Chris Lee & Partners

[Basil]

You're welcome theBusinessman.

Should all investors be familiarising themselves somewhat with certain defensive types of industries? Or simply buy an ETF if you want exposure to something you don't have a good level of familiarity with?

A lot depends upon how much time you have to apply to your investments.  Use of ETF's and managed funds is a great time efficient way to supplement your own stock selection and substantially boost your diversification and lower your overall portfolio risk.

My view is that to be familiar with various industries is one thing but to make individual stock selections, if you want to beat the market you have to have an in depth knowledge of the companies you're investing in. 

[Bev]

I agree absolutely with Basil, he has helped me hone my investment skills.

One other item I like to check is the nett profit to total sales percentage.  I like to see that percentage increasing slightly year on year, whether it is from economies of scale, or, increased efficiencies...

Also, don't fall in love with a particular stock.  Circumstances change and it may pay to sell a favourite.

Become aware of the stock rampers on some forums.  Try to crunch the numbers yourself before you buy.

I came back to the market after a sizeable time away.  Because I have loads of spare time I checked through every single stock on the NZX, using the herald business pages.  Doing that I located Trilogy which wasn't widely followed.  Although, being a small company it wasn't very liquid, it eventually did extremely well.

Good luck

[Basil]

Thanks for your kind words Bev.  It's been enjoyable over the years trying to make a difference. 
One other thing to really watch with retailers is stock turn especially with apparel companies with 4 seasons.  Its notable that HLG has a stock turn of more than 4 which is far and away the best in the industry and really helpful considering the seasonality of the year.
Turners also have a very good stock turn and were quite quickly able to adapt to lower value cars in the Winter of 2024 in the very depths of the recession.
On the other hand with the likes of KMD - One of their key problems has been very slow stock turn.

[Bev]

That makes sense Basil.

Where appropriate, I will factor in turnover in future.

[Basil]

It just occurred to me today that some people might not know how to work out stock turn.  A worked example for HLG in FY24

Step 1 Get the average stock during the year (opening stock $31m + Closing stock $27.5m) / 2 = $29.25m
Step 2 Work out what that average stock generates in sales by calculating back off the gross profit percentage which HLG states as 59.4%.  Formula is average stock / 100-Gross profit percentage 59.4 = 0.406
Therefore $29.25m stock generates $29.25m / 0.406 = $72.04m gross sales.
Step 3 Stock turn = Gross sales per annum $435.6m / the level of gross sales average inventory held produces $72.04m = 6.05 times.
Anything over 4 in the apparel business is extremely good as it means the retailer sells more of each of the 4 seasons stock per season than they would normally hold, (in season restocking is required for popular items) and will leave minimal stock from each season to be sold off at end of season sale prices.

Here's a poor retailer by comparison.  Kathmandu.
Average stock held $290.4m + $266.9m = $278.65m
Gross margin 59% so average stock will generate 278.65m / 0.41 ()100-59) = $679.6m sales.
Total group sales were $979m therefore stock turn is only 979 / 679.6m = 1.44 times.
This is hugely problematic for any apparel retailer even one with most sales concentrated in summer and winter.  Its one of the key reasons why KMD are going broke.
The less times you can turn stock per annum the less money you make.

It would be interesting to compare Turners stock turn with 2 Cheap cars.  Maybe an exercise for another day.


 

[winner (n)]

Great way of looking at HLG stock management is this -

Every $1 of stock generated $8.77 of Gross Profit ...... and they did that 6 times a year

Great use of capital eh


Briscoes not too bad on same measure, WHS pretty poor considering the business it's in and Kathmandu you summed up already

I'll update my retail stock management file next week and put it up on Retail Stocks thread

If people interested look up GMROI ....Gross Margin Return on Management ....key management tool for retailers.

[Red Baron]

It just occurred to me today that some people might not know how to work out stock turn.........

Good to zee you handing out zage advice Basil.    Eef and old dog like you can learn new tricks, then zo can Chris Lee.   Are you billing heem vor eet?

RB

[Basil]

LOL.  Its good to share knowledge and in a small way, help others.

[Ferg]

Nice post Basil.  Rather than lost in this thread....how about creating a new thread and pasting in your thoughts from this one?

I agree with everything you say except I look at 10 years rather than 5 to look through the Covid disruption.  Some companies did very well (e.g. FPH) while others did very poorly (e.g. SAN) out of Covid.  This was not necessarily due to anything amazing or poorly by Management...rather some were the beneficiary of health initiatives and others the victim of supply chain disruptions.  Consequently many companies are reverting to their long term averages.  Some are currently riding down the other side of the wave which, if you look at  5 years, might not give a fair view of the long term prospects while others appear to be doing exceptionally well as they revert to their long term average.

Just very briefly, these are some of the key things I take into consideration with my dividend hound and value investor approach.

As I am sure you guys can appreciate with my long career as an accountant I am a numbers man and what matters most to me is earnings per share.  I believe in the long run share prices follow earnings per share, i.e. the market is a weighing machine not a voting machine.  (Ben Graham / Warren Buffet).

I put a heck of a lot of emphasis on recent past performance and the last 5 years with all the challenges over that period of Covid, the flow on effects from that and the almost endless recession here that's followed is a truly brilliant litmus test for how resilient a business is.  We may never get a better litmus test in our lifetimes.

I'm basically retired now, (although I keep my practice going on very much a part time basis and look after clients I have helped over the decades that I like, which keeps my mind active and keeps me in contact with likeable business people...complete retirement and doing no work at all is overrated in my opinion), but that won't last indefinitely and at some stage I'm looking to replace that remaining part time practice income with dividend income.  That's my focus area at present.

Looking at the last 5 years earnings per share for any company during this tumultuous period and their dividends per share gives you the perfect opportunity to test the resilience and reliability of a companies ability to continue to pay dividends.  Any company that has passed this litmus test with flying colours is worthy of further investigation...sadly there are not many on the NZX.

At my core I am a value investor, dividend hound and a show me the money sort of guy.  I want to pay as cheap as possible a price for growth companies (growth at a reasonable price).
My key filter I use is a derivative of Ben Graham's valuation formula.  I pay a no growth PE of 8.5 and then only 1 PE more for every 1% I forecast a company can consistently grow its earnings over the next 5 - 7 years.   I use the forward next years multiple, (FY26).  Ben Graham used historical PE multiple and paid up to 2 times the expected growth rate + 8.5 PE.   This deep value for growth approach sounds quite easy and prescriptive and of course it is prescriptive and rules out a vast number of growth companies on the NZX, but it ensures, as best as I can forecast it, that I am getting growth in EPS on the cheap.  Accountants are mean bastards and don't want to pay much for anything lol  The real skill here is of course determining how you think a company can grow its earnings over the next 5-7 years.  I look for factors around what are their key competitive advantages, what moat if any exists, what's driven the growth in the past and is that likely to continue into the future as well as looking at the stage of the economic cycle we are at and how that will affect earnings going forward.  How long is their runway for growth is also a key consideration.

Couple of worked examples might be useful.  HLG has a 5 year CAGR of 9%.  I believe with the runway of growth in Australia, (they have very low market penetration there with Glassons stores), they have a very long runway of growth at that sort of rate going forward.  I estimate circa 20 years.  To me this stock screens as extremely good value as its well within my valuation screening criteria.  It would be good value up to no growth PE of 8.5 + 9, 9% being the historical growth rate = FY26 PE of 17.5.  Brokers are forecasting eps of circa 76 cps in FY26 so its very good value up to 17.5 times that at $13.30 and therefore very, very deep value at its current share price of $9.  They have a very strong balance sheet with no debt and circa $1 per share in cash.  HLG is N.Z's oldest listed company and Tim Glasson has an 18% stake.  Execution with Glassons Au by James Glasson has been brilliant and he's obviously tied into the business with inheriting some of his father's stake in due course.  I have a large allocation to HLG.

Likewise Turners has grown EPS at a 5 years CAGR of 10%.  I see them doing similar for the next 5-7 years and deserving of a similar metric to HLG noted above.   My valuation screener says they're good buying up to no PE of 8.5 + 10 = 18.5.  They currently trade on a forward PE of 14.5 and are one of the  very. very cheapest GARP stocks on the NZX and have built an extraordinary track record of resilience and dividend growth over the last 5 years.  The board and management have a circa 30% stake in the business and a clear runway ahead for growth. Turners also commands a large foundational sized portfolio allocation and will be one of the key ways I enjoy growth in dividends in the future.

My view is once you start paying PE multiples over 30 for anything, you're leaving yourself wide open to that growth company disappointing you in the future.  Paying that sort of multiple or higher you're basically making the call that company XYZ is going to keep growing really fast for the foreseeable future.  This doesn't sit comfortably with my value and GARP M.O. at all.

If there's no growth its okay to me to buy a share for income if I think the company can reliably pay me a gross dividend of equal to or more than 5% above the official cash rate.  Ideally no growth companies should be on a no growth PE of 8.5, (which is the benchmark Ben Graham used) but cashflow is very much a factor here and if a company can reliably pay high gross dividends its worth owning for income provided you buy it at a good price.  Watch out for agricultural companies with wild cyclical swings in commodity prices, they're very risky, disease, pestilence, wild cyclical changes in commodity prices e.t.c.

Apart from the numbers I'm looking for what makes a business resilient.  What's their special sauce.  Watching the cash flow, are the earnings real or just on paper, how strong is the balance sheet and do senior management and directors have real skin in the game.  Overseas studies have shown where senior management / directors interests are aligned with shareholders and they have a serious stake in the business, those business's consistently outperform.

I put a hell of a lot of stock on past performance, probably 80-90% and 10-20% on what a company says they're going to do in the future..  Have management already built a track record of earnings per share over this treacherous 5 year period in business that impresses me ?  Have they earned my respect ?  I'm not really looking to take meaningful positions in companies where management might or might not earn my respect in the future.  This is a function of my age and lack of desire to invest in speculative positions.  Speculative investment should be kept under 10% of one's portfolio for someone in their semi retirement or full retirement in my opinion.

Dividend per share growth.  Its okay to keep holding companies that are paying less than OCR + 5% if they have a demonstrate-able track record of strong DPS growth, Turners a very good example, arguably the best example on the NZX.  Although the forecast FY26 gross dividend is only about 6.5%, it should keep growing at circa a CAGR of 10% per annum so only takes a couple of years to get back above OCR + 5% and after that all future growth is cream on top.

Of course there are exceptions to the above fundamental principles.  Two good examples are current significant positions in Tower and MCK.  Towner doesn't have a 5 year track record of earnings and dividends that impresses because of the extreme weather events of the summer of 2023.  Sure extreme weather like that could happen again but I believe the very high yield I am forecasting and significant changes in their business model in recent years makes this a great emerging dividend payer.  I see it as somewhat speculative and high risk so my portfolio allocation is less than 10%.  MCK is a takeover play pure and simple and I think there's an excellent chance there's another takeover attempt coming in 2026 at a significant premium to the current share price.  Index inclusion events are another favorite place this hound looks for a feed.

Watch out for certified B Corp companies and any company that runs amuck with ESG.  Any company that puts people and the planet on exactly the same footing as shareholders and spends vast amounts of management time meeting all the requirements for that...just run for the hills.   Such a company has lost sight of the very reason they exist to put shareholders interests first and foremost.  Sure, respect the environment and be fair to employees and other stakeholders but shareholders come first and I always look at a companies culture to make sure they really know what they're there for and who they are serving.

This is just a very, very brief overview of some of the key ways I go about being a value investor.  One day I might write a book but that will be years away if it ever happens.  In closing, there are many ways to skin a cat and others have done well using different approaches to mine and that's fine.  This is what has worked well for me over the years and what I feel comfortable with.  Happy to answer any questions or expand upon any topic that you want me too.

[Basil]

Thanks for your kind words Ferg.  I've done what you suggested.  I like your approach of looking over a 10 year period too.  I get where you are coming from 100%.