Strategy: Greg Hoffman Time for good news
A takeover, new shareholders, a mining resurgence ... life has been kind to this column’s stocks
“Takeover offer f or Grays eCommerce this morning,” I texted my wife on Star Wars day (May 4). “Is that good news?” she replied. “Short term yes, long term no,” I responded.
Online auction business Grays eCommerce (ASX: GEG) was covered in this column in April and July 2016 after I first laid out the case in November 2015, concluding “there’s a decent chance that the share price will be north of $2 in five years’ time. That would mean today’s investor would double their money over that period for an annual compounded return of around 15%.”
The takeover bid from fleet leasing and equipment finance company Eclipx values Grays at roughly $1.33 a share at the time of writing. That represents a capital gain of around 40% since November 2015, in addition to a small franked dividend payment earlier this year. Assuming the deal is completed over the next few months, the annualised return will comfortably exceed 20%. That’s significantly more than the 15% annual return I was targeting in November 2015, which is why I described the deal as “short term good” for investors.
Yet I believe that Grays is on track to justifying a $2 price in a few years. In that sense, investors have had a potentially lucrative long-term investment cut short, which is “long term bad”.
Eclipx doesn’t strike me as the most logical owner of Grays and it’s possible that another more logical suitor could enter the fray – perhaps by the time you’re reading this. So I’m holding on for the possibility of another bid emerging, though it’s most likely that Eclipx will be successful given Grays’ directors and largest shareholders support its bid.
The excitement at Grays is only the latest in a string of activity for stocks that have been covered in this column over the past couple of years. Let’s check back in on a few key companies.
Lottoland takes a punt
Online lottery ticket retailer Jumbo Interactive (JIN) was first mentioned in my October 2012 column and covered more recently in March and April 2016.
The big news here is that Lottoland has taken a 7% stake in the company. Lottoland lets people bet on the outcomes of various lotteries around the world (such as those mega jackpots in the US that sometimes make the news). You may have seen its ads on TV.
Lottoland has also signed a big money sponsorship deal with the Manly Sea Eagles rugby league team. It seems serious about establishing a strong presence in the Australian market.
Jumbo has a database of more than 2 million Aussie lottery players and more than 15% of them have bought tickets online in the past 12 months. That database must look pretty attractive to Lottoland.
Currently, Jumbo only resells tickets for Tatts Group’s lotteries on rolling six-month contracts. Previously, I’d felt this was the weak link in its business model but Lottoland’s entry into the market turns that on its head.
Tatts may now be keen to sign a longer-dated exclusive agreement, providing Jumbo with much more certainty. Tatts may also be interested in making a takeover bid to ensure that so many Australian lottery players don’t end up in the hands of a disruptive competitor such as Lottoland.
Lottoland may be interested in a full takeover or simply striking a marketing agreement with Jumbo. Either way, Jumbo now holds a strong hand at the bargaining table with both Lottoland and Tatts.
Jumbo’s share price has surged by more than 70% in 2017 alone. That reflects its improved bargaining position and strategic value. The stock has grown to become the largest holding in the private portfolios I manage and I may look to sell some shares for portfolio balancing purposes in the coming months but for now I’m a happy holder of the stock.
SurfStitch slips
One that hasn’t been going well is a speculation in online surfwear retailer SurfStitch (SRF). When I wrote my column for the September 2016 edition of Money the stock was trading at 20c. As I write today, it’s down 40% to 12c.
I was intrigued by the company’s $61 million cash balance at December 31, 2015, which compared favourably to its then market value of less than $60 million. But 12 months later, that cash balance had been sliced to $33 million and is expected to fall further by June 30.
On the positive side, CEO Mike Sonand’s turnaround is showing some early promise. Sonand is an experienced retail executive who’s focusing on retail basics and simplifying SurfStitch’s formerly messy structure.
The cash buffer that initially attracted me has depleted far more than I had hoped but that’s offset to some extent by turnaround progress and a lower share price. I’ve recently added to the initial small speculative position.
It’s important to recognise that SurfStitch is now a riskier proposition, being a heavier bet on an operational turnaround, compared with my initial idea of buying cash at a discount. But Sonand has around $200 million of annual revenue to work with. If he eventually achieves even a 3% or 4% profit margin, today’s buyer should do well.
Miners dig themselves out
Miner South32 (S32) was “the opportunity I’m most excited about” in February last year. “Not much has to go right for South32 shares to rise by 50% from here and I wouldn’t be surprised to see them triple at some point in the next decade.” I didn’t have to wait that long, with the stock tripling inside 12 months. An extraordinary result.
The price is now 10% off its absolute high and I have been taking some profits in recent months. I think South32 remains well placed for the longer term but the gains are less likely to be spectacular from here.
BHP Billiton (BHP) also featured in the same column and proceeded to rise by more than 85% in less than a year. It’s pulled back with the recent retreat in iron ore prices but adds a healthy element of diversification to the small-stock-packed portfolios I run, so I haven’t sold any.
Pinnacle climbs high
I could barely contain my excitement in June 2015 when I wrote about Wilson HTM, now known as Pinnacle Investment Management (PNI). I had high hopes that an investment Pinnacle had made in a funds management firm called Antipodes Partners might pay off handsomely. Happily, that has been the case. Antipodes now has more than $3 billion under management, which I suspect may be a record for a two-year-old Australian funds manager.
Pinnacle is a large position for the portfolios I manage and I have taken profits as the price has run up, but it remains the second largest individual stock holding in the portfolios I manage.
Overall, the past few years have been kind to the stocks highlighted in this column. That won’t always be the case, which is why managing risk is a key topic. That’ll be the focus of next month’s column.