Please remember this is just for discussion. This isn’t advice. Always seek a qualified financial advisor who knows your circumstances when making decisions.

Yeah, it isn’t easy. The more uncertain I am about something the greater the margin of safety I require.
Sometimes the biggest messes can give you great profits aslong as you price it correctly. But as you know this is alot easier said than done !
The Wine industry is clearly in value territory now – but its abit like a minefield because theres alot of debt on the balance sheets. But when you buy something for 10-20% of its tangible assets (sometimes already written down) you have to begin to wonder if mr market has over done it again. When things in an industry go from bad to worst in history + the economy and market have imploded than that is usually a good time to buy. The no.2-3 wine producer Australian Vintage (used to be McGuigan Simeon Wines Limited)in Australia has gone from 6$ to 30c..There has been very little dilution over the last 4 years and they have controlled their debt levels for several years (not excessively borrowing more and more) so value is arguably still there.

I guess at the end of the day you gotta do what works for you and everyone is different. You have good instincts which cant be learnt from books or taught.

In the bigcap arena I like Tabcorp. I worked out even with all the earnings uncertainty, in a worst case scenario — because the yield is so high, longterm, there is very little risk for capital loss. The market has priced in earnings uncertainty to near worst case. If Tabcorp can reclaw back some earnings (which appears likely) this will be repriced. So its basically like a high yielding bond with superior capital appreciation potential. I also like the new ceo. Given Gaming companies have alot of cyclical earning streams (they are not purely defensive) they are usually bght at this stage of the business investment cycle historically too.

Please remember this is just for discussion. This isn’t advice. Always seek a qualified financial advisor who knows your circumstances when making decisions.

I feel there may be a health care/biotech surge in equities in the next 6-12 months. I cant explain why, merely my intuition is guiding me in this direction so I should listen.

MVP description:
“MVP is a leader in emergency pain relief and respiratory products. The Company manufactures
a fast acting inhaled analgesic for pre-hospital and emergency pain relief called Penthrox. It is
used in all Australian Ambulance Services, the Australian Defence Forces, Sports Medicine and
for analgesia during short surgical procedures in Dentistry and Cosmetics.”
*from company announcement

“Veterinary: Veterinary division is responsible for the development, marketing, sales and supply of a range of veterinary equipment with a specific focus on anaesthesia and surgical consumables: Anaesthetic machines (both open circuit and closed circuit); Breathing circuits and equipment; Vaporisers; and Breathing monitors.”
http://www.morningstar.com.au

I think the Veterinary healthcare arena could be a big growth ticket in the future. Given aging demographics, elderly are likely to seek more companionship from pets. Additionally, more and more people are treating pets as members of the family (they are even buying them health insurance !).

One of the main problems with pet anaesthesia is that pets wake up too quickly off it and it can be dangerous. MVP’s pain relief method gives significant advantages here as quoted in one of their recent announcements:
“Methoxyflurane has considerable potential for veterinary use and it is expected that this approval will open another
significant market. The drug has some distinct advantages for veterinary medicine including the
slowness with which animals emerge from anaesthesia and therefore the ability to manage
animal welfare post-anaesthesia. Further, MVP have been developing novel delivery methods
for Methoxyflurane that will include the management of post-operative pain, which it is hoped
will be incorporated into the product offering following regulatory approval.”
Also, they now have FDA approval (which was very costly and a long process). So they can now actively market their Methoxyflurane product(s) in the US.

Before the previous manufacturer stopped producing Methoxflurance they were servicing quite a few clients which provided profitability at many multiples of MVP’s current earning capacity. If MVP can recapture even parts of this business (given they are the only ones doing it now) profitability has the potential to rise considerably. If this doesn’t work out it has other divisions that provide alternative growth paths and base profitability to protect downside risk, whilst giving reasonable upside.

Balance sheet clean, buying back shares at depressed prices and directors loading up.

Please remember this is just for discussion. This isn’t advice. Always seek a qualified financial advisor who knows your circumstances when making decisions.

I know what you mean about smaller ISPs. They may struggle to become more than a niche player, but you still can make decent returns off them if they are severely mispriced.

I myself am a value investor and I try to be a bottom up investor (which is hard especially if the entire industry is struggling) – so as soon as there are significant differences between price and value my eyes light up.

I read your piece on servcorp – it was very good. I think anything that reduces costs and allows businesses to make more money is a good thing in high inflationary environments.

Please remember this is just for discussion. This isn’t advice. Always seek a qualified financial advisor who knows your circumstances when making decisions.

This is true.

Also given difficulties obtaining credit now and possibly in the future + higher interest rates — this may create bigger moats for higher capital intensive industries.
In turn, lots of entrepreneurs may move into the lower capex industries like the tech sector, creating additional margin pressures.

Personally I like smallcaps. The bigger companies are nearly always overpriced and it is hard to tell where larger caps growth comes from (speculation? manipulation? institutional investors?). At least with smallcaps you know they are driven by speculation, and hence their volatility.

I see the tech sector as a bit like the finances sector – they do most of their revenue generating by creating a product and then just sitting around raking in profits.

Which is good, when the sectors are healthy. But somewhat disastrous when excess competition exists.

As China and India grow, their capacity for producing IT products also grows. And now google seems to be taking over the planet. See the problem with the tech sector is that it is a global market. You can easily sell products globally. Whilst that can be an advantage, it can also be a huge disadvantage when you realise who you are up against in the global market.

Personally I just don’t see much room for huge profits from IT products (besides the big fish like google, microsoft, facebook, etc) and I am going to avoid that sector.

ATP – luxury industry, currently being priced as a distressed debt asset when it has very low net debt.

AVG – Wine industry.

CKT – Japanese REIT.

CYG – Auto/infra industries

ELX – Lasers

MVP – Pain relief

WFL – MIS industry.

Note this is not advice only meant for conversation purposes. You must seek professional advice if you want financial advice.

If only we could make our investments with Hindsight.

“BTW I see MLB has not done much since I posted the blog about them. I wonder what is keeping their share price down?”

Profits could be falling further?
Directors have bght some at around this price – so thats a good omen.
Its just comeout of 5 years of profit growth — its going to be difficult to grow from here.
Margin erosion and commoditisation are obviously issues for this company. But like you said historically it can hold its own in a competitive landscape. I am not very familiar with this company so I can’t really comment much more.
Recently, the entire tech sector has been underperforming the market:
http://bespokeinvest.typepad.com/bespoke/2009/09/is-the-tech-sector-running-out-of-gas.html
So this sector could be the next one to pop?
Lots of quality hedge funds have been buying tech stocks in their latest 13f filings and it appears to be the right time in the business cycle to be buying techs: http://www.onlineinvestingai.com/blog/wp-content/uploads/2008/12/business_cycle_stock_market_sectors_29_1_08.jpg

The problem is that when you look back at a stock that has failed it all looks obvious that the company was going to falter. That makes it even more painful!

BTW I see MLB has not done much since I posted the blog about them. I wonder what is keeping their share price down?

Hey Greg — we have all experienced this. I guess aslong as we are right more than we are wrong (with sound money management) we should come out on top in the end !

If you go onto their website: http://www.servcorp.com it explains their product offerings and how they work etc.

I might look at SRV in more detail next time I write a stockwatch article.

As for Small Caps, I have done really well from some of them and also seen a total wipe-out with others. Personally I find Small Caps are hard to follow and there is not a lot of research available on most of them. But they still tempt me because it is generally easier to understand what these companies do and the directors are more approachable.

In a few years most of the value will disappear.
The small cap sector was absolutely punished in this crash due to lack of liquidity and everyone running to safe haven large cap stocks. In the 70’s when we had high inflation small caps actually out performed large caps by a significant margin for over a decade.

On Inflation and small caps vs large caps:
“Outside of the commodity space, mid cap and small cap growth stocks are likely to outperform the large cap indices as they have the potential to maintain the balance between genuine earnings growth and inflationary earnings growth. This .. [is] .. because large mature companies which operate in mature markets have far less scope for natural revenue expansion than less mature growing companies who operate in growing maarket segments. The natural growth of these smaller stocks can help protect the investor from the inflationary effect on stock prices.”
http://www.slideshare.net/moneyvidya.com/how-to-invest-when-inflation-is-high

Historical outperformance emerging from recessions:
“Since 1970, data show that 12 months after coming
out of a recession, small caps were outperforming
large caps by an average of 13% for an average return
of 36%. Furthermore, the outperformance lasted for
an average of 33 months. In the first seven months of
2009, small cap stocks rose 33.2% on a total return
basis, outperforming large caps by 10.7%. Based on
the past average, that outperformance could continue
for at least another two and a half years if the
… recession ended sometime around mid-2009.”

Historical outperformance from 73-83.
“In fact, from 1973 through 1983, small-company stocks decisively outperformed large-company stocks every single year, including 1977 and 1981 in which the S&P had negative years and small-company stocks returned 25.4% and 13.9%, respectively.”
http://taylorfrigon.blogspot.com/2009/02/return-of-1970s-part-2.html

We need to adapt to new market conditions. Buying bluechips and holding may have done well in the past but arguably will not do well in the next 10 years IMO. Investors thought this would work in the 70’s because of what happened in the 50’s and 60’s — dejavu?