It’s been too long

I don’t know where to start.

I guess with Peter’s death. To me Peter was one of the greatest living Irishmen. His warmth, generosity, kindness, fire and brilliant humour made life better.

I used to keep this picture of Peter with my son on my desk. The photo reminded me to live in the moment, to enjoy the moment, to love the moment.

Peter died from cancer this week.

I’ll write more soon.

Is your mobile phone glued to your hand?

“Never invest in any idea you can’t illustrate with a crayon.” Peter Lynch

Mobile Embrace (ASX:MBE) is a fast growing, mobile marketing company.

Passionate founders, hugely scalable, high margins and massive tailwinds.

Crayons are so yesterday! Here’s my Mobile Embrace illustration.

Mobile Embrace business

 

If you want to read more go read the annual and half year reports.

Or be influenced by Marcus Hamilton at Taylor Collison.

MBE looks cheap for a fast-growing, mobile-focused company with a strong track record of delivering organic and acquisitive growth. Accordingly, we reiterate our Outperform recommendation and $0.45/sh price target.

Long Mobile Embrace. My target is $1 within 2 to 5 years, reassessing as it goes.

Regulatory and technology risks.

Dismantle your binary thinking

Most of us are programmed from birth to think in binary terms.

Right and wrong, good vs evil, heaven and hell, cops and robbers, snake and ladders, to name but a few.

Binary thinking keeps things simple at the expense of reality.

Break the binary chains restraining your mind

Look at Investing from a New Angle

We do not live in a binary world. We live in a multivariate world.

The core of investing is assessing probabilities. If you think in binary terms you’re closing your mind to the raft of possible outcomes.

This is a quick rant, inspired by the following example of binary thinking resulting in a logical fallacy.

When 50-60% of your revenue is “highly likely” to reoccur, then by definition 40-50% of your revenue is “highly unlikely” to reoccur.

That sentence is at the end of this great write-up on billing software company Gentrack. [Update: author was being humourous, it was a play on words.]

If 50-60 percent of revenue is highly likely to reoccur then all you know is that 40-50 percent is not highly likely to reoccur. 20 percent may be likely to reoccur.

Open your mind to a world of possibilities.

How to tell if management will reward shareholders

The extravagance of any corporate office is directly proportional to management’s reluctance to reward the shareholders.  Peter Lynch

Director’s and management’s salary packages are inversely proportional to their willingness to reward shareholders.

Those wasting shareholder money on remuneration consultants don’t deserve your trust. Hiring remuneration consultants is managements way of telling you they want more of your money than they deserve. It indicates management are profligate and will waste your money on non-profitable activities, such as those consultants.

Unfortunately Nearmap Limited (ASX:NEA) have gone one step further and are wasting even more money. Nearmap are holding a special general meeting for shareholders to approve two option grants valued at over $200,000 each. The two directors are new and are on already on $70,000 annual packages.

The two directors, Ian Morris and Peter James, don’t even have any of their own skin in the game. Neither has invested one cent in Nearmap.

The cost of these options grants includes:

  • the time/opportunity cost the directors should have spent improving the fortunes of the company instead of figuring out how to enrich each other
  • the cost of the remuneration consultant
  • the costs of the general meeting, including documentation, director’s and management’s time, cost of venue and associated costs
  • the value of the options $434,000

The directors and management of Nearmap should concentrate on improving the business and spend less time wasting valuable shareholder funds and enriching themselves.

MMC Contrarian Share Buy Back - Vote No

How low can WorleyParsons go?

A little under two years ago I met the then CFO of WorleyParsons Limited (ASX:WOR) over drinks at my daughter’s new school. The next day I looked at WOR for the very first time. The shares were then trading at around $16, down 70 percent from the all time of $54.19 and down 30 percent over the last year.

On trailing financials WOR looked interesting, but with an uncertain future and stacks of mining and energy services falling hard I decided to wait.

and wait

and wait some more.

While biding my time a neighbour mentioned buying WorleyParsons. As I recall that was around $10 and despite the near on 40 percent fall since I first looked at WOR the deterioration in the sector appeared to be accelerating.  I held my tongue, as nobody appreciates contrary views to their purchases.

WorleyParsons 2016 top pick for the brave

Credit Suisse have now listed WorleyParsons as one of its top six 2016 stocks picks for the brave. With a projected return of 150 percent.

Buyers beware! That projected return should be taken with a grain, nay a big bag of salt. Back in September 2013 Credit Suisse upgraded WorleyParsons to outperform and increased the target price to $26.60. Credit Suisee said WorleyParsons’ 14-times price-to-earnings ratio and 5 percent dividend yield were compelling.

Someone should have schooled that analyst in the danger of driving forward while looking in the rare view mirror.

 

WOR falling knife

Today WOR trades at $3.35! Has this falling knife bottomed? Is a 94 percent fall from its all time high far enough?

I’m sure I don’t know the answer. However, despite legal action to the contrary management appear to be doing a decent job of navigating difficult times. What I do know is market conditions will one day improve and a leaner WorleyParsons will deliver a 150 percent return and more. It has the balance sheet and cash flow to survive.

After two years of watching and waiting I’m finally confident enough to say WorleyParsons deserves a place on your watchlist.

More importantly, don’t try to catch falling knives! 

3 Ways a Stock Should Pay You

Do you get a lot of useless mass emails? I know I do.

You know the type of emails I’m talking about. They have a catchy headline and a thin veneer of information, but really they’re simply advertising. Mutton dressed up as lamb.

Among the deluge of email noise, Tom Jacobs stands tall. I asked his permission to reprint the following email, as both it and Tom deserve more attention. I’ve followed, liked and learnt from him for 15 years. I recommend you do too.

3 Ways a Stock Should Pay You

Many people incorrectly think there is magic to stock gains and losses because they consider only price. Rather, what matters is whether the business creates what’s called shareholder value. If it does, the stock price will eventually follow. Very simple.

You’d think creating shareholder value would be the goal of every company, right? Sell products and services, take in more money than you spend, and reinvest the excess cash to earn more than if it sits in the checking account. This creates value for owners, whether of a lemonade stand, coffee shop, or Apple, and someone would pay more to buy the business-through our shares.

Yet many businesses are in business to create value for management, not owner-shareholders. And even those who try to be shareholder friendly aren’t often good at it. There are very few truly good CEOs, or every company would make shareholders better off. How do we find good management?

 

The Five Choices

There are five places execs can spend cash beyond what’s needed to run the business: (1) property, plant, equipment, research and development; (2) mergers and acquisitions; (3) dividends; (4) buying back the company’s own undervalued stock; and (5) paying down higher interest debt.

The first two are growth investing. Here, companies build more manufacturing and distribution facilities, hire more software developers, buy other companies and grow empires! More often than not, these fail to create a more valuable company. These investments don’t earn a sufficient return, and roughly 85% of M&A activity fails to add shareholder value. Simply, most CEOs don’t spend shareholder cash well.

 

The Virtuous Cash Cycle

The other three choices help prevent management from blowing our money on skittles and beer. They provide shareholder yield. Paying down debt saves on interest payments, freeing up more cash. If the company’s shares are selling at a price that places a very low value on the company, buying its own stock is a good investment. And when the company buys back shares, our shares own more of the company, and earnings and cash flow per share rise, usually leading to stock gains.

Plus, if a company pays dividends, every share it buys back eliminates paying the dividend on that share forever. If the dividend yield is 4% a share, the company “earns” 4% a year forever just by not having spend it anymore. Even more cash is available to increase the dividends, buybacks, and debt paydowns. It’s a virtuous cycle.

Despite this simple thinking, most investors avoid companies that pay dividends and buy back stock, believing their best days are over. Quite the opposite. The best days for management moon-shot paydays may be gone, but the sweet paydays for shareholders have just begun.

Don’t worry about our vibrant entrepreneurial culture. Venture capitalists and institutional investors will always provide capital for companies with new ideas, products and services to enhance our lives. However, let’s leave it to them to speculate.

Instead, we will buy cheaply and get paid. It’s as simple as that.

 

Tom Jacobs is the co-author of What’s Behind the Numbers? A Guide to Exposing Financial Chicanery and Avoiding Huge Losses in Your Portfolio. He is an Investment Advisor for separately managed accounts at Dallas’s Echelon Investment Management and serves clients worldwide. You may reach him at tjacobs@echelonim.com.

Rene sure knows his acquisition sauce

My Net Fone Ltd (MNF.AX) CEO Rene Sugo sure knows his acquisition sauce.

The acquisition of Telecom New Zealand International voice business is another excellent bolt on for My Net Fone. The TNZI network that MNF are buying from Spark New Zealand Limited (SPK.AX) expands its reach.

$90-100 million of revenue and $3.5 million EBITDA before synergies. This deal will surely be less than 6 times EBITDA in the first year, maybe as low as 5. Anywhere in that range for a growing complementary business is good buying. This deal adds scale, global reach, a good brand and more. Two thumbs up!

Anyone want to talk about it? Or why Spark are selling?

Disclosure: Long MNF

 

Fusion Fund December Performance

With another year down it’s now only 4 billion years until the sun swallows the earth. Better hurry up and do all the things you’ve been wanting to!

I hope 2015 is a fantastic year for you and yours.

By now I’m sure you’ve seen all the Back to the Future II comparisons.  In case you missed it that 1989 movie was set in 2015 and featured flying cars, hover boards and self lacing Nike runners, along with some far out clothes. While people are working on flying cars and hoover boards, commercial availability is still decades away. The good news is Nike is planning on releasing self lacing shoes this year!

Fusion Fund Performance

Fusion Fund finished the year with a 7.9 percent gain, slightly ahead of the total return index’s 5.6 percent gain.

fusion-fund-performance-vs-all-ords-accum-2014-12 fusion-fund-performance-2014-12

Whale hunting in small ponds – multibagger stocks

SomnoMed Limited (ASX:SOM) is making ripples in a big pond. Here’s an excellent presentation on SomnoMed’s exciting growth potential, or just the slides.

100% unsubstantiated rumours suggest that James Spenceley at Vocus Communications Limited (ASX:VOC) has go big or go home tattooed on his inner thigh.
James’ audacious and intelligent stretch for West Australian telco Amcom Telecommunications Limited (ASX:AMM) shows he wants to be a whale.

I highlighted those 3 growth companies both here and as Motley Fool Australia recommendations. Another Motley Fool pick of mine Sirtex Medical Limited (ASX:SRX) is now 4 times higher.

Do you want to know how to pick multibagger stocks?

Here’s my path

How to pick multibagger stocks

  1. Identify growth sectors.
  2. Determine rewards and risks for companies in those sectors.
  3. Compare multiples and ratios to similar stories.
  4. Look for mispricing.
  5. Spread your investments, but stay concentrated. 5 to 15 companies is the sweet spot for most investors.
  6. Add to your winners. Especially if you didn’t start with a large position.

OK maybe it’s not super easy and yes that list merely skims the surface.

But here’s the secret to how you can trounce the market.

Just do the odd numbers. Growth sector, multiple/ratio comparison, buy a small basket.

If you’re lucky you’ll beat the market. If not then maybe give value investing a try. It’s a more reliable path to investing success.

A final tip to help reel in multibagger stocks.

We’re after the twin turbo of under-priced growth. We want price multiple expansion to magnify underlying growth.

We don’t need to stretch for low probability ideas. Such as story stocks with revolutionary inventions or ideas.

Sirtex, Vocus, Amcom and SomnoMed were small but proven companies when I picked them. They were high probability swings.

Swing less.

Disclosure: Long SomnoMed and Vocus.

Do stock price targets make sense?

When investing it’s easy to get bogged down in numbers. Whether it’s a simple price multiple like P/E or the input and output of a discounted cash flow analysis, numbers are the primary focus of most investors.

Judging by analysts reports the one number that rules above all others is the one year price target. That one number is supposed to accurately summarise hours/days or even weeks of research.

Of all the bullshit numbers, the 52 week price target, often predicted down to the cent, is the crappiest of them all. Yet it’s the one number highlighted in bold on the front of research reports.

Stock price targets make no sense

Price targets are a double dip of delusion. To think you can accurately predict the forward price of any stock to the cent or even within 20 percent is crazy, you can’t. Worse yet, fundamental analysts focusing on a short time frame such as a year exacerbates the delusion.

I try to keep to it simple.

  1. Is this company meaningfully undervalued?
  2. How sure am I right?
  3. How large is the downside if I’m wrong?
  4. Are there good catalysts to send this company towards over-valued within a few years?

As I’ve said many times, I utilise both the market weighing and voting machines. I seek the twin turbo charge of increasing value and multiples. I want the weight and popularity of a company to increase. That’s my path to market outperformance.

Price ranges make more sense

I mentioned Nearmap (ASX:NEA) is my last post. I like it’s growth prospects, sticky recurring revenue and leverage. So here’s an example of how I think about price targets ranges and returns from my investment in Nearmap.

nearmap-possible-price-range

Each of the five rows in blue display possible prices for 1 to 6 years hence — my sweet spot in investing is circa 1-3 years. The two green rows at the bottom show the total and annual compounded returns for the middle/bold row above (average range).

The price ranges are based on multiple valuation methods such as dividend discount, discounted cash flow, return on equity or price multiples. Each method is a different tool and works better or worse depending on the company. I choose a combination I consider most appropriate for the company in question. For Nearmap that’s DCF and price earnings multiple derived from projected profit and loss statement.

Wow, it’s starting to sound like I get bogged in numbers! But that’s far from the truth. If you run into me on the street or in a cafe, I would not be able to tell you my price range for Nearmap. Heck most days I couldn’t even tell you its current price (it’s fifty something…right?) as those sort of details are almost meaningless to me. But I could say it’s probable Nearmap will thump the market over the next few years and has the potential for excellent long term returns.

As I’m long Nearmap I probably wouldn’t tell you about the downside — the execution risks and the competition. However I will tell you this, next year’s earning may well disappoint a few investors and that could provide an attractive entry point. But I’m not prepared to speculate on that, so am both long and living in hope that next years earnings do disappoint so I can opportunistically buy more.

Garbage in garbage out

The main reason I do valuations is not for the price output, but to examine the inputs. Can the company grow sales that fast? Will the industry support those sales? What will margins look like? Can the company self fund?

I view valuation as a tool to help me think more deeply about a company and its prospects, rather than a tool to output a single target price or even a price range.

Circling the wagons

Circling back to the fours questions I posed earlier. The two times I bought Nearmap it was meaningfully undervalued and I had a high conviction. The valuation gap is now smaller, but Nearmap does have excellent long-term potential.

When I bought there was limited downside due to the strong, sticky and growing Australian revenue stream. With Nearmap’s US expansion and price increase there is now both more upside and downside potential.

Nearmap is a catalyst rich company that could easily provide the twin turbo charge I seek.

Disclosure: Obviously long NEA. 

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