Trention AB is a Sweden-based company that invests in and provides credit to companies. Within credit operations, Trention AB offers various types of financing solutions. In the investment business, the Company invests directly in both listed and unlisted, primarily Swedish small and medium enterprises. Trention AB is listed in Sweden (NASDAQ Stockholm) under the ticker TRENT.
Below I present my key arguments for why each margin of safety criteria is considered to be fulfilled. At the end of the write-up, I also include some “other factors and characteristics” that I consider to be of importance for the idea.
Margin of safety
1) Selling below liquidation value?
TRENT is currently trading at a price-to-net-current-asset multiple of 0,71x.
Market capitalization = 182M SEK
NCAV = 255M SEK
The company’s current assets consist mostly of short-term loans and cash.
Not included in the NCAV amount stated above is TRENT’s 26,4% ownership in the Swedish publicly-traded company Saxlund Group. At the current share price of Saxlund that position has a market value of 10M SEK. Although this position is stated as a non-current asset, one might argue that it can be considered to be more of a “readily ascertainable asset” nature.
Together with the NCAV amount stated above, a fairer liquidation value multiple would then be 0,69x
As of the latest financial report (Q2 2019), TRENT has posted ten consecutive quarters with positive net income.
3) Sound financial position?
TRENT currently carries 20M SEK of debt on the books. That is a small and financially sound amount considering TRENT’s debt-to-equity ratio of 0,1x.
TRENT has a Z-score of 7. That’s well above the cut-off for the indication that financial troubles could lie ahead (i.e. risk of bankruptcy).
From an income statement perspective, TRENT has shown that the amount of debt they carry is not an issue (i.e. they have had no problem covering their interest payments).
4) Responsible management?
From my research on the current management team, I have not found anything that indicates that they are fraudulent or irresponsible.
Considering some recent events related to a reservation of 26M SEK for potential credit loss one might argue though that their track record as capital allocators has its weak spots. On the other hand, the fact that they have recently formulated a dividend policy of 30% of the net income demonstrates that they at least are to be considered somewhat shareholder-friendly in their capital allocation decisions.
The chairman of the board (Mats Gabrielsson) has considerable skin-in-the-game as he owns 40,95 % of TRENT.
Support.com Inc is a provider of cloud-based software and services for technology support. The Company offers outsourced support services for service providers, retailers, Internet of Things (IoT) solution providers and technology companies. Support.com Inc is listed in the United States (NASDAQ Stock Exchange) under the ticker SPRT.
Below I present my key arguments for why each margin of safety criteria is considered to be fulfilled. At the end of the write-up I also include some “other factors and characteristics” that I consider to be of importance. Hopefully, with this leaner format, compered to previous write-ups, I’m able to speed up my writing process as I take my scribbled down back-of-the-envelope notes into something that’s worth publishing.
Margin of safety
1) Selling below liquidation value?
SPRT is currently trading at a price-to-net-current-asset multiple of 0,65x.
Market capitalization = $31,7M
NCAV = $48,7M
The company’s net-current-assets mostly consists of cash and cash equivalents and short-term investments.
SPRT has a negative enterprise value.
SPRT is selling at a price-to-net-cash multiple of 0,87x.
Net cash = $36,5M
SPRT has accumulated $143M of net operating loss carryforwards. This amount I consider to be somewhat of a hidden “asset” and something that could become a valuable commodity for the company in the future.
2) Proven business model?
As of the latest financial report (Q2 2019), SPRT has posted three consecutive quarters with positive net income.
One should note that SPRT has struggled a lot historically (e.g. the company has negative retained earnings of $-211M). However, since activist investors took control of SPRT in 2016 and a new management was put in place things have been moving in the right direction profitability wise. Mainly as a result of heavy cost-cutting.
3) Sound financial position?
SPRT has no interest-bearing debt on the balance sheet (i.e. SPRT’s debt-to-equity ratio = 0x).
The company has a negligible amount of operating leasing not on the books.
The company is profitable and sits on a large pile of cash.
4) Responsible management?
Management that has been in place since 2016 seems responsible and shareholder-friendly according to their track record as operators and capital allocators of SPRT. They seem to have a clear plan of execution to turn the company around and/or unlocking the value of trapped assets.
Other factors and characteristics
SPRT is a nano-cap market capitalization company ($31M).
SPRT recently reported the termination of certain agreements with one of their customers. As a result, the share price took a big hit. The market, in my opinion, overstated the negative consequences of what had been reported. This provided me with the entry point for my position.
Disclosure: The author is long Support.com INC (NASDAQ:SPRT)
Signaux Girod SA specializes in the design, manufacture, marketing, installation, and maintenance of sign equipment. The company has been in business since the 1960s. Signaux Girod SA is listed in France (Euronext Paris) under the ticker GIRO. Note that GIRO file their financial reports in French, so please be aware that there is a risk that I have misunderstood or overlooked something that might be of importance.
Similar to many of the other Liquidation Oxymoron’s that I own, GIRO is a nano-cap company (€13,8M) with shares that are highly illiquid. Unlike some of my other ideas though, GIRO is a family-owned and operated Liquidation Oxymoron that conducts its business in a boring and quite stable industry. When I initiated my position in GIRO at a price of €12,20 the shares were trading at a 52-week low. Not only that, looking back historically one realizes that GIRO has only traded at current price levels and valuation multiples a handful of times. As I will try to demonstrate below, GIRO is a perfect candidate for a diversified portfolio of Liquidation Oxymorons.
Margin of safety
1) Selling below liquidation value?
According to the latest financial report GIRO has an NCAV of €19,9M. In relation to the market cap of €13,8M, GIRO is currently selling at a price-to-NCAV multiple of 0,69x. However, as stated in their latest annual report, GIRO has operating leases of €3,4M. With the operating leases taken into consideration, the price-to-NCAV multiple of 0,84x is a little bit less appetizing. On the other hand, looking at the latest balance sheet we find €29,4M of PP&E. With a net-tangible-asset value of €51,5M, we here have a company that is selling at a price-to-net-tangible-asset multiple of 0,27x. Digging a little bit deeper into the latest financial report one concludes that land and buildings make up for €19M of the total amount of PP&E. Furthermore, the €19M value of land and buildings included in the PP&E value on the balance sheet is an amount that has been highly depreciated. The gross value for land and buildings is stated at an amount of €38M. In sum, although it’s hard to say what the exact liquidation value for GIRO is, looking at the numbers mentioned above I also think it’s hard to not come to the conclusions that GIRO today is selling well below its liquidation value. As Benjamin Graham has famously said;
You don’t need to know a man’s weight to know that he’s fat.
2) Proven business model?
Looking at the historical records one soon comes to the realization that GIRO’s business model is not only a proven one but a quite stable one as well. In the last ten years, GIRO has posted a positive net income in seven of those. Looking at GIRO’s retained earnings of €44M per the last quarterly report further certifies that view. However, last year was one of those three years where the company posted a negative net income. So far this trend has persisted as the last financial report (2018/2019 half-year report) also had negative net income numbers. If one is to believe management though there are some positive indicators for what lies ahead. For example, management state in the last financial report that they expect higher profitability for the second half of the year compared to the same time period last year.
3) Sound financial position?
GIRO currently sits on its smallest debt position in ten years. Per the last financial report, GIRO had €13,7M of debt on the books while they for many years carried an amount of ~€30M of debt. While the trend of a decreasing debt position is a good sign, what is maybe most encouraging is the current debt-to-equity ratio of 0,2. That is a ratio that I in absolute terms determine to be a financially sound one. Furthermore, considering that GIRO for the majority of the last ten years has posted positive net income numbers also suggest that the amount of debt they carry is manageable for them. In other words, GIRO is to be considered financial sound on income statement basis as well. Similar to some of my other ideas though, GIRO’s current Z-score of 2 indicates that financial troubles (i.e. bankruptcy) could lie ahead for the company. However, considering what I have described above, I don’t think the risk of bankruptcy as the Z-score formula suggest is a palpable or even real one in this case.
4) Responsible management?
GIRO has not only been aggressive in paying down their debt position over the last couple of years, management has also made sure that shareholders directly and continuously have gotten a piece of the capital-allocation-pie as well. In the last ten years, GIRO has paid a dividend in eight of those. A small side note to that, in 2018 GIRO paid their shareholders €10M in dividends after the company had sold one of their businesses. The €10M dividend amount is huge considering that GIRO is a €13,8M market cap company (back then the market cap was around €20M). Finally, the company has also been quite aggressive buying back its shares on the open market. In total, GIRO has bought back 7,6% of the total shares outstanding as of current date. There is a buyback program in place and it seems that management is determined to continue with their share buybacks. A side note here is that the shares bought back have not been canceled (i.e. they are held in treasury). In sum, I think it’s pretty clear that GIRO’s management as operators and capital allocators has not only been responsible but quite shareholder-friendly.
Other factors and characteristics
GIRO is owned and operated (e.g. CEO and chairman is Claud Girod) by the Girod family. As of today, the family owns 63% of GIRO.
Disclosure: The author is long Signaux Girod SA (EPA:GIRO)
McCoy Global Inc. is a provider of equipment and technologies used for making up threaded connections in the global oil and gas industry. The Company’s products are used during the well construction phase for land and offshore wells during both oil and gas exploration. The company was incorporated in 1999. McCoy Global Inc. is listed in Canada (Toronto Stock Exchange) under the ticker MCB.
Background
MCB is a company that I have owned previously for reasons similar to the ones that make up the situation today. That is, MCB is selling well below liquidation value although it has good going concern characteristics. Furthermore, MCB is trading at a historically low price (MCB is at a 52-week low and the company has not traded at these levels since 2004). From my perspective, MCB is a clear mean reversion candidate. The position in MCB this time around was bought at an average price of 0,67 CAD. As a result, MCB has been one of the worst performers in the Liquidation Portfolio so far. I say that in combination with the view that nothing has happened that mandate such a decrease in MCB’s share price. As a result, MCB is a potential double down candidate going forward.
Margin of safety
1) Selling below liquidation value?
At the current share price of 0,5 CAD, the company has a market capitalization of 14M CAD. If we put that number in relation to the NCAV of 24M CAD as of the latest quarterly report it should be evident that MCB is selling well below its liquidation value. I say that it should be evident because of the fact that the numbers above translate into a price-to-NCAV multiple of 0,6x. Selling at such a low multiple (one of the lowest ones in the Q2 2019 Liquidation Almanack) there should exist a considerable margin of safety in relation to liquidation value even though about half of the net current asset consists of inventory. What further suggest that the company is selling below its liquidation value is that I have yet to take any of the company’s 11M CAD of PP&E into consideration. That is, with a net tangible asset value of 36M CAD the company currently trades at a price-to-net-tangible-asset-value multiple of 0,4x.
2) Proven business model?
Looking at MCB’s income statement history one soon realizes that this is a company that conducts its business in a cyclical industry.[1] In this case the oil and gas industry. For MCB their success has been and continues to be correlated to the price of oil and gas. For the last ten years, MCB has recorded five years of positive net income and five years of negative net income. In the positive years, MCB has recorded good net income margins in the range of 7-14%. On an accumulated basis though the years of negative net income have exceeded those that have been positive. One will come to a similar conclusion if one takes a look at MCB’s retained earnings (-34M CAD). On the other hand, the accumulated free cash flow over the last ten years is positive. A further positive note is that MCB on a rolling twelve-month basis has a positive net income. Finally, the order intake (17M CAD) and backlog (15,4M CAD) doesn’t look too shabby either as per the last quarter. In sum, although cyclical I think it’s fair to state that MCB has a business model that has been proven to be profitable in good years but also able to survive during the bad ones.
3) Sound financial position?
For a number of years, MCB operated without any debt at all (2016-2013). During the last two years though they have carried an amount of debt in the range of 4-5M CAD on the balance sheet. Looking at the latest quarterly balance sheet the total amount of debt is now 7,7M CAD. That amount translates into a debt-to-equity ratio of 0,2. In other words, the current debt level is by no means at a level that I find alarming. One should also note though that MCB during 2012-2009 had 6-9M CAD of debt on their books. In other words, the current amount of debt is nothing out of the ordinary for MCB. A positive note in relation to their debt position is the fact that the company currently sits on 9M CAD of cash (cash and cash equivalents makes up about 21 % of the company’s current assets). Together with what I have stated above regarding MCB’s business model, I find it unlikely that MCB will struggle to pay any of their interest payments or that they will struggle to pay or refinance the 2,3M CAD portion of their debt that is short term. However, one should know though that looking at MCB’s Z-score of 1,3 tells another story. A Z-score of 1,3 indicates “distressed” if one is to interpret what the number tells you according to the original formula. As I have just tried to layout though, I think that is not the case here. On that note, MCB has had similar Z-scores during most years looking back historically.
4) Responsible management?
Apart from the valuation, what I find most intriguing about the MCB idea is related to management and how they have approached things historically. Both as operators, capital allocators, and financiers. First of all, navigating and surviving the harsh cyclical business environment that MCB operates in tells us that management is at least somewhat competent. Also, I have found nothing that indicates that management would be fraudulent or shareholder unfriendly. Quite the contrary.
During the last ten years, MCB has paid a dividend to shareholders in six of those. MCB has also bought back shares (worth 0,39M CAD) during the last two years. However, looking at the last ten year period they have been net issuers of their own shares. The total dilution though has been minor and most of the share issuance was done during 2013-2014 when the company was trading well above book value. One should also note that the total amount of dividends paid over the last ten years (21,9M CAD) well exceeded those amounts that the company raised from share issuance over the same time period (2,92M CAD). Also, one should know that there is a share repurchase plan currently in place (active until 4 June 2020) for 5% of the shares outstanding. This share repurchase plan is an extension of the one that lasted until 4 June 2019. Although the total amount that they have bought back is nothing to be excited about (0,39M CAD), MCB has used their share repurchase plans for seven consecutive quarters in a row now. This buyback consistency in combination with the way management has argued for the validity of this plan I do like though:
McCoy’s management and Board of Directors believe that the current market price of its common shares does not represent the underlying value of the Company, and has determined that the repurchase of its common shares is a desirable use of funds and in the best interests of the Company and its shareholders.
Insiders own about 3% of the shares outstanding. The CEO James W. Rakievich alone owns 2,08 %. Although insider ownership is a bit less than what I like, the compensation of insiders is at least reasonable in relation to this amount of ownership. On that note, one should also be aware that there are about 1,4M options outstanding but all are out of the money by a wide margin as of the current date.
Disclosure: The author is long McCoy Global Inc (TSE:MCB)
[1] I would like to stress that high cyclicality will be a common theme for the ideas that I present in the Liquidation Almanack going forward. Cyclicality is often the very reason why companies are pushed down to a price that is so low that one can come to the conclusion that it’s selling below its liquidation value. On the other hand, the cyclical nature of these businesses also creates the foundation for a strong mean reversion candidate. The important thing is to sort out those companies that can survive the downturn so they can enjoy the fruit that comes with the upswing of the cycle. One part of such evaluation is the historical track record of a company’s business model (i.e. historical profitability).
Continental Materials Corp based in Chicago, Illinois, was founded in 1954. The parent company owns six manufacturing companies in the building and industrial products markets in North America. The companies operate primarily in two industry groups; Heating, Ventilation and Air Conditioning (HVAC) and Construction Products. Continental Materials Corp is listed in the United States (American Stock Exchange) under the ticker CUO.
Background
CUO was one of my latest additions to the Liquidation Oxymoron’s portfolio for Q2 2019. The position was purchased at an average price of $15,25. Compared to many of the other ideas in the Q2 Liquidation Almanack, the pitch for CUO is a bit less straightforward. Still, I would argue that CUO is one of my most interesting positions because of the multiple catalysts in play and several favorable factors and characteristics that go along with the idea.
Margin of safety
1) Selling below liquidation value?
Looking at the latest financial report, it’s perfectly obvious that the CUO has a liquidation value that well exceeds the current market cap of $26M. For example, the company’s net-current-asset-value (NCAV) equals $43M. However, because of events that took place since the Q1 report that view is more debatable as of current date.
Here is the deal. During 2019 CUO got a favorable outcome from a legal situation which resulted in a settlement agreement of $15M. On top of that, the company recently sold one of their wholly-owned businesses for $27M. In total, that $42M would equal $25 per share in cash alone. As a result, per the last quarterly report, CUO had an NCAV of $43M with about half of the current assets in cash and cash equivalents. In relation to the market cap of $26M, we would here be talking about a company that is selling at a 0,6x multiple in relation to NCAV. However, what is not reflected in the last quarterly report and the numbers mentioned above is the fact that CUO made three acquisitions during May and June 2019. In other words, a large portion of the cash as stated on the latest balance sheet is most likely gone when the next quarterly report is published. How much is as of current date unknown as they have only released a few details about the transactions made. There is one exception. One of the three transactions was In-O-Vate Technologies, Inc. which CUO acquired in June for $12,3M.
Although the amount of cash will be lower in the next quarterly report and we, therefore, don’t know the liquidation value as of current date, I still think it’s reasonable to assume that CUO is selling well below its liquidation value as of today. I base that belief on a three-part argument that: 1) the businesses that CUO did not sell are profitable and should be worth something as they managed to sell the one that was not profitable for $27M. 2) The businesses that they have acquired should also be profitable assuming that they have followed their stated acquisition profile (more about that below when I discuss the second margin of safety criteria). In other words, the value of the $42M in cash should at least somewhat be carried over going forward. And finally, 3) apart from what I have already mentioned as it relates to the NCAV it should be noted that there is $15M of PP&E that already sits on CUOs books. Arguably that amount adds to the margin of safety of CUOs liquidation value as of today. That is, the company currently has a net tangible asset value of $62M which currently translates into a price-to-net-tangible-asset-value multiple of 0,4x.
2) Proven business model?
Looking at the earnings record for CUO one realizes that the company has both struggled and prospered historically. For the last ten years, CUO has reported more years (six) with negative net income numbers than positive. However, stepping beyond the last ten years by looking at the company’s retained earnings one gets a more favorable impression of CUOs business model. Retained earnings amount to $74M at the end of Q1 2019. On a similarly positive note, the accumulated amount of free cash flow over the last ten years is positive. The difference between earnings and free cash flow has to do with the fact that CUO made two quite major write-offs related to investments in the mining industry during the last ten years. Although what I have just stated is important to note, the previously mentioned changes in the company’s corporate structure make this information less valuable when one is to evaluate the whether CUO has a proven business model or not. Furthermore, because we know so little about the businesses that were acquired we are dealing with a few unknowns as it relates to that evaluation.
Here is what we do know though that leads me to believe that CUO has a proven business model going forward as well. First of all, the businesses that were not sold off were profitable per last quarter and what was sold was unprofitable. Secondly, going forward they are focusing on acquiring family-owned manufacturing companies and thereby moving away from their historical bad investments in the mining industry. Also, although we know little about the companies acquired (American Wheatley and Global Flow Products – price unknown, In-O-Vate Technologies Inc – price $12,3M, and Serenity Sliding Door Systems and Fastrac Building Supply – price unknown) we do know something about the CUOs acquisition profile that led to these specific acquisitions. Specifically, CUOs acquisition profile state that CUO is looking for companies with “Profitability – 5% operating margin minimum” but also companies with “Risk profile – Stable returns”. Although I don’t know for sure, I give CUOs management the benefit of the doubt here and believe that the businesses they have acquired follow their stated profile. In sum, on a consolidated basis, I believe CUO should be profitable going forward and therefore to be considered to have a proven business model.
3) Sound financial position?
CUO had $0,8M of debt on the books per the last quarterly report. One should here note that ten years ago the amount of debt was $13M. With such a small portion of debt together with what I have just stated about the company’s profitability history, it should come as no surprise that CUOs current Z-score amount to 4,2. In other words, a Z-score that is well above the cut-off for what could otherwise be an indication that troubles lie ahead (i.e. risk of bankruptcy). The only question one has to think about as it relates to this margin of safety criteria is; will CUOs levels of debt change as a result of the recent acquisitions? My answer is, I don’t’ have any reason to believe that a major increase in debt will be seen going forward given the amount of cash at hand when CUO made these acquisitions. At least, not an increase that would jeopardize or change my current view about CUOs financial position.
4) Responsible management?
I think there are a few positive things to say about CUOs management from a capital allocation perspective although they have made some mistakes historically (e.g. the investment in the mining industry as discussed previously). Looking at the last ten years CUO have been net buyers of their own shares. Going forward that seems to be the case as well given the fact that a stock repurchase plan for $1M is in place for the next 36 months (starting 6 of March 2019). The $1M might first seem like an insignificant amount for a $26M company. In absolute terms that is true. However, given the fact that CUOs free-float consists of only 397K shares (there are 1,72M shares outstanding in total), that is not so. In numerical terms, at the current share price of $15,25 the $1M share buyback plan would equal about 17% of CUOs free-float.
The low liquidity is related to one of the main reasons why I have confidence in the responsibility of CUOs management. That is, the CUO is both founded and majority-owned by the Gidwitz family. Insiders together own 73% of the shares outstanding. Management has arguably considerable skin-in-the-game both financially and emotionally which should at least somewhat align them with outside shareholders. On a negative note though, one should note that CUO has never paid a dividend to its shareholders (not during the last ten years at least). In sum, my view is that CUOs management is neither fraudulent nor shareholder unfriendly.
Other factors and characteristics
Using some of the information from CUOs acquisition profile mentioned previously we can make an educated guess about the added profitability from the three acquisitions they have made. CUO state in their acquisition profile that “Size – from $10m to $100m in Revenue” is one of their target criteria. Using their stated “Profitability – 5% operating margin minimum” criteria on top of that we can calculate potential amounts of added profitability:
Assuming an average revenue of $10M for each of the three acquisition would result in an increase of $1,5M in operating income for CUO.
Assuming an average revenue of $50M for each of the three acquisition would result in an increase of $7,5M in operating income for CUO.
Assuming an average revenue of $100M for each of the three acquisition would result in an increase of $15M in operating income for CUO.
If any of these amounts turn out to be anywhere close to reality we are here talking about a considerable increase in CUOs overall profitability. I would argue that given the company’s current market capitalization of $26M the market as of current date gives no or little credit for any of these alternatives to be true. This could potentially be a catalyst when the next financial reports are published. For example, using the second alternative of $7,5M in operating income would imply a price-to-operating-income multiple of 3x for CUO (without taking into account any of CUOs current profitability) as of today.
Disclosure: The author is long Continental Materials Corp (NYSE:CUO)
IndigoVision Group plc is a United Kingdom-based company engaged in the design, development, manufacture, and sale of networked video security systems. The company was incorporated in 2000. IndigoVision Group plc is listed in London (AIM stock exchange) under the ticker IND. Note that the company is traded in GBX but the company uses USD as their reporting currency.
Background
IND has been in the Liquidation Oxymoron’s portfolio since February 2018 when I entered the position at an average price of 118 GBX. As I write this the shares are currently trading at a price of 174 GBX. The price of IND has increased quite a bit and as a result, my first margin of safety criteria (i.e. selling below liquidation value) is no longer fulfilled as of today. Since the follow-up date for my evaluation to hold or sell my IND position is a few months away (February 2020) that conclusion might change though. This depends on the share price development as well as the development of the company’s liquidation value until the follow-up date. If my reasoning here is unclear I recommend that you read part III of my Investment Manifesto where I explain my holding- and selling process.
Margin of safety
1) Selling below liquidation value?
IND is an illiquid nano-cap stock with a current market cap of $16,4M (13M GBP). The shares are currently trading at a price-to-NCAV multiple (operating leases included) of 1,3x. When I entered IND back in February 2018 the same multiple was 0,75x. The change in margin of safety in relation to liquidation value has mainly been a result of an increased share price but also a negative burn-rate for the company’s liquidation value. As of today, I would not make the claim that IND is selling below its liquidation value. In relation to that claim, I would argue that the company has no other readily ascertainable assets on the books to take into consideration for the calculation of liquidation value. Also, based on my analysis I have no reason to believe that there are hidden assets not reflected on the company’s balance sheet that should be taken into consideration for the calculation of INDs liquidation value.
2) Proven business model?
The last four years have been hard for IND. Although they have managed to put out quarterly reports with positive net earnings during that time they have on a full-year basis recorded losses. However, before 2015 the company recorded positive net earnings six years in a row with net profit margins in the range of 5-9%. Looking at the company’s retained earnings of $15M solidifies that IND, although recently struggling, have a proven business model. Furthermore, in relation to what I have just said it should be noted that management in a trading update from 16 May 2019 stated that indicators support a return to profitability for the company in the current year. Also, in a more recent trading update from 11 July 2019 IND stated that for H1 2019 a return to profitability for the first half of the calendar year is to be expected. That is good news indeed as achieving H1 profitability would be the first time they do so since 2014.
3) Sound financial position?
There is not much to say when it comes to the assessment of the soundness of the company’s financial position. IND has almost no debt on its balance sheet ($0,01M). As a result, debt-to-equity, that is one of my main ratios to look at when it comes to the assessment of this criteria is as good as it gets (i.e. 0x). Another key ratio is the Altman Z-score which is currently at 3,6 for IND. That number is well above the cutoff that could otherwise indicate that financial troubles lie ahead (i.e. risk of bankruptcy).
4) Responsible management?
During the last ten years, the company has paid shareholders a dividend in eight of those. The last and first of those ten years were the ones when the company didn’t pay a dividend. IND has also historically made some minor share repurchases but also issued some shares (stock options related). In total though the company has over the last ten years been net buyers of their own shares (i.e. bought back more than what they have issued). The shares bought back have not been canceled and as a result IND has currently 97,238 shares in treasury as of 31 December 2018. In sum, since I have not found anything that indicates fraud together with what I have described above I think it’s fair to state that IND has responsible management.
Other factors and characteristics
IND is a clear mean-reversion candidate. Both in terms of its level of profitability and the valuation multiples that the company is valued at by the market. IND has only during short time periods historically fit the Liquidation Oxymoron description (i.e. the company has historically trade well above its liquidation value). If the company can manage to get back to profitability, as seems to be the case based on recent trading updates, the valuation multiples and the share price will naturally trend upwards. Furthermore, with a return to profitability, a reinstatement of a dividend and/or share repurchase plan might also be in the near term horizon as this has been a common capital allocation approach historically.
IND is not completely forgotten or unknown to established investors although it’s a nano-cap stock that is highly illiquid. Two investors that I deeply respect and follow closely are Peter Gyllenhammar (a well known Swedish investor who runs a private investment company called Peter Gyllenhammar AB) and Jeroen Bos (author of the book “Deep Value Investing: Finding Bargain Shares with Big Potential” and fund manager at Church House Deep Value Investment Fund). Both investors are on INDs list of major shareholders. Gyllenhammar bought his 4,26 % stake in IND as late as August and September 2018. Bos has a 3,8% stake in IND and based on the funds latest factsheet the company is the tenth largest holding with a portfolio weight of 4,6%. Having these two respectable investors on “my team” is always comforting.
There have recently been some changes in management. Most notably, the company got a new CEO in 2018 (Pedro Simoes). Although I don’t give much weight to the potential relationship between the CEO change and the profitability improvements, I think it’s a good sign that the company is has taken action to try to turn the ship around. What is maybe more interesting than the CEO change is the fact that insiders have been buying shares on the open market quite recently. However, on that note, one should know that only one director of IND owns more than 1% of the shares outstanding. So there is not that much skin in the game to talk about here.
Disclosure: The author is long IndigoVision Group PLC (LON:IND)
Cofidur SA is a France based company that specializes in electronic sub-contracting services for sectors such as aviation technology and defense, multimedia and networks, transport, telecommunications and industry. The group’s activity is divided into a) equipping, assembling, and integrating electronic cards and b) design and manufacture of printed circuits. The company has been in business since the 1980s. Cofidur SA is listed in Paris (Alternext stock exchange) under the ticker ALCOF. Note that the company file their financial reports in French, so please be aware that there is a risk that I have misunderstood or overlooked something that might be of importance.
Background
ALCOF entered the Liquidation Oxymoron’s portfolio in November 2017 at an average price of 368 EUR. As I write this the shares are currently trading at a price of 286 EUR. Although the price has declined quite a bit I believe that the margin of safety has increased since I first entered the position. As will be evident below, ALCOF is a prime example of a Liquidation Oxymoron – a company that is worth more dead than alive (i.e. selling below liquidation value) although it’s are very much alive (i.e. it has solid going concern characteristics). Also, ALCOF has a few seeds of potential catalysts in place that could unlock current undervaluation.
Margin of safety
1) Selling below liquidation value?
ALCOF is a nano-cap (11 MEUR market capitalization) company with shares that are highly illiquid and overlooked. At current levels, ALCOF is trading near historical lows and selling at one of the cheapest price-to-liquidation multiples that I know of. At the current share price of 286 EUR, the company is selling at a 0,5x multiple in relation to its net current asset value (NCAV) of 22 MEUR. Of the total amount of net current asset about 22% consists of cash and cash equivalents. The rest consists of about equal amounts of inventory and accounts receivables. Historically the NCAV has been growing steadily (i.e. positive NCAV burn-rate) mainly as a result of decreasing total liabilities (see more about this decrease in the comments on criteria 3 below).
There are some PP&E on ALCOFs balance sheet (3,8 MEUR) but nothing major to take into consideration for the calculation of liquidation value. The price-to-net-tangible-assets multiple is currently 0,4x. However, one should know that ALCOF sold one of their four factories (Cherbourg) last year for a price of 3,6 MEUR. A price well above the value on the books back then. As they own another site in Montpellier it’s not to far fetched to think there could be some hidden value on the books for that site as well.
2) Proven business model?
When a company sells at such a low multiple in relation to its liquidation value one would expect that profitability has been and continues to be a big concern for the company. That is not the case here as ALCOF has recorded positive net earnings for the last eight years while simultaneously generating good amounts of free cash flow. Also, retained earnings currently amount to 22 MEUR. Furthermore, the level of profitability has been more than just fine as ALCOF have continuously posted net profit margins in the range of 2-4% and ROIC in the range of 10-16% during the time period mentioned.
3) Sound financial position?
During the last eight years, shareholder equity has increased from 13 MEUR to 26 MEUR while the company’s total debt has simultaneously decreased from 18 MEUR to 4 MEUR. In other words, the financial position has not only been improved tremendously but is currently at a level that in absolute terms is to be considered very financially sound. Debt-to-equity has decreased from 1,3x to 0,1x. Final, a key ratio that also demonstrates the financial soundness of ALCOF is the Altman Z-score which is currently at 3,2. According to the formula, with a Z-score > 3 ALCOF is in the “safe zone” as it relates to the risk of bankruptcy.
4) Responsible management?
Added on top of the capital allocation decision to aggressively pay down its debt positions, ALCOF has also paid a dividend to shareholders for each year during the last ten years. The current dividend yield is 2,8%. The company has also made some share repurchases historically (about 10% of the shares outstanding during the last ten years) and there is currently an active share repurchase plan (active until 24 November 2019) in place for another 10% of the shares outstanding. One should here note that the share repurchase plan has a price buyback limit set at 400 EUR. Although the current share price is 286 EUR and the company is sitting on a big pile of cash, ALCOF has yet used the current share repurchase plan. In sum, although I think it’s fair to state that ALCOF’s management has not historically maximized shareholder value I also think it’s fair to state that management have neither been fraudulent nor have they been unthoughtful in their historical operational and capital allocation decisions.
Other factors and characteristics
ALCOF is not only cheap from an asset valuation perspective (i.e. trading well below liquidation value) but from an earnings power valuation perspective as well. For example, the company is currently trading at a P/E of 3x. However, one should note that ALCOF is not a clear mean-reversion-candidate, as low valuations (both in relation to assets and earnings) has been a recurring theme for the company historically.
During the last year, insiders have been selling shares on the open market (last time was in February 2019). On that note, one should know that a company called EMS Finance owns +50% of ALCOF. The majority ownership can be dated back to 2009 when EMS Finance tried to buy ALCOF but failed. The CEO of ALCOF (Henri Tanduc) is also the CEO of EMS Finance. On the shareholder list of EMS Finance, we also find other insiders of ALCOF. Insiders that have been selling ALCOF shares on the open market. I have yet to figure out why they have been selling their personal shares on the open market. Also, I have not found anything that would indicate that EMS Finance has simultaneously increased or decreased their position in ALCOF. Insiders selling on the open market is obviously a concern with the ALCOF idea going forward. However, as long as EMS Finance don’t decrease their position I will try not to read too much into it.
Disclosure: The author is long Cofidur SA (EPA:ALCOF).
it’s with real excitement that I publish this first-ever Liquidation Almanack! Hopefully, you will find what I present interesting and worthy of your time. If so, make sure that you have subscribed to the Liquidation Almanack so you don’t miss out on future ones (you will find the subscription form here). Since this is the first-ever Liquidation Almanack I feel it’s my duty to point you in the direction towards my Investment Manifesto. The manifesto is the core of the Liquidation Almanack. Reading it will provide you with an understanding of the philosophical, analytical and practical processes that underlie everything that I present herein.
In this Liquidation Almanack, I will start by presenting the Liquidation Oxymoron’s portfolio performance for Q2 2019 as well as for the first half of 2019. After that, I will outline the Liquidation Oxymoron’s portfolio holdings at the end of Q2 2019. One should here note that I will publish individual in-depth write-ups for each portfolio holding in the following weeks. The first write-up will be published tomorrow! You will be notified of these write-ups when published if you have subscribed to the Liquidation Almanack using the subscription form mentioned earlier.
Portfolio performance
The Liquidation Oxymoron portfolio was up 7,98% in the second quarter of 2019 (13,43% for the first half of 2019). I’m neither satisfied nor dissatisfied with these numbers since I ultimately measure my success by the outcome of my exited positions over a full cycle. In other words, I don’t consider myself a successful or unsuccessful investor based solely on my buy decisions. My hold and sell decisions are equally if not more important when I evaluate myself as an investor. Nevertheless, I will continue to present the portfolio performance in the Liquidation Alamancks that will follow since that might be of interest to you and since I can easily access that information.
Portfolio holdings
At the end of Q2 2019, the portfolio consisted of ten holdings. Two positions were bought before Q2 2019 and eight were bought at some point during Q2 2019. As stated previously, I will post individual in-depth write-ups for each portfolio holding in the following weeks. On that note I would like to stress the point that although I do write-ups for the positions on an individual basis it’s what they together can accomplish, as a portfolio of Liquidation Oxymorons, that I have my core conviction in and what my investment strategy is formed after. Therefore, before reading about the holdings I would again recommend that you have read my Investment Manifesto. Finally, make sure that you have read, understood and accepted my Disclaimer before continue reading this Liquidation Almanack.
Finally, if you want to discuss any of the positions mentiond in this Liquidation Almanack, the memos, or if you want to talk investing in general you are more than welcome to shoot me an email at cigarrfimpar@gmail.com or reach out to me on Twitter.
During my time as an undergraduate student, I worked part-time at a treatment center for people that had some form of mental illness in combination with ongoing drug addiction. Working there taught me a lot of things. Not at least, that you can learn something interesting from anyone. Unexpectedly, sitting one night talking to one of the patients made me realize, out of all things possible, that Buffett with his famous cigar-butt metaphor had got it all wrong. Telling the story that caused my realization and correcting Buffett’s metaphor delusion will be the focus of this memo.
The cigar-butt metaphor
The first time Buffett mentions the cigar-butt metaphor, that I’m aware of, is in the 1989 Berkshire letter.
If you buy a stock at a sufficiently low price, there will usually be some hiccup in the fortunes of the business that gives you a chance to unload at a decent profit, even though the long-term performance of the business may be terrible. I call this the “cigar butt” approach to investing. A cigar butt found on the street that has only one puff left in it may not offer much of a smoke, but the “bargain purchase” will make that puff all profit.
In a much later letter, the 2014 letter, Buffett again uses this metaphor with the backdrop of buying Berkshire itself.
I purchased BPL’s (Buffett Partnership Ltd.) first shares of Berkshire in December 1962, anticipating more closings and more repurchases. The stock was then selling for $7.50, a wide discount from per-share working capital of $10.25 and book value of $20.20. Buying the stock at that price was like picking up a discarded cigar butt that had one puff remaining in it. Though the stub might be ugly and soggy, the puff would be free. Once that momentary pleasure was enjoyed, however, no more could be expected.
Reading the two statements above one gets the impression that although Buffett himself had previously used the cigar-butt approach, he had a few negative things to say about it. Going back to the 1989 letter Buffett explains why this approach is to be considered “foolish”.
Unless you are a liquidator, that kind of approach to buying businesses is foolish. First, the original “bargain” price probably will not turn out to be such a steal after all. In a difficult business, no sooner is one problem solved than another surfaces – never is there just one cockroach in the kitchen. Second, any initial advantage you secure will be quickly eroded by the low return that the business earns. […] Time is the friend of the wonderful business, the enemy of the mediocre.
While I think there is validity to the “first” and “second” argument that Buffett makes, his overarching conclusion (i.e. this is a foolish approach if you are not a liquidator) is wrong and something worth pushing back on. I will do so with the help of a personal story.
A cigar-butt[s] story
During my time as an undergraduate student, I worked part-time at a treatment center with people that had some form of mental illness in combination with ongoing drug addiction. One evening when I was working the night shift, a patient, let’s call her Agnes for the sake of this story, came into the “office”. Agnes said she was going to smoke a cigarette and wondered if anyone of us would care to join her for a chat. Why not I said and we headed over to one of the smoking rooms. As we sit down opposite each other Agnes takes out a small box and places it in front of her on the table. From the box, she took out four items. Cigarette papers (i.e. rolling papers), cigarette filters, a plastic bag filled with cigarette-butts and a lighter.
With a meditative focus, you could tell that this was not her first time, she started to tear up one cigarette-butt after the other. She collected the tobacco from five or six of the cigarette-butts and then placed it on a line in one of the cigarette papers. She took a filter, placed it in one of the ends of the cigarette paper and started to roll the thing back and forth in her hands. A few seconds later, a whole cigarette was in the corner of her mouth and white smoke had started to climb towards the ceiling. Although I had seen Agnes smoke before I didn’t know that she rolled her own cigarettes. Even more so, I didn’t know that the tobacco that she smoked came from cigarette-butts that she had found and collected from the streets during her daily walkabouts. Collecting cigarette-butts had become a daily routine she later told me.
One should know that Agnes had very little money to spend on anything, and the money that she did have was to a large extent spent on alcohol. I would here make the claim that people with drug addiction are to be considered the most inventive and entrepreneurial people in the world. Unfortunately, though, this ingenuity and entrepreneurship are often focused on things that either hurt themselves or society in general. Or both. This case was no different as we are talking about smoking cigarettes. However, one could also argue that Agnes because of her ingenuity at least didn’t have to take a puff from an “ugly and soggy” cigarette-butt found on the street that had been in the mouth of some unknown person in order for her to have “momentary pleasure”. Rather, because of her ingenuity, she was able to make herself a fresh whole cigarette at almost no cost for her to enjoy at length. Talk about the inverse of the description that Buffett gave us. At that moment I had my realization for where Buffett got it his cigar-butt metaphor all wrong.
Lessons from Buffett’s cigar-butt metaphor delusion
First of all, going back to the quotes earlier, Buffett forgot to mention that you will continue to find cigar-butts all over the place. Using the approach that he is talking about, you are not relying on “one last puff” as to all there is and will ever be. Rather, you are relying on multiple puffs from different cigar-butts. Buffett forgot to mention or even think about that you don’t have to take a puff from the discarded ugly and soggy cigar-butt here and now for your momentary pleasure. Rather, you can find and collect a few of those cigar-butts and then roll yourself a fresh whole cigar from the tobacco that they contain. Just as Agnes did. The difference between these two approaches and their outcomes for the “smoker” (i.e. investor) are paramount for how we think about and apply this investment strategy. Essentially, we should not call the strategy the “cigar-butt” (singular) approach to investing as Buffett labeled it. But rather, the “cigar-butts” (plural) approach to investing. As a side note, this is why my investment writing pseudonym is Cigarrfimpar (cigar-butts in Swedish) and not Cigarrfimp (cigar-butt in Swedish).
I would like to end this memo by claiming that I think Buffett was very much aware of the cigar-butts metaphor that I have tried to put forward. The best evidence of that is found in his 1965 partnership letter:
Deep value investing explained by Buffett in 1965.
But more importantly, he was less negative about this strategy than what might first appear. Specifically, Buffett seemed to have realized that he and Berkshire had reached the alpha limits of the cigar-butts strategy. The basis for that argument can be found in the 2014 Berkshire letter where Buffett made the following statement.
My cigar-butt strategy worked very well while I was managing small sums. Indeed, the many dozens of free puffs I obtained in the 1950s made that decade by far the best of my life for both relative and absolute investment performance.
[…]
But a major weakness in this approach gradually became apparent: Cigar-butt investing was scalable only to a point. With large sums, it would never work well.
I would also make the claim that the reason Buffett used the cigar-butt metaphor the way he did was that he actually wanted to distance himself from the strategy. Essentially, this was a foolish strategy when trying to get good deals buying control of public and private companies. Selling to a “liquidator” or at least an investor perceived to have a “liquidator mindset” is not something most founders and owners are willing to do. They want to know that their “baby” and/or their ownership is in safe hands going forward. Therefore, you have to profile yourself away from that image and in Buffett’s case, his historical self, if you want to go in the opposite direction. As was the case for him and Munger. The last thing they wanted to be thought of as was short-term focused liquidators. Going back to the 1989 Berkshire letter where the cigar-butt metaphor was first mentioned I think this conscious investor-branding strategy is evident.
I could give you other personal examples of “bargain-purchase” folly but I’m sure you get the picture: It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price. Charlie understood this early; I was a slow learner. But now, when buying companies or common stocks, we look for first-class businesses accompanied by first-class managements.
An investor that similar to Buffett was from Graham-and-Doddsville but unlike him didn’t go the Munger route of value investing was Walter Schloss. His answer to Buffett on the importance of owning multiple cigar-butts I think will be a perfect way to end and summarise this memo on where Buffett got it wrong with his cigar-butt metaphor.
One of the things we’ve done – Edwin and I –is hold over a hundred companies in our portfolio. Now Warren [Buffett] has said to me that, that is a defense against stupidity. And my argument was, and I made it to Warren, we can’t project the earnings of these companies, they’re secondary companies, but somewhere along the line some of them will work. Now I can’t tell you which ones, so I buy a hundred of them. – W. Schloss
In Part I and Part II I have laid out the Investment Principles, the Exclusion Process, and the Inclusion Process for the Investment Manifesto. Hopefully, it is now clear why and what I look for when searching for investment ideas for the Liquidation Oxymoron’s portfolio. Having covered these aspects we now turn to and take a look at my thoughts and reasoning for Portfolio Construction. Before we go into the main focus areas (i.e. the buying-, holding and selling process) for this final part of the Investment Manifesto, I want to get some related stuff out of the way. This will relate to Idea Generation, Country and Market Preferences, Decision-making, and Leverage for the Liquidation Oxymoron’s portfolio.
Idea Generation
So far in the Investment Manifesto I have explained why and what I look for (i.e. the Liquidation Oxymoron’s). However, I haven’t explained how I find these Liquidation Oxymorons. Also, since my first investment principle that I laid out in Part Iis to “continuously work on investment idea generation” I thought a brief explanation for how I practically source my ideas for the Liquidation Oxymoron’s portfolio would be a good idea.
I divide my sources of idea generation into two buckets. The first bucket I call the serendipity bucket. Ideas that just fall into my lap for one reason or another without an intentional search effort by me personally. Blogs, Twitter, investor letters, and email-discussion with like-minded investors are the main underlying sources for this bucket of idea generation. The second bucket I call the screening bucket. Ideas that I with some form of personal and deliberate effort manage to find. Primarily this is done with the help of different quantitative screens and screener providers. Other than classic quantitative screens I also use some linguistic screens. Linguistic in the sense that I track and search for certain words, phrases, and sentences of interest.
Country and Market Preferences
Now that you know how I practically source my ideas I thought it would be a good idea to also say something about where I geographically search for these ideas. The short answer to that is; the Investment Manifesto has no geographical preferences or limitations. Simply, I invest where I can find Liquidation Oxymorons. The reason for that is that the number of companies that fit the Liquidations Oxymoron description (i.e. going concern selling below liquidation value) are not that many in total at any point in time. But more importantly, the supply of Liquidation Oxymoron’s is ever changing for where one can geographically find them. Therefore, limiting oneself to not having the whole playing field at one’s disposal I would risk becoming a . . .
one-legged man in an ass-kicking contest. – C. Munger
Two arguments that one often comes across for why one would limit oneself geographically is either related to a country-market risk (e.g. “Japan has never been a good place to invest”) or country-company risk (e.g. “all Chines companies are frauds”). First of all, I don’t engage in macro analyses or predictions. Secondly and most importantly, I try to not be caught in traps of first-level thinking. Rather, I try to take advantage of them and the consensus belief that they create. I’m not saying that these risks don’t exist or that they aren’t real. What I’m saying is that these and similar generalizations create the very foundation for the discrepancy between price (i.e. consensus) and value that I try to take advantage of as an investor. This discrepancy is the most important thing to focus on if one is to be a successful investor as I have explained in the memo: Consensus is what you pay; the relationship to value determines what you get.
Decision-making
I have previously advocated and applied a strict “punch-card” approach for decision-making in investing. With that, I refer to an approach with a set limit of decisions (buy and sell decisions) that I would be allowed to make and when to make them. Although I’m still an advocate of a punch-card approach to decision-making in investing, this Investment Manifesto will outline a less stringent approach. What that means practically will hopefully be clear as I present the Buying-, Holding- and Selling Process in this post. For now, I would like to share my general thoughts on this topic.
Similar to my reasoning for having no pre-set geographical preferences or limitations, I want to make sure that I avoid transforming myself into a “one-legged man in an ass-kicking contest” when it comes to decision-making. As I have already mentioned, the supply of Liquidation Oxymoron’s is ever changing and the absolute number of them are not that many. Therefore, I don’t want to be handcuffed from pressing the buy-button in times when Liquidation Oxymorons exist in above average numbers or when there is a one-time-event to take advantage. But also, I don’t want to handcuff myself to from certain events that are important to act on from a sales perspective. Still, I want to strive for the essence of a punch-card approach since it forces me to make well thought through decisions and to be patient. This goes back to making sure that I follow my third investment principle. That is, to “be selective and cautious in the buying- and selling process” as laid out in Part Iof the Investment Manifesto. In conclusion, I have tried to formulate punch-card guidelines that strike a good balance between forcing me to be selective and cautious but also making sure that I’m not handcuffed from acting with decisiveness and conviction.
Leverage
For the question of using or not using leverage for the Liquidation Oxymoron’s portfolio, my answer is short and simple: I don’t and will not use any portfolio leverage. On the question of why that is so, no one has said it better than:
My partner Charlie says there is only three ways a smart person can go broke: liquor, ladies and leverage,” he said. “Now the truth is — the first two he just added because they started with L — it’s leverage.
It’s insane to risk what you have and need for something you don’t really need.
This goes back to my belief as laid out in Part Ithat risk- (i.e. permanent loss of capital) control should be the number one priority for all investors:
In order to succeed, you must first survive. – N. Taleb
The Buying Process
The way I approach the Buying Process for the Liquidation Oxymoron’s portfolio has been heavily influenced by one of the all-time great investors:
One of the things we’ve done – Edwin and I – is hold over a hundred companies in our portfolio. Now Warren [Buffett] has said to me that, that is a defense against stupidity. And my argument was, and I made it to Warren, we can’t project the earnings of these companies, they’re secondary companies, but somewhere along the line some of them will work. Now I can’t tell you which ones, so I buy a hundred of them. Of course, it doesn’t mean you own the same amount of each stock. If we like a stock we put more money in it; positions we are less sure about we put less in. The important part is to have some money in the stock. If you don’t have any money in a stock you tend to forget about it. We then buy the stock on the way down and try to sell it on the way up. – W. Schloss
In Part II I laid out the underlying aspects of the Inclusion Process and concluded that all companies that have survived the Exclusion Process are potential candidates for the Liquidation Oxymoron’s portfolio. I also stated that I will rank these investment ideas in terms of their probability of upside potential. That is, the likelihood and conviction that there is an upside and that the upside potential will materialize. This ranking of most probable upside potential will be an outcome of an evaluation of the Upside Potential, Catalysts, and, Other Factors and Characteristics for each individual Liquidation Oxymoron as explained in Part II. The ranking and the buy decisions based on the above will not be an exact quantitative science. Rather, I would like to think of it as I apply a semi-qualitative/quantitative selection process for which companies to buy for the Liquidation Oxymoron’s portfolio and when I ought to buy them.
To guide me in this selection process I will use a punch-card guideline formulated as; ~three buy decisions per month. My reasoning for this punch-card guideline is that ~three buy decisions per month will strike a good balance between making sure that I’m able to take advantage of the best Liquidation Oxymoron’s out there while it simultaneously forces me to be cautious and selective. Note that what I have described is a punch-card guideline and not a strict rule. I’m therefore allowed to deviate from this guideline for reasons argued for previously (see “Decision-making” above).
Finally, regarding sizing the positions for the Liquidation Oxymoron portfolio. The rationale for my guidelines here can be found in the W. Schloss quote above. At the time of purchase, a position in the Liquidation Oxymoron’s portfolio will amount to 1-2% of the total portfolio. However, if the case for a Liquidation Oxymoron is intact or has improved on a fundamental level I have the option to double down. In the event that I double down on a position that would count as one of the ~three buy decision for that month.
Summary of the Buying Process:
The Liquidation Oxymoron’s are ranked in terms of their probability of upside potential.
The ~three highest ranked Liquidation Oxymoron’s are selected each month for the Liquidation Oxymoron’s portfolio.
~Three buy decisions per month.
At the time of purchase, a position in the Liquidation Oxymoron’s portfolio will amount to 1-2% of the total portfolio.
If the Liquidation Oxymoron case is intact or has improved on a fundamental level I have the option to double down on the position.
Exercising the option to double down counts as one of the ~three buy decisions that month.
The Holding- and Selling Process
The holding process is centered on the following punch-card guideline: each position that is bought to be included in the Liquidation Oxymoron’s portfolio is to be held for one year. The underlying rationale for this guideline goes back to my investment principle of Patience as laid out in Part I of the Investment Manifesto. Patience in the sense of being selective and cautious in the buying- and selling process. Having a pre-set holding period of one year forces me to make sure that I follow that principle. One should here note that in the event, I decided to double down on a position that will reset the one-year holding period from that date.
At the end of the one year holding period, each position is evaluated in a follow-up. The follow-up is basically a re-evalutation of the Exclusion Process as laid out in Part I of the Investment Manifesto. In other words, the follow-up is an evaluation to see whether the position is still to be considered a Liquidation Oxymoron or not. In the event of a successful follow-up (i.e. the position is still to be considered a Liquidation Oxymoron) the position will be held for another year. At the end of the second year, the same follow-up evaluation is once again repeated. From previous experience, the average holding period for the Liquidation Oxymorn’s is in the range of one to three years (i.e. one to three follow-ups). One should here note that there exists no guideline for maximum holding period. As long as a position has successful follow-ups it will remain in the Liquidation Oxymoron’s portfolio. In the event of an unsuccessful follow-up (i.e. the company is no longer to be considered a Liquidation Oxymoron), the whole position will be sold immediately. I will not scale down on any positions in the event of an unsuccessful follow-up. The Liquidation Oxymoron’s positions are too small for that to be a rational and cost-effective selling approach. One should note that a position that I have sold is not excluded from being included in the Liquidation Oxymoron’s portfolio in the future. The only requirement to be considered an investment candidate again is that the company at that point in time qualifies as a Liquidation Oxymoron.
A follow-up will also be triggered in the event that; a) the company is bought out from the stock market or acquired by another company, b) the company is delisted or there is a change of stock exchange listing or c) there is clear evidence of a pump-and-dump scheme (i.e. extreme price volatility without any fundamental news published). This type of follow-up will be triggered in order to both take advantage of one-of-events but more importantly, to protect the position from the negative consequences of some of these events. The most common outcome when a follow-up is triggered by one of these events is that the position in question is sold.
Summary of the Holding- and Selling Process:
Each position that is bought to be included in the Liquidation Oxymoron’s portfolio is to be held for one year.
In the event that I double down on a position that will reset the one-year holding period.
At the end of the one year holding period, each Liquidation Oxymoron is evaluated in a follow-up (i.e. a re-evaluation of the Exclusion Process).
In the event of a successful follow-up, the position will be held for another year.
There exists no guideline for maximum holding period.
In the event of an unsuccessful follow-up, the whole position will be sold immediately.
A follow-up will also be triggered in the event that; a) the company is bought out from the stock market or acquired by another company, b) the company is delisted or there is a change of stock exchange listing or c) there is clear evidence of a pump-and-dump scheme.
Concluding remarks
The rationale for my presentation of the Investment Manifesto has been twofold. First, to provide you with a clear point of reference and understanding for the philosophical, analytical and practical processes that underlie the Liquidation Almanack. Not explaining such processes would leave you with an inadequate understanding of what I present therein. Secondly, carving out my Investment Manifesto into words is something that I have wanted to do for a long time. Actually, I started typing down my first initial thoughts for the Investment Manifesto about four years ago. To put your thoughts and ideas for your philosophical, analytical and practical processes into words, is as important and valuable as writing your own investment analyses. The point I want to make is that developing a manifesto takes time, but there is nothing more important than having a clear map of what to do and what not to do as an investor if one strives to be a successful one.
Finally, I would like to point out that an investment manifesto doesn’t need to be as extensive as the one I have presented in this three-part series. To the contrary, an investment manifesto in the form of a checklist can serve that purpose. Also, I would like to stress the importance of finding sources of inspiration as you develop your own manifesto. Remember to take advantage of what eminent investors before you have already come to realize. Therefore I thought it would be a good idea to end my Investment Manifesto presentation by providing you with an example of what I consider to be an example of a masterful investment manifesto. An investment manifesto that has remained my absolute favorite one over the years and one that has been a tremendous source of inspiration when developing my own Investment Manifesto.
Liquidation Almanack 