My short take on REA (continued)

REA Group Ltd (ASX:REA) as I've mentioned before, is priced for perfection in my view. Thinking about a catalyst for this stock is difficult. REA virtually uphold a monopoly in the Australian housing market, which is good news for people that bought in many years ago let alone one year ago. But if you're like me and didn't then I'm also on the lookout as to what might drive earnings further. Due to their monopoly power, growth in the Australian market is slim. Obtaining more market share is practically out of the question. I believe they can extract more revenues from existing customers by changing their fee structure. This, in conjunction with their expansion overseas is interesting. But, something that i learned from Phil Fisher's book Common Stocks and Uncommon Profits is "what are they doing that competitors aren't doing yet?". If they change their fee structure, they may lose customers to rival Domain. As they expand overseas their competitive advantage may not exist in other markets which may be more developed.

REA is on my potential list of investments but i don't know enough about the company to buy into it yet.

G8 educaiton

G8 educaiton (ASX:GEM) have announced a 28.5% increase in its annual dividend. This is a stock i may or may not own, but i believe sticking to the facts is always important. The stock has rallied about 6% in response to this announcement. I've also noticed the "updated broker" valuations which seems interesting but not something I'd use in my own models. I'd watch to see how much they're paying for their acqusitions. Their horizontal integration is moving along at a hefty pace but they've broken their own rules and payed almost 6 times EBIT for their Sterling acquisitions. They are doing so to reduce overheads and gain economies of scale, and im assuming to eliminate competition at the same time among other things. The good news though is that most of the market (about 80%) is independently owned, and i believe don't have much bargaining power. I question if there's potential for a monopoly here. This strategy was adopted by ABC Learning Centres but did so in a way that made no money. That's why i believe it's important to watch out for what G8 Education is paying for their acquisitions to ensure they're not paying some absurd amount. G8 eduction owns about 10% of the childcare market and has alot of room to move.


Enjoy :)

ASX Sharemarket Game (Part 2)

So, it's been 2 months into the game and my portfolio has had a 4% climb in 'value'. This is weaker than it was last month. This is because i hold quite a few tech-stocks and as we've seen over the last few weeks they have experienced sharp sell off in the US (Particularly NASDAQ stocks). While you can't completely attribute this to the fall in those stock such as Real Estate.com (REA) and Carsales (CRZ) it's definitely played a role. I've had to sell my bad performing stocks (largely because the time-period for this game is so short). My top performers G8 Education and TPG Telecom were also the stars of my portfolio last month. Given the opportunity, I'd probably buy more of TPG. I manged to climb in and purchase REA at a good price (but wouldn't buy this if the money was real as i think the stock is priced for perfection). I've fallen in ranks but i hope to regain them by the end of the game.

Given the short-time period of the game, I've had to dance a bit in and out of stocks (which is something i highly dislike). What I've learned and will be applying next time the game comes round is to have less diversification. Initially, i started with 9 stocks, which i believe is too much. Ideally, i would only want to hold one stock but this isn't allowed for the game (as they wish to encourage diversification). Next time, I'll only want to be holding around 5 stocks.

Is Coca-Cola Amatil a good buy?

As a value investor I'm constantly searching for the stocks in the red to see if i can find a bargain. Coca-Cola Amatil (CCL) have come out within the past few weeks and released a 15% downgrade in earnings. I haven't read too much into this as I've been quite busy with other stuff, but from my limited understanding here's how i paint the picture for CCL. Their operations in Australia are strong but are coming under pressure from their main buyers; Coles and Woolworths. This is leading them to bring prices down and erode their margins. Sales are relatively flat in Australia (and much in the advanced world, as seen by Coca-Cola Company (THE)). Much of the growth is being driven by emerging markets.In relation to CCL, the problem is exacerbated by Pepsi's intense price competition (prices cut by about 33%) i'm not too sure what's going on with Pepsi but i know they've been bought out by the Japanese beer company Asahi.This pressure in conjunction with pressure from Coles/Wow is not painting a pretty picture for Coke.

What do i think? I believe given Cokes relatively stable earnings power for some time, they are a good buy. However, not a good buy for everyone. I think coke is a defensive stock and thus if you're at a certain spot on a risk profile landscape such as one who is approaching retiring (in about 7-10 years) this could be a good buy. I don't think it's fallen far enough for me as i can afford to lose, thus the gains that one should expect from this stock over the next few years, is unlikely to match my preference. Having said this, i;m waiting to see what Cokes next few annual reports look like to see if they miss forecasts again and the price can fall further. If it falls far enough I'd be happy to buy it. But at current prices, it's not low enough for me. I'm confident in CCL's ability to continue to deliver in the medium to long term.

VSC General Annual Meeting

VSC today released that they'll be holding their Annual meeting in Sydney next month. I'm very excited and as a result i will be attending. This is my first Annual Meeting and it should be an interesting eye opener.

Organic foods/Whole foods

My mother was just skyping  my Auntie who lives in America and i overheard them talking about Whole Foods and organic foods. I jumped in and asked my Auntie who said she purchases all of her groceries from Whole Foods "If i was Wal-Mart and i was to tell you that we're thinking of introducing organic food in our stores. Further, i tell you, that to do so, it will increase our costs by 5% but I'm going to charge you 20% more, would you still buy?" She said "Yes, noting that she already pays 25% more to buy organic". I then said, "okay, but what if i was to tell you that inflation is going to be 3% this year but we're going to increase our organic range by 4.5%, would this bother you?" She said "Not really". This is an interesting quality, to be able to increase prices without inverse sales pressure. I believe Coca-Cola exudes such a quality (partly i think because their products are relatively cheap. For example, a 2% increase won't look like much in nominal terms. However, a product which costs 150,000 with the same percentage increase might be attention grabbing). I also found this very interesting because as I'm looking into Vita Life Sciences who sell a premium product. I wonder, as they expand their operations into Asia, how the rise of their middle class will impact their sales. This is a question I've been asking myself for weeks.

Circle of competence

Warren Buffett's famous 'circle of competence' to me is a very important concept in relation to investing. I've briefly mentioned it in my opening blog statement (Buying $1 of assets for $0.50), but it's something which i believe needs more attention. Buffett defines a circle of competence (to my understanding) as a imaginary 'circle' which encompasses all of the companies in which he totally understands. The perimeter therefore, defines what businesses he totally understands and area exceeding this perimeter would be businesses in which he doesn't completely understand and won't invest in. As Buffett always says the size of the circle isn't important but being able to identify your perimeter is crucial. Knowing when a business is outside of the circle should prompt no further investigation as a investment.

I'm always trying to update my circle and I've found a definite business area which is outside this circle which is mining companies and exploration services. The reason why mining companies are outside my circle is because their cash flows are based on the price of commodities which to me are extremely difficult to forecast with a certain degree of certainty and thus i won't go near them. I don't think BHP even knows where the hell coal prices will be in 6 months, what chance do i have forecasting 10 years out let alone 1 month? Many people will disagree with this and that's fine but that is my reasoning. Exploration companies are (mostly) speculative plays, which i don't engage in and are way too capital intensive. Speaking about capital intensive businesses, Airlines are another area i won't get into and thus, are outside my circle of competence. This is because, they essentially, offer a commodity like product. And, to my understanding, commodity like products compete on price which is the last thing i want to happen (as price cutting will put downward pressure on margins, lowering profits and share prices). Despite Qantas' efforts to exert some sort of price coercion (through Flybuys for example)  price cutting still occurs. There's other reasons why i don't like airlines but i won't get into that in this post.

Telstra is another business which is out of my circle. This is because they haven't been able to drive earnings for the past 10 years. Now i know that alot of Australian investors like Telstra and that's also fine, but it's a company that i won't invest in (unless their earnings start to change to say the least). 

Vita Life Sciences

I can't stop thinking about this stock. Every time i look at it, i get more attracted to it. I have no idea how it managed to grow sales/earnings during the GFC, looks like i have to dig deeper into those 2008-9 annual reports to maybe offer some insight. It's a shame and a blessing to see next to none coverage of this stock. If it continues to drive earnings anywhere near the rate it's doing it at now, i think it may start to attract an audience. This could possibly be my first 10 bagger (or so). Still plenty more of research to do first.However, the stock is quite expensive at present times.

The Reject Shop

Having a very quick glance at The Reject Shop, it looks like it might offer some value.Will pursue more investigation during my mid-semester break.

Danny DeVito taking value investing to its Net-Net roots :)

https://www.youtube.com/watch?v=yypj-aYtp9c

Risk

"Risk comes from not knowing what you're doing" a famous quote by Warren Buffett. I never quite could put my finger on what this meant. I was just sitting here role playing by asking someone what stocks they own in their portfolio. I'm assuming that this is someone who doesn't invest directly. So i ask them "What can you tell me about company A's capital structure, is it net cash positive etcc..." and the reply is "I don't know" I think this is what Buffett means by risk coming from not knowing what you're doing and not how much volatility its stock price has.

An interesting thought

I recently completed an assignment on the EMH and behavioral finance. Looking mainly at critiques of both. I just had an interesting thought as I sit here witnessing g8 plummet. In one of the essays I read by Robert Shiller he points out a concept called overreaction and under reaction. I think I just understood what it meant. G8 has just released an update regarding it acquisition. The stock has fallen since its release and this could be exhibiting overreaction by the market or vice versa. I think that's what Shiller was getting at. I.e the price shouldn't have fallen that far or maybe it should fall further? I think it's important to stick to your senses and think independently of the market. As I get deeper into this game I'm worrying alot less about what prices are doing and focusing on businesses. I use to check my stockbroking account at least 30 times a day when I first started and now I forget to check it. While I knew not to do this before I started investing my own ,money it was really hard not to watch the tapper. However, I'd never let a change in the  price force me into making a decision in isolation of fundamentals. If however, no business fundamentals have changed and price of a stock I own or would like to own falls by a certain amount this will potentially trigger a buy.