I’ve made the premium post about Company 3 available to all readers. The post was published in May, 2017. Company 3 is Legend Corporation (ASX:LGD).
In short: The business was operating at somewhat depressed levels in the last couple of years, but I thought this was probably temporary. Legend Corporation is a fairly boring business that has two main things going for it: a very cash generative business and a good capital allocator.
To illustrate the second point: Legend’s CEO, Brad Dowe, continues to find acquisitions at attractive prices. He’s been smart about structuring these. There is usually some sort of earn-out for the acquired company’s management that offers them an incentive for them to keep working hard post-acquisition. In a recent acquisition a claw-back was put in place, because there was disagreement about the near-term earnings for the business. Mr. Dowe proved to be right and $2m was returned to Legend. He is not looking to overpay for any acquisition. And of course, zero shares were issued in making these acquisitions. This is what you can expect when the CEO owns ~29% of the outstanding shares.
Legend is the largest position in my portfolio currently. The company posted a strong trading update today and the shares are up 23%. Last month Legend already posted improved results for fiscal 2018.
Today’s announcement was a bit surprising to me, because I haven’t seen the company make a trading update so soon after announcing results before. I’ve updated the post with my latest thoughts about the company.
Another update is that I recently sold Company 2. This is a small community bank that has a shareholder with some history of activism in other small banks. My reason for selling is that I’ve found a couple of other banks that are looking more attractive. I try to keep the size of my basket of community banks limited and felt that it was better to move on here. Shares are now trading slightly above book value. Unfortunately the activist has remained quiet at this bank. There was also an accounting issue that caused book value to take a small hit. I still think the company will be sold relatively soon, but I don’t think it will sell for more than 1.2-1.3x book value. I think the other banks I bought recently, including Company 10 look more attractive at this point.
All in all, I’d say the results for my portfolio so far this year are probably mediocre. I only do the calculations once a year, but this is what it feels like right now. I’ve got a number of positions in Asia and emerging markets that have steadily declined this year. I also have a few positions in beaten down energy services stocks that have not participated in the recovery for this sector. I’m not finding that many opportunities currently. I think Hong Kong and Singapore do offer some bargains, but some of these have looked cheap for years now. I continue to own them though. It seems to me that a collection of these bargain bin stocks should do well over time, but concentrating in a small number of them seems like a bad idea.
Don’t expect many (premium) posts from me during this period. I will continue to post irregularly. If anything, I think I’ve posted too many mediocre ideas since I started VIB premium. Fortunately, Legend has been working out well so far.
Disclosure: long Legend Corporation (ASX:LGD)