tag:blogger.com,1999:blog-4815867514277794362.post8739187765844797700..comments2024-03-08T06:18:28.125+11:00Comments on Bronte Capital: Follow up to the small cap post - and some notes on SuperValuJohn Hemptonhttp://www.blogger.com/profile/03766274392122783128noreply@blogger.comBlogger17125tag:blogger.com,1999:blog-4815867514277794362.post-73468243225309708482012-07-22T03:21:43.100+10:002012-07-22T03:21:43.100+10:00missed this the first time through but nice post. ...missed this the first time through but nice post. And just for future reference, I think you have wrongly attributed the line "Have you ever gone 24 hours without a rationalization." The line was in the Big Chill and I'm pretty sure it originated there.<br /><br />If not, please delete this post.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-63285870910624680972012-04-25T08:59:17.502+10:002012-04-25T08:59:17.502+10:00Deduct 99 marks for misspelling <>.Deduct 99 marks for misspelling <>.carsjamhttps://www.blogger.com/profile/16590380385637079965noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-53895334039532187042012-03-13T04:22:11.603+11:002012-03-13T04:22:11.603+11:00So u shorted Hpq...I didn't think you were tha...So u shorted Hpq...I didn't think you were that type of investor...btw what do u think about HPQ now?I think that hpq and tesco are among the best large cap out there todayAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-12850839068849885052012-03-12T07:31:23.545+11:002012-03-12T07:31:23.545+11:00Hi John. Been following your blog for over a year ...Hi John. Been following your blog for over a year now and enjoy reading individual company analysis. I looked at this companys bonds last year and passed on them. The company is too leveraed so any freezing again in the credit market in the future may docs them into Ch.11<br /><br />Also my other problem is that the company does not seem to really have a turnaround future despite managements best efforts. They are not in the best financial condition to take on big competitors. This reminds me of Sprint which decided to go 'all in' with the iPhone and assumed enormous amounts of debt they cannot afford. <br /><br />I got burned by sprints bonds last year. So living credit line to credit line isn't a investment strategy for me.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-33857150468099406882012-03-09T12:40:44.495+11:002012-03-09T12:40:44.495+11:00Funny you should mention SVU (an appropriate ticke...Funny you should mention SVU (an appropriate ticker symbol). I glanced at it a few months ago, it seemed interesting, and I bought a trivial amount of in the money LEAPS to tide me over while I did more rigorous research (a bad habit born of good intentions: the surest incentive to do work is money already on the table). Then I basically went through an accelerated grieving process:<br /><br />Denial: "I understand this co completely, and nobody else does."<br /><br />Anger: "Why is it so cheap? This is ridiculous."<br /><br />Bargaining: "If it just can improve comps a tiny bit, the price is going to the moon."<br /><br />Depression: "This sucks."<br /><br />Acceptance: "I'm not smart enough to figure out whether they can turn it around. Management is smarter than I am, but I suspect they don't know the answer to this either."<br /><br />With that, I sold the LEAPS at a miniscule profit, though losing money would have been more appropriate. <br /><br />I think that the problem with a lot of "cheap" smaller companies is that they need them wave of a fairy wand to make them realize their potential: comps need to improve for no reason, products need to catch on despite being equivalent to competitors', white elephants need to surprise everyone, etc. Just one thing (usually) needs to go right, and you've tripled your money. Tripled! Compared to whatever you can get in VOD or GE or ____!<br /><br />This "big score" thinking is a problem, I think, because it tends to narrow an investor's focus; one tends to check on whether the key wave-wand is imminent and ignore a host of other factors. Nobody buys megacaps for a big score (though they sometimes get it; hello, AAPL), and there are many ways one can be myopic with larger cos as well, but one does tend to buy them for what they are, not what the might one day be if everything breaks their way. Maybe lg-cap investing is peering into the future, and small-cap investing (at times like these, anyway) is doing so with rose-colored glasses.<br /><br />That (excessively) said, I make my living (such as it is) mostly on smaller companies, though they tend to be microscopic, financials, or both.ADLnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-70358442205930637982012-03-09T12:27:38.326+11:002012-03-09T12:27:38.326+11:00Anonymous: I checked the fact held true year on ye...Anonymous: I checked the fact held true year on year.<br /><br />I am alert to that one.<br /><br />JJohn Hemptonhttps://www.blogger.com/profile/03766274392122783128noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-23654405102686534072012-03-09T12:07:40.015+11:002012-03-09T12:07:40.015+11:00Small critique. It is slightly misleading to comp...Small critique. It is slightly misleading to compare December 3, 2011 to February 26, 2011 when comparing Inventory and A/P for the simple fact that grocery stores load up on Inventory for the holiday season as this is the busiest time of year for them. Year over year comparison would be much better and then if the fact still holds true, point well taken.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-46287674790823359022012-03-08T16:20:55.098+11:002012-03-08T16:20:55.098+11:00On average small caps may not be cheap. But, my qu...On average small caps may not be cheap. But, my question to anyone here is why does it matter so much. Are we looking to buy entire indexes? Or just pick stocks one at a time..wherever they may be..and however small or large they may be.<br /><br />Here is an article from Royce which addresses the main question of the posts. Large Cap valuation v/s Small Cap valuations. I think its a good read.<br /><br />http://www.roycefunds.com/News/Contrarian/2012/0215-value-its-not-all-relative.aspadibhttp://motiwalacapital.comnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-1354539367199829612012-03-08T12:46:25.659+11:002012-03-08T12:46:25.659+11:00In response to John - I think we mostly agree.
...In response to John - I think we mostly agree. <br /><br />To be concrete, the kinds of small caps that I have found attractive in the past couple years include FRD and CNRD which are still only trading around P/E ~ 5x (excluding cash) after having run up 100%+ since 2010. To me, these were very low risk since they both had shareholder oriented management with lots of cash and historically profitable operations. <br /><br />The trick is to avoid the sketchy small caps - and they are the majority. I'm guessing that you can't look for things like FRD and CNRD because you're too big for it to be worth your while. But, that is exactly the point. Small cap managers have an advantage. Whether they can utilize that advantage is another question. There are still some companies like this out there - but they are harder to find than in 2010.<br /><br />I love your passionate responses - they are entertaining and almost always on the mark. Keep up the great blog.<br /><br />Cheers,<br />TomTomnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-58724333120003505682012-03-08T07:43:36.749+11:002012-03-08T07:43:36.749+11:00In response to Tom - yes there is some value in sm...In response to Tom - yes there is some value in small caps - but like Robert you really need to look where people are not.<br /><br />The places people are not are mostly -not exclusively - things that are unattractive to PE buyers.<br /><br />I find value in small cap financials, German dual structure stuff.<br /><br />Still some people have thrown up some names here that are at first blush more interesting than SupaValu.<br /><br />The SupaValu thing came about because of the depth of passion in my comments.<br /><br />I am kind of responsive to my readers.<br /><br />--<br /><br />Only issue with saying all that - it is easy to find some value in large caps. The risk is lower too. <br /><br />JJohn Hemptonhttps://www.blogger.com/profile/03766274392122783128noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-85865906866487610712012-03-08T04:50:37.078+11:002012-03-08T04:50:37.078+11:00John, thanks for sharing your notes and commentary...John, thanks for sharing your notes and commentary on the industry. I was looking for some projects for summer interns, and this will be a great introduction for them in how to make the broad sweeps on a stock and sector.<br /><br />Hopefully we'll connect up some day in either Chicago or Sydney, as I live in the former and occasionally visit the latter. I am a big fan of the blog.<br /><br />Thanks,<br />RogerRoger Fhttps://www.blogger.com/profile/05766560558235173918noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-52964971697770306692012-03-08T04:11:04.325+11:002012-03-08T04:11:04.325+11:00Thanks for the detailed follow-up John. Sorry we ...Thanks for the detailed follow-up John. Sorry we didn't bring up something that was investable, but it's always worth thinking about the grocery industry so we're ready when it gets properly cheap.<br /><br />Anon: You're right that the dividend is insane. I see it as a signal that management is interested in pretending along with investors that this company is not over-leveraged and has adequate cash-flows to pay shareholders consistently. You will note that whenever someone starts losing an argument on cash-flows & valuation re: this type of company, they resort to "But it pays a 5% dividend! That's money in your pocket! There's no way they will cut it further! Even if the stock goes nowhere, you make 5%!" Then the price craters and they cut the dividend. We saw it with Citi, BofA, GE, etc. Funny that this lot never admits error or integrates subsequent dividend cuts in their favorite stocks into their thinking.najdorfnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-5134108733932390492012-03-08T04:01:50.690+11:002012-03-08T04:01:50.690+11:00Think I agree with Tom that some mis-communication...Think I agree with Tom that some mis-communication was in play here. Just based on average prices small caps seem to be expensive at the moment (GMO's asset class forecast is imo a good sanity check), and think a lot of people would agree with this statement.<br /><br />I think most people had more a problem with the PE argument, as it also would imply that small caps as a group would almost never be attractive as long as those guys are around.Hielkonoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-84232799118586932662012-03-08T03:23:13.955+11:002012-03-08T03:23:13.955+11:00Looking at your analysis, one thing I'd say is...Looking at your analysis, one thing I'd say is that it's unlikely SVU will stay at the current valuation for long. <br /><br />So maybe a straddle (with bias, if you feel like it) would be to play it. That is, if you have nowhere better to deploy your money ;)Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-81364265022939277962012-03-08T02:26:11.619+11:002012-03-08T02:26:11.619+11:00Most of this small cap argument is a mis-communica...Most of this small cap argument is a mis-communication. There are 2 different statements.<br /><br />1) "Small caps on average are not attractive at the moment." John and company agree, as do I (a small cap manager).<br /><br />2) "You can find value in small caps at the moment." I think this is true, and I'm guessing most agree with me. I rejected SVU as too difficult after 5 minutes. This is not a good example of easy value IMHO. (I probably have less money than most on this board, so I can look at $20M to $50M mkt cap companies. SVU is huge to me.)<br /><br />There is no contradiction between 1 and 2. Sure is fun to watch everyone fight though.<br /><br />Cheers,<br />TomAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-14199256055116067122012-03-08T02:15:46.668+11:002012-03-08T02:15:46.668+11:00Your first post had two threads: (1) does a potent...Your first post had two threads: (1) does a potential private equity bid drive up all small-cap stock prices, and (2) are small-caps too expensive such that one should only look in large caps.<br /><br />You, like me and my partner, are an extremely strong "N" on the Myers-Briggs scale; we tend to use a few data points we already have to reason out how the world "should" be, rather than go out and gather a thousand data points detailing how the world "is." And lo, it usually works, if you're good at the reasoning part.<br /><br />But not always. In this case, you used reasoning on #1 above to make a flat generalization on #2. It didn't work. We, like you, have a long book that is currently dominated by large caps, because they are cheap as a group. But our book also includes a nice collection of out-of-the-way small caps that are cheap -- in some cases, stunningly cheap. I don't need to worry whether a real or imagined PE bid is making them less cheap than they otherwise would be; they are more than cheap enough, even after adjusting for business risk or stock liquidity or whatever you want.<br /><br />These small-caps are not the SuperValus of the world. SVU is covered by at least 15 sell-side shops. For "stunningly cheap," you usually need stocks that almost no one has heard of.Robert in Chicagonoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-47624285258824739682012-03-08T00:37:30.016+11:002012-03-08T00:37:30.016+11:00Analysis makes a lot of sense - thanks for the not...Analysis makes a lot of sense - thanks for the note. A couple notes i might add to show how competitive this business is. Kroger is a terrific operator...great comps, consistently low pricing, great mgmt and guess what? the stock does nothing. They have to re-invest all the gross margin growth back into lower prices. Also, in the conventional grocery space, you are competing with the Costco's, BJ's and even the Targets now that are slipping in. Those folks are much more price competitive. It seems you want to be at the high (Whole Foods or TFM) or low end (Club guys seem to high strong comps). Guys in the middle are struggling from continued new entrants and pricing. I think SVU has a good CEO, just an incredible uphill battle to climb. Very difficult to juggle that debt-load, high store prices and declining sales. On your point regarding what this will look like in 3 years or so..how does anyone know what the real ebitda is? we know their prices are way above mkt in their conventional stores. If they can't find more cost take-out, ebitda could fall a fair bit and then you are bumping up against covenants. <br /><br />One thing that is completely insane is the dividend. Why are they paying a dividend? Over the last 3 years they could have payed off another $250-$300mm in debt. No one is in this name for the divvy.Anonymousnoreply@blogger.com