So I've recently completed my analysis of Vita Life Sciences (ASX:VSC).I've come to a conclusion and will be buying this stock soon as i believe it's undervalued. While i can't see a strong catalyst for this stock in the short term, i can in the next 5-10 years. So, in the interim i.e. <5 years I'll just be updating my forecasts, as reports/results come up. Remember, i don't try and focus on what's happening within the short-term which i seriously consider to be less than <3yrs in terms of prices. So if the price gyrates up and down in this interim i'll be focused on the facts.
I hope this one goes down in my books (for the better or worse lol.) This could be a mistake purchase, not because i lack confidence or there's alot of questions marks but more to do with my lack of experience, but it's important to learn from experience, better early than later when i might be using alot more money. Come on VSC i believe in you :)
Friday 30 May 2014
Monday 26 May 2014
University
The other day, i was asked why i went to university as opposed to working full time. It took me a while to answer this question. People go to university for all kinds of reasons, whether it be higher earning power in the future, to learn more, or whatever. The reason why i go to university is due to a range of things but if it has taught me anything, it's not how to calculate the intrinsic value of a business, or anything like that. Because that can be taught to many. I believe, my key takeaway that university has given thus far is the ability to ask questions and to question everything. The ability to ask the right questions i think is a difficult skill. Some may disagree but that's fine. I plan on getting better at this in the future.
This may seem like an irrelevant post... but is it? I'll let you decide that.
This may seem like an irrelevant post... but is it? I'll let you decide that.
Thursday 22 May 2014
Vita Life Sciences (ASX:VSC) Annual General Meeting
Today VSC held their AGM which i attended. Most of the directors were there and the MD lead the presentation. As this was my first meeting ever i didn't know what to expect. My aim was to gain a better understanding of the business and get a better foundation as to what their future growth prospects are like. From my understanding, the company isn't expecting as much of an increase in NPAT as previous years (which have been around 100% p.a.) They are targeting 19% revenue growth CAGR (from memory). But they did hint towards strong growth in the medium term (3-5yrs the MD Eddie said).
From what i gathered, this is their reasoning: they sell a premium product (gross margin of about 65-70%) and Eddie himself said we stay away from commodity like products such as Fish Oil, which was music to my ear because we all know what happens when a product is a commodity... yep, competes on price which is something i want to stay away from. Thus, they only sell to health food stores and won't engage in price competition by selling to major pharmacists such as Chemist Warehouse. They spend copious amounts of money on training their staff within the context of product knowledge and aim to attract loyal customers which doesn't happen overnight. Thus, as they expand in Asia and setup a solid footprint, they want the demand to come to them (gives them more bargaining power over pricing).
The management is extremely professional and on face value seem to be ensuring the company succeeds and is acting in the best interests of the company. This would also make sense seeing as management are substantial shareholders.
They have reaffirmed their EBIT forecasts for FY14. I believe the company could offer some interesting long-term value but still, more work needs to be done. The stock is trading on a P/E of about 19 and a P/B of about 5.56 indicating it's quite expensive. However, no debt, a strong balance sheet with about 50% representing cash and cash equivalents and an Asian market with over 2 billion people which as a whole are getting wealthier and more health conscious is interesting to say the least. They even hinted towards expanding into the Middle East but can't be done yet because the company is so small, they don't have the management experience/knowledge to exploit opportunities over there.... yet.
Two things strike me as suspicious at the moment. Firstly, they have revenue growing at around 20% but a 100% increase in the bottom line. Is this likely to continue or? This question was asked by a fund manager today in the meeting and the CEO replied by saying it will but might not be as strong as in recent years. Lastly, i'm suspect of why they are buying back stock at a P/E of 19, indicating a earnings yield of around 5.2%. Does this mean they aren't finding opportunities elsewhere to generate at least that amount? This one is playing on my mind.
From what i gathered, this is their reasoning: they sell a premium product (gross margin of about 65-70%) and Eddie himself said we stay away from commodity like products such as Fish Oil, which was music to my ear because we all know what happens when a product is a commodity... yep, competes on price which is something i want to stay away from. Thus, they only sell to health food stores and won't engage in price competition by selling to major pharmacists such as Chemist Warehouse. They spend copious amounts of money on training their staff within the context of product knowledge and aim to attract loyal customers which doesn't happen overnight. Thus, as they expand in Asia and setup a solid footprint, they want the demand to come to them (gives them more bargaining power over pricing).
The management is extremely professional and on face value seem to be ensuring the company succeeds and is acting in the best interests of the company. This would also make sense seeing as management are substantial shareholders.
They have reaffirmed their EBIT forecasts for FY14. I believe the company could offer some interesting long-term value but still, more work needs to be done. The stock is trading on a P/E of about 19 and a P/B of about 5.56 indicating it's quite expensive. However, no debt, a strong balance sheet with about 50% representing cash and cash equivalents and an Asian market with over 2 billion people which as a whole are getting wealthier and more health conscious is interesting to say the least. They even hinted towards expanding into the Middle East but can't be done yet because the company is so small, they don't have the management experience/knowledge to exploit opportunities over there.... yet.
Two things strike me as suspicious at the moment. Firstly, they have revenue growing at around 20% but a 100% increase in the bottom line. Is this likely to continue or? This question was asked by a fund manager today in the meeting and the CEO replied by saying it will but might not be as strong as in recent years. Lastly, i'm suspect of why they are buying back stock at a P/E of 19, indicating a earnings yield of around 5.2%. Does this mean they aren't finding opportunities elsewhere to generate at least that amount? This one is playing on my mind.
Wednesday 14 May 2014
A falling share price can be a good thing
Is a falling share price always a bad thing?
I don't really seem to think so. If a stock falls for legitimate reasons such as an earnings downgrade that's normal but I'm not referring to this. What I'm making reference to is when a share price declines with no simultaneous change in underlying firm value. I'll illustrate the way i see it with an example so you can better understand my style of investing. If you're going shopping and you buy milk today for $1.50 and you come back tomorrow and it's $1.25 will you be upset? Well i can't answer for you, but i surely wouldn't be because i can now buy more milk at a cheaper price.
What i like looking for in the stock market are bargains, like the milk example. Traditional value investing has come a long way from Net-Net investments which in my opinion are irregular. Information was much less available to the market in the early days of this style of investing when Graham was applying such a technique. In other words the market has become more efficient. Now a days, i believe the mindset has shifted towards finding high quality business who have rising intrinsic values. Sometimes as Phil Phisher has pointed out you may have to pay a fair price for a good business. But in my opinion this is better than paying a good price for a fair business. Some examples of which i wold regard as high quality (Australian) businesses would be Real Estate Group, CSL, and Flight Centre. This isn't always easy in this day and age. But as Walter Scholls said, the market can at times get nervous, and that bad news causes trouble. When this happens, you can sometimes find a good company not for a fair price but also for a good price. Warren Buffett did this with his American Express purchase. They had a fraud slip up and it sent the stock falling. Buffett swooped in and bought some stock at a good price. This is rare but I'm constantly on the search for this type of opportunity. The Global Financial Crisis would have been the perfect time to start buying (or adding to your positions) in high quality business, but i wasn't involved in the market at that time. These sorts of opportunities are once in a lifetime. And i believe the patient, long-term investor who seeks superior businesses will be rewarded in the long run. Buffett doesn't care at all about stock prices, he only looks at them to see if there is a discrepancy between what the business is worth and what its currently trading at. He once said "if you buy a good business and it does well, then you'll do well in the stock market." Sometimes, i believe that this is completely true.
On a side note, Buffett has moved on from his "Cigar-butt" type investments to buying for quality (growth style) you might say he's a function of both value investing and growth investing (but i think more heavily weighted towards value). Some have said the rise of Berkshire Hathaway could be partially attributed towards Buffetts profound blend of both growth and value investing mind frame/techniques. I watched a good interview with Jean-Claude Van Damme where he was asked to describe his fighting technique. He said it was a blend of many different styles. He used the example of a good chef and a great chef. He said you can be a good chef and master one style of cooking. But you can become a great chef by mastering various different style such as French, Chinese, and Indian Cuisine and blending them to create your own styles/dishes. This is what Himself but also Bruce Lee did with fighting styles. Rather than learning one style they mastered many and formulated their own distinct fighting styles by blending moves from different fighting styles and mixing them up. This is what Buffett in one way or another has done with investing. As he himself says "I'm 85% Graham and 15% Phisher". Which are two people with two completely different investing styles.
I don't really seem to think so. If a stock falls for legitimate reasons such as an earnings downgrade that's normal but I'm not referring to this. What I'm making reference to is when a share price declines with no simultaneous change in underlying firm value. I'll illustrate the way i see it with an example so you can better understand my style of investing. If you're going shopping and you buy milk today for $1.50 and you come back tomorrow and it's $1.25 will you be upset? Well i can't answer for you, but i surely wouldn't be because i can now buy more milk at a cheaper price.
What i like looking for in the stock market are bargains, like the milk example. Traditional value investing has come a long way from Net-Net investments which in my opinion are irregular. Information was much less available to the market in the early days of this style of investing when Graham was applying such a technique. In other words the market has become more efficient. Now a days, i believe the mindset has shifted towards finding high quality business who have rising intrinsic values. Sometimes as Phil Phisher has pointed out you may have to pay a fair price for a good business. But in my opinion this is better than paying a good price for a fair business. Some examples of which i wold regard as high quality (Australian) businesses would be Real Estate Group, CSL, and Flight Centre. This isn't always easy in this day and age. But as Walter Scholls said, the market can at times get nervous, and that bad news causes trouble. When this happens, you can sometimes find a good company not for a fair price but also for a good price. Warren Buffett did this with his American Express purchase. They had a fraud slip up and it sent the stock falling. Buffett swooped in and bought some stock at a good price. This is rare but I'm constantly on the search for this type of opportunity. The Global Financial Crisis would have been the perfect time to start buying (or adding to your positions) in high quality business, but i wasn't involved in the market at that time. These sorts of opportunities are once in a lifetime. And i believe the patient, long-term investor who seeks superior businesses will be rewarded in the long run. Buffett doesn't care at all about stock prices, he only looks at them to see if there is a discrepancy between what the business is worth and what its currently trading at. He once said "if you buy a good business and it does well, then you'll do well in the stock market." Sometimes, i believe that this is completely true.
On a side note, Buffett has moved on from his "Cigar-butt" type investments to buying for quality (growth style) you might say he's a function of both value investing and growth investing (but i think more heavily weighted towards value). Some have said the rise of Berkshire Hathaway could be partially attributed towards Buffetts profound blend of both growth and value investing mind frame/techniques. I watched a good interview with Jean-Claude Van Damme where he was asked to describe his fighting technique. He said it was a blend of many different styles. He used the example of a good chef and a great chef. He said you can be a good chef and master one style of cooking. But you can become a great chef by mastering various different style such as French, Chinese, and Indian Cuisine and blending them to create your own styles/dishes. This is what Himself but also Bruce Lee did with fighting styles. Rather than learning one style they mastered many and formulated their own distinct fighting styles by blending moves from different fighting styles and mixing them up. This is what Buffett in one way or another has done with investing. As he himself says "I'm 85% Graham and 15% Phisher". Which are two people with two completely different investing styles.
Saturday 10 May 2014
Aveo Group (ASX:AOG)
Aveo group is a stock that i currently own. It was my first purchase and i made a slight mistake being so trigger happy and buying the stock disregarding solid fundamental analysis. I went in for various reasons, namely, the thematic issue of the aging population and the fact that it's trading at a discount to net tangible assets. However, i didn't place enough importance in its ROE which is very low, and in fact sub economic, risk-adjusted and relative to term deposits. I broke my own rules. But, i sit here and ask myself "Am i extremely confident that this company is going to be earning substantially more money in 10 years that it is at this moment?" and I'm confident to say yes. It has, however had ROE's in excess of 25% but at its current rate it's too low. On these notes, i won't be selling this one, just yet. This is mainly due to the 2 reasons why I've bought the stock in the first place. If they are able to generate a return on equity in excess of 15% I'd be much more comfortable owning this stock than i am now. The reason why i emphasize the ROE to the extent that i do is because i believe the true value of a business is how much it can generate on the funds invested. As I've mentioned in the past, i like companies that have stood the test of time and been able to generate increasing profits. Given that the future is uncertain and that nothing is this game is certain what i try to do is look for situations in which the odds are mostly in my favour and that the risk of permanent capital loss is minimal. Buying into a start-up tech company with no track record is not something I'd consider. Some other factors of which i put priority on is stuff like company management (which i judge by how effective they are at generating returns on funds invested), is the business trading at a discount, and the list goes on. One thing that i find interesting is that of debt. I don't like companies with debt. At university i've been taught that debt can increase ROE and magnify returns. This is true. But, debt is not something i like regardless. As Seth Klarman says "if you look at most of the corporate blowouts its because they've been over leveraged". And as i said before, my number one goal is capital preservation, thus, debt is not something i like because even though it might magnify my returns, my number one goal is avoiding permanent loss.
I'm deviating away from the topic that i started with a bit, but i believe that being able to turn the stock market off and just focus on the business itself is crucial. Looking at the company right now and asking yourself "is this business undervalued at the current price?". If the answer is yes, and you've got a sufficient margin of safety, the choice is almost obvious what the succeeding action should be (all of this is after rigorous fundamental/qualitative analysis is done). This is not always easy, as Buffett says if you've got a decent IQ, the game becomes more of one towards controlling your emotions. I believe value investing is usually contrarian in nature, I find myself looking at stocks that have lost 50% in price, not up by 50%. I think this is where value tends to show up. Buying against the crowd isn't easy. When everyone is selling and you see your stock falling, can you stand by yourself and claim you're right? This is something that isn't taught at school.
I'm deviating away from the topic that i started with a bit, but i believe that being able to turn the stock market off and just focus on the business itself is crucial. Looking at the company right now and asking yourself "is this business undervalued at the current price?". If the answer is yes, and you've got a sufficient margin of safety, the choice is almost obvious what the succeeding action should be (all of this is after rigorous fundamental/qualitative analysis is done). This is not always easy, as Buffett says if you've got a decent IQ, the game becomes more of one towards controlling your emotions. I believe value investing is usually contrarian in nature, I find myself looking at stocks that have lost 50% in price, not up by 50%. I think this is where value tends to show up. Buying against the crowd isn't easy. When everyone is selling and you see your stock falling, can you stand by yourself and claim you're right? This is something that isn't taught at school.
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