On February 05, 2019, my Mentor sent me a message asking my opinion on a list of companies that met our 7 Tenets of Successful value investing. We wondered based on relatively recent price movements in 2018 whether acquiring more shares in these companies was a prudent move. Below is my response extracted in its entirety (errors and all) from my email.
“Good morning Sir,
Please forgive my delayed response.
I share a few thoughts below on your picks. I am mostly in agreement with your selection. As for those that I don’t share the support for, I made suggestions as to what I feel could be potential alternatives.
NCBFG – I agree with this on the basis the company is still growing. Yesterday there were 3,598,470 units that traded.
Perhaps this is linked to the fact that the offer for Guardian Takeover offer. I have not been able to confirm this.
GRACE KENNEDY – Agreed, value company that is still growing relatively aggressively and is under-appreciated by the market.
ACCESS FINANCIAL SERVICES (ASF)– I think buying PROVEN might be a better choice for two reasons. 1. Proven is like a Caribbean Berkshire Hathaway, and is one of the largest shareholders in AFS. AFS is also overvalued in the market today and is going to be faced with increased completion in the near to medium term,. Both LASCO and Sagicor have entered the micro-financing space and there are a number of boutique shops (unlisted) that they already compete with. I do not expect sufficient growth in the near term to justify the price and think that the price will come down.
RJR – I agree with this despite the slow rate of adoption and the sustained losses. RJR really doesn’t have to do much in order to turn the company around and I suspect that in time there will be a response to the declining revenues. At that time, a lot of people will lament how they “missed” it.
SEPROD – I agree with this selection as well. Strong company with an established brand and high quality products. Increasing export will drive growth, albeit slow growth.
KINGSTON WHARVES – I have been to quite a few presentations that suggest expansion plans are well advanced for the ports. This was supported by the last annual report. The Management has emphasised their ambition of making the port a global logistics and transshipment hub. That is currently priced into the stock but significant growth in earnings could easily bring the PE down from the 50s to 30s or 20s. This might even be self reinforcing in that as the earning report come out more and more positively, people will become more and more willing to pay higher prices for the stock. Buying now can be justified.
SSLVC – AI agree with this one but I think we will have to wait to see the company’s results improve. It is not fully appreciated in the market.
JSE – I agree with this but still think it is expensive. What I cannot say definitively is whether the stock price will come down any time soon. With a steady stream of IPOs, Jamaica’s increasingly improving macro economic situation and the recent upgrade in our Fitch rating to B+ (Stable), we could see more and more investors (both local and international) getting into the market. That will certainly bolster earnings. I see this the same way as KW.
JAMAICA BROILERS – Strong company, a relatively silent mover but it has a long history and proven results. Expansions overseas are consistent and they are one for the long term.
I think your portfolio is reasonably balanced. In my view there is a benefit to that in that you have relatively good exposure to different sectors. This actually looks like it could be an index fund by itself. I would encourage some exposure to the Energy Sector, you had initially hinted an interest in MPC Energy. I was a bit sceptical at first but after seeing their presentation at the JSE Conference, I am fully convinced that this is a value stock that will be worth way more than it is now. Alternatively, you could wait for WIGTON but I think MPCEL (which operates Caribbean wide) has much better prospects. In the worst case, it will be a consistent dividend payer 5-7 years from now.
I think some exposure to a high growth stock like Paramount Chemicals (PTL) will be advantageous. Also, projecting the statements forward suggest that it too is undervalued.”
I thought you might find it useful to see the actual email.
Why Do I share this?
The answer is that I want to prove a point. While we did have some insight in the volumes trading for the companies however, you will notice that most of these assessments are QUALITATIVE in nature. We investigated them from a purely qualitative perspective. In the follow up to this post we will see how my Mentor’s portfolio is looking today. By the way, we bought all the companies mentioned in varied quantities.