I’m just finalizing my review of The Great Irish Share Valuation Project (TGISVP) for 2012. My end-Q3 review is here & here for reference (and this post’s relevant also – it may even offer some interesting commentary on general stock selection & valuation). In this post I’ll cover last year’s winners & losers.
NB: FY 2012 performance is TGISVP specific, i.e. it’s only measured from the specific date I set a target price for each stock in Q1 2012. [Apologies if you'd prefer actual FY 2012 stock performances - but I'm sure there would be a high degree of overlap, anyway]. There’s no M&A to highlight for Q4 – the only items of note are i) United Drug (UDG:LN) abandoned its Irish listing in favour of London, and ii) Elan (ELN:US) spun out its drug-discovery unit, Prothena Corp (PRTA:US) – but the impact for shareholders was minimal.
Here’s the 2012 Top 10 Winners:
Hmm, my pick of the winners looks like a real coin toss – I was only bullish on half these stocks! [Wait for my next post to see how I did overall with TGISVP, despite this...]. Now I look again, I actually own none of these winners. Crikey, how on earth did I even manage a (measly) +20.2% performance on my Total Portfolio last year?!
Providence Resources is the only genuine resource stock winner here. It now carries a a heavy weight on its shoulders – the hopes & dreams of investors who’ve lost buckets on other resource stocks! Proving I’m not a permanent resource stock bear, I was reasonably bullish on PVR. Obviously my valuation was risk-weighted, so actual/continued success with its Barryroe discovery prompted PVR, not surprisingly, to run well ahead of my price target.
I was also bullish on Datalex & United Drug, but under-estimated their popularity. I’ll admit my DLE valuation was conservative, reflecting the company’s small size & low level of profitability. In reality, underlying profitability could be far higher, but it’s absorbed by continued investment & contract acquisitions. In all likelihood, a takeover’s needed here to crystallize DLE’s ultimate valuation, but that may still be some years away (quite rightly). On the other hand, I expect United Drug will find it difficult to make any progress in 2013. It’s clearly back in acquisition mode, but I suspect this masks continued pressure in its core business (with no relief in sight for Irish or UK government budgets).
Petrel Resources is a complete joke… Why bother talking up your Iraq & Ghana prospects any longer, when Offshore Ireland’s finally become the topic du jour?! In a masterful shift in IR strategy, Petrel recently announced a potential one billion barrels in their Porcupine Basin blocks, in the Irish Atlantic Margin. As a result, the price surged 400%+ in two days! Needless to say, it’s been cut in half since then, but still managed a Top 3 position for the year. Petrel’s long-term chart is probably the best reminder of the long, difficult & expensive road that lies ahead for shareholders…
I still maintain I was 100% correct with my zero price target for Siteserv. Sure, I could have told you Irish taxpayers would take a bath on its loans… But how on earth could I guess they’d get f**ked a second time ’round, with EUR 5.0 mio of their money awarded to SSV shareholders?
Greencore also mystifies, but for different reasons – so much so, I couldn’t resist writing about it here & here. Divesting non-core assets & focusing on convenience foods may seem admirable, but I just don’t get it. Sure, it’s a low-risk industry, but how excited can you get about its growth prospects? Or the relentless pressure from the supermarket chains? The best hope is to become the lowest cost No.1 or 2 in each market – having an already weak balance sheet certainly doesn’t facilitate that objective…
GNC’s 2012 performance tells me I’m wrong, of course, but all I see are poor cashflows, and an excessive level of debt, pension deficit & net payables. In the past 3 yrs, average annual operating free cashflow (operating cashflow, less capex) was GBP 37.1 mio, which provides less than 2 times coverage for the avg. GBP 19.9 mio annual net interest expense. Annual free cashflow (operating free cashflow, less net interest & taxes) has only averaged GBP 16.8 mio in the same period, which puts GNC on a current 24.3 times FCF multiple!?
Last year, I tagged Aer Lingus as a Top 3 stock, offering over 200% of upside potential. This valuation recognizes the great turn-around Chris Mueller is executing, and also AERL’s huge cash hoard. It also factors in a significant pension payment, which the company strenuously denies as a liability…even as they roll over & continue negotiating a likely settlement! On the other hand, it’s worth noting I didn’t include any benefit from potential sales of valuable Heathrow landing slots. Unsurprisingly, Aer Lingus didn’t manage to eliminate such a large valuation gap within a single year, so it still appears to offer significant upside.
Glanbia really surprised in 2012. I already considered it (slightly) over-valued, and I wouldn’t normally expect an agri-business share price to rally so aggressively. Or to reach such a premium valuation – GLB’s now on a 19.0 P/E ratio!? The coup de grace here is my Dad, of all people, who recently recommended it to me as a buy… Now I know it must be way over-valued!
Merrion Pharm is far too difficult a call. It has about a year of cash on hand, and clearly relies on the grace & favour of its key shareholder/lender, Irelandia (Declan Ryan). I value it accordingly… The company did announce some positive progress with Novo Nordisk (NOVOB:DC) in February. Investors seized on this as a welcome reminder of the indeterminate but potentially significant milestone payments/royalties Merrion might earn. Finally, I’m delighted to round off with Grafton – this is more like it, I called its year-end share price almost to the very cent..!
Now, here’s the 2012 Top 10 Losers:
OK, please restrain your natural value investing urges, in all likelihood there’s nothing to bottom-pick here! And precious little to learn either from an individual review of these stocks. If you didn’t know enough to avoid some/all of these losers, you’ll probably end up with a few of your favourites on next year’s list too. [Er um, gulp - I actually own one of these, Petroneft Resources!? At least I was bearish on 7 out of 10 of these losers. btw The hit & miss record predicting the top winners & losers is quite normal - another great argument for diversification in your portfolio.] Some people just never learn… I mean, all we have here is:
i) A bloody fraud, Worldspreads: OK, I’ll admit – nobody could, or did, foresee this – even with hindsight, there doesn’t appear to have been any tangible signs of fraud. Personally, I was already pretty disgusted by the management/governance here, but I did see significant value being potentially realized from a sale (the company’s desperate game plan, we can now presume), and I certainly didn’t have any inkling of fraud.
ii) A woefully over-indebted company, Independent News: Well, excessive debt & squandered cashflow/opportunities were pretty much de rigueur for any (ex) O’Reilly company. Combine that with an old-media business, and the shares really were toxic waste.
iii) And a grand total of eight resource stocks, topped by the infamous US Oil & Gas: About all these sh*t-biscuits discovered last year was ignominy… And no, just in case there’s some muppets reading this, that isn’t some kind of rare earth mineral.
Quite honestly, calling the average performance on the likes of this dross really wasn’t too difficult. It certainly didn’t win me any plaudits. [Still waiting for some thanks from USOP shareholders for my emphatic GBP 620p Sell. Unfortunately, they all claim they haven't sold a single share... So who sold the hell out of the share price?! C'mon, USOPians, it's the New Year - let's see some fresh hope, hype & spirit from you. What have you got to lose...except all your money?] When you see people really fall in love with a share/company, you just know they’re probably going to lose a bloody packet…
OK, let’s throw in a quick year-end listing of the shares which perhaps may now offer the best & worst potential. Please Note: Price targets mostly remain unchanged from those I originally set in Q1 2012. Subsequent results & news-flow may demand a (possible radical) re-evaluation of a company’s prospects & valuation, so you should definitely take these with a cup of salt now. Not to mention the fact you might completely disagree with my valuations & price targets, anyway! Obviously, DYOR if you contemplate buying or selling any of these shares.
Here’s the latest TGISVP Bottom 15:
And let’s finish up with the TGISVP Top 15 (I own the bolded stocks):
It’s even more important to mention that all the above stocks appear technically cheap to me in terms of their (risk-weighted) valuation. In reality, I wouldn’t necessarily dream of touching certain stocks with a barge-pole… They might be cheap, but they’re far too leveraged and/or have too many corporate governance issues for me to stomach.
Here’s the file if you’d like to review/revise my valuations:
[btw I can thoroughly recommend Phoenix Magazine - they do a great year-end round-up of Irish stocks, plus a bunch of interesting stock picks for the New Year. Take a look here, in the Moneybags sections - the Xmas edition will probably be yanked v shortly - if that's the case, you'll have to either chase down a print copy, or contemplate a subscription.]
Filed Under: Value Investing,