Posts By: Geoff Gannon

Geoff’s Avid Hog Watchlist: Catering International & Services (CTRG:FP)

The following stock may appear in a future issue of The Avid Hog.

Catering International & Services trades in Paris under the ticker “CTRG”. The company was founded in Marseilles, France in 1992. Two families control 71% of the shares. The founder, Regis Arnoux, controls the majority of the company’s shares. He still runs the company. Catering International provides remote site services (mainly catering) in extreme conditions. Revenue is about evenly divided between serving mining customers (51%) and oil & gas customers (47%). Operating profit – but not revenue (more on that later) – is about evenly divided between Asia/Pacific (54%) and Africa (46%). So, we’re basically talking about a company that caters for mines and oil fields in Asia and Africa.

Let’s start with how I found the company.

I ran a screen at Stockopedia looking for E.U. stocks sorted by their gross profits relative to net tangible assets. I then eliminated companies that either had lost money in one of the last few years or that now traded above 8 times EBITDA. I also eliminated companies where the business description suggested they were far from all 3 rings of my circle of competence: 1) consumer habits, 2) business support services, and 3) industry standards. This left a little over 40 stocks. I then looked for English language information on all 40 stocks. About 14 of these stocks had multiple annual reports in English. Catering International was one of them.

A few things appealed to me immediately about Catering International. The business sounded both mundane (catering) and niche (extreme conditions). It’s a business support services provider. Gross profitability was adequate.

A few things also concerned me right away. Catering International serves mining and oil & gas customers. That means the commodities these companies are extracting – their reasons for being at these sites – are at bubble levels. I’m not saying they are in a bubble. The supply of oil and gas is finite. So you can argue that bubble prices relative to the past could be justified throughout the future. But there is no long-term history of prices being this high. Therefore, we don’t have a relevant record of consumer or producer behavior to go on. We don’t know how marginal – high cost and high risk – some of these sites are. Catering International has been a very fast growing company. Some of that growth was driven by customer interest in more extreme conditions which high prices for commodities like oil and gold have to encourage.

The good news is that you don’t have to expect a lot of future growth to invest in Catering International. Using the most aggressive estimates of EBIT and enterprise value you get a price of 6.5 times EBIT for the company. Using the most conservative estimates of EV and EBIT you get a ratio of 8.2 times. Any price less than 10 times EBIT seems quite fair for a company like this – even without a lot of growth.

I need …

The Inevitables

In his 1996 letter to shareholders, Warren Buffett explained his strategy of investing in “inevitables”:

Companies such as Coca-Cola and Gillette might well be labeled “The Inevitables.”  Forecasters may differ a bit in their predictions of exactly how much soft drink or shaving-equipment business these companies will be doing in ten or twenty years…however, no sensible observer – not even these companies’ most vigorous competitors, assuming they are assessing the matter honestly – questions that Coke and Gillette will dominate their fields worldwide for an investment lifetime.

I happen to have a Standard & Poor’s Stock Market Encyclopedia published in 1967. So, I figured I could check just how persistent the profitability of these “inevitables” is.

Here are the operating margins of 5 such inevitables.

New Value Investing Blog: Moatology

There’s a new value investing blog called “Moatology”. This post on Pulse Seismic is a good example of what the blog does best. Moatology brings you good businesses you haven’t heard of. If you’re looking for a value investing blog to add to your reading list, check out Moatology.…

How to Quantify Quality

Someone who reads the blog sent me this email:

I kind of understand the quantitative part of stock analysis (such as number crunching, valuation) but really struggle to understand the qualitative aspects which determine quality. What kinds of questions to ask yourself in order to gain more insights into the qualitative?

A qualitative analysis does not have to be any less evidence based than a quantitative analysis. However, you do have to gather the evidence yourself.

What counts as evidence? How can we separate our own biases, speculation about the future, etc. from actual observations of quality? Evidence is fact based. Facts come in several flavors.

Number

Example: Tiffany’s New York Flagship Store had $305.54 million in sales in 2012. That is $6,671 per square foot. Based on calculation made from data given in Tiffany’s 10-K on percentage of sales at flagship, worldwide net sales, and gross retail square footage of flagship.

Quote

Example: John Wiley, Reed Elsevier, Springer, etc. have bargaining power with their customers.

The largest (academic journal) publishers wield the power…as a former colleague of mine once said, ‘the more journals you have, the higher your usage stats are and the more money you can charge.”

Based on discussion with a university press editor.

Anecdote

Example: Over the last 10 years, I have placed an average of one order every 4 to 10 days with Amazon. At no point in the last 10 years, have I ever made less than one order every 10 days. I have been a member of Amazon Prime since 2006. The number of orders made each year has roughly tripled from 2003 to 2013. It doubled after I became a Prime member.

Based on information found in my own order history for 2003 to 2013 at Amazon.

History

Example: The 4 most successful periods in animation were at 3 companies: Disney (twice), Pixar, and DreamWorks. At the time of their success, these companies were run by Walt Disney, Jeffrey Katzenberg, John Lasseter, and Jeffrey Katzenberg (again). All worked at Disney at some point in their career.

Based on more than half a dozen books on Disney, Pixar, and DreamWorks.

Experiment

Example:

377 participants were assigned to (Weight Watchers), of whom 230 (61%) completed the 12-month assessment; and 395 were assigned to standard care, of whom 214 (54%) completed the 12-month assessment. In all analyses, participants in the commercial programme group lost twice as much weight as did those in the standard care group.

Based on a journal article appearing in The Lancet.

As you can see, there is no need to be less evidence based when analyzing a business’s quality than you are when analyzing its price. However, you have to impose an evidence based discipline on yourself. You have to go through the primary sources and extract the relevant facts on your own. They will not be presented in as easily digestible form like an EV/EBITDA ratio on Yahoo Finance. When it comes to quality, you need to gather …

(All) My Thoughts on The Avid Hog

This post is going to be all about the new newsletter Quan and I just started. So, if a paid newsletter isn’t something you’re looking for right now – this post is going to be pretty boring for you.

It’s also going to be pretty long. I have a lot to say about The Avid Hog. I know most readers of the blog aren’t interested in ever paying $100 a month for any product. So, I don’t want to clog up the blog with a lot of little posts about the newsletter. Here’s one big one. If you’re not interested, skip it. Regularly scheduled (non-promotional) content will resume next week.

Quan and I have been working on The Avid Hog for over a year. I’m here in the United States (in Texas). Quan is back in Vietnam. He went to school in the U.S. And we started work on The Avid Hog in person while he was still living over here just after his graduation.

Quan moved back to Vietnam. But that did not end preparations for The Avid Hog. Today, we do everything by email, Skype, etc. The only difficulty is the time difference. It’s exactly 12 hours. It’s midnight in Hanoi when it’s noon in Dallas and vice versa. This make picking Skype times interesting.

The Avid Hog is an unusual newsletter for a few reasons. The biggest reason is that it’s a product of two people. All the decisions about what stocks we start research on, what stocks make the cut and get a full investigation, and what stock makes it into the next issue – these are all decisions we make together.

It’s easier than you might think. Quan and I don’t disagree on a lot about stocks. This is both a plus and a minus. The plus is that it makes it easier to produce The Avid Hog. The minus is that anything I badly misjudge is something Quan’s likely to misjudge too. We are not very good at catching each other’s mistakes. We are too similar in our thinking about stocks for that.

What is our thinking about stocks?

Officially, the label would be “value investor”. But that’s a rather wide tent. And we tend to be pretty far over on the quality side of things. If we’re going to compromise on quality or price, it’s always going to be price.  I think we both tend to agree with Ben Graham. The biggest danger for investors isn’t usually paying too high a price for a high quality business. It’s paying too high a price for a second rate business.

The model business we like would be something like See’s Candies. Read Warren Buffett’s 2007 letter. There’s a section in it called “Businesses – The Great, The Good, and The Gruesome”. See’s is given as the example of a great business.

If you read that section carefully, you’ll understand what I mean when I say See’s is the kind of business Quan and I …

Blind Stock Valuation: Mystery Office Equipment Company (1966)

Net Cash: $18 million

Shares Outstanding: 7,992,106

Businesses

1. “Duplication of printed communications and business forms for accounting paperwork systems and high speed reproduction of output copy produced by electronic computers.”
2. “Sales of machines, supplies, and services for general purpose data writing and mechanized repetitive writing.”

Facts

1. Majority of revenue comes from supplies, services, and rentals. Minority of revenue comes from sale of machines.
2. U.S. sales are 81% of total. Foreign sales are 19%.

Questions

1. What did one share of this company’s stock trade for in 1966?
2. What price should it have traded for?
3. What price would you have paid?
4. Why?

 …

Finding Enough Investment Ideas

Upon seeing that The Avid Hog is a monthly newsletter, someone asked this question:

…how do you expect to find suitable candidates every month? Is the supply of good companies that large?

The supply of good companies is enormous. If you don’t have any restrictions on market cap or country, there are always good companies out there. Supply is never the problem. Knowing that supply well enough is.

Although I consider myself a value investor, I don’t get ideas the way most value investors do. You can see a good example of how a value investor looks for ideas in this video of Michael Price’s presentation at the London Value Investing Conference. Another good example is this quote from Nate’s latest post at Oddball Stocks:

I value banks like I value companies.  I find a bank that’s clearly undervalued, then I work to either confirm or deny the valuation.  This is the opposite of someone who might research and value a company and once the valuation is done look at the market value.  I start with the market value, I’m not looking for franchise companies, I’m looking for companies that appear cheap, and I want to confirm they actually are cheap, if so I invest.  This means I don’t have a Watchlist of banks or companies I’d like to buy if the price were right.  Rather I continually trawl low P/B stocks and pick up what’s on sale that week or month

Let’s contrast that with the ideal I strive for. In a perfect world, my approach looks more like how Warren Buffett described his analysis of PetroChina to Fox Business. He told Fox Business the important parts of his approach are that:

1. He tries to look at the business first, without knowing the price
2. He decides what he would pay for the entire company
3. He compares the price he would pay to what the entire company is trading for in the market
4. If the price he would pay is a lot higher than what the whole company trades for in the market, he buys it.

That’s the ideal approach for me. I’ve found personally that it’s the one that works best. If I appraise the entire business with fairly little preconception of where the stock should trade, has traded, etc. and then I compare my appraisal to the market price I’m on the firmest footing in terms of knowing I have a bargain.

The hypothetical I often pose when talking to Quan about a stock is:

Imagine you are running a family holding company. The assets of all your family members are tied up in this company’s stock. You can put 25% of the value of your holding company into buying this business in its entirety. Would you do it?

In other words, is this a business you want to be in forever? Is the price good? And would you be willing to put 25% of the money of the people you care most about into it?…

How The Avid Hog Works

Sample

At The Avid Hog, we do not offer trial periods. Nor do we make old issues available for free. However, you may sample the current issue of The Avid Hog. Sampling is done on the honor system. You do not need to enter your credit card information. Just call or email Subscriber Services and ask to be sent the current issue. If you are satisfied with your sample, please come back to the site and pay for the product you just enjoyed by clicking the subscribe button. If you are unsatisfied, think of it as an (unwanted) gift.

Talk to Subscriber Services

Refund

Any subscriber who is unsatisfied with an issue will receive a $100 refund. If you cancel because The Avid Hog no longer meets your expectations, your last $100 payment will be refunded. We do not issue refunds greater than $100.

Billing

Subscriptions are billed through a $100 recurring monthly PayPal charge. You are charged $100 each month on the same day of the month on which you subscribed. For example, if you subscribe to The Avid Hog on October 3rd, you will be charged $100 immediately on October 3rd. You will then be charged another $100 on November 3rd, then again on December 3rd, and again on January 3rd, and so on until you cancel.

Issue

A new issue is released each month. Issues are sent as a PDF attachment via email. Issues are sent to all subscribers on the day the issue is published. The day the issue is sent is the same for all subscribers regardless of their billing date.

Cancel

You may cancel your subscription to The Avid Hog by calling or emailing Subscriber Services. If you cancel due to dissatisfaction, you will receive a $100 refund.

Website

There is a website for The Avid Hog. It is the best place to find up to date information on what The Avid Hog is, how it works, and who to talk to when you have a question.…

How Did Mohnish Pabrai Not Make Money in Japanese Net-Nets?

This is a serious question. I’m probably not qualified to answer it, because I have a poor understanding of Pabrai’s investment approach.

Here is the blog post that stumped me:

The Pabrai funds invested in a basket of Japanese (net-nets) starting October 2010. Mohnish has exited all the positions with a realized gain of 2.2% including dividends, or 1.4% annualized.

The notes go on to give examples of some stocks Pabrai owned:

Examples include Hibiya Engineering and Ryoyo Electro. Both were trading below NCAV at the time of his investment, generating profits as well as positive and consistent cash flows. Managements of both companies were also repurchasing shares. Hibiya ended up just a little bit profitable and Ryoyo turned out be a -15% loss.

I can’t explain Pabrai’s experience with Japanese net-nets. But I can tell you a little about my own. We have two records of it. One is personal (my own account where I actually bought net-nets and made money). The other is public (a paid report I put out on March 21st, 2011). There is a third record you should check out. Go to Nate Tobik’s Oddball Stocks and read all his Japanese net-net posts. These three experiences are more indicative of what individual American investors would have gotten out of their Japanese net-nets.

I won’t talk a lot about my private record, because it’s private. You can’t verify it. But it’s better than the public record I’m about to show you. Instead of picking 15 Japanese net-nets, I went with no more than 5 at a time. I ended up buying a total of 6. I started with 5 and then added one later to replace a stock (Sanjo Machine Works, which is on the list) that was bought out. Like always, I concentrated a little more than other investors might. In this case, that got me a better personal result than the more diversified group I’m about to show you.

So let’s talk about that group of 15 net-nets. Let’s talk about the public record.

I published a (paid) report on Japanese net-nets on March 21st, 2011. So we have a list of 15 Japanese net-nets we can look back on without the usual biases of a hypothetical backtest. This is an actual observation. We’re working off a dated PDF that went out to buyers.

Here are the returns (in Yen) of those 15 Japanese net-nets since March 21st, 2011.

Zaoh (9986): 84%

Fuji Electric Industry (6654): 23%

Mitsui Knowledge Industry (2665): 28%

ASICS Trading (9814): 82%

Sonton Foods (2898): 47% TAKEOVER

Nisshin Electronics Service (4713): 33%

Daito Gyorui (8044): 9%

Sanjo Machine Works (6437): 186% TAKEOVER

NJK (9748): 67%

Noda Screen (6790): 62% TAKEOVER

M.O. TEC (9961): 41% TAKEOVER

Yasuhara Chemical (4957): 1%

Techno Associe (8249): 71%

Kawasumi Laboratories (7703): 12%

Seiko PMC (4963): 83%

Now, the Yen has fallen 18% against the dollar since March 21st, 2011. So, we will factor that into our results. Taking the currency loss into consideration, here are …

What is The Avid Hog?

The Avid Hog is a monthly value investing newsletter written by Geoff Gannon and Quan Hoang. It is best suited for buy and hold investors looking for an above average business at a below average price. Each month, Geoff and Quan pick the best buy and hold stock they can find. They discuss that one stock in a series of 9 articles. These 9 articles – each over 1,300 words long – include separate sections on the 7 points that make up Geoff and Quan’s personal buy and hold checklist:

1. Durability
2. Moat
3. Quality
4. Capital Allocation
5. Value
6. Growth
7. Misjudgment

In addition to 12,000 words of written analysis, each issue of The Avid Hog includes:

1. Historical financial data
2. Owner earnings calculation
3. Intrinsic value appraisal
4. Margin of safety measurement

The goal of each issue is to provide subscribers with enough information – in the form of facts, quotes, and data – to make their own decision about the stock. Unlike many newsletters, the focus of The Avid Hog is business analysis. The intended minimum investment time frame is 3 years. The stocks profiled are the same stocks that Geoff and Quan are researching for their personal accounts. Geoff and Quan have agreed to limit all future purchases to stocks that have appeared in The Avid Hog. This ensures the idea flow subscribers are seeing is identical to what Geoff and Quan are thinking when it comes to their own money.

The cost is $100 a month.

At The Avid Hog, we do not offer trial periods. Nor do we make old issues available for free. However, you may sample the current issue of The Avid Hog. Sampling is done on the honor system. You do not need to enter your credit card information. Just call or email Subscriber Services and ask to be sent the current issue. If you are satisfied with your sample, please come back to the site and pay for the product you just enjoyed by clicking the subscribe button. If you are unsatisfied, think of it as an (unwanted) gift.…