Wednesday, February 21, 2018

Picking the Dogs- Round 2

I am quickly writing this post to illustrate the concept of inverting to solve problems.

I think we can neatly use the concept of inverting when we are trying to pick the Dogs, or any investments, come to think of it.

The core philosophy is that we are more likely to encounter inefficiencies and mispricings if we are willing to approach things differently from what the consensus is doing.

Let's start with the Darlings- ALU, APX, PME and WTC. What is it about these stocks that got punters so excited? Quickly off the top of my head, here is a list:

1. They are showing, and promising, lots of growth (more than 20% per annum).
2. They are all technology and software related.
3. They all appear to have a growing worldwide market with a long runway.
4. They have fabulous gross margins.
5. The above 4 allows them to weave a very simple but compelling narrative.

If we are to pick Dogs, it would be logical to look for the complete opposite:

1. They are shrinking, and not promising any growth whatsoever.
2. They are in old school industries- manufacturing, fabrication, trading, printing, etc
3. They have very limited markets.
4. They have terrible margins.
5. The story sounds horrible.

So with those clues, I have picked a portfolio of 4 Dogs. They are the hairiest bunch you will ever see. But they do have some adorable characteristics:

(a) No debt or no net debt, and excess cash plus other assets 
(b) Positive cashflow/profits
(c) Priced at less than 3x to 5x multiples of cashflow/profits

Yours One Legged

1 comment:

Anonymous said...

and your dogs are.....?