LONDON -- Paulypilot -- real name Paul Scott -- is one of the most popular "Fools" of all time and the eponymous founder of the Paulypilot's Pub -- Share Ideas discussion board on www.boards.fool.co.uk. He has enjoyed spectacular successes and failures, though not in equal measure. Thankfully, Paul's big successes have enabled him to make a living for the past decade from the markets, but it has always been a rollercoaster ride.
Paul shared his portfolio details with us last November. Since then he has decided to change his overall approach, saying:
I'm focusing much more on pure value investing, with a long-term horizon these days. It's a painful time to be doing that, as many shares seem in permanent downtrends, but I believe their value will come through in the end. We've seen before how prices can move up very rapidly once they start an up-trend.
And it can be impossible to buy in any size once the good news starts to flow, so I would rather buy when the tide is out, and potentially take some short-term losses. But this is mitigated by re-checking my analysis and then averaging down. Providing the balance sheet is strong, and there is no risk of insolvency, averaging down in the right shares can be a very good strategy. But it can also be lethal if you average down on stocks where your analysis is wrong, as I found to my cost with shares such as Invox and Accident Exchange in the past.
The macro view
Paul's macro view is reasonably sanguine. He believes the euro crisis will be sorted out, because it has to -- and he sees a disorderly collapse as "unthinkable." Paul reckons:
The Germans only act when staring disaster in the face, due to domestic political considerations. The solution has to be some form of money printing, which is now the lesser of two evils, and slightly elevated inflation will erode excessive debt levels over time. The UK should be actively planning to leave the EU, because it is inexorably heading towards federalism, and this is not politically acceptable to the UK. As a large net importer (4 billion pound per month deficit with the rest of the EU), the UK is in a strong position to negotiate a largely free-trade deal outside of the EU. …
So the crisis is coming back in waves, but this is creating deep value in small caps, as it seems to have shattered investor confidence. I see that as an opportunity, and that purchases made at today's prices will look very cheap indeed once the economy is recovering, which it will.
So what are those purchases exactly? Well here's Paul's current lineup of investment favorites.
Paul managed to side-step the recent profits warning at French Connection
Mixing the latest information into the prior-year figures, Paul calculates a group loss this year of about 2 million pounds -- despite the U.K.-Europe retail division's likely loss of 17 million pounds. In other words, a problem division losing 17 million pounds is hiding a successful, growing business making a 15 million pound profit. Paul adds:
As the group's UK estate comprises of only 70 relatively small shop leases, this is a manageable problem, and over time the loss-making shops will be disposed of, while the company owns a wholesale debtor book that is roughly double the market cap, with no corresponding debt. So the current valuation of 22.3m pounds at 23.25 pence per share is a tremendous opportunity in the longer term. But in the short term the next set of interims (to 31 July) are going to look grim, as it's a second-half seasonally weighted business -- so expect a thumping loss to be reported.
Corporate insolvency and recovery specialist Begbies Traynor
Next up is Paul's long-time favorite, IP video security company IndigoVision
Paul sees newspaper group Trinity Mirror
- "Yes, it's a declining sector, but it's still hugely profitable; the Mirror newspaper makes an operating profit margin of 16%, and even the regionals achieve 10%-plus."
- "The balance sheet isn't understood by the market. Net debt is reducing rapidly, should be fully repaid in 2-3 years -- and it is all unsecured, plus there is plenty headroom on the covenants. At that point, the company will be a cash cow able to pay potentially large dividends again."
- "The costs are mainly variable, so it isn't operationally geared and the group has been able to maintain very high levels of profitability. The company has also confirmed profit guidance for 2012. The pension fund deficit is a problem, but is less than two years' EBITDA, so fears are exaggerated."
Paul thinks fears associated with the Leveson inquiry and phone-hacking are receding and that the market seems to be ignoring the company's 177 million pounds of freehold property, which doesn't seem to have been revalued. Paul says: "These are mainly town and city-centre printing sites, which will be redeveloped in time. Over time, Trinity will morph from a newspaper group into a property company."
Home Retail Group
Argos and Homebase owner Home Retail
- "Trading has bottomed out; while Homebase sales were down 8%, this was clearly weather related, and about half the shortfall was recouped from a rise in gross margins, by my calculations."
- "The excitement is not the P/E, which is around 13 on current year forecasts, it's the balance sheet. You effectively get the business itself for free, because Home Retail had an average cash balance throughout the year (lower at the year-end) of 320 million pounds. It also had an in-house store-card operation with net debtors (after bad-debt provisions) of around 450 million pounds, with no debt on the creditor side at all -- just trade creditors and provisions for onerous leases, for example."
- "So the net cash and debtor book equals the entire market cap of 674 million pounds at a 82.8 pence share price. Should Home Retail wish to do so, there is an opportunity to monetise the debtor book."
- "The pension fund was in balance, but a deficit of around 100 million pounds arose in 2011 due again to the lower discount rate. However, this is offset by roughly the same amount of freehold property owned, so doesn't worry me."
- "Argos is the UK's second largest internet retailer, and 41% of its sales are now via the internet. It has also seen threefold growth in sales via mobile phones, so it is rapidly becoming an internet retailer that also happens to have some shops The USP is that you can 'click and collect' the same day, which can often be a godsend when you need something quickly. It is also a big advantage over other internet retailers at Christmas, avoiding postal delays."
- "Meanwhile, Homebase is benefiting from the failure of Focus DIY, so now only has two main rivals -- B&Q and Wickes."
Your comments, please
So what do you think of Paul's current lineup? Please let me know in the comment box below.
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