Category Archives: Articles

A Time for the Inner Scorecard

The Edge7 and Edge Fund projects have been very much focused on presenting the Outer Scorecard. This Outer Scorecard has shared stock analysis, updated investment performance graphs, stock valuations and my general thoughts on many matters investing and the market over the last three years.

A Time has come where it feels right for me to focus on the Inner Scorecard.

So, I leave you with this passage from Ecclesiastes chapter 3 verses 1 to 8:

ecclesiastes3 1 8 11 A Time for the Inner Scorecard

This article is published by Dean Mico.

The ASX All Ordinaries Rocking Horse

rocking horse 300x225 The ASX All Ordinaries Rocking HorseThe ASX All Ordinaries closed:

October 28 2013 at 5437
October 28 2014 at 5434

Just like a rocking horse, in the past 12 months, the Aussie share market has seen plenty of movement but made no progress!!!

 

Daily Chart
ALL ORDINARIES INDEXdailyOct The ASX All Ordinaries Rocking Horse


Weekly Chart

ALL ORDINARIES INDEXweeklyOct The ASX All Ordinaries Rocking Horse

This article is published by Dean Mico.

The information provided in this article is intended for general use only. The article is intended to provide educational information only. Please be aware that investing involves the risk of capital loss. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information herein.

The Aussie – Where you at?

The Aussie Dollar is at an interesting juncture at the moment.

September / October correlation

International institutions in part were responsible for the fall in the Australian share market since September into October as these institutions sold out of Australian based assets and the currency with it.

With confirmation around mid September that international money was vacating the area, I have been watching the Aussie more closely than usual.

Threat vs Opportunity

A lingering threat to the Aussie equity market is the potential for a continuation of a falling currency.  If international money collectively decides to pack up its Australian bat and ball (so to speak) and find assets to buy off of our shores, than the risk is a lower Australian share market as a result.

However, this could set up a nice opportunity for locals to buy quality Australian assets (shares) at attractive prices in the intermediate term.

Weekly Chart
AUDUSD The Aussie   Where you at?

Zoomed Daily Chart
The zoomed in daily chart shows Friday’s short squeeze.
AUDUSDshortterm The Aussie   Where you at?

Crowded Trade Squeezed
Each of the currency traders I follow that cared to share via social media last week were all short the Aussie Dollar sometime between Wednesday and Friday morning of last week.  They were all seeing the same thing, a break to the downside of the triangle was imminent. Well the break down came albeit temporarily.  As quickly as the Aussie dollar broke down it moved back above support.  Surely upon confirmation of the fake break, many covered.

Interestingly, the currency also faked to the upside Saturday morning Sydney time before settling back inside the triangle.

The Question Remains
Which way will the Aussie dollar and potentially our share market move from here?

I suspect if those squeezed traders from Friday get the slightest hint that another wave of international money is leaving Aussie shores, they will be back for another try.

Either way, I will continue to give a little more credence to the Aussie Dollar for  clues about which way the Australian share market will resolve itself.

This article is published by Dean Mico.

The information provided in this article is intended for general use only. The article is intended to provide educational information only. Please be aware that investing involves the risk of capital loss. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information herein.

A case study of a great business with a history of paying dividends

At the Edge Fund, I especially like to buy a piece of businesses that demonstrate a history of paying dividends. And, it is even better if the trend of the dividend stream is rising over time.

Businesses that possess such a history of paying steadily increasing dividends do so because of the positive cash flow generated from the operations of the business. With ARB Corporation announcing a special dividend of $1.00 per share this week (when share price was $12.30), that seemed a good enough reason to highlight why businesses with economics such as ARB Corporation make great long term investments.

ARB Corporation (ASX:ARP) – Quick case study
Do you see a correlation when comparing the annual total dividend with the glacial speed of the yearly price chart?

The Yearly Chart
ARB CORPORATION LIMITEDyearly A case study of a great business with a history of paying dividends

Dividends Paid since 2004

Year 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Total Dividends 9.5 cents 10.5 cents 11.5 cents 13 cents 15 cents 17.5 cents 19.5 cents 24 cents 25 cents 28 cents 29 cents
Special Dividend 20 cents 40 cents $1.00

Time is the friend of a wonderful business
The correlation between rising dividend payments and rising share price in this instance is quite easy to see.

At the Edge Fund, I am continually assessing Australian businesses looking to find those with characteristics like ARB Corporation. That is, businesses that have investment characteristics that make them safe, reliable and profitable over time.

This article is published by Dean Mico.

Disclosure: The Edge Fund owns shares in ARB Corporation.

The information provided in this article is intended for general use only. The article is intended to provide educational information only. Please be aware that investing involves the risk of capital loss. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information herein.

Northern Star Resources Limited (ASX:NST) – Just an observation really

Northern Star Resources Limited (ASX:NST) is an Australian gold producer. The company has recently expanded from operating one very high-grade low-cost mine producing around 80,000oz gold per annum to a business that now operates four mines with a production profile in excess of 500,000oz gold per annum.

Paulsens
Paulsens the original mine contains gold mined at ridiculously high grades resulting in it being very profitable.

Management
I first researched this business in early 2012 and was immediately impressed with the CEO Mr Bill Beament. A couple of presentations watched online showed an extremely articulate and well organised individual. And the knowledge about his mine and industry was easy to see. The message presented at the time was about maintaining profitablility, spitting out cash and keeping things small and simple.

Acquisitions
Northern Star has made four acquisitions in quick succession since the end of 2013.

  1.  December 2013: Plutonic acquisition
  2. January 2014: Kundana acquistion
  3. January 2014: Kanowna Belle acquisition
  4. May 2014: Jundee acquisiton

With the acquisitons came a new message about being a ‘global mid cap miner’ that appealled to ‘international investors’. Upon reading this change of direction, what immediately stood out to me was a phrase known as the institutional imperative.

Institutional Imperative
As human beings, it is easy to understand the motivations for each of us to strive for bígger, better and more. Warren Buffett coined the phrase the institutional imperative in his 1989 letter to his shareholders which explains this human desire for bigger and better. It is a motivation which is hard to avoid. However, he also warned at the same time that when it comes to operating a business, bigger is usually not better. From Warren Buffett in 1989:

“the tendency of executives ….. to (make) acquisitions (that) will materialize to soak up available funds”

Is this case any different?
In studying this business since early 2012 and then being a shareholder in varying quantities in Northern Star since June 2012 until about a month ago, this is what I see in terms of the quality of the business and its profitability.

Year 2012 2013 2014 2015
Rank Gold 1 Gold 1 Gold 3 Gold 4
Profitability 56% 29% 19% 14%

*Forecast estimates of profitability are are subject to change on a daily/weekly basis.

In short, the maths suggests for the foreseeable future that a bigger business in this case does not produce higher profits or a better quality business.

The Chart
For now, the market appears to agree with my view about the effects of the institutional imperative being at play.
NORTHERN STAR RESOURCES LTD1 Northern Star Resources Limited (ASX:NST)   Just an observation really click to enlarge

Summary
Northern Star Resources has been an excellent gold mining business run by an intelligent manager. I do wonder if the company has bitten off a little more than it can chew with four acquistions in quick succession.

This article is published by Dean Mico.

Disclosure: The Edge Fund no longer owns shares in Northern Star Resouces Limited. However, my view is that this business has been the best gold producer in Australia over recent years and if I am ever to come back looking to own shares in a gold miner in the future, Northern Star will be my first port-of-call.

The information provided in this article is intended for general use only. The article is intended to provide educational information only. Please be aware that investing involves the risk of capital loss. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information herein.

Data#3 Limited (ASX:DTL)

Data3 logo 300x77 Data#3 Limited (ASX:DTL)Data#3 Limited (ASX:DTL) is an ASX listed company that provides market-leading business technology solutions.  The company operates in what is now a hybrid IT environment where some of their clients prefer solutions maintained on their business premise and other clients have solutions outsourced to the cloud.  Data#3 provides IT Solutions across a wide range of industries throughout Australia and Asia Pacific.

Headquartered in Brisbane, Data#3 have offices in all Australian capital cities with data centres, and warehousing facilities in Sydney, Melbourne and Brisbane.

Data#3’s customers cover a wide range of industries including banking and finance, mining, tourism and leisure, legal, healthcare, manufacturing, distribution, government and utilities that are located throughout Australia and Asia Pacific.

Does this business have a sustainable competitive advantage?

Data#3’s competitive advantage comes about due to having strong relationships with leading global vendors of IT software.  This enables Data#3 to act as a consultant and implement the right IT solutions from the vendor with the best technology to meet their client’s needs.

Data#3 have adapted to the changing environment in the last few years it appears better than most.  The company offers business technology solutions including offering Software, operating Infrastructure, Managing the solutions and now offering Applications (Apps).

While the IT solutions have become pretty much a commodity, the way in which their clients are using technology has evolved due to cloud computing and the integration of tablets, smart phones and apps being used in the workplace.  This evolution has created the next opportunity for Data#3 as their clients ‘upgrade’ to the new way of doing business.

Data#3 have adapted, bolstered their business and diversified revenue streams in the past year by:

  • Partnering with The Alpha School System (TASS) to provide ‘best-in-breed’ IT solutions to the Australian education sector.
  • Acquiring a Wi-Fi Data Analytics company named ‘Discovery Technology’ to enhance the company’s offering of cloud based solutions.
  • Acquiring a company called ‘Business Aspect Group’ that specializes in helping businesses transition from traditional technology to new ways of doing business in an ‘app centric environment’.  This acquisition is immediately earnings accretive.

What are the risks facing this business?
One risk that caused the ‘sell-off’ in 2013 in a number of IT business is the ever changing technology sector creates permanent structural challenges for those that do not adapt. I think Data#3 have used their relationships with global vendors to stay at the forefront of this structural change for the time being.  This has enabled the company to adapt their business and act on the need to acquire a couple of businesses that specialize in offering services that meet this new way of doing business.

Is it run by able and trustworthy management?

The business has been run for many years with a strong balance sheet showing plenty of cash on hand.  The company operates with an interesting cash flow seasonality where cash flow runs low in the first half of the financial year to December before jumping significantly in the second half of the financial year by June.

Is it trading at a bargain price?
The company was a clear bargain a few months ago and is still good value in my opinion.

Company Code Rank 2014 Actual Valuation Today’s Share Price Margin of Safety 2015 Forecast Valuation 2016 Forecast Valuation
Data #3 Limited DTL Gold 1 $0.78 $0.82 18% $1.00 $1.10

*Forecast estimates of intrinsic value are subject to change on a daily/weekly basis.

The Situation
The company had rightfully been sold down on a weaker outlook for the year to April 2014.  I had been patiently lining up a buy in Data#3 for many months since the company announced at their Annual General Meeting on 7 November 2013 that a turnaround was not expected until the second half of 2014.  I was pleased with my execution in buying this stock at the time.  Price is now is at a bit of an inflexion point where it could fall or just continue on the upward trajectory.

The Conversation
I tweeted my buying of this company in a twitter conversation that originated out of an article I wrote back in May about another IT company DWS.  A couple of the tweets in the conversation are here:


The Chart

DATA3 LIMITED Data#3 Limited (ASX:DTL) (click to enlarge)

Summary
In summary, Data#3 has been an excellent business with a solid reputation for many years.  The company has adapted to the challenges it faced over the past couple of years and appears to be flourishing again as a result.  It met these challenges while still maintaining a strong balance sheet and a very strong position in the IT space.  The company was very cheap and is still good value if you believe the opportunities created by adaption are sustainable.  And, how can you go past a company with a number in its name?

This article is published by Dean Mico.

Disclosure: The Edge Fund owns shares in Data#3 Limited.
The information provided in this article is intended for general use only. The article is intended to provide educational information only. Please be aware that investing involves the risk of capital loss. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information herein.

Magellan Financial Group Limited (ASX:MFG)

Magelllan Financial Group Logo Magellan Financial Group Limited (ASX:MFG)Magellan Financial Group Limited (ASX:MFG) is a specialist funds management business based in Sydney.

Magellan manages global equities and global listed infrastructure strategies.

Magellan operate six global investment funds in total.  They have two Global Funds (one is hedged);  two Infrastructure Funds (again one is hedged) a High Conviction Fund and the Magellan Flagship Fund which is also listed on the ASX under the code MFF.

What is there to like about Magellan’s business?

1. Magellan enjoys a significant tailwind with a strong pipeline of inflows adding new funds under management each month.  Magellan began in 2008 with a few billion under management.  Today, the company manages about $23 billion and has the capacity and a pipeline of distribution channels virtually guaranteeing new fund inflows each month.  Magellan present that they expect to be managing in the vicinity of $70 billion by the year 2018.

2. This growth in funds under management creates the potential for significant revenue and net profit growth for many years to come.

3. Magellan invests in arguably some of the best performing businesses around the globe.  In a way, Magellan’s shareholders receive the benefit of the performance of those global businesses via an Australian domiciled company.  Some of Magellan’s large international holdings as of June 2014 include:

  • Microsoft (USA)
  • eBay (USA)
  • Tesco (UK)
  • Nestle (Switzerland)
  • Visa (USA)
  • Oracle (USA)

What are the risks facing this business?
One risk is the ability of the company to produce significant returns on investment particularly if / when global equity markets fall for a significant period of time.

Is it run by able and trustworthy management?
Magellan’s CEO and Portfolio Manager is Hamish Douglass.  I form my investment views from a wide range of sources.  There are a number of people both here in Australia and internationally that I am happy to read everything they write and even happier to watch every video presentation they make.  Mr Douglass is one of those people.

Is it trading at a bargain price?
Magellan on my valuations is not trading at a bargain price.  However, with the tailwinds behind this business, its performance to date and the intelligence of the manager, it would be a pleasant surprise if this business was trading at a cheap price.

Company Code Rank 2014 Actual Valuation Today’s Share Price Margin of Safety 2015 Forecast Valuation 2016 Forecast Valuation
Magellan Financial Group Limited MFG Gold 1 $8.95 $13.37 -46% $9.15 $10.02

*Valuations subject to change on a daily/weekly basis

The Chart
After falling from the high $12’s in July 2013 to the high $9’s in December 2013, Magellan gave a nice clean buy signal for my system in December 2013.
MAGELLAN FINANCIAL GROUP LIMITED1 Magellan Financial Group Limited (ASX:MFG)(click to enlarge)

Summary
In summary, Magellan is an excellent business run by a very intelligent manager.  Magellan has a long run way ahead courtesy of a large pipeline of new funds under management flowing into the business.  In a way, Magellan is a proxy for receiving international investment performance from some excellent global businesses without having to research abroad.

This article is published by Dean Mico.

Disclosure: The Edge Fund owns shares in Magellan Financial Group Limited.
The information provided in this article is intended for general use only. The article is intended to provide educational information only. Please be aware that investing involves the risk of capital loss. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information herein.

Reporting Season Wrap – Part 4

Reporting Season has pretty much finished and on balance the core stocks we hold are fundamentally stronger than they were this time last year. Here is my thoughts on some of our main holdings that reported in the fourth week.

NIB Holdings Limited (ASX:NHF) is a relatively new holding in the Edge Fund. We have held some of this stock since October 2013.  It is simply a reliable and steady business that has a growing demographic.  I will write some more detail about NIB in the not to distant future.  Weekly chart included…
NIB HOLDINGS LIMITED Reporting Season Wrap   Part 4 (click to enlarge)

McMillan Shakespeare Limited (ASX:MMS) is a company I have discussed a few times in the past year or so.  It reported good results and more importantly the outlook is bright.  After breaking out in May, it decided to take the scenic route in June and July.  Fortnightly chart attached…
MCMILLAN SHAKESPEARE LIMITED3 Reporting Season Wrap   Part 4 (click to enlarge)

Flight Centre Limited (ASX:FLT)
published results that were flagged to the market but still were a little sub par due to a couple of varying ‘one-off’ costs.  This is one of the stocks which has sat at the core of Edge7 and driven our performance since Christmas 2011.  The outlook for the next year or two looks good.  The market appears to have priced in the relatively lower results in the April to June period and I think this looks like it has the potential to go higher from here.  Weekly chart below…
FLIGHT CENTRE TRAVEL GROUP LIMITED1 Reporting Season Wrap   Part 4 (click to enlarge)

This article is published by Dean Mico.

The information provided in this article is intended for general use only. The article is intended to provide educational information only. Please be aware that investing involves the risk of capital loss. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information herein.

Reporting Season Wrap – Part 3

This week has definitely been a big week with the volume of companies reporting seeming like a never ending conga line.  Here are my thoughts on a few of the companies we hold.  Each of these companies I  have written about in the past.

Sirtex Medical Limited (ASX:SRX) produced an outstanding result.  The share price had a good trot into results and continued on after too.  Still huge potential here and it is good to see the market likes it as much as the patients whose lives the company help save. Weekly chart attached
SIRTEX MEDICAL LIMITED11 Reporting Season Wrap   Part 3
(click to enlarge)

ARB Corporation Limited (ASX:ARP) reported results in line with expectations.  This is A Reliable Business for both shareholders and those needing help when their Four Wheel Drive needs to be winched in the outback. Fortnightly chart here
ARB CORPORATION LIMITED Fortnightly Reporting Season Wrap   Part 3
(click to enlarge)

Webjet Limited (ASX:WEB) produced results that surprised the market and myself to a degree.  I was anticipating earnings per share of 19 cents and the result was 24 cents a share.  Using a simple Price/Earnings ratio of 15 times (ie Price $2.90 / Earnings 19 cents).  I expect (although it is not guaranteed) a re-rate on Webjet closer to 15 times the 24 cents of earnings equaling $3.60 before too long.  And, that is before pricing in earnings growth looking out over the next two financial years.  Love it!!  Quarterly chart attached
WEBJET LIMITED Quarterly Reporting Season Wrap   Part 3
(click to enlarge)

This article is published by Dean Mico.

The information provided in this article is intended for general use only. The article is intended to provide educational information only. Please be aware that investing involves the risk of capital loss. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information herein.

Why has the Edge Fund has been fully invested since May?

This chart below explains why we have continued to be at least 95% invested since the end of May.  We are currently 98% invested and holding just 2% cash.

Probability of good things happening has increased
During July, the ASX finally broke above the sideways price movement going back to October 2013. From my view point, this means that the probability of good things happening for share prices in aggregate has increased.

I have been sharing updates of this chart for the past few months with those invested in the Edge Fund.

The weekly chart of the ASX All Ordinaries shows that breakout above the top of the arrows at the 5500-odd point level.  The time between the arrows represents a nine month (October to July)  sideways consolidation.

ALL ORDINARIES INDEX Why has the Edge Fund has been fully invested since May?
(click to enlarge)

Today’s investors are living in unprecedented times

In 1994, the US market endured a similar sideways movement for a little over 12 months prior to enjoying a bull market run for more than a year.  However, in Australia, we have to go back to the 1960’s to see a sideways consolidation of the same duration.  And, yes, after that long consolidation in the 1960’s, what followed was over a year of strong gains.   I doubt many people reading this were actively investing in the 1960’s which means that today’s market participants are certainly operating in unprecedented times.

The longer we stay above that 5500 breakout level on the ASX All Ordinaries (about 5540 is the equivalent on the ASX200) the higher the probability of this upside continuing.

Cash on the sidelines is finding a home
With record low interest rates forcing people to look beyond bank term deposits, it seems enough of this money is now collectively finding its way into the share market.

The current consensus is to hold 30% cash
I have observed a number of fund managers over the past couple of months on business TV programs such as Switzer and CNBC talk about the market being “fairly priced” or “fully priced”.

These fund managers have cited this ‘fully priced’ reason to hold cash levels of about 30% as a consensus. Holding the consensus view may be safe on their part because if everyone else is doing it (holding cash), than they won’t look bad relative to their peers.  But, I do wonder if holding high levels of cash at this point is in the best interest of their clients, those who have invested in such funds?

I have only seen one fund manager on these business programs holding just 5% cash to his credit, but a couple others holding 40% cash and one fund holding 50% cash!!!

Holding cash in a rising market will likely equal under performance

  1. A fund holding 30% cash meaning they are 70% invested have to rely on the stocks they hold outperforming the market by 43% in order to keep pace with a rising market.
  2. The manager holding 50% cash (ie only 50% invested) has to rely on their stock picks rising twice as fast as the rising market just to keep pace.

So, while fundamentally, the rationale of these fund managers is correct to hold higher levels of cash.  In practice, given the positivity now shown on the charts as an aggregate of the sentiment of all investors in the market place, it is likely those holding high levels of cash will under perform the market until the positive sentiment drifts away.

Good news
The good news for those heavily invested is that the longer the All Ordinaries stays above this 5500 breakout level, the more pressure those fund managers holding high levels of cash will face.  If this breakout holds and continues higher, the fund managers holding a lot of cash will have to make a decision based on two choices:

  1.  Stay wrong (stay with relatively high cash levels)
  2. Chase the market higher by putting some of their cash to work

A combination of the two will probably prevail.  I think their is a distinct possibility that those chasing the market higher and trying to find ‘pockets of value’ will most likely fuel higher share prices in the months ahead.

Waiting for opportunities or an opportunity cost?
Another rationale given by many fund managers is that they are holding cash waiting for opportunities. I use to subscribe to that way of thinking because everything I read and heard from experts told me this was the best approach.  Fortunately, I am no longer on that band wagon.  Here is why……

  1. I currently have more good ideas than cash.
  2. I have a simple solution when I am fully invested (which I am) and a better opportunity does come along.     
    I will simply sell half of my two most expensive or a third of my three most expensive holdings relative to value in order to free up enough cash to buy a full position in what is now the best opportunity for investment gains.


Perhaps, just maybe

And perhaps, just maybe, those holding cash waiting for ‘opportunities’ have just missed the best opportunity they may have for a year or two to buy the cheapest stocks on dips during the last nine months.

Monitor and Adjust instead of Forecast
Assuming the breakout holds, I hope I am good enough to stay the course until the market tells me the probability of good things continuing is coming to an end.  It could be a week, a month, a quarter or a year from now.  I have some views that it could be well into 2015 at this stage but would prefer to ‘monitor and adjust’ rather than stick to a forecast. I plan on holding until the market profile morphs into something that looks more like January 2008 or May 2011.

Beating a rising market will not be easy
We hold a diversified portfolio of companies that in aggregate have stronger fundamentals (higher profits, lower debt levels and better cash flow) than the average stock on the market.  While beating a rising market will not be easy if it persists, I believe that the fundamentals of the companies we hold can lead us to outperform the broader market even if it does continue rising.

Happy investing !!!!

This article is published by Dean Mico.


The information provided in this article is intended for general use only. The article is intended to provide educational information only. Please be aware that investing involves the risk of capital loss. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information herein.