The Great Irish Share Valuation Project – H1-2013 Performance

Wexboy_Value

TGISVP – H1-2013 Performance

Time to wrap up the mid-year review(s) – let’s finish with The Great Irish Share Valuation Project. To recap:


- A total of 73 Irish companies are included this year (same as last year – but US Oil & Gas (USOP:G4) & Fastnet Oil & Gas (FAST:LN) were subsequently listed, so I added them later in the year, increasing the 2012 total to 75).


- Each company’s been individually reviewed & valued, some time between Jan & May, and I’ve kept a record of all share prices (at time of evaluation) & price targets to properly assess performance.


- I’ve made no subsequent changes to the file, except: i) to adjust for DCC (DCC:LN) migrating to a London-only listing & for Petroceltic International (PCI:LN) consolidating its shares 1 for 25, and ii) Continental Farmers Group (CFGP:LN) will continue to be included at its GBP 36p takeover price (the Saudi bail-out came in the nick of time, just before the cash ran dry!).


- Since my TGISVP review/valuation phase was spread over 4 1/2 mths, we need to adjust our benchmark (the ISEQ) accordingly. Like last year, I’ll take the mid-point (in terms of companies valued) of this phase – i.e. Feb-25th – as the most appropriate start date for the index.


I’m bemused to see I’ve apparently become more bearish this year! Last year, I was bullish on 48% of all stocks, while this year that’s now dropped to 40%. But consider the unique nature of TGISVP, which includes an extraordinary selection of junior resource stocks, complete with assorted incompetents & cowboys! Not surprisingly, I’m bearish on pretty much all these rubbish stocks – so stripping ‘em out, it’s fair to say I remain bullish on Irish stocks. OK, perhaps a little less so today, but with the ISEQ up +17.1% in 2012 & another +16.7% this year, that’s no great shocker..!


Let’s first take a look at the best & worst performers YTD. I’m being rather lazy here, this is solely from a TGISVP perspective – so I’m only tracking each stock’s performance since its evaluation date (i.e. sometime in Jan-May). These tables are therefore somewhat biased & should be taken with a grain of salt. [Though I'm sure there's a fair amount of overlap with H1-2013's actual best & worst performers].


Here’s the Top 10 Winners:





So that’s a couple of actual/takeover induced stock surges (CFGP & Elan Corp (ELN:US)), some penny-stock gyrations, while the rest have racked up some really nice performance. [And then there's my old nemesis, Greencore Group (GNC:LN) - that's another bloody spectacular performance for a sandwich maker!? The more this one goes up, the more investors love it... Meanwhile, my bearish perspective remains horribly off-base, but GNC's recent interims do nothing to change my mind: Revenues grew just 0.9%, both net debt & the pension deficit increased again, and free cashflow was actually negative (by GBP 12.9 mio). The stock remains an over-priced potential disaster, in my opinion]. Tsk tsk, I actually own none of the winners…


And the Losers:



That’s quite the collection of junior resource stocks – I believe cluster-f*** is the technical term. I wonder if there’s some muppets out there actually sporting all these stocks in their portfolio?! You know it, mate… Then again, to my grief & shame, I own one of these disasters: Petroneft Resources (PTR:LN). But at least PTR has reserves to report, which the rest of the bunch can mostly dream about… And how about a cheer for plucky little US Oil & Gas (USOP:G4) – which, to date, appears to only have bullsh*t & water to report – rather surprisingly, it’s managed to avoid the dunce’s hat. That honour goes to Clontarf Energy (CLON:LN), another no-hoper.


Right, so how did the TGISVP portfolios perform? Well, first we need a bit of a refresher on how the portfolios are constructed (btw no material changes from last year, so skip down if you like):


TGISVP – Beta Portfolio: We assume an investor goes equally long all 29 stocks with positive Upside Potential (e.g. invests EUR 1 in each stock, for a total of EUR 29). The other 44 stocks, identified as neutral (2) or over-valued (42), are ignored. The portfolio return contribution from each stock is simply its Gain/(Loss)%/29.


TGISVP – Smart Beta Portfolio: Stocks are chosen on same basis as Beta Portfolio, with one twist: All 29 stocks are divided into quartiles, and we assume EUR 4 is invested in each top quartile stock, 3 EUR in the next quartile stocks, down to EUR 1 in the bottom quartile stocks (for a total of EUR 74). This preserves diversification, but focuses the portfolio on stocks with the most Upside Potential.


TGISVP – Alpha Portfolio: Same as Beta Portfolio on the long side. But we also include a short overlay of all 42 over-valued stocks, with EUR (1) invested in each stock short. Essentially we’re just adding a second inverse Beta Portfolio.


Smart Alpha Portfolio: Same as Smart Beta Portfolio on the long side. Again we also assume a short overlay of all 42 over-valued stocks. In similar fashion, we divide these stocks into quartiles, and invest from EUR (1) to EUR (4) (for the most over-valued quartile) in each stock short.


[OK, the (Alpha) portfolios are somewhat theoretical... But so what?! I've read plenty of studies & white papers in my time that blithely ponder far more academic analyses (potentially in data-mining). Anyway, unlike them, this is a fully transparent real-time exercise in valuation & portfolio management].


Now, here’s our H1-2013 TGISVP portfolio & benchmark performance:





[Remember, the ISEQ performance is just from Feb-25th. If I'd been able to magic up a Dec-31st valuation for all TGISVP stocks, the benchmark return would be far higher at +16.7% - but presumably Portfolio returns would be that much higher too. btw Wow! This is basically a repeat of last year - really makes you wonder if over-weighting the Irish market big time in Jan-Feb might be a v rewarding strategy?!]


Umm, compared to last year, I have to admit the table’s a bit of a mixed bag! Fortunately, I’ve previously highlighted my preference for the Smart Portfolios, particularly the Smart Alpha Portfolio - so we’re actually looking pretty damn good!


But why did the Beta Portfolios perform so poorly? Well, for the Beta Portfolio, Zamano (ZMNO:ID) made a nice contribution, but Petroneft was a bigger detractor. In fact, I tot up a (3.3)% loss from junior resource stocks in aggregate, so that’s most of the shortfall right there. The rest effectively comes from my bearish calls, i.e. stocks I missed out on (vs. the index) – ironically, the biggest performers in this category were Food & Agribusiness stocks (like Glanbia (GLB:ID), for example), of which I’m usually quite fond. The same is true of the Smart Beta Portfolio, except the numbers are a little bigger – which actually flips it into negative performance territory.


Another irony – the major out-performance of the Alpha Portfolios is also due to junior resource stocks! While my few bullish calls on juniors are obviously a drag, the vast majority of resource stock shorts pay off in spades (topped by those misfits, USOP & CLON). In fact, I count a net contribution of +18.1% from shorting juniors, so in aggregate my other long/short calls actually dragged returns down! Again, the same is true for the Smart Alpha Portfolio – of course, with my largest shorts actually concentrated in the juniors, out-performance is that much greater.


Now, at this point, you may want to remind me: a) shorting junior resource stocks can be difficult/impossible, and/or b) only a real idiot couldn’t figure out (& take advantage of) such a blindingly obvious strategy!?! OK, in my defence: i) again, I point you to all those academic studies, and ii) there are legions of muppet investors out there who will (rather incoherently) argue the exact opposite in strategy… So here’s the valid alternative to that trade


But seriously, these Portfolio returns serve up the same question I’ve asked before: Is it even possible to invest in junior resource stocks in any kind of successful analytic fashion? [I also have to ask: If resource stock investors can't even manage to benefit from a QE-enhanced market, when exactly are they dreaming of turning a f***ing profit?!] It seems quite clear value investing isn’t the answer… Assessing management’s prior record may be a far better approach – the select few who’ve actually managed to prove up resources AND create shareholder value in the past may be your best bet. But in the end, I suspect analysis is wasted – these stocks move up & down en masse, so individual stock selection may be a pointless exercise.


Bigger picture, though, I’m pretty encouraged by the performance of the TGISVP Portfolios YTD & last year. We’ll obviously have to wait far longer for real confirmation, but I believe these results offer intriguing potential… We still have to prioritize portfolio diversification, but a more consistent/in-depth approach to valuation & ranking in individual (smaller) markets (and sectors) may offer great opportunities for adding (lower risk?) alpha to your portfolio.


For reference, here’s my TGISVP file:


TGISVP H1 2013 Performance (xlsx file)
TGISVP H1 2013 Performance (xls file)

gordongekko

Great post. There's a lot of useful info in that post

Merelyme

Petroneft AGM at 11am tomorrow in the Herbert Park Hotel, Ballsbridge, Dublin 4. Will there be news of a farm-out? This company make very few announcements other than obligatory RNS's. Any thoughts?