Strategy: Greg Hoffman On-the-ground research

Insights gained from burning a bit of shoe leather can be as valuable as reports, spreadsheets and ratios

Iarrived early and took a front-row seat, keen to observe every second of the 2017 McGrath Ltd annual general meeting. There’d been talk in the media that founder and major shareholder John McGrath might take the company private after a difficult two years of listed life. And with a share price fall of around 75% since the float, my contrarian instincts had kicked in. I was getting interested in the stock as a potential turnaround opportunity.

The directors began to arrive in the minutes before the meeting was scheduled to start. Separately. There was very little talk or camaraderie between them. John McGrath’s body language was downbeat and the air was thick with tension.

My gut told me that this was not a man on the verge of launching an audacious privatisation proposal. And the seemingly icy relations between directors didn’t bode well. This didn’t strike me as a tight team hunkering down together for the long haul.

Importantly, attending the annual meeting may have saved me from making a mistake. Before the meeting I’d been running the numbers on McGrath, attracted to its property management division and the potential of its mortgage broking business. But I was unsettled enough to delay the thought of purchasing the stock after seeing potential issues at board level and developing the feeling that a privatisation effort was not under way.

In fact, two months to the day after the annual meeting, all directors not named McGrath announced their intention to resign. So did CEO Cameron Judson, leaving the company’s founder to step back into the leadership breach.

Not only does John McGrath now face the challenge of a perilous operational turnaround but, as the last person standing on the board, he has the difficult task of recruiting directors into a business facing further tumult and potential litigation. At the time of writing, no privatisation bid had emerged.

On-the-ground research

Such on-the-ground research has proved valuable to me over the years. It can be easy as an investor to get too focused on reports and spreadsheets but insights gained from burning a bit of shoe leather can add a different dimension to spending more time in front of a computer screen. It also puts you in a different position to the legions of spreadsheet jockeys who dominate the financial markets.

In 2016 I held an investment in a stock called RNY Property. It was listed here on the ASX but its assets were in America. It owned a portfolio of office buildings in the New York tri-state area and things weren’t going well, so I decided to head over and investigate.

I visited all but one of the properties in the portfolio over four days. Where possible, I walked hallways to get a feel for vacancy rates and the kind of shape the buildings were in. I’m no real estate expert but seeing these buildings for myself gave me an understanding of the stock, which I never would have had

sitting back home in Australia. As with McGrath, I went into this phase of my research with a positive leaning towards RNY Property. But also as with McGrath, the on-the-ground experience changed my view. I ended up selling out for a loss.

Searching for Yowies

As I was buzzing around New Jersey, Connecticut and New York in my little hire car visiting these office buildings, I also took the opportunity to investigate another line of thought. Earlier that year a young analyst had enthusiastically pitched me a stock called Yowie. It was kicking big goals in America, he said.

The company’s main business was selling niche chocolate confectionary products (shaped like yowies) and the headlines of its ASX announcements were certainly triumphant: “Yowie now available to 20,000 new convenience channel outlets”, “Yowie number one selling novelty candy item in US market” and “Yowie secures national ranging in tier one retailer”.

A day after that last headline, Yowie clarified that the “tier one retailer” was Walgreens, “the largest drug retail chain in the United States in sales and profits”. So each time I was near a Walgreens store I dropped in, checked the shelves and asked the staff about Yowie.

I visited half a dozen stores on the east coast and another two stores in San Francisco when my return flight was delayed for a day. None had Yowie on their shelves and no staff members I spoke to had ever heard of the product.

This wasn’t definitive proof of anything. Yowie had said that it wasn’t a full rollout across the Walgreens store network. But if I’d found the products prominently displayed and flying off the shelves, then I would have moved the stock up my research list.

I also asked a friend in the industry about one of the company’s announcements, clumsily titled “Yowie celebrate one millionth Yowie off new line”. My friend works for one of the major confectionery players in North America and scoffed at the number. “One of our major products would move almost a million units a day,” he told me. It didn’t seem obvious that Yowie was going to be a big winner in the hyper-competitive American confectionery market.

A year later I was in the US again and took a few opportunities to visit Wal-Mart and Walgreens stores to search for the elusive Yowie. This time I managed to find one Walgreens store stocking the product. Down on the bottom shelf of the confectionery aisle in a battered box stood two forlorn, dusty Yowies. They’d obviously been there for a good while.

Put together, all of this was enough for me to doubt whether the product was as hot as the company’s continuously upbeat announcements might have led me to believe. I shelved it as a potential idea and watched the share price continue a downward trajectory, happy to be a spectator.

These are just three examples of how on-the-ground research has helped me. For more insights into this type of research, I recommend reading One Up On Wall Street by Peter Lynch. He was a master of this kind of thing, making a habit of translating insights from family shopping trips or holidays into great investments.

Common Stocks and Uncommon Profits by Philip Fisher is another, more advanced book with insights about this, especially in chapter 2, titled “What ‘scuttlebutt’ can do”.

I reckon this kind of research is one of the ways a small investor can gain an edge over larger investors. An investment that is meaningful to me would not be important to most professional fund managers. So I can justify spending days doing this kind of research for a five- or six-figure investment while they can’t.

It’s not a technique that’s likely to help you much with huge stocks like BHP Billiton or the big banks but it can provide a good leg-up in the kind of situations I’ve described in this column. And perhaps best of all, it can be great fun (not to mention possibly tax deductible – check with your accountant).

Down on the bottom shelf in a battered box stood two forlorn, dusty Yowies