Magic Hat Portfolio: AIR in, NPT out

My Magic Hat fantasy fund, which is mostly mechanical, is on Stockopedia: http://www.stockopedia.com/fantasy-funds/magic-hat-463/ Its goal is too achieve above capital returns greater than the FTSE350 and Magic Formula screen using a portfolio of about 12 shares selected from Stockopedia’s Greenblatt Screen. It relies on “strategic ignorance”, which means that I do not put much thought into company fundamentals.

Over 3 years, the fund has returned 33.7%, compared to 20.9% for the FTSE 350. That is ca 4% pa out-performance, which is not bad, but not great. Over the lifespan of the fund, the FTSE 350 has returned about 15.0%, whilst the fund has returned 51.8%, which I think many would find a gratifying result. Over two years, the fund has returned 17.4%, the Greenblatt screen has returned 17.1%, and the FTSE 350 has returned just 2.7%. So my fund has achieved a similar result to Greenblatt. I am a little disappointed in this, because I had hoped to improve on the results. The robot seems to be the equal of me. My fund looks to be more volatile than the underlying index, but it does seem to perform better. Compared to the Greenblatt screen, however, my fund invests in far few companies, and has far lower volatility. The Greenblatt screen has shown huge swings, whilst my fund has been rather more consistent in chugging out performance.

NPT (NetPlay TV) is kicked out of the portfolio today, having been sold at a loss of 15.9%. It now has an MFI score of C-. Good riddance! NPT tanked shortly after being added to the portfolio, so I was, understandably, annoyed. No more gaming companies for me, unless it’s something like Ladbrokes or William Hill. I have been burnt enough on gaming companies. Everything always proceeds along normally until one day you wake up with a disaster on your hand.

AIR (Air Partner) enters the portfolio. The Company provides aircraft charter brokering and other private aviation services. I am a little nervous about including it, as I have already have Dart and Flybe in the portfolio. That makes it rather too concentrated in one sector, and a potential recipe for disaster. It is fully listed, and pays a generous dividend. It has a Stock Rank of 100. So I will put it in.

There are companies in the Greenblatt screen that I do not fancy at all. I think investors will do better if they stick to dividend-paying stocks. If a stock really is of high quality, then why doesn’t it pay a dividend? AIM-listed companies also need more caution. AIM is littered with frauds and companies of incredibly poor quality. I would not necessarily say that all AIM companies should be avoided, but you should be aware that you are stacking the odds against yourself.

An example of one company that I would not touch with a bargepole is MAIL (Mail.ru), which is “a Russia-based Internet company”. Stockopedia flags the company as a potential earnings manipulator (the M-score), with one of the risks being that accruals are high as a proportion of total assets. Its net income has exploded over tenfold over the last five years – which seems too good to be true. Cash from operating activities is significantly, and consistently, below the net income figure. This is a huge red flag (no pun intended). It is also not paying any dividends. It all seems like a disaster waiting to happen.

May you be well.

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Avoid unique businesses

Reading through Paul Scott’s small-cap value report (http://is.gd/iWoObP), I see that CAP (Clean Air Power) is down nearly 30% today. He says:

it’s a micro cap which had promising sounding technology, but it just hasn’t worked commercially to date. The company was struggling before the plunge in oil price, but with much cheaper oil, one of the key cost advantages of its technology (to allow trucks to run on a mixture of diesel and natural gas) has gone … it [is] fairly clear that the existing shares might end up being worth nothing.

Its business is:

Clean Air Power Ltd is a United-Kingdom based manufacturer of natural gas powered trucks. The Company’s Dual Fuel technology works by allowing heavy duty diesel engines to run primarily on natural gas, with diesel acting like a liquid spark plug. Minimal changes are required to the standard diesel power plant. Efficiency comes as standard with Dual-Fuel, with trucks running on up to 90 percent natural gas. This technology has been applied on DAF and Mercedes-Benz engines and will form the core of any Dual-Fuel application to an engine with Original Equipment Manufacturer cooperation.

Stockopedia notes that it has been listed publicly since February 2006 (this information is a very useful recent addition to Stockopedia!), so it has had a long trading history. That is good to see. Unfortunately, it seems never to have made a profit, which is atrocious. The number of shares in issue seems to have ballooned from around 42m to 257m. The company is AIM-listed, naturally.

CAP has a stock rank of 23, which isn’t exactly high. It is frightening to think that around a quarter of the companies on the stock market are worse than this. The stock rank looks like it may be receiving a boost from its Value score (78). Its Momentum score is 19: a sign that something is wrong. Its Quality score is an abysmal 4.

If the quality score is low – let’s say below 20 – then you should definitely take that as a severe red warning.

Investors could have avoided becoming entangled with this nightmare stock easily:

  • it has never made a profit. Preferably, companies should have a proven ability to pay dividends
  • it is AIM-listed, with a lot of shares being issued every, or nearly every, year
  • It has a low Stockopedia stock rank. Whilst some may debate how much their Quality rank picks up in terms of actual quality, a rank of 4 makes this company almost certainly uninvestable

Most of the comments about the stock on ADVFN look pretty sensible, although you’ll always find some deluded/deluding soul:

A gamechanger in a sizzling hot market should attract at least 2 if not more players interested to invest and or partner; I am hoping CAP can then achieve a fair deal for existing and future investors

What I would like to add about companies to avoid is this: never invest in an unusual businesses. Converting diesel engines to use natural gas counts as unusual. As far as I am aware, you will not find any other listed company that does this as their main business activity.

As Peter Lynch reminds us: “long shots almost always miss their mark”, and “it’s usually better to wait until a company turns a profit before investing”. You will save yourself a lot of money if you follow those two principles!

Update 03-Aug-2015: I learned that on 28-Jul-2015 the company issued a statement saying: “in the event of an offer, and partly due to the short term financial constraints that the Group is operating under, the Board can provide no assurance that significant value will be returned to shareholders.” Translation: this company is dead. Sell!

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Website: Simply Wall Street

Simply Wall Street is a website aimed at helping investors understand the stock market by turning complicated data into simple visuals.

Here is an example of one of their visuals:

hsba

Up to 30 companies can appear on their main grid. As you can see, a  company is scored on the following areas:

  • Value – fairly self-explanatory (e.g. PE ratio is a metric they look at)
  • Future – this is future growth rates based on analyst estimates  (e.g. does the average analyst expect revenue to increase by 50% or more in 2 years)
  • Past – historical growth rates, taking into account such things as 5-year growth in EPS and ROCE
  • Health – these are quality measures, covering liquidity and solvency
  • Income – it covers not only if the stock is an above-average dividend payer, but also considers the dividend volatility, and its sustainability

All bases are therefore covered, except one: there is no share price momentum.

The interpretation of the snowflake is intuitive, and doesn’t require much in the way of explanation. It is worth noting, though, that the greener the blob, the higher the overall score.

If you click on a snowflake, you can see more details about the company. The first thing you see is their summary. For HSBC it is “Undervalued established income payer with sound financial health”. The snowflake gives you a good idea of what you might expect. It looks like a solid dividend payer in good health, with good value, but I wouldn’t necessarily expect growth to be particularly good.

Below that is a section on competitors. You can see the snowflakes for the peer group in the database, rather than the peer group within the UK.

The page then shows a more detailed breakdown of the scores, looks at executive compensation, and gives a description of the company.

The main page shows results from the Footsie. You can obtain snowflakes and other information for individual companies by using their search box. For example, I pulled up the details for DOM (Dominos Pizza): “Established income payer, in a sound financial position with a proven track record”.

The database does not cover AIM-listed companies.

An important section to consider is their “Explore the market”. It is broken down into three main areas:

  • grid views – which I will discuss below
  • options – where you can change the market you filter on
  • industry filter

The grid view is the most interesting. You can obtain list of candidate shares by clicking on the relevant menu item:

  • Popular – which gives results for the Footsie
  • “Your first investment” – whilst most of the results are UK companies, there were a fair number that were not, like Boeing, Hugo Boss, etc.
  • “Bank account beaters” – for income stocks
  • Potentially undervalued
  • High growth potential
  • “More views” – covering such areas as deep value, unloved high growth, etc.. Perhaps the view of most interest will be “Big green snowflakes”, which are all the companies ordered by their total score.

If you would like to find out more, you can visit the link I provided above, or read their press release.

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#sourceforge – the beginning of the end?

I’ve had problems looking at Sourceforge projects. There were some sit-related problems earlier this month, but they had ostenbily been cleared up. The problems seem to have arisen again, though. The official problem has been stated on Jul 17:

#SourceForge is down due to a storage platform bug, we’re working 24×7 on recovery & data validation to restore services! Slashdot restored.

I suspect that this is not the whole story, though. Why so?

On May 27, 2015, Sourceforge issued a statement (http://is.gd/Bsi6Zu) regarding kickback from users about the GIMP-Win project:

“GIMP-Win project wasn’t hijacked, just abandoned” … In cases where a project is no longer actively being maintained, SourceForge has in some cases established a mirror of releases that are hosted elsewhere.  This was done for GIMP-Win.

That seems innocuous enough, until you read some of responses to the article:

By hosting it anyway wrapped with sleazeware, you cross a line and become just one of those sites that re-host files wrapped with sleaze. You’re playing a dangerous game, and you’ve made a mistake. So you must remove this project now, or deactivate the sleazeware, and then we can talk about how to keep mistakes like this from happening in the future.

So, the gist of this is:

  • the GIMP developers decided to choose another host for their project
  • they abandoned Sourceforge as host
  • Sourceforge maintained a mirror with the new site, at their own discretion, but bundled adware services in their own installers
  • the GIMP developers expressed their displeasure at this practise, and requested that Sourceforge remove GIMP from their site
  • Sourceforge refused, and locked the original developers from the project.

So Sourceforge has been charged with acting unethically – a view that I agree with.

We now get to those mysterious recurring outages at Sourceforge, and why I am speculating that this is tied up with the GIMP fiasco.

To see why this is a feasible hypothesis, we need to turn to an article on Reddit (http://is.gd/FLLGQ1):

“Don’t like what’s happening with Sourceforge? Petition their mirrors to stop providing them service.”

The deal here is that Sourceforge is not the sole hoster of its files. It requires mirroring host sites to cope with the bandwidth. The mirroring sites are usually open-source friendly sites that generally provide the mirroring as a public service, as far as I know.

It appears that they are now receiving signnificant volumes of requests from ordinary users to stop their mirroring. As you can see from the Reddit article, there have been many mirroring services that have capitulated to the request, or at least stated that they would re-evaluate their position.

Think about it. Why would a server mirror Sourceforge when all it does is create admin work for themselves, at no benefit to themselves, with significant kickback from the public? Answer: none that I can think of.

I see that Kent still seems to be up-and-running. This is likely to be a significant mirror, and it would be good for the Sourceforge protesters if it was taken offline.

This likely explains Sourceforge’s technical problems. It now has to take up the slack from the mirrors that have been taken offline. This has proven to be too big a problem, at least so far.

So Sourceforge is facing user hostility, uncooperative mirrors, and overburdened infrastructure. Any resources that they do pour into it could amount to pouring resources into a losing proposition. Hence the title of my post: “the beginning of the end?”

Update 21-Jul-2015:

  • A Reddit article suggests that Sourceforge is down due to storage problems (rather than mirroring problems), and details why the problems might be sudden, and ongoing, suggesting that they have a basic infrastructure problem
  • A TechRepublic article from 24-Jun-2015 has more depth into the malware issue (“It’s time to go away, Sourceforge. That once king of app hosting, Sourceforge, has lost its crown and its way. Jack Wallen discusses why Sourceforge is now Scourgeforge. “)
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Thinking about growing my hair for charity

In the 80’s I used to have comparitively long hair. My heuristic for deciding to cut my hair was when it interfered with my eyes. I had a “watershed” moment in 1995/6 when I was working on my PhD. There was a bet for me to have my head shaved. Ever since then I have been keeping my hair very short. I used to take it either down to the bone (pretty rare, actually) or a number 4 at most. I used to cut my hair myself, but when I moved back with my parents I got my dad to do it. I think my dad doesn’t want to do it anymore, as it’s too much hassle. I don’t want to go the barbers, because it’s like six quid for a haircut. I’m unemployed at the moment, so I don’t want to cough up six quid for a haircut. I have to be extra careful with money. I’ve hit upon a Plan B; which is to say, not cut it at all. If I grow it long enough, I will even be able to give it to charity, which I think is a great idea. Human hair is used to make wigs for people with cancer. Due to my advancing years, I have quite a lot of grey hair. Fortunately, there are some that accept it. It’s something I want to do , but I guess I’ll have to see how I feel about it as my hair lengthens. I don’t know what I’m going to do when my hair gets down to eye level. Let’s see if I can go through with it.

My hair at about 4-5 months length, albeit starting from a length close to 0. I think I've got the

My hair at about 4-5 months length, albeit starting from a length close to 0. I think I’ve got the “bed head” look down to a T.

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Not entirely humorous

The subject of castration came up recently, so I thought I’d share a couple of anecdotes …

When I was living with my parents in Essex, we had a young Jack Russell terrier called Toby. He hadn’t been fixed, and there came a time when he started to become outrageously horny. He always sat with my father, who became the incessant subject of his amorous advances. My grandparents were staying over at the house at the time. I was either in my late teens or early twenties. I found his shenanigans hilarious, and my giggling would often set my father off, too. So, imagine the scene, generations of the family sitting around for civilised conversation. My father simply rests his arm on the base of armchair, to be pounced upon instantly by the terrier, who then proceeded to “show it some loving”. The all-round tension was further heightened when I cheekily dead-panned the line “He probably thinks dad’s arm is a lady dachshund”. I chuckled, my dad showed a mirthful response, although clearly embarassed, and the rest of the family just sat by passively as if nothing was wrong. I think it a catalyst for having Toby fixed.

Shortly after moving to Scotland, someone’s stallion had escaped from its owners. Running down the road, it diverted itself into one of my fields. I called the police, who, shortly after, was able to identify the owner. The owner, a middle-aged lady, and her son came around to inspect the horse. I was in my early 20’s, and her son was a few years younger. She said that the horse was “entire”. I asked what that meant, and she explained that it meant “not castrated”. Oh! She said that it had probably escaped because, like “all young males”, it was prone to aggression. I couldn’t help thinking at the time that she was referring to either me or her son indirectly.

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CHAR – Chariot Oil & Gas – and impossible share prices

My investing process.

My investing process.

The problem with investing is that when your results are good, it’s sometimes difficult to distinguish between genius and being the luckiest idiot in the world …

In April, I had reported that I help shares in CHAR (Chariot Oil & Gas) (http://is.gd/BMVanD). I knew that it was a share I could end up looking foolish for owning. Here’s what I said at the time:

Bought this one earlier in the year because it’s a net-net. It’s not done anything yet, but we’ll see. It qualifies for 3 Stockopedia screens, all of them bargain screens. That shouldn’t be too surprising considering how cheap it is. Actually, Stockopedia’s Negative Enterprise Value Screen has shown a pretty dismal performance, being down 30.8% over 2 years, underperforming the Footsie by about 40%. Maybe it’s a strategy that works best after a market crash, when there are plenty of bargains available.

I bought in Feb 2015, having noted that it was a net-net and had a significant directors purchase in Oct 2014 by a director at 10.5p. Come May, the shares were up over 25%, so I decided to sell at 11.06p. I figured that this was a good gain for 3 months, the shares were overbought anyway, and, well, the company never made a profit.

If I were to play with net-nets again, I would probably stick to companies that had at least demonstrated some ability to generate a profit, and that I thought were not scams (I’m not saying that I thought CHAR was a scam) or Chinese companies. That is a nigh-on impossible trick to pull off in this market. I know, because I checked recently. Net-nets will almost certainly be AIM companies in any event. I wouldn’t rule them out just because of that, though. Net-nets are unlikely to be the mainstay of an investing portfolio, simply due to the lack of candidates.

I set a share price alert of 8.5p on CHAR to see if it would be triggered. The shares were trading at this level for much of mid-December 2014, and I was curious to see if they would go down to those levels. Clearly, they did.

I haven’t bought any more, though. I really don’t like the fact that CHAR has never been profitable. I have set a new price alert of 5.95p, at which I may consider buying again.

Why 5.95p? Because it’s a 30% reduction of the current “impossible” price of 8.5p. I had read that a famous investor said that when you see a share trading at an impossily cheap valuation, try to buy it for 30% less. Perhaps a knowledgeable reader will be able to place the name. You may be surprised.

One such surprise happened a couple of days ago: LMI (Lonmin). I am an unhappy holder of these shares, and noted later, after further falls, that the shares were “impossibly cheap”. I set an alert for them when it was 30% below this figure, to 80p. On the 13th, the shares hit 74p, setting off the trigger. I had decided not to buy – I wasn’t prepared to risk it – which in hindsight was a pity, because the shares have bounced back sharply, standing at 81.5p now.

According to Stockopedia, the company has a PBV of 0.23. Although the company has many problems (what would you expect at current valuations?), we have to remember that it’s a “real” company, not some AIM nonsense. I heard that Barron’s reported that LMI was a top pick at the London Value Investing Conference. I think it was picked by Schroders. If anyone can confirm or deny that, I would be grateful.

So there we have it: when trying to buy value shares, set a target 30% below the impossibly cheap valuation level.

Now all I have to do is practise what I preach.

May you all be well.

Edit 15-Jul-2015: Fixed errors. “I’m saying that I thought CHAR was a scam” now reads “I’m not saying that I thought CHAR was a scam”. One word can make all the difference!

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