The Age published this David Potts article on Listed Investment Companies today. I started writing the following article a month ago, but didn’t finish my research and with my plate now full I won’t in the near future. So here in its incomplete glory is my short take on Listed Investment Companies LICs. In summary it doesn’t look hard to find a good LIC which consistently beats the market and trades and a discount to NAV (net asset value). At the very least LICs are a good source of investment ideas for further research.

the higher the fees, the higher the discount you should demand. So the lowest cost machines, such as AFIC and Argo, should trade at the highest price relative to their underlying asset value…. A rule of thumb you might employ is to ‘capitalise’ the ongoing costs (including the management fee) at, say, 10%. So if a fund’s ongoing costs total 1.5% per year, then you’d divide this by 0.1 (or multiply by 10), and apply a discount of 15% to NTA.  You might then apply an additional discount if a performance fee is present; perhaps deducting another 5% to 10% depending upon the arrangement ii

Westwind asked for a review of the MyClime Service. The best advice I can give is give their free trail a go, as that is certainly worth way more than it costs . While doing so make sure you check out; John Abernethy’s thoughts, What Value Today, Company Valuation Dashboard, the forum and the training webinars. MyClime is not a newsletter it’s an excellent investing tool suitable for people wanting to do their own valuations based on Clime’s sound valuation methodology. George Whitehouse, John Abernethy and many other intelligent investors post on the forum.

Promo over. Westwind was also interested in some of their investment ideas. Clime group stocks by their required return (rr) into three levels, very low to high. They then rank those by Value/Price Margin.  The likes of Woolworths and JB Hi Fi currently feature near the top of very low required returns (safer) and Reverse Corp and Jumbuck Entertainment  are near the top of high rr (speculative).

The middle group is low required returns and at the top of that list is, interestingly, Clime Capital Limited (CAM), Clime’s listed investment company. For LICs MyClime uses NTA.

Here is the current NTA and top holding for Clime Capital.

CAM is not the only LICs amoung the low RR companies; the ASX publishes a monthly list of LIC Premium/Discounts to NTA.

Other LICs catching my eye are BEL, WIC, HHV, WAM and WAX.

Here are their current NTA and portfolios, a good source of investment ideas.

WAM

CAM’s expenses (see below) explain a large part of discount. Upside comes if Abernethy and grew can continue their out-performance. CAM’s share price should then get the double boost of the out-performance  and the discount narrowing.

Of course Argo still trades at a premium, due to their long term out-performance and very low management fee. Milton Corp is the only company of interest in their largest holding. MLT, unsemgingbelievable, it to is a LIC, though selling at slight premium to after tax NTA, probably deservingly so. MLT has a brave 31.5% banking allocation. Low 0.17% operating fees net management fees which as always need to be checked. 2010 AR

No related posts.

Anteo Diagnostics is another business without  earnings of note but making cool  stuff that a large industry could adopt. Unfortunately Anteo fails Lynch’s crayon test as I can’t illustrate what they do with a crayon.

Peter’s Principle #3:
Never invest in any idea you can’t illustrate with a crayon. Peter Lynch Beating the Street p27.

However as their main product, Mix&Go, is reminiscent of days gaily picking lollies at the pick ‘n’ mix I’m going to keep digging. Anteo’s products make clinical (blood) tests faster and more reliable and they are now trying to flog the technology to bead manufacturers and pathology suppliers. It’s a big market and this small player ($50M market cap) could reap royalties from for years to come.

According to a message board poster Anteo was covered in the most recent Bioshares edition (#396) with the following key takeaways.

Mix&Go can deliver from 10-70% improvement in sensitivity of immunoassays; ie. increasing the detection rate of actual positive samples.

So far the technology has been put in front of 55 groups, including most of the top 20 life sciences bead manufacturers as well as purification and separation players.

Anteo is currently dealing with many of the top 20 IVD companies.

One of these Top 20 IVD companies is evaluating Mix&Go for a particular test which has 10% false negatives. The test generates $200 million in Europe alone.

The test evaluated is one component in a six-test panel. If successful, there are five other tests in the panel to which Mix&Go could potentially be applied to.

Anteo believes it will be cash flow positive from having this one company adopt Mix&Go for this one test.

Anteo would sell the Mix&Go to the IVD company, but an R&D deal which expands the relationship between the two companies could be possible.

Anteo Diagnositics is on the verge of making strong progress in 2011, with a key validating deal expected in the near term.

There are two basic investing strategies with companies like Anteo. Swing for the fences and expect to strike out a lot (buy prior to profits) or wait for the easier run to first base. As Anteo could have years of growth ahead of it I’m happy to wait for the single to first base and am adding Anteo to my watchlist.

• Southern Cross Equities’ (SCE) buy report provides an excellent overview though it’s worth noting SCE own nearly 6 million shares.
• Background of the founder Joe Maeji.
• BRR interview with CEO. Very positive 47 companies evaluating and not one has said NO.
• Mix&Go competitive advantages, Warning geek alert.

Credentialed management, excellent product which Anteo believes could produce $150M- 400M annual royalties in five years and with two deals already done the stock is slightly de-risked.  Anteo are cashed up with around two years burn in cash after recent option exercises. The key question is how much faster and better and how much does it cost?

Disclosure: Adding to Watchlist, no current position.

Universal Biosensors (ASX:UBI) is hoping to crack the tough $10B glucose testing market via a partnership with J&J’s LifeScan. UBI’s main product the One Touch Verio is the most accurate glucose self testing meter currently available. The One Touch Verio is currently only available in the Netherlands (launched Jan 2010) and Australia (Sept 2010), though J&J are planning on launching in the US in 2011.

UBI is yet to obtain profitability and is dependent on J&J sales and marketing in a very crowded and competitive landscape. While the One Touch Verio is currently the most accurate, that crown is never held for long.

Good balance sheet with plenty of cash. This is the pivotal year for UBI and as such UBI deserves a place on my watchlist this year. Need to see broad European and US launch and aggressive marketing by J&J.

UBI is the largest holding of one of Australia’s top performing funds, The Wilson HTM Priority Growth Fund.

Razor and blade business model. Some manufacturers give away their meters to enable the future sales of the testing strips.

LifeScan the responsible J&J subsidiary said in this presentation, “Maintain #1 U.S. position – Launch new strip platform offering patients greater value to help patients gain further accuracy and insight” Version 1 received 501k device approval from the FDA in 2010 and LifeScan  are planning submission for version 2 in 2011.

CEO resigned in September 2010  prompting rumours of UBI being acquired.

Recent company presentation.

Disclosure: No position

I’m busy looking after the sick and the young and so am tossing this half finished Telstra analysis out there to help clear my plate and of course to get feedback.

Here is the PDF of my Telstra analysis.

To the right is one of the main points from my analysis and why I created the poll for Telstra’s lowest probable share price this year. The returns are not annualised.

In the next seven months Telstra will cough up 28cents dividend, that’s 40cents pre-tax. Over such a short time frame a valuation makes little sense as the voting machine will determine the price. However what this chart shows is that at the current price of $2.80 Telstra presents an excellent short term opportunity with an attractive risk/return profile.

Disclosure: Long Telstra

The BP Gulf oils spill is a horrendous disaster. I hope the promised $20B relieves a little of stress many of the people around the effected gulf area must be under.

Investors should have already run their ruler over BP. There are a lot of good investors already long, are you among them? I’m not. I see BP as good value right now, but am prepared to wait and see if I get outrageously good value. An easy pitch with bases loaded.

Mike Klein’s log charts highlight the opportunity and why you should be at least kicking BP’s tires. BP is trading substantially below it’s long term trend at around three standard deviations away from its mean, with a RMS of -3.17 and return factor of 2.39.

Value oriented mangers have been loading up on BP, see the video below. Newsletter and many other investors have been getting long in the market soaking up BP shares.I’m counting on them having bought on the way down as is their want to get aboard early. I’m hoping for a second wave of selling as some pension funds and funds mandated to only hold dividend paying shares start to sell down.

Whitney Tilson of hedge fund T2 Partners touting BP on CNBC.

Clearly I might miss out. I think we’re near the peak of reporting and interest. As solutions prevail and uncertainty is replaced by certainty the price will adjust to a fair value. FV is still uncertain, but realistically the future price of oil is a bigger determinant to the value of BP than the cost of this environmental tragedy. A price of $50 within two years seems like it would be in the ballpark, with maybe $30 and $70 being the outer edges of the park. Of course I’m hoping BP trades lower than that in the near term.

I’ve read discussion about selling puts. Yes the yields are attractive, but as always you’re trading away the upside and holding all the downside. Selling ITM Puts increases the possible return with an obvious corresponding rise in risk due to reduced time time premium.

Why should BP in your portfolio or watchlist? It currently represent a better than average return to risk. When people start talking about bankruptcy for a company with 1-2% chance of that occurring then risk to return is likely to be momentarily skewed. Legally BP America is holding the bag and although BP appears to be standing behind it, the boards first responsibility is to shareholders. The worst case scenario is BP America is sacrificed which is around 25% of the group. There is so much analysis out there on BP at the moment that there is no point in me recapping it here. The number one reason BP should be on your radar is that it is an opportunity to gain experience dealing with fear.

A plan of how to play the unfolding random walk from here is in order. First let’s ignore the concept of random walk and try to predict what is most likely.

The chart layered with fundamental information suggests a bottoming process at around these prices. U bottoms are most common and with ongoing uncertainty and further selling pressure, better prices could occur over the next month or two, I give that 60% likelihood. Prices consolidating here I give 20%. With the $20B promise  giving  some certainty despite all its uncertainty, the price could firm from here. I’ll give that a 20% likelihood, if it happens I’ll miss out on investing.

I may enter an opportune buy order to catch any one day sell offs. In general I keep these 10% below the market for 1/3 to 1/2 of a full position.

Other steps should include. Investigate BPs debt for bargains. Look at the sector for other opportunities like ATPG, whose price has been beaten down due to drilling embargo.

Disclosure: No position at time of writing.

I know I’ve said Telstra looks great before, that’s called consistency.   

Over the last few years I’ve  bought and sold Telstra and bought again. I now have my largest holding of Telstra, with an average cost price higher than the current price. I’ve held some Telstra shares for a while, collecting excellent dividends. This is not a recommendation, as always do you own diligence.

The AFR said today

” Telstra’s rivals will launch a co-ordinated lobbying campaign today, aimed at forcing the former telephone monopoly to separate its retail and wholesale divisions and divest itself of its cable network and 50 per cent stake in Foxtel.”

Great, separating the divisions would like more likely create more focused companies with executives more incentivised to succeed. With less government and regulatory interference to boot.

If you doubt my logic, then lets try another tact

Wholesale – who cares, pay me for it and leave me with the growth retail division. Or leave Telstra as one, then I can use the cash cow wholesale to fuel growth in faster growing divisions. I win either way and none of this really matters anyway. It’s the brand. Telstra is Australia’s best known brand and it will the major player in Australian telecommunications for the foreseeable future. 

Telstra will continue paying an excellent dividend, while owners wait with a high probability of selling at higher prices.

There’s a probable catalyst within two months. If the NBN doesn’t work out there’s still plenty of scope for any other good news to send the shares higher. The Telstra share price reflects the worst outcome .

The big reasons is the fat dividend which this article summarising the benefits of. Another good article on dividends by the same guy.

So big dividend, low downside risk, good probable capital returns with at least a 3:1 reward/risk profile, for Australia’s best known brand with possible catalysts on the horizon.

Teltsra dividends since 1998. The dividend has been steady for four years, with two bonus dividends passed out in ’05-06. Prior to that it grew from $0.07 a half to the current $0.14 twice yearly dividend.

News Articles

via Business Spectator

“Telstra Corporation Ltd has been ranked Australia’s strongest brand by a leading brand consultancy.

Interbrand valued the Telstra brand at $9.7 billion, followed by Commonwealth Bank of Australia Ltd at $7.1 billion and National Australia Bank Ltd at $5.1 billion.

Westpac came in at number four with a value of $4.8 billion, while ANZ Banking Group Ltd lagged slightly behind its main rivals, coming in at number seven with a brand value of $3.1 billion.

Interbrand said Telstra was ranked highest because of its the only telco with “a truly integrated telecommunications experience”, while Commonwealth Bank of Australia beat off its rivals because it has “achieved success through its consistency in cross selling and delivering the types of products customers want across a range of categories”.”

Selling Telstra again

“However, last year the brand failed to make the top 20 in the Principals/Synovate Authentic Brand Index, a highly regarded reputational study. In fact Telstra was among the top 10 companies whose rating on the index declined the most. At the same time, BigPond, thanks perhaps to its rabbits, achieved the third biggest jump in its rating, marginally below that of Telstra. And with Trujillo and Telstra chairman Don McGauchie constantly under siege in the media, some leading marketing and branding people now argue the telco’s brand has reached a critical juncture. ”

KongZhong Corporation (ADR) (NASDAQ:KONG) blew away analysts estimates when they reported after hours on Wednesday. Could this baby gorilla of the wireless market finally be growing up into a chest pounding 800lb gorilla?  The three analysts following KongZhong had a consensus estimate of $0.03 with a range of $0.02-0.04. 2009 estimates are for $0.14 with a range of $0.09 -0.20. With 2010 $0.19 and a range of $0.16-0.24. Revenue estimate for the quarter was $27.76M with 2009 estimate of $108.2M and 2010 of $119.8M.

According to Market Watch

Wednesday reported its first-quarter net income rose to $2.5 million, or 7 cents per American depositary share, from $88,000, or breakeven, in the same quarter last year. Excluding items, the Beijing-based wireless services company would have earned 10 cents per ADS. Revenue increased to $29.6 million from $21.4 million a year ago, the company said. Analysts surveyed by FactSet Research had forecast earnings of 3 cents per ADS. The company expects second-quarter revenue of $30.5 million to $31.5 million

Q1 2009 Highlights

• Revenues exceeded guidance – revenues increased 38% year-over-year and increased 11% quarter-over-quarter to $ 29.6 million, exceeding guidance of $27.5M to $28.5M.
• Gross margin stabilized – Total gross margin was 49% or roughly the same level as in the fourth quarter of 2008 (“4Q08″).
• Mobile game accounted for 17% of total revenue in 1Q09, compared to 10% in 4Q08 [This is their new growth engine]
• Significant increase in net income – net income was $2.52M, a significant increase compared with 4Q08 net income of $ 0.52M.
• Diluted net income per ADS was $0.07 based on 36.74 mn ADS outstanding as of March 31, 2009.
• Non-GAAP net income was $3.73M and Non-GAAP diluted net income per ADS was $0.10.
• $141.67M in cash and cash equivalents – As of March 31, 2009, the Company had $141.67M in cash and cash equivalents, including funds received from the issuance of US$6.78M in convertible senior notes to Nokia Growth Partners.

The full release can be viewed here at PR Newswire.

That is an impressive beat, but how can this company with an ever changing strategy trade at $8? It’s forward P/E of 38 and a PEG of 3.45 would seem to place it in another era, a decade ago. 

For starters it might be the $3.86/share  cash on the balance with no debt. If you subtract the cash you get a forward EV/E of around  25 and a 2010 forward EV/E of 18 based on analysts estimates. Those numbers start looking a little more reasonable. Or perhaps the analysts have been low balling, as they have been burnt by Kong in the past. Earnings and revenue estimates are sure to be adjusted up. We might even see an upgrade.

Business Outlook: Based on information available on May 14, 2009, the Company expects total revenues for the second quarter of 2009 to be between $30.5 million and $31.5 million.

Analysts were expecting revenue of $25.32M with a range of $22.30M-28.33M for Q2 and eps of $0.03. Momentum studies like this, Momentum Strategies by Louis Chan, Narasimhan Jegadeesh and Josef Lakonishok, reveal how past earnings surprises predict large drifts in future returns as analysts and the market are slow to respond. I have found this to be especially true for companies like KongZhong, who have recently disappointed many market participants and have changed their strategy.

NOTE: I wrote the title and key points last night in anticipation of earnings beat. I am now editing this extensively and adding a lot of new information and analysis and will continue to do so throughout the day as time permits.  Promises, promises. I’ve run out of time for writing as I’ve been too busy reading and modelling earnings. I encourage you to read the earnings release (linked above) and the conference call. I’m going out on a limb with ambitious targets of 2009 revenue of $136M and eps $0.35.

“Strategy is to develop mobile games into a key growth driver for 2009 and beyond; second, transform Kong.net into a mobile based social gaming and community platform; and the third one is to manage our WVAS business for strong cash flow.” 

Stock Buy Back

As of March 31, 2009, a total of 568,994 ADSs of the Company (representing 22,759,760 ordinary shares), were repurchased at an average price of $4.0761 per ADS as part of the Company’s share repurchase program, which began on November 18, 2008. This aggregate figure includes the 223,090 ADRs repurchased before December 31, 2008, (representing 8,923,600 ordinary shares).

Finally a company buying their stock back near the lows, rather than the common practice of wasting shareholders funds by buying at high prices. Kong get a big tick in my book for this.

Take a Walk on the Dark Side

The following two charts highlight the simple moving average technique of closing and opening positions on a cross of the 50 and 200 day moving averages. When the 50 DMA crosses above the 200 DMA it’s called a Golden Cross and when the 50 crossed below the 200 it’s called the ominous Death Cross. Yes I did just say a few days ago that there is no need to use the same trigger for selling and buying, but there is also no reason to ignore them. 

This longer term chart

Following the simple death and golden cross would have got you out of KongZhong at $9.88 and back in at $4.42. I’m not cherry picking these charts, it is what it is.

If you had of been flexible and were following the fundamental story of KongZhong you could have done even better.  In mid 2006 new consumer protection rules for WVAS were introduced in China. The sell off in KONG was immediate. Kong started buying back shares in November 08 and the price continued to rise strongly.

I did neither, my KongZhong story is thus far not a proud chapter in my investing history, but at least it is profitable. It’s time I actually reviewed what I did and why. In short I sold $7.50 Mar07 puts on KONG is Sept 2006 for $1.30. I was put in March 07 for a cost price of $6.20. Actually now that I look at my records the story looks better than I thought. In late Sept07 I sold $7.50 Nov07 calls for $0.65. While I don’t actually reduce my cost price I do maintain an “owed” price, which accounts for profits from options on open positions. Those calls closed OTM so my owed price became $5.55. At expiration KONG was $4.85 and I made this note on my spreadsheet, “F***ing Sell, rather than p*** around with Calls”  Though I don’t recall that specific trade, that highlights an important lesson to all newbie option traders. Trying to scalp a few extra nickels will often bite you on the arse. If you want to sell something, sell it.   

Disclosure: Long KONG