technicals, and notes that Henderson Global remain sellers of the stock.

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Portfolio review

It’s the end of the tax year, so I thought I would do a little portfolio review. It’s generally more convenient for me to do my accounting based on the tax year, as opposed to calendar years.

My personally-selected portfolio returned around 28% for the year, which compares favourably with the ASX (FTSE All-Share) of 9%. That sounds great, but when you consider that the MCX (FTSE 250) returned around 22%, and I am heavily invested in mid- small- caps, there is nothing to be impressed about. The portfolio is net of all transaction costs, but ignores dividends, special dividends, and any CGT liability. Some of that portfolio will be protected within ISAs. My dividend receipts were way down on last year, due to the high churn in my portfolio. I should learn to leave alone!

My OEICs did OK, gaining about 16%,which will include a distribution element. Again, that’s ahead of the ASX, but behind the MCX. I have held my OEICs for YEARS, some of them stretching back over at least 15 years. It is certainly not always the case that my personally-selected portfolio beats my OEICs. My favourite holdings are AXA Framlington UK Select Opps, and FSS (Fidelity Special Situations). FSS has come under a lot of fire on account of the stewardship of Sanjeev Shah. I have seen some YouTube videos with Sanjeev in them, and it appears to me that he knows what he’s doing. Personally, I am willing to give him the benefit of the doubt, and say that his style of investing just didn’t work in the environment of the time. Alex Wright now heads FSS, and he has shown an impressive performance with other funds.

I am actually thinking of selling down some of my OEICs, maybe getting rid of a few stragglers, either due to their relatively small size, or their persistent underperformance. This has been prompted by the new fee structures for discount brokers that has come into effect. I need to be careful, though, and try to balance my expectations for the kinds of returns I am likely to generate. I find that I tend to do very well after the market has had a period in the doldrums. The market has been going gangbusters since 2009, so I just need to be conscious of the fact that I could be making a switch at precisely the wrong time.

Stock valuations look pretty consistent across all market caps (http://is.gd/IyrsUS), so there might be a more level playing field between the top 100 companies and the rest of the market. It is interesting to see a plot of the ASX (red line) and MCX (blue line) in the chart below. Note that although the MCX has beaten the ASX handily over the last decade, both indices were neck-and-neck at the end of 2008. Really, the MCX looks like it is acting like a high-beta version of the ASX. Good on the way up, not so good on the way down. So there needs to be a note of caution there.

chart

My best performers include RGS (Regenersis), THT (Thorntons), TCG (Thomas Cook), and TLDH (Top Level Domain Holdings). They were either growth or recovery plays. The first three companies will be familiar to many people. I still hold THT, although I regret selling all of them.

TLDH is an internet company: “provide services in all facets of the domain name industry, from registry ownership and operations to consumer sales through its Internet Corporation for Assigned Names and Numbers (ICANN)-accredited registrar.” I had written about TLDH in the past, negatively. In October 2013, the company had a placing in which there was heavy director participation in order to commercialise their domains. The share price sank on the announcement. I changed my mind about the prospects on TLDH, figuring that the company would actually do good business and earn high returns on capital. I bought at 5.99p. I sold out in March at 15.0p when I realised that revenues were unlikely to come through as quickly as hoped. The company changed its ticker and name to MMX (Mind and Machines Group) in March. I intend to keep an eye on it. You never know, I could change my mind and decide to buy some again.

Now is as good a time as any to build up a “watch list” of hi-tech companies. It’s impossible to know, of course, exactly how far along the hi-tech bull market we are. With companies like ASC (ASOS) coming off the boil, and internet companies comping to market at very stretched valuations, we may have already reached the peak. But that’s only MAYBE. For all I know, these companies are merely pausing for breath in a bull market that could run for a few more years. I think it’s sensible to stay on the sidelines for now, and wait for the enthusiasm to be drained from the sector.

In terms of my worst performer, that would be OFF (Office2Office), which does office supplies, and suchlike. I bought in at around 46.1p, and sold on 2 January at 29.0p, for a 37% loss. Ouch. Their trading update on 13 January was downbeat, sending the shares down around 14%. I had neglected to write down my reasons for selling, which is an oversight on my part. I clearly thought I made a mistake.

My golden rule for turnarounds is: if you think you’ve made a mistake about its turnaround potential, then sell, even if you have to take a hit. If you had seen the RNS, and took that 14% hit, you would have sold out at 24.5p. The share price is now 20.75p. Turnarounds are risky, and you need to be able to take decisive action.

So, overall, my investing performance for the year probably rates a C, maybe C-. Still, I guess 28% is not to be sniffed at – I could imagine a lot worse results! But it could really only be that it was all down to luck. The bull market has been humming along nicely for a few years now, so it’s not certain that small and mid caps will outperform the blue chips. It’s simply too difficult to say whether the Footsie will be up or down in a year’s time.

It’s also worth noting that relative performance can depend critically on whereabout you choose endpoints. The start of the 2013/4 tax year coincided with a low point in the indices. A few days either way, and my outperformance might well have been in double-digits. I also find that I tend to have phases where my performance is quite contrary to the indices, with frustrating declines when the indices are advancing, but then with healthy advances even in the face of poor overall market performance. It happens like that sometimes.

Anyway, that’s enough rambling from me. Happy and prosperous investing to you all.

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Recovery position – additional perspective

Schroder’s “The Value Perspective” wrote an interesting article in Jan 2014 entitled “Recovery position – Companies that have fallen heavily in value can go on to make big returns” (http://is.gd/doMrkE)

The notes that of the shares that lost 90% of their value, just 3% went bankrupt. About 40% of them lost money. 16% went on to 5-bag.

I have taken the values from their graph, and re-computed returns on a spreadsheet (http://is.gd/Onro8J). I have made an assumption that the high end of companies returns 500% returns is 2000%.

This raises a number of interesting observations. One is: can you improve your odds? My answer is: I can possibly give you three yesses and a no.

My first ‘yes’ is that you can probably improve your odds by reading RNSs, and eliminate those companies which say that value is unlikely to be attached to the company.

My second ‘yes’ takes the form that you should look for extreme cheapness, rather than just a 90% fall per see.

Before I get to my third ‘yes’, I want to give you my ‘no’: making money at this is a numbers game, not an intelligence game. Intelligence could well be counterproductive in this exercise. You have to go in with the attitude that you DON’T know what will happen, NOT that you have insight into the situation.

My third ‘yes’ is that you can probably improve your chances with highly-volatile shares. PREDICTABILITY is BAD. You want high uncertainty, not high certainty (insofar as you are not CERTAIN that the company will fail).

What you are doing is aiming for long-tail effects. Your median return is around -14.5% (i.e. negative), as shown in row 6 of the spreadsheet. But the mean return is 261%.

You need to place many bets, and get lucky, rather than place concentrated bets.

These conclusions are nothing new. If memory serves, Tweedy Browne wrote a paper on catching falling knives, and noted they obtained market-beating results. The above-average returns seemed to be from the longshots that paid off. So if you adopt the strategy, you should probably expect most of the shares to not work out.

In my observations above, I suggested using high-volatility shares. I suggest that as a proxy for the uncertainty surrounding the company’s prospects. I think that liquidity is also likely to work in your favour. One measure of volatility might be the company’s beta. I’m not sure I like that measure, as it measures share price movement correlated with the market. But that’s not quite the same as I’m suggesting. I don’t think high betas are going to provide an advantage per se. I’m just throwing ideas out here … you could of course actually take historical share prices and compute a normalised standard deviation. Failing that, if that was too much bother for you, then you might take the 52w high less 52 w low, divided by their average. That will give you a crude proxy for volatility.

Happy investing to you all.

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