A Volcano Of An Investment

You might think it’s unbecoming for an investment blog to headline an article with “A Volcano Of An Investment”. That’s not my headline, though, but was the headline for an article on the Motley Fool about SUH (Sutton Harbour Holdings) on 17-Dec-2010.

I haven’t really been following the story, but a brief synopsis of the article is as follows:

A marina and a fisheries business … it exited its ill-fated venture into an airline business … it will now focus on building long-term value through waterfront regeneration activities … management know they have to turn things around or suffer the consequences. The 11% presence on the shareholder register of Crystal Amber — an activist fund which takes stakes in undervalued companies and takes action to enhance value — confirms this in my view


The company traded at below NAV at the time, so it looked like a value play. I commented, shooting from the hip, that there seemed like a lot of management hubris if it became involved with an unrelated business. I noted the low z-score, and the fact that its ROE over the last year had been about 5% – a very lacklustre figure.

So just how well would you have done? Not very, as it turns out. The share price is 20.59p, from 37.5p when it was recommended. I see that it had a placing of £6m in Dec 2011 (against current market cap of £21m) to fund development costs of its marina and pay down some debt.

Riddle me this: why would I pony up dough to invest in a company that has had an average return on equity of less than 5%?

SUH perhaps exemplifies all of the typical problems with deeper value investing, and why I tend not to go for this style of investing any longer. It’s possible to come up with a bunch of theories as to why something will do well, but unless you’ve got the kind of solid insight into a situation that some-one like Wexboy has, all too often the theories turn out to be wrong. It’s why I don’t like net-net investing. Far too often the companies are just junk for known valid reasons.

It’s a well-known saying in value-investing to take care of the downside, and the upside will take care of itself. I’m not so sure about that. Unless there’s some clear upside or growth opportunity, I think it’s all too easy to buy into a share that just flops around gasping for breath, like a fish on a jetty.

One approach that I do like is that adopted by John Kingham at UKValueInvestor. I think his approach of looking for reasonable value in a universe of high quality companies is likely to be the sanest, safest way to beat the market. Unless you’ve got the skill of Wexboy, that is.

Even if you’re not an investing genius, it’s possible to find some interesting value companies. A couple of months ago I bought some JDG (Judges Scientific), the scientific instrument maker. It’s got a very good growth story, and it’s difficult to believe that you could have bought in at less than 10X FCF at the time. Ah, but I boast. JD. (JD Sports) still looks pretty good to me, trading at an absurd EV/EBITDA of less than 3. I also like IAE (Ithaca Energy), which is involved in the exploration, development and production of oil and gas in the North Sea. It’s trading on a rolling PER of 3.7 according to Sharelock Holmes, and I think that there is a significant growth story attached to this stock. Expect a few bumpy rides on this stock, as I have no doubt it will experience at least its fair share of growth pains.

What else? I think there are some companies in the definitely “not junk” value range. Like MCRO (Micro Focus), which I picked up in May, and still trades at less than 10X FCF. It has a monster ROE of 114% according to Sharelock Holmes. It earns high margins, spits off cash, and we can probably expect the company to increase its debt levels and return more cash to shareholders. It has doubled revenues over 5 years. Another company I like it ITE, the conferences organiser. It’s trading at less than 10X FCF, too, and is similar to MCRO in the respect that it has high margins and high return on capital. I had seen an article disparaging ITE as an investment idea recently. Some of its events occur only once every 2 years, making comparisons year-on-year a little tricky, allegedly. Having said that, sales and EPS have grown nearly every year over the last decade – although there was a blip downwards in 2010.

Happy and prosperous investing to you all! And avoid those funny-tasting cigar butts!

About mcturra2000

Computer programmer living in Scotland.
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