Swinging for the fences
I was thinking about the portfolio today. I wrote after my Thorn Group Ltd (ASX: TGA) and RNY Property Trust (ASX: RNY) purchases that they were ‘singles’ or perhaps a ‘double’ for RNY in cricket terms – one run, or two runs. You can do well with singles in the stock market. 5% share price growth per annum plus a 5% dividend (if you reinvest it in shares growing at the same rate) will turn 10 grand into a million buckaroos in 43-ish years.
But what about swinging for the fences, or ‘hitting it for 6’ in cricket terms? What about the limited downside stocks with asymmetric payoffs, the multibaggers? Successful fund managers always seem to own a fair number of these over time. I am not sure how many I could reasonably expect to spot in my 5 year experiment, but I will need to spot several over my lifetime if I want to make a career in investing. Peter Lynch wrote in One Up On Wall Street that his biggest winners took an average of 7 years, I think, to play out.
Initially when I conceived of this experiment I had not planned to have any multibaggers. For a portfolio that is supposed to show my ability to pick good stocks and generate market beating returns, this is a bit ludicrous (what was I thinking?!). I recant my sins, yes, I will be looking for possible multibaggers despite my focus on singles so far.
Perhaps I originally thought that it would be hard to get a multibagger in 5 years, but even my own portfolio says that’s a lie. In the past 2 and a half years I’ve already doubled my money on 2 stocks (although one has subsequently declined to my original price). Conceivably if they continue growing at the rate they have recently, they could possibly be 3- or 4-baggers by the end of a 5 year holding period. So I’m keeping an open mind for the potential multibaggers. Fast growing small-cap stocks are a possibility, and to be honest I haven’t looked at many of those recently. I have made a mental note to start looking at a few more in the near future (I can think of a few prospects off the top of my head).
Bottom-feeding on ‘value’ stocks could be another viable way to pick up a multibagger inside my intended time frame. They seem to take 3-4 years to turn themselves around, after which the market catches on to the fact that the business is profitable and safe to buy again, and reprices it closer to the market average. Just look at the resources stocks – sucking wind in 2014, riding high in early 2017. I’ve spotted a couple of potential turnarounds recently, MMA Offshore Ltd (ASX: MRM), which I’m naming because I’m not a buyer at the moment, and one other which I won’t name (yet).
MMA, short for Mermaid Marine Australia, is coincidentally another Forager pick, and one that they lost money on by being too quick to buy and placing too much credence in the group’s Net Tangible Assets (NTA). I look forward to reading more about that one in their upcoming quarterly report.
For me, Mermaid Marine is still a potential opportunity. It’s still trading at a discount to its Net Tangible Assets and once it pays off some debt to its bankers (with existing cash) it won’t have to make any more debt payments until they come due in 2019. That gives it two years to sort itself out. The primary reason I am not buying is that the vessel market is very subdued and an upturn will lag behind a recovery in oil prices. If we assume that oil/gas markets recover in the next 12 months – if they recover – this gives the company just 12 more months for the vessel market to improve, and to start generating profits and cash. I’m not sure that will be enough time to convince bankers to extend its debt or sell vessels to repay it before it comes due in 2019. That said, the upside is significant – I estimate around 4-5x – if the turnaround occurs.
I’d like to buy shares but I think the outcomes are too close to uncertain at this point – making it just gambling. The vessel hire market seems to be in the process of stabilizing and I am looking forward to the next report where they are forecasting up to $20 million in EBITDA. If much of that comes out as free cash flow or even profit, and further signs of improvement in the vessel market occur (such as more vessels winning contracts and fleet utilisation or day rates rising), then I could change my opinion.
The second company is another nasty, beaten-up business without a competitive advantage, but is now trading 33% below where I thought it could be cheap enough to buy (which was already a low price). I’ll probably write about that one a bit more in the coming months, after its annual report.