Dealbreaker checklist

I had heard of the idea of checklists some time ago, and even put together some ideas that I did not make use of. I have a couple of objections against checklists:
1. It’s too easy to end up with a laundry list of numbers, with the result that you cannot see the wood for the trees
2. It is difficult to adapt well to different investing styles. For example, a company may be a great turnaround play, a great momentum play, or a great steady compounding GARP. What you would look for in each case may be completely different. Turnarounds are likely to be of low quality, with high debt. Steady compounders are likely to be of high quality and low debt, and hopefully with net cash. How will a checklist adapt to these scenarios?

Charlie Munger offered some sagely advice:

It is remarkable how much long-term advantage people like [Warren Buffett and myself] have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.

With that idea in mind, I have started to put together a “dealbreaker” checklist. Rather than tell you what to buy, it tells you what not to buy. If a company satisfies any of the criteria, then it should be immediately rejected:

  1. listing less than 5 years (exceptions: government issues, and spin-offs)
  2. Chinese/Israeli/Indian/African/etc
  3. never made a profit

I’m tempted to add: all AIM resource stocks.

What’s on your dealbreaker checklist?

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$DTG.L – Dart Group – some thoughts

I’m not saying that Ryanair is a cheap-and-cheerful airline, but …

So a passenger was forced to land a plane after the pilot fell ill at the controls. Ryanair have since charged the passenger for his seat upgrade.

Or, how about:

Say what you will about Ryanair, but their tight fuel reserve policy guarantees a search radius of not more than 50 miles if one of their planes went missing.

If that tickled your fancy, then there’s more jocularity to had here: http://is.gd/iJjfJM

OK, now on to the actual point of the post …

RYA (Ryanair) released its full year report today, announcing that revenues had increased 12% and EPS increased a massive 69%. Load factors were up from 83% to 88%. The shares rose nearly 6%, as you might expect.

In initial trading, DTG (Dart Group) rose over 1.6%, presumably on the back of RYA’s report, but has since eased, and is now up only 0.2% to 403.25p.

It is interesting to note that RYA’s share have been range-bound since April, and now look to be making a breakout. Remarkably, DTG has been following a similar pattern since April 10, trading in a very tight range.

DTG had a great run before that, rising from 300p in mid-March to 400p by 10 April. That’s quite a move. I had been discussing the matter with WheelieDealer (https://twitter.com/wheeliedealer). He’s a nice chat, and undoubtedly a much savvier investor than me. He also runs a blog: http://wheeliedealer.weebly.com/

Given such a great run-up, a period of consolidation seems logical. My hypothesis is that it is part of a continuation pattern. There’s no guarantees of course, and I must once again remind everyone that I’m useless as a technical analyst. The consolidation period seems plenty long enough, too, so I’m hoping that it will make a move soon. Maybe RYA’s results will act as a trigger for a move upwards.

The share price did crash in June 2014. It went below 200p. I’ve looked through my notes, but can’t see my thoughts on the move. I really ought to do better than that! I remember being in two minds about what to do next. Many may have taken the view that DTG had gone far enough, and it was time to take money off the table. I am sure I had that view myself, so I certainly can’t hold it against anyone who sold at that time. If it was bought as a momentum trade, then I am very sympathetic with a decision to cash out. My view is that momentum trading definitely requires a selling discipline – which is something along the lines that you think that the trend is broken. There’s no point in going up hill and holding on all the way to the bottom, wherever that may be.

I am pretty sure that I saw the combination of a high Stock Rank and low EV/EBITDA as a reason to hold on. I think, also, that at the back of my mind that actually DTG is a good growth stock. Look at the numbers. DTG had revenues of £268m 9 years ago, compared to £1120m recently. Even during the credit crunch, revenues only dipped slightly, from £439m to £434m. The year after, they rebounded strongly to £542m.

The shares have been very volatile, and in 2008, actually trading at less than 20p. Imagine buying then!

EZJ (easyJet) have also been an excellent performer, too. Their shares have risen 505% over the last decade.

I am generally against AIM-listed companies and although DTG is listed on AIM, I actually think it is one of the small percentage that aren’t garbage.

BWTFDIK

406p

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Youth, by Isaac Asimov. My verdict: poor

Youth is a short sci-fi story by Isaac Asimov. You can listen to it on Youtube (https://youtu.be/WBV2c44GxKY). It’s a little over an hour long. You can also obtain it for free on Project Gutenberg at http://www.gutenberg.org/ebooks/31547

It is a story about a spaceship that lands on a planet to explore the posssibility of space trade. The landing is low-key, and they aim to talk only to an industrialist and an astronomer. The spaceship crash-lands, however. The aliens are captured by the sons of the natives, who think them to be just strange animals. They plan to sell them as exhibits in a circus. Whilst the adults are trying to seek out aliens, the children are trying to keep them secret. The adults eventually discover what’s going on, set the aliens free, and allow them to return to their home planet.

Women do not play much of a part in this story. There is a cook, although she is only referred to. The women is a wife, whose function appears to be shriek at the discovery of the space travellers.

There is a small twist at the end, but if you read the Gutenberg version and look at the pictures, the game is given away early.

Goodreads readers have given the story 4 out of 5. Personally, I would give it 1. The story is not deep, and does not explore any original themes. I also did not think that the dialogue was convincing. The natives were too slow on the uptake at working out what they boys were up to. Either that, or the narrative was too clumsy. Goodreads reviewer Scott Kaelen called it right: “plodding and predictable … The dialogue here is iffy at best, annoying at worst”.

But hey, I am not a professional literary critic, so WTFDIK.

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$TUNG.L – some AIM lessons

Lest you think I mock too much, I’ll point out that I dropped a packet on SHOE (Shoe Zone) recently, having bought in the day before the price plunge. Mr Market sure likes to maximise theatrical effects.

TUNG (Tungsten Corp) provides electronic invoicing. I had only heard of it vaguely before today. I bring it up because its price has dropped 18.6% to 80.20p today. Paul Scott picks up the story on Stockopedia (http://is.gd/MtIWdu):

the company has admitted it needs to raise fresh cash for operating purposes. The shares are in freefall, as you can see from the chart below. … this share is a good example of how management making large share purchases immediately after bad news, is actually an increasingly bearish signal. … Am I tempted to catch this falling knife? In a word, no.

TUNG has a stock rank of 13. Its quality score is 21. I find that the Q-score needs to be taken with a pinch of salt, but when it is low, it should possibly serve as a warning indicator.

TUNG has apparently been overpromising and underdelivering.

My view of AIM is becoming increasingly pessimistic. There’s just too much garbage floating about there. Whilst there are some very good companies listed on AIM, the odds are heavily weighted against you. I don’t necessarily say to avoid AIM /completely/, only to avoid AIM generally.

Really, a lot of heartache can be avoided by only betting on companies that have a long trading history, say at least 5 years, and have demonstrated profitability. I’m not saying avoid a company just because it has made a loss, as I think there will be some value opportunities out there. But the general rule is: don’t.

TUNG has never reported a profit, for example, and increased revenues have incurred increasing losses. Its Piotroski score is 2. So whatever the directors are saying, the numbers are saying that it’s crap. Maybe the company will be profitable in a few years, earning high returns on capital. Fine. Invest then. Remember the sage words of Lynch: it’s usually better to wait for a company to turn a profit before investing.

TUNG seems to have a lot of cash, which might give investors some assurance. I say: be careful. I have seen a lot of junk apparently have a lot of cash.

One of the easiest ways of getting a picture of the company’s activities is to look at the cashflow statement. Stockopedia provides a very useful year-by-year summary.

What you’ll see in TUNG’s case, for example, is that they’ve issued £149m of stock for p/e Apr 2014. On the other side, they’ve acquired businesses with £72m. It’s much better to see that the company has accumulated the cash through careful and scrupulous retention of earnings.

When you think about it, cash on the balance sheet doesn’t mean very much if it’s the shareholders who just gave them money. It’s a depressing tale, and TUNG seem to be doing the same-old same-old as other AIM companies: raise dough, and splash it out on acquisitions. That increases the EPS growth nicely, fuelling the cycle … until it doesn’t.

I am of the opinion that AIM companies should be the companies who are least in need of making acquisitions, as they should be the ones most able to grow organically.

I’m not really of the school that says “protect the downside and the upside will take care of itself” – I think the truth is more nuanced than that – but on the other hand, I think there is a great deal to be learned from studying investing disasters. I have definitely found I have built up a better picture of what to look for over the last year. For every investing disaster that you manage to avoid, the odds become better tilted in your favour. That’s one place you can gain an edge. And investing is all about edge. It doesn’t matter so much as the specific form of the edge, as long as you’ve got one.

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$THT.L – Thorntons – I sold

THT – Thorntons – is, as everyone knows, makes chocolate.

THT, as an investment, has been very good to me on a few occasions. I have tended to dip in and out as circumstances have dictated. I did extremely well out of its initial recovery phase, which has since petered out. I’ve done quite well trading these ones.

My latest purchase of THT was on 26 Feb 2015 at 68.48p (inc. all transactions costs). It was actually part of me testing a strategy about buying big price-droppers. I have constructed a decision matrix for deciding if shares that drop 10% or more should be bought, kept, or sold. The matrix is here: http://www.markcarter.me.uk/money/synopses/2015-04-26.htm
I derived it from a Stockopedia article (http://is.gd/RGFQK0), which is in turn based on Mauboussin’s work.

My matrix is based on momentum and value, and ignores quality. The strategy is a fairly short one: 90 days.

I bought THT because the shares dropped more than 10%, the momentum was weak, and it was in the 16th percentile of cheapness (i.e. cheap rather than expensive).

Today, THT announced that Jonathan Hart will step down as CEO. The share price reacted badly (down 2.58%), and I figured it was time to bail out. On the technical side, the RSI is over 70, so definitely overbought. Price versus the 50dMA is 24%, which also looks stretched. I hadn’t been paying attention to the technicals, but looking at them now, they do suggest that now is a good time to take money off the table.

The CEO stepping down also looks like a problem for the fundamentals.

As a complete rambling aside, I recommend that you try Green & Black’s chocolate. Their milk chocolate is my favourite. I much prefer Green & Blacks to either Galaxy or Cadbury’s. It’s like comparing Cusson’s Imperial Leather soap to Tesco economy soap. Cusson’s soap is solid, and a bar lasts a long time. It was a surprise the first time I used Tesco soap. The bar tends to disintegrate immediately. It doesn’t so much form a lather, as kind of fall off in chunks into the sink. All that would achieve is clogging up the drains.

I sold out at 92.18p (again, absolutely all transaction costs included), giving me a gain of nearly 35%. I’m more than a little happy with that for a holding period of just under 3 months.

It’s too early to say how my decision matrix will work out in general. I had previously reported that another purchase, PRES (Pressure Tech), made under the same decision matrix, was only doing so-so. Well, I had spoken a little too soon, as PRES is now performing much better: up 26.8% since purchase. I was due to sell it earlier this month, but I actually decided to keep it. The yield was nearly 3.5%, had a good ROCE, and was increasing its dividend by nearly 5% pa over the last 5 years.

I intend to put my decision matrix to further use. It’s a question of sitting patiently for the right opportunities.

Readers may be interested in Bruce Packard’s blog article on THT from 1 Jan 2015 (http://is.gd/WIixPO), amusingly headlined “How NOT to run a chocolate factory”.

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$SHOE.L – Shoe Zone – my investing disaster

SHOE (Shoe Zone) is a chain of shoe shops.

I bought on 20 April 2015 at 258p. The company had a stock rank of 93, a Piotroski score of 8, and a yield of 5.2%. It passed the screen of screens, including the Value Momentum screen. The odds looked good to me, so I bought.

What could possibly go wrong? The trading statement issued the following day, that’s what. The weather was blamed, and the fateful words “below market expectations” sent the shares down 28.2% to 185p. Needless to say, I was not a happy bunny.

At that point, I decided that my investment was a bust idea, and wanted out. The question is: should I bail out there and then, or wait? I consulted my decision matrix (http://is.gd/WUoFcJ). The combination of cheapness and high momentum suggested to me that I should hold onto them for awhile, and hope for a recovery within 90 days. If it weren’t for the fact that they were cheap, a sell would have been in order.

Share price declines continued, and in fact lasted much longer, and were deeper, than I expected. The shares finally bottomed at 160p on 27 April. There was a quick recovery to 175p. Presumably it was around about those levels that people decided to bail out, and short-term traders took their profits. The flat-lined for awhile before bottoming out at 160p again on 7 May.

The shares recovered subsequently. I decided to bail today at 188.8p, figuring that I wasn’t expecting much better.

Maybe the company will go on to recover nicely, and in fact grow. It has left a sour taste in my mouth, though.

At the time, I noted that the company was listed on AIM and had a listing period of less than a year. I was aware of these facts as potential red flags, but, alas, I was seduced by the mechanical screens.

I’ll see how the shares fared 6 months down the line. My suspicion is that, unless the company pulls a rabbit out of the hat, the shares won’t go anywhere.

BWTFDIK. Not one of my better ideas.

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Share idea: LOOK Lookers

LOOK (Lookers) is a car retailer and distributor.

It issued an IMS on 14 May (http://is.gd/iAasp4), saying:

The company produced a strong trading performance in the quarter to 31 March 2015, particularly during the important month of March and the Board is very pleased to yet again report a record result for the period. This positive result was a healthy improvement on the corresponding period in 2014. … The financial performance of the group in the three month period builds on what was already a strong comparative in the previous year. We therefore believe that the results for the year ending 31 December 2015 should be in line with current market expectations.

The market reacted well to the news, sending the shares up 2.1%.

I own shares in LOOK, and it has mostly been an uneventful ride for me, having seen only a 10.4% gain since I bought them in March 2014. The outlook for car sales were looking positive at the time, the shares were on a modest valuation, so I was bullish on the stock. Consequently, I had hoped to see much more action from them, but it has not been the case.

Having said that, I do like the market’s recent reaction to the recent news. It has a Stockopedia value rank of 63, which doesn’t make it a screaming bargain. However, it does have a momentum score of 94, which is good, and an overall stock rank of 97. It also passes 6 Stockopedia screens. Among them is the Value Momentum screen. It’s not a screen that I have used that much, but I like the logic of combining momentum with a reasonable PEG score. People can, of course, argue that PEG is not value, but I do think it is worthy of some consideration as a scale of PE against growth expectations.

Price versus its 50dMA is 6.1%, so if you’re looking for a momentum trade, for example, you perhaps don’t have to worry about being technically overbought. RSI is 66%, however, which is edging towards 70, an area that would be considered overbought.

I’m happy to hold this one, and hope that we can see further gains.

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