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Investing

My Portfolio On The 13th Of January 2021

I’ve been stocking up on some Fisher Paykel Healthcare (NZX.FPH) shares over the past few days, so I thought I’d update my pie chart to get a visual representation of my portfolio as it has previously proved useful to me.

The chart isn’t as useful to me as it has previously been because I’m not so fussed about having a balanced portfolio at this stage. This year is mainly about accumulating growth stocks (particularly those growing this year) so I can get as much of a discount as possible to next year’s prices, in preparation of selling up some angel investments to enable my retirement by the end of next financial year.

My case for investing in FPH is because it’s a long term growth stock, which means that even if it falls after proliferation of COVID vaccines, it should recover the position within a few years. However, it’s my believe that this perpetually expensive stock is likely to surprise on the up-side. The reason for this is that the last guidance provided made some conservative assumptions, and the COVID situation has got worse since that guidance was released. Additionally, my research suggests that vaccine deliveries are not happening very quickly when the global population is concerned. I suspect that COVID will be around a long time to come, so FPH is a good bet.

I feel happy to be overweight in FPH and SUM (because of the way the residential property market is going), but am disappointed that I didn’t buy more EBO shares back when I had identified them as good value.

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Investing

2021 Stock Picking Competition

Each year there is a stock picking competition, which I believe started on ShareTrader.co.nz, and is now sponsored by NZ Herald (I may be wrong about that). The competition requires each participant to select 5 stocks at the start of the year and a backup stock in case one gets bought out. The winner is the participant who’s stock price (adding any dividend payments) has increased the most from the start of the year to the end of the year.

I find the competition quite difficult because of the time of year it starts. Typically I don’t do a lot of research over the Christmas break, and it’s often a time that is between company announcements, so it’s a bit of a guess where things are at, at that time of year. Also prices are a bit random due to the annual Santa Rally.

Nevertheless, here are my picks for the 2021 competition:

  • FPH
  • SUM
  • RYM
  • EBO
  • HLG (I was very tempted to pick ATM, but I don’t expect the Daigou Channel [Australia/China travel] to have recovered by the end of the year – ATM will likely be my pick for the following year)

Feel free to record your own picks in the comments at the bottom of this article, or head over to the sharetrader.co.nz website to enter officially (though I think it might be a bit late if you haven’t already entered – still, there’s no reason you can’t comment your picks below and join in the fun).

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Investing

Changing My Investing Strategy – Part I

Past Strategies

I’ve had a number of strategies for investing over the years. Initially I was a property investor who planned to do a FIRE (Financial Independence, Retire Early) type approach to saving in order to buy 5 houses to rent, then give up the aggressive FIRE saving to live a normal life for 30 years until those houses were paid off so I could live off the rent.

The property market changed a few years into my plans, which altered my strategy as each year passed, changing from a strategy to buy and sell to retire, to a buy and leverage to buy stocks, eventually becoming too much of a burdon in the effort to do my tax returns and dealing with bad tenants, causing me to part ways with property and focus solely on stocks.

I then discovered Angel Investing, and have made significant gains investing a number of six-figure sums in a handful of companies in this arena, which has altered my retirement timeframes significantly.

With my retirement timeframe brought forward, I now need to change my investment strategy from investing in growth stocks that will eventually pay dividends in 5-10 years time, to a new strategy that will give me an income and security in my retirement, which will be either next year or the year after – though truthfully I haven’t decided if I want to work for a few more years to get more security, socialize while my friends are at work, or become mega rich (the later is possibly less interesting to me, unless it would facilitate some other interest, such as making a business out of some of my inventions – yes, I’m also an inventor!).

How To Make An Investment Strategy

Having a strategy is something often talked about, but not often explained. People new to investing will always say:

“My strategy is just to make a bunch of money.”

“Buy low, sell high!” – words often proclaimed by the least educated of investors.

“I will invest in shares until I have enough money to buy a house.”

New Investors

Actually to be fair, the last one in the list of quotes there is almost a strategy.

To build an investment strategy, you first need a goal. That goal will most likely be to buy a house or save for retirement, though it could be as simple as buying a car or saving for a holiday. In fact, I would suggest that everyone’s goal should be to save for retirement, and holidays, homes and cars are things that you include in your strategy as interruptions along the way.

Once you have a goal for your strategy, you need to do some financial modelling. This will tell you what you need to do in order to meet your goals.

To do a financial model, first work out how much money you’ll need to attain your goal(s). Then work out how much you can save, how much you’ll need to invest each year, and how much your investments need to grow to attain the goal(s) set out. You’ll need to do several of these models to model what happens if things go right, wrong or somewhere in between. You’ll need a strategy for each scenario (or at least a strategy to deal with the near term issues).

Once you’ve got your models sorted out, you should think about whether they are tolerable. Do they prevent you from having the sort of life you want? If so, perhaps you can make another model that has some compromise? Your compromise should not involve making your financial models rely on your situation becoming more fortuitous than you might realistically expect. Alternatively this might be the nudge you need to put in the effort to get that higher paid job.

Once you have your financial model, you should refine your investment strategy around this. There might be a few investment strategies that fit your models. For example, at for the past few years, my strategy was to save like crazy then put my savings into investments that will grow at a rate that does not require me to save any of my salary – which I then used as a giant leisure budget as compensation for my time spend saving. Of course this was balanced by a backup plan which involved my savings being redirected back to investing if things didn’t go to plan.

You should always have at least one backup plan.

In fact, not only should you have backup plans, but you should have multiple plans that phase in and out of existence as situations change, much like my car keys seem to when I’m looking for them.

My Investing Strategy For 2021

My goal remains the same, which is to retire, but my timeframes have changed significantly. Therefore my new goal is to invest in things that will:

  • Give me dividends within the next 1-2 years, every year. This basically means that I need investments that give me dividends now, which have a history of paying dividends, so I can be sure that they will produce dividends in 1-2 years.
  • Gives me security of income for decades to come. This means that I’ll need access to a pot of money that can get me through bad times, with possibly a Plan C in case that goes awry. This also means that I’ll need my dividend producing stocks to grow the dividend return at a rate higher than inflation to be comfortable, or come up with an alternative strategy such as buying growth stocks that may not pay dividends, but can be sold at a later date to cover the failings of my dividend growth stocks – not my preference. I will also need a significant amount of diversification such that the loss of a few stocks from my portfolio will not make my lifestyle untenable, or have a Plan D that makes my lifestyle less expensive while I save / work for enough money to replenish my position.

As I’ve written a lot today, I think I might write up the rest of my Investing Strategy for 2021 another day. In the next article of this subject I will cover my costs, how I plan to diversify and cover my risks, and my investing strategy for the coming year prior to the preparation for my retirement, which will involved divesting my holdings in companies and investing in dividend paying stocks (unless those companies start of pay reliable dividends backed by a policy in the Company Constitution).

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Investing

Reviewing The Year

Since 2021 is just around the corner I thought it might be a good time to look back and review my analysis on this website. The benefit of this would be to ensure that I’m providing quality analysis to others, but most importantly, to myself! Without reviewing yourself, it’s easy to let your ego convince you that everything you do is right, which stops you improving or even ensuring that you’re doing the right thing.

How will I measure the performance of my analysis?

This is a tough question. If I were a trader, I could just look at the “Buy” ratings I gave stocks and see if the share price went up after the article. I could then further quantify the success by weighting my results against how much I could have made on my trades. But I’m not a trader. I am an investor who has a specific strategy to attain my goals. For such an investor, it’s not about buying a stock and seeing if the market pushed the share price up; it’s about buying a stock and seeing if the reasoning was justified.

Good investing (as opposed to trading) is not measured by prescience of the share price, but sound reasoning within a fitting strategy.

Lewis Hurst

Given that, I will now go through the years articles written under the Investing section of my website and see what I can glean…

My Performance

Looking through my articles over the past year, I can draw the following conclusions:

  1. I was almost always right with my analysis when I did thorough research.
  2. I was good at predicting where share prices would go.
  3. I was bad at acting on minute indications that something might be wrong – even if I was able to detect that there was possibly something wrong.
  4. I was terrible at predicting the impact of Coronavirus and the recovery, particularly around retail stocks where there has not been enough information to perform a proper analysis or where directors have not been forthcoming with information.
  5. I have seen people on the internet (Facebook and Sharetrader.co.nz) using logic that was written in some of my articles – both in valuation techniques that I created and in explaining the logic around why stocks are priced the way they are.
  6. I have bought stocks without doing the full research, which caused me to sell them after doing the work that I should have done in the first place. Specifically, my assumptions have been very wrong when I did not do the full research required.
  7. I was bad at predicting where the economy was going.
  8. I was good at predicting the effect of fiscal stimulation.
  9. I managed to publish information about the Chinese producing a COVID19 vaccine before it reached national media.
  10. Finally, there are a LOT of speeling mistakes in my articles. I apologize for this.

Despite a lot of red in the above list, I think I didn’t do too badly. Basically I’m good at pricing stocks, picking opportunities and doing the research, but bad at predicting things when there’s not much information, and I need to make sure I don’t buy without researching things thoroughly.

I think the one thing of concern is that I need to react quicker to the suggestion that there might be bad news, and I need to somehow address my inability to predict the future of the economy.

To do this, I will keep trying to predict the future of the economy until I get good at reading the signs (assuming that such a thing is possible). Until I get good at this, I will re-engineer my investment strategy to account for my inability to mitigate this risk – which is something that I intended to do anyway in light of my changing financial circumstances as I accelerate towards retirement (or perhaps I should say “financial independence”, as I’ve not decided what to do about my work plans), which should be at the end of 2021 or some time in 2022.

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Investing

Legal Matters: Convertible Note Gotcha’s

I’ve never invested with Convertible Notes before, the idea has always had a funny smell that’s put me off. I feel too inexperienced with Convertible Notes, and therefore don’t feel like I know all the risks and things to look out for when buying Convertible Notes.

What Are Convertible Notes?

Convertible Notes are an alternative to buying shares, in order to invest in a company. Essentially Convertible Notes are a legal contract that defines a thing you get, which at some point should convert into actual shares in the company.

Convertible Notes are a great way to invest if it’s hard to place a value on the company. For example, if a company has limited financial history making a valuation difficult, then Convertible Notes can be used to invest, such that the notes convert into shares after a period of time has passed that would enable a valuation. The value that they would convert into would then be based on that future value and an investor would either get a large chunk of a small company, or a small chunk of a big company.

Problems With Convertible Notes (From An Investors Perspective)

Like any legal contract, you have to read and understand the terms so you don’t get caught out. You also need experience in the area to know what gotcha’s need covered off, and what snakes could be hiding in the long grass.

As I am inexperienced when it comes to investing in companies via Convertible Notes, I thought it might be useful to use this article to store information about Convertible Note gotcha’s that I come across or can think of. I expect this list to grow organically as I discover new information or am forced to investigate this more thoroughly due to investment opportunities popping up with Convertible Notes. If you are aware of things that should be added to the list, please leave a comment below.

  • Convertible Notes must have a condition that ensures that they convert into shares, and it must be impossible for that condition not to not come true, otherwise the Convertible Notes will never be worth anything.
    An example of a Convertible Note that never matures would be one that is converted to shares based on the market value ascribed at the next capital raising. Existing shareholders / directors could then ensure that they never raise any more capital, causing the Convertible Notes never to convert to shares.
  • You don’t have the same rights as a shareholder, which means the terms of your investment could change if the existing shareholders vote to change the Company Constitution.
  • In the case of investing in very early stage companies, the (typically 20%) discount to the next capital raise that you get in buying the Convertible Notes is probably not enough to represent the level of risk of investing in a less mature company – so the risk premium is not fairly reflected in the price of the Convertible Notes.
  • What happens if the company is bought out? Is this covered by the conditions of the note?
  • What happens if the subsequent fund raise which dictates the value of your Convertible Notes is not at arms length from the existing shareholders? They could manipulate the share price higher, so you don’t get fair value for your investment.
Categories
Investing

Could NZ’s Delegat Take Advantage Of China’s Ban Of Australian Wine?

Delegat’s Group Ltd (DGL) is the world’s #1 NZ wine exporter, exporting to North America (44%), the United Kingdom, Ireland and Europe (34%), and the Australia, New Zealand and Asia Pacific region (22%).

DGL has a market cap of $1,501,783,000 with an NPAT of $60.8m for FY20 which represents a 20% increase on the previous year due to a 9% increase in sales and favourable exchange rates. NPAT growth over the past 3 years has averaged 17%, though removing FY20 from the equation makes growth look flat over the prior 4 years. That said, it seems that increased investment in the business may be contributing to growth, and that continued investment planned for FY21 would suggest that the strategy may pay off. Based on this, I will assume a growth rate of 15% – 17% for coming years (the latter number being the company’s Outlook / guidance).

Despite owning a vineyard (Barossa Valley) in Australia, I am still unsure how the recent Chinese bans on Australian wine will affect DGL. On one hand, they will find less competition for their NZ wine in China, but on the other hand, they may have been previously benefiting from a joint marketing effort from competing Australasian wine producers in China. Obviously Barossa Valley wine will be negatively impacted by the ban. In any case (pardon the pun – DGL reports sales in terms of ‘cases’ of wine), it seems that wine shipped to China represents less than 22% of revenue (my assumption for modelling will be 10%).

Debt is not small (read: medium amount of debt), but seems serviceable to me. PE seems to be about 23-24 after removing cash (minus liabilities) – I talk about a range because it depends what you class as a liability.

I like that DGL own significant assets in land, which makes them a good investment in this booming property market. The value of the assets is almost half the share price, which puts a minimum bottom range on the valuation (excluding the risk of a property market drop) – that said, it’s not a possibility for an investor to get money from that land unless the company isn’t doing well, so I wont base my valuation on that – but, it does offer a moat to the business, which is a good thing.

I also like that growth has been solid and there is a plan to continue growth, which has been tested in the last year.

Given the above, I think there’s definitely value at the current price. I think that if there was more confidence in the growth strategy (such as if the current model was subscription based, and not at the whim of changing markets), they would be commanding a PE of up to 27. However, given the nature of markets and the low dividend return, the current share price seems about right as an upper boundary.

I probably won’t be investing in DGL because the long term dividend outlook (as a result from growth) doesn’t excite me and there are other investments with a safer and similar return / growth, such as Summerset or FPH (though there is post COVID19 risk to earnings drop for FPH… But also risk of further upside if the virus rages on, which is my bet).

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NZX

Delegat’s Group Limited (NZX:DGL)

More information on Delegat’s Group Limited…

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Investing

What Shares Are A Good Buy Right Now?

Since I’ve not been writing much over the past few weeks, I thought I’d do a wrap up of what bargains I think are out there currently.

  • EBO – I think these are cheap at $26 or below. I’ll leave you to search my reasoning in my EBO articles (Click the NZX menu button, then click on EBO to see my articles about EBO).
  • SUM – I’ll leave you to place a number on what these are worth because I’m running out of time to do a financial analysis on SUM, but take a look at my last article on SUM to give you some food for thought.
  • RYM – As with SUM, flat inflation = an increase to the OCR = cheap mortgages = higher property prices = good for retirement villages.

Shares That Are Worth A Look

The following shares are worth investigating and analysing (I intend to, but haven’t had the time). Note that I’m definitely not suggesting they are worth buying, just that they are worth investigating:

  • M7T – I’m not saying these are cheap right now because I’ve not done the analysis (again – no time), but they are definitely worth investigating. If you’re looking for an explanation about why the share price fell recently, the clue is in the expected NPAT vs what was delivered. I would say that there was a lot of depreciation and amortisation that people weren’t expecting (something I’ve been harping on about for a while if you read through my M7T articles, specifically the stuff about Capitalized Costs). That said, I’m not aware of any fundamental problems there, but worth looking into.
  • DGL – It’s a company that may benefit from increased property prices. I don’t know if they are having issues distributing goods to China or not. Needs investigating because the company has also had solid growth outside of any benefit from property prices.
  • NZX – Could be a good hedge, as companies need to have access to money during tough times, also the NZX takes a subscription fee, which I like as an investor.
  • HGH – For the first time that I am aware, HGH has offered the lowest mortgage rates. This could be an accelerant to help them acquire a decent market share. Needs investigating.
  • Over on the ASX, the following companies interest me and I need to do some analysis: CSL, GPR, NXT, PME, BGA, EVS.
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Investing

Why I Think Summerset Is A Great Buy Right Now

The most recent stats on CPI (Consumer Price Inflation) are pretty flat, which to me suggests that we are looking at another drop in the OCR (Official Cash Rate). This means cheaper mortgages, which means more demand for property. The increased demand will push prices up, causing property investors to be in a better position to buy more property with equity in their existing property portfolio. This will create more demand, and push prices higher.

This will help companies that benefit from high property prices, which includes retirement villages as older folks feel that a buoyant housing market is a good time to sell – giving them more money to move into a retirement home. Of course the flip side of that, is that retirement home prices go up as the value of property goes up, so I believe they stand to benefit from increased demand (sales) and price.

I think Summerset (NZX:SUM) is a great buy right now because they have a massive land bank, build a lot of property each year, and their properties are good quality. The main concern investors seems to have is the growing number of unsold units each year, though Q3 sales stats may abate a lot of this concern, making Summerset my clear preference.

I think Ryman Healthcare (NZX:RYM) could be a better buy in some ways, because with the risk of rising prices and the economic (and general) volatility at the moment, older people may be attracted to Ryman’s fixed fee’s for life offering. Though I’m a little put off Ryman since reports of problems with the built quality of their buildings, which could bring costs and problems for the company later down the line. Additionally, they have a greater presence outside NZ, which carries its own risk to their clientele.

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Investing

A Bob Each Way

Given all that’s going on, I’ve been thinking about what’s the best way to invest. I noticed in my portfolio that there are some shares that benefit from the Coronavirus situation, and some that would benefit if it went away. Since enough time has passed that companies have released announcements covering periods operating under Coronavirus, it’s fair to say that companies that are coping under Coronavirus have had their share price correctly revalued with respect to this, and that being rid of Coronavirus would would only sent their value upwards.

Therefore putting a bob each way, or hedging an investment in a company that’s benefiting from Coronavirus with an investment in one that would benefit from its riddance could prove a good investment under all scenarios. So I thought it might be fun to make a list of pairs of stocks could collectively be good investments.

ATM & FPH

This is an obvious one. FPH has been selling humidifiers (which improve the performance of ventilators – required by Coronavirus patients) faster than they can make them and the share price looks like it could double under another year of Coronavirus. In the event of Coronavirus being eradicated, FPH may return to their normal growth trajectory (15% pa), though there’s a risk of dropping back closer to pre-Coronavirus levels if new buyers of humidifiers fail to see value / demand in their continued use. That said, this wouldn’t be the worst thing if (like me) you see FPH as a bond proxy and don’t mind the 1% dividend in a solid company.

ATM has recently had their share price ravaged as the lack of Chinese people (tourists, students, etc.) travelling from Australia caused the Diagou market to dry up. A cure in Australia & China could see the ATM share price double within a year. It has to be said that there is also downside risk from the current Australian-Chinese relationship.

ATM & DGL

Speaking of the current poor relationship between Australia and China, I think ATM & DGL could be another good pair for my list. If China bans Australian wine imports, this could be good for DGL who export a lot of their wine to China and might enjoy a lack of competition in the australasian arena.

I had thought that DGL exported a lot of wine to China because I remembered reading that on a share forum. Upon investigation, it seems that only 22% of their products are sold to Asia/Pacifica.

What other pairs can you think of?