Andrew Kuhn December 30, 2019

Familiarity Breeds Success: Why Members of Congress Do Best When Buying Local Stocks

From 12/21/2010

Here’s an interesting article from BusinessWeek about how members of Congress do best when picking stocks from their own districts. While cynics will jump to the conclusion these representatives must be trading on inside knowledge gleaned from lobbyists, or just outright favoring local companies, I have to say I have a better record investing in New Jersey companies.

I was born and raised in New Jersey. I still live and work here. I know the place. And I do best when investing in New Jersey companies. At least half my best long-term investments were in New Jersey companies. It’s a small sample. But it’s a significant stat.

Also, I remember reading a paper in an academic journal, I’m going to say it was published sometime in the 1960s, that looked at brokerage accounts and found the two strongest predictors of good performance in any trade were the distance of the corporate headquarters from the investor’s home and the length of time the stock was held. The shorter the trade, the worse investors did. The closer the headquarters, the better investors did.

The combination of a local business held for a long time was often the investor’s best performing trade. That’s true for me. And it seems to be true for our elected representatives too.

It’s also how Phil Fisher got started investing.

Generally, it’s not a bad idea to read up on all the public companies in your home state. It might come in handy one day.

While I’m sure some folks will jump to the corruption angle, I totally disagree. There hasn’t been enough study of how familiarity affects investment performance. In my experience, familiarity turns otherwise mediocre traders into long-term value investors. Locals and insiders who otherwise aren’t value investors suddenly become very Buffett like when the business is down the street or they’re in the board room.

I’ve got a story about how being on the inside makes you a better investor.

I know a guy who used to work at Goldman Sachs (GS). Near the end of his career, he’d left Goldman and gone to work as the treasurer of a public company. It was a utility. Very easy to understand. Eventually the stock got cheap. And the dividend yield was obscene.

Now, this guy isn’t normally a good investor. He’s not terrible. He’s just not good. Not a real stock picker. Not going to dig into the 10-K of some obscure company. And definitely not a contrarian. He’ll buy some blue chips and some investment grade bonds. But he’s no value investor. And he’s no risk taker.

Day after day he sees the stock trading so low. He knows the dividend is covered. I should point out, that’s not because he’s the treasurer. This was a public company. It was a utility. Anyone could see the dividend was covered. Dividend coverage isn’t hard to calculate for a utility. Any outsider looking at the company knew the dividend was covered.

But

Warwickb December 17, 2019

Suria Capital Holdings Bhd (KLSE:Suria): A Cheap, Conservatively FInanced Port Concession Operator

Writeup by Warwick Bagnall

www.oceaniavalue.com

Suria has some sell-side analyst coverage so I wouldn’t say it is a totally overlooked stock. But it has several features which make it a quick pass for many investors: top line revenue is up and down by >50% in many years (the company reluctantly books some capex as revenue), it is small (~116 MM USD market cap) and it is illiquid (~4% annual share turnover). You can’t buy more than a few thousand USD per day of stock without moving the price. Half of the float is owned by a controlling shareholder. Its shares are listed in a small country which isn’t covered by the more popular discount brokerages. Suria is not worth the hassle for most investors, even those that haven’t been turned off Malaysian businesses by Billion Dollar Whale.

For those who are not put off by Suria’s obscurity, this is a very robust business with reasonable growth prospects at a cheap price. Suria’s main business is operating the port concession for the eight ports in Sabah (the northern part of Borneo, part of Malaysia). And the controlling shareholder I mentioned above is the Sabah state government, who also happens to set the concession tariffs.

Main Business – Port Operations

Port operations provide the majority of Suria’s revenue and are the most predictable part of the business. The port operations concession was granted in 2003 for a period of 30 years with an option of a second 30 years. The concession allows Suria to charge tariffs on all ships loading or unloading cargo or passengers in Sabah waters based on various factors such as the tonnage handled, length of the ship, number of passengers etc.

In return, Suria pays the government a percentage of some of the tariffs charged and lease fees for land use. Suria originally paid MYR 210 MM to buy the concession and has also paid for long term leases of parcels of port land (more on that later).

Suria is obliged to spend MYR 1.363 billion in capital on upgrading port facilities over the duration of the concession. All bar about MYR 300 MM of this has been spent at the time of writing (December 2019). Government loans with interest rates around 4% and generous terms such as 10-year repayment holidays have formed much of the funding for the capital projects. The balance has been funded through Islamic debt with profit margins of 5.15 to 5.85%.

The tariffs and lease costs are set by the Sabah Ports Authority, a division of the government and are supposed to be reviewed every five years. They are under review at the time of writing. Strangely, it looks like the existing tariffs were set in the 1970s and this is the first time they have been escalated since then. This means employees (Suria’s main cash expense) consume about 5 percentage points more of revenue than they did 10 years ago. Despite that, Suria’s cash operating margins from port operations are …

Geoff Gannon December 14, 2019

Truxton (TRUX): A Small, Fast Growing Private Bank with Extremely Low Net Non-Interest Expense

by PHILIP HUTCHINSON

Overview

Truxton is a small, fast growing private bank with extremely low net non interest expenses due to its wealth management business and very high level of deposits per branch

Truxton Trust is a one-branch private bank and wealth management firm in Nashville, Tennessee. It was founded in 2003 by a group of founders (some – though not all – of whom are also executives at the company) who appear to be a mix of very well-connected members of the Nashville business community and long-time private bankers who spent their prior careers mainly at SunTrust.

There are two parts to Truxton’s business. First, it’s a private bank. So, it takes deposits from rich customers (wealthy individuals, families, trusts, and the like) and lends those deposits out – often to borrowers who are also, or are connected to, its depositors. It also provides other full-service banking services to those clients. So, high-touch, personal service, with clients having dedicated staff at the bank that they know personally, a more bespoke approach to lending, etc, compared to the more statistically driven and cost focussed approach of mass market banks. And, second, it’s a wealth manager. Customers use Truxton for wealth management of their net worth. Truxton does – I think – do some discretionary management of bond and stock portfolios. But, the company isn’t a wealth manager in the same way as a big fund manager like Blackrock, Schroders, or Fidelity. It holds the direct relationship with the customer, who has a brokerage, retirement, etc, account with Truxton. But equally, it’s not really a broker like Schwab, Interactive Brokers, or even a full service traditional stockbroker either. It’s performing a service that is more like what a financial adviser (what I’d think of as an independent financial adviser – an IFA – here in the UK) would do for an affluent client, but aimed at genuinely high net worth individuals. And, it would encompass a wider set of services than an IFA would provide. Truxton’s services include things like managing and administering trusts and foundations established by the client (hence the name, Truxton Trust), providing tax and inheritance advice, administering a client’s estate after their death, and advising on overall portfolio composition. Truxton takes a fee – essentially 1% of AUM, maybe a bit more – for these services.

It’s important to understand that there are these two separate parts of Truxton’s business. But, the reality is that the key to Truxton is that it has a wide relationship with its key customers encompassing both their banking arrangements and their wealth management. Something like having the personal and business checking accounts for a business owner, the time or CD deposits of that customer, accounts for his or her family, trust and investment brokerage accounts with the vast majority of that customer’s investments, and loans to that customer secured on their business, their investment properties, or similar. Basically, the private bank and wealth manager together are intended to have high share …

Geoff Gannon December 14, 2019

Canterbury Park (CPHC): A Stock Selling for Less than the Sum of Two Parts – A Card Casino and 127-Acres of Land (Plus You Get a Horse Track for Free)

Canterbury Park (CPHC) is a sum of the parts stock.

After our experiences – and when I say “our”, I mean my decisions to buy – Maui Land & Pineapple, Keweenaw Land Association, and Nekkar – Andrew has a sticky note on his desk that says: “When thinking about SOTP, think STOP”.

Canterbury Park (CPHC) is a sum of the parts (SOTP) stock. Since we’re thinking “SOTP” should we also be thinking “STOP”?

Yes, Canterbury Park is a sum of the parts stock. But…

That doesn’t mean it is primarily an asset play. Though it might be. I’ll talk about the company’s horse track and card casino in a second. But, first let’s get the hardest part for me to value out of the way.

I find it difficult to value the real estate assets of this business. So, I will be judging them based in large part on the range of per acre transaction prices – for both sales of land and purchases of land – I found in the company’s filings. Amounts paid or received per acre seem to range from about $180,000 to $385,000. Some of these deals are a bit more complex – for example, it’s difficult to determine what the price per acre the company received was when it exchanged land for an equity stake in an apartment complex or something like that. In one specific example of this – I would say the company exchanged about 1 acre of land for every 8 apartment units (I mean here the equivalent of owning 100% of 8 units, actual ownership is a minority stake in a greater number of units). Well, what exactly are 8 apartment units worth in the area? I don’t know. Could 8 apartment units be worth something in that same $180,000 to $385,000 range? Could it be more? I’d have to do a lot more research – and be a lot better at understanding real estate investments – to get definitive answers to how much Canterbury Park’s real estate is worth. It’s an important part of the investment case here. But, it’s not one I can evaluate well.

The real estate not being used by the business is 127 acres. Total real estate ownership is more like 370 acres. But, most of it is tied up in the horse track – so, I’ll limit discussion to the 127 acres that is planned to be developed into apartments, townhomes, extended stay hotels, etc. The lowest values I found for actual transactions the company has engaged in were around $180,000 per acre. If we assume the company receives the equivalent of $180,000 in value – sometimes in cash from sales of land, sometimes from equity stakes in joint ventures that rent out apartments for years to come, etc. – we’d place a value of about $23 million on all this real estate. It might be worth $25 million.

It could be worth a lot more than that depending on how it’s developed. For example, …

Geoff Gannon December 7, 2019

Stella-Jones: Long-Term Contracts Selling Utility Poles and Railroad Ties Add Up to A Predictable, Consistent Compounder that Unfortunately Has to Use Debt to Beat the Market

Stella-Jones mainly provides large customers with pressure treated wood under contractually decided terms. The customers are mainly: U.S. and Canadian railroads, U.S. and Canadian electric companies, U.S. and Canadian phone companies, and U.S. and Canadian big box retailers. Stella-Jones has some other sources of revenue – like selling untreated lumber and logs – that provide revenue but no value for shareholders. The company also has some more niche customers – probably buyers for using wood in things like bridges, piers, etc. – that probably do provide some profit, but not profit meaningful in scale to the categories of customers I mentioned above. The company also sells some stuff that I’d consider more or less byproducts of their main business. Everything they do is clearly tied to either wood or the treatment of wood. Because there is less information about the smallest product categories the company sells and because those categories are either low or no margin or are probably too small to move the needle for making a decision about whether or not to buy this stock – I’m going to pretend Stella-Jones sells only 3 things: 1) Ties to U.S. and Canadian railroads, 2) Poles to U.S. and Canadian electric and phone companies, and 3) Pressure treated wood (for outdoor decking, etc.) to U.S. and Canadian big box retailers.

First, let’s discuss the economics of this business. One: the first two categories – railroad ties and utility poles – are super predictable, because the U.S. and Canada already have basically all the railroad ties and utility poles they’re ever going to need. What these countries need is simply annual replacement of those products. These are long-lived assets. On average: a utility pole can go 65 years before needing to be replaced. Railroads and utilities can defer replacement due purely to age. But, why would they? This isn’t the most expensive form of cap-ex to spend on. Eventually, network performance will degrade if they don’t maintain this stuff. And these are usually very, very creditworthy customers. They don’t have to rely on short-term borrowing from banks. Stella-Jones’s most important customers can all issue long-term bonds to raise the capital needed to fund not only normal maintenance projects but even growth cap-ex. So, there could be some cyclicality here. But, it’s probably a lot less than you’d think. It’s going to be far, far less cyclical than companies like suppliers of newer technology products to utility and telecom customers. It’s going to be a lot less cyclical than suppliers of locomotives to railroads. Although technically Stella-Jones is clearly selling a physical (and pretty much commodity) product to these customers – the economics here are going to look a lot more like they are being paid to maintain something on behalf of their customers. They’re providing a constant supply of replacement parts.

The physical scale of Stella-Jones and their customers is possibly a lot bigger than you might be thinking. What I mean by this is that the company moves a large …

Andrew Kuhn December 6, 2019

One Ratio to Rule Them All: EV/EBITDA

By Geoff Gannon

06/07/2012

For understanding a business rather than a corporate structure – EV/EBITDA is probably my favorite price ratio.

Why EV/EBITDA Is the Worst Price Ratio Except For All the Others

Obviously, you need to consider all other factors like how much of EBITDA actually becomes free cash flow, etc.

But I do not think reported net income is that useful. And free cash flow is complicated. At a mature business it will tell you everything you need to know. At a fast growing company, it will not tell you much of anything.

As for the idea of maintenance cap-ex – I have never felt I have any special insights into what that number is apart from what is shown in actual capital spending and depreciation expense.

When looking at something like:

Dun & Bradstreet (DNB)
Omnicom (OMC)
Carbo Ceramics (CRR)

I definitely do take note of the fact they trade around 8x EBITDA – and I think that is not where a really good business should trade. It’s where a run of the mill business should trade.

I guess you could get that from the P/E ratio. But when you look at very low P/E stocks – like very low P/B stocks – you’re often looking at stocks with unusually high leverage. And this distorts the P/E situation.

Which Ratio You Use Matters Most When It Disagrees With the P/E Ratio

The P/E ratio also punishes companies that don’t use leverage.

Bloomberg says J&J Snack Foods (JJSF) has a P/E ratio of 21. And an EV/EBITDA ratio of 8. Meanwhile, Campbell Soup (CPB) has a P/E of 13 and EV/EBITDA of 8. One of them has some net cash. The other has some net debt. J&J is run with about as much cash on hand as total liabilities.

They can do that because the founder is still in charge. But if Campbell Soup thinks it can run its business with debt equal to 2 times operating income – then if someone like Campbell Soup buys J&J, aren’t they going to figure they can add another $160 million in debt. And use that $110 million in cash someplace else.

And doesn’t that mean J&J is cheaper to a strategic buyer than its P/E ratio suggests.

That only deals with the “EV” part. What about the EBITDA part? Why not EBIT?

Don’t Assume Accountants See Amortization the Way You Do

The “DA” part of a company’s financial statements is usually the most suspect. It’s the most likely to disguise interesting, odd situations.

Look at Birner Dental Management Services (BDMS). The P/E is 21. Which is interesting because the dividend yield is 5.2%. That means the stock is trading at 19 times its dividend (1/0.052 = 19.23) and 21 times its earnings. In other words, the dividend per share is higher than earnings per share. Is this a one-time thing?

No. The company is always amortizing past acquisitions. So, the EV/EBITDA of 8 is probably

Geoff Gannon December 5, 2019

Points International (PCOM): A 10%+ Growth Business That’s 100% Funded by the Float from Simultaneously Buying and Selling Airline Miles

Points International (PCOM) is a stock Andrew brought to me a couple weeks ago. It always looked like a potentially interesting stock – I’ll discuss why when I get to management’s guidance for what it hopes to achieve by 2022 – but, I wasn’t sure it’s a business model I could understand. After some more research into the business, I feel like I can at least guess at what this company is really doing and at how this helps airlines. My interpretation of what the company is doing is sometimes a bit different than what I’ve read about in write-ups of this stock on Value Investor’s Club, Seeking Alpha, etc. The company’s own investor presentation doesn’t lay things out quite the way I will here. So, everything you read in this initial interest post should be consumed with the understanding that it’s my best guess of how this business works – and that guess could be far off the mark.

Points International has 3 segments. One of these is “Loyalty Currency Retailing”. That segment produces more than 100% of the company’s economic profit because the other 2 segments together add up to a slight loss, break even result, etc. depending on the exact year or quarter. At this point, I see no reason to assign any value – positive or negative – to the other two business segments. Points International also says it serves a lot of different clients. It mentions a total of 60 clients who it does some work for. However, only 30 use even one of the company’s “Loyalty Currency Retailing” functions. As a side note: in a YouTube video I saw, the company’s President seems to mention the number 36 in reference to Loyalty Currency Retailing – so, when I say “30” going by the company’s reports to regulators and so on, the actual number may now be 36 but I’m not 100% sure that’s what the President was referencing. So, I’m going to keep saying they have about 30 out of 60 clients actually allowing them to do any Loyalty Currency Retailing. Loyalty Currency Retailing is the only business that produces value here. So, all profits are from only 30 (or so) “partners”. Customer concentration seems extreme here if you read the note that 70-75% of revenue comes from 3 partners. However, gross profit is the more meaningful measure here. I would just cross out revenue and replace it with gross profit for most discussions of this company. The one exception would be “float”. I’ll discuss that later. It’s possibly best to treat gross profit as this company’s top line revenue and to treat the reported revenue as a form of “billings” as other marketing companies might put it. So, gross profit concentration is such that 80% of gross profits comes from 12 partners. Based on other things the company says, I would assume these partners are airlines based in the U.S. and Europe. I think the concentration here is really that almost all profits …

Geoff Gannon November 25, 2019

Sydney Airport: A Safe, Growing and Inflation Protected Asset That’s Leveraged to the Hilt

Today’s initial interest post really stretches the definition of “overlooked stock”. I’m going to be talking about Sydney Airport. This is one of the 20 to 25 biggest public companies in Australia. It has a market cap – in U.S. dollar terms (the stock trades in Australian Dollars) – of about $13 billion. It also has a lot of debt – including publicly traded bonds. So, not what you’d normally consider “overlooked”. On the other hand, Andrew and I have a couple standard criteria we use (low beta and low share turnover) to judge whether a stock might be overlooked. And Sydney Airport happened to score just barely well enough on these two measures of “overlooked-ness” that it wasn’t automatically eliminated by our screens. For this reason, I left the stock on a watchlist that went out on our email list. While a lot of people mentioned the stock definitely wasn’t overlooked – a lot of other people also mentioned they’d like to hear my thoughts on the stock. So, here they are.

Sydney Airport was suggested to me by my former newsletter co-writer Quan Hoang. He’s from Vietnam originally. And he’s now spent time in Australia. He was looking at stocks and sent me over some financial data of Sydney Airport. A few things jump out about this company immediately. One: it pays out basically everything it can afford to in dividends. Two: it uses a high amount of debt (close to 7 times Net Debt/EBITDA – at one time that number was closer to 11 times Net Debt/EBITDA). However, this isn’t a distressed company in any way. The debt is spaced out – about half of it matures within the next 5 years and the other half after the next 5 years. The bonds are rated by Moody’s and S&P. Sydney Airport intends to maintain an investment grade rating. That’s usually not easy when you have well over 6 times Net Debt / EBITDA. But, this is an airport.

The problem with the debt here is not solvency risk. It’s that the stock price with the debt added – so, the enterprise value relative to various earnings power measures – creates a pretty high future growth hurdle that needs to be cleared. On a dividend yield basis, the stock looks cheap. It yields 4.3%. However, you need to be careful with that number. Consider, for example, Vertu Motors in the U.K. It also yields 4.2%. But, instead of having more than 6 times Net Debt / EBITDA – it has basically no net debt. It also pays out only about 1/3^rd of its earnings as dividends. I’m not saying Vertu Motors is a better stock than Sydney Airport – though, at this point, I do own Vertu and don’t own Sydney Airport – but, I am saying that it’s a lot easier for Vertu to cover its dividend and grow it over time than it is for Sydney Airport. Basically, if Sydney Airport doesn’t want to increase …

Andrew Kuhn November 25, 2019

Burford Capital Limited LSE (AIM): BUR

Recommendation: Buy

Burford Capital is complicated to value; and so vulnerable to opportunistic short sellers, but this weakness offers opportunities to long term investors.

Stephen Gamble, writer and analyst, 12^th October 2019.

[email protected]

www.gambleinvests.com

Figure Above: shows how each of 74 concluded matters in period 2009-2016 contributed to profits in this period – 4 matters make up 50% of gross profits, 11 matters make up 75% of gross profits

Figure Above: shows gross cash profit/loss for each of the 127 matters concluded/partially realised in period 2009-2016. 58% of cases give a positive return, the rest break even or lose money.

Overview

Burford Capital is in litigation finance, a relatively new industry in a growth phase, with complex assets. The recent attack from short sellers give rise to opportunity for longer term investors.

Lawsuits are risky for companies: they have to commit large amounts of capital up front to pay for expensive lawyers, they can take years to settle, and the return on their investment is unknown until the end, and binary: either a large cash windfall, or else a total loss, and they may even face a liability for costs of the other party. Furthermore, once litigation has started, it has to be seen through to the end in order to prevent a total loss of money invested. This often takes multiple appeals, making the total cost difficult/impossible to ascertain at the start. In summary, lawsuits can be difficult to justify to shareholders since the duration, cost and outcome are inherently uncertain. However, they are often desirable in order to protect key business interests – so the companies are left with a difficult choice when considering whether to litigate or not.

It is at this point that companies considering a lawsuit, are increasingly turning to a third party litigation finance company. They can provide capital, to avoid the problems discussed above, and in return, they take a slice of the outcome. Therefore they do not need to spend money at any point in the litigation process, e.g. on lawyers etc. since the litigation finance company will spend its money instead. This changes litigation from an uncertain and risky enterprise into a simple opportunity cost – that they might have made more money, if they had paid the lawyers themselves. It also incentivises companies to pursue litigation that they might otherwise have deemed too risky. For the company, the cost of making ~30% less money in victory or settlement, is much preferable to the risk of committing an unknown amount of money for an unknown duration, where if the commitment is not followed through to the end, all the money invested is lost. Furthermore, in many cases the company still retains some control over the litigation, and can input into the strategy pursued – without having any financial risk. Litigation finance can be crudely characterised as a ‘corporate no win, no fee,’ claims industry.

This industry is a relatively immature one compared to the personal claims one, which …

Geoff Gannon November 23, 2019

F.W. Thorpe: A Good Business Making Durable Products that May Have Already Peaked

Today’s initial interest post is a company I like a lot. It’s trading at a price that could be justifiable – possibly – based on that company’s past performance. But, it’s not a stock I’m going to give a very high initial interest level too. The reason for that is uncertainty about the future.

I’ll get to that uncertainty in a second. First, I want to describe what FW Thorpe does. The company makes lights. I won’t go into too much detail here. You can always read a company’s annual report for yourself. So, I hate to go into analysis free re-hashes of a company’s basic business model. I’ll do that a little here, though, because I don’t want you to think FW Thorpe makes light bulbs for your house.

The company’s focus in on professional lighting with the lowest cost of total ownership. It makes lights for everything from clean rooms to warehouses to retail shops. FW Thorpe’s products are used for street lights, in tunnels, up on the ceiling of the office you may be working in now (though, if you’re not in the U.K. or the Netherlands – it’s a lot less likely that’s an FW Thorpe product). The company also makes lighting for emergency signs. It has a business unit that seems to me to be focused on making emergency sign lighting that complies with regulations while looking aesthetically pleasing (the customers all seem like locations that care about the look of the interior of their building). Some lighting is used to illuminate advertisements and things like that. It’s a whole variety of professional lighting where the main focus is not having the cheapest initial purchase price. It’s about what the lighting does and how little it’ll cost you in electricity bills, replacement, etc. over many years into the future.

Basically: FW Thorpe makes lights. Decades ago, lighting was not a very durable product. But, that changed in recent years. Unfortunately, not so recent that we’re still in the middle of this shift from more disposal lighting to more durable lighting. What was once often fluorescent (and incandescent) lighting became LED. As you probably know, a lot of governments put in rules phasing out incandescent lighting. Many of these rules were put in place anywhere from 5-15 years ago. So, again – we’re talking about a tailwind that was stronger in the past than it will be in the future.

I’m sure there are people reading this who know more about the lifespans of incandescent, fluorescent, and LED lights. But, from what checks I could make – it seems that a typical LED light can have a life as much as 10 times that of a typical fluorescent lamp. I was, however, able to find references to some fluorescent lamps designed to have similar lifespans to LED lights. So, companies have probably always been working on extending the lifespan of any of these types of lighting. For us as investors here – the problem is that …