Ann: Trading Update, page-54

1. As I have said earlier to @MarsC, the main point of my initial post was not about SDI and its downgrade, instead it was to remind others to conduct their own analysis when making investment decision. I did this because I felt that there are some here who end up becoming SDI shareholder because they follow the steps of others without really doing their own homework.

Personally, I can't bring myself to believing that anyone would be dumb enough or naive enough to buy shares solely on the basis of what they read on an online stock discussion forum, without conducting some first principles research of their own.

What they may seek to do - as most of us do - is have their existing views refined (either positively or negatively, but admittedly mostly on a confirmatory basis) by what they read.

But for people to - as you imply - tap into a stock discussion thread without having any firm opinion on the stock in question, and then to buy that stock - on which they have conducted no research themselves - simply because some other posters had a BUY sentiment accompanied by positive commentary... I am sure that does not happen.


"And the last "misgivings" was about the volatility of the earnings. Other companies who also rely on a lot of R&D, such as ARB & BRG didn't experience such a magnitude of volatility during tough periods. So maybe, the quality of SDI's moat is not that good."

No, the earnings of ARB and BRG didn't fall as much during their "tough periods", but their premium valuations at the time meant they weren't priced for any falls at all. The result was that their share prices fell by disproportionately more than the fall in their earnings (by as much as 40% to 50% in each case). REH was similar impacted when its earnings disappointed between 2011 and 2014. So, its not just changes in profitability that influences the value-at-risk; the starting valuation point matters just as much.

In the case of NCK and ONT, when these companies met with adverse events our of left-field events, the extent of the financial deterioration was ~25%. Their share prices fell by similar amounts.

Again, value-at-risk is not merely a function only of the extent to which financial performance falls short; it is also how a stock is priced at the time of the under-performance.


Put another way, given the valuation multiples that are being applied to ARB, BRG and REH, I shudder to think what the share price response would be if those companies experienced an adverse event (and I express those misgivings as an owner of each of those companies).

So, sure SDI's moat is not the same as ARB's or BRG's or REH's.
But - again - the stock is not priced like it is.


"At first glance, the figures don't look that flash, but we need to consider the following:
ARB: 3%pa in a period which includes the end of the mining boom
BRG: 7%pa in a period which includes the loss of a major contract (Keurig)
ONT: 4%pa in a period which includes the end of CDDS
REH: 10%pa in a period which includes a major expansion of the distribution network, which in other companies, are usually associated with cost overruns, project delay and business disruption.
NCK: 21%pa in a period when there are numerous discretionary retailers who hit the wall."

In each of those cases, even as a shareholder I could quite easily provide countervailing arguments, for example, ARB and BRG both have significant offshore activities and with the end of the mining boom came sharp falls in the A$, so there were some natural hedges built into their earnings. In REH's case, the indifferent earnings performance between 2011 and 2013 wasn't cost-related; it was that the top line that simply didn't grow. As for NCK, it didn't face the same structural pressures as other "retailers" that performed dismally (all those new houses and apartments that were built needed furnishing); and I remember when SUL and JBH were experiencing the glorious tailwinds of new store maturation... its hard to not report impressive earnings growth when you - on a fixed cost base - have new stores attracting more and more foot traffic, and hence revenues - all off a low base. (In fact, I remember when the likes of NBL and SFH were rolling out new stores in the early- to mid-2000s... even those crappy retailers looked like retail rock stars at the time.)

And ONT lost a major source of easy revenue when the CDDS was suspended. As did BRG when it lost Keuring. Those situations of breached moats are pretty analogous with the erosion of SDI's amalgam revenues, are they not? (In fact, in SDI's case, the amalgam loss is occurring over a number of years, whereas ONT and BRG had sales disappear in quite sudden fashion.)


"Most successful business owners usually have more than 90% of their wealth tied to their business. In fact, this is the very reason why they become rich. If they keep adjusting their portfolio just so that the business doesn't represent too big of a proportion, then their stake will be diluted regularly and as a result they won't be as wealthy.
An example of this is the Browns of ARB. Had they just kept their original shares and not sell a little bit during the special dividend, they would have been much wealthier now."

Sure, but I think you are committing the logical fallacy along the lines of "Do-what-Tiger-Woods-did-and-you-can-be-just-like-Tiger-Woods". There are tens, nay hundreds, of thousands of talented and aspiring golfers who applied themselves as best as they could during their careers, and yet - instead of victoriously holding claret jugs aloft on the 18th green at Augusta - they are selling discounted golf gear in Golfworld Golf Marts or Drummond Golf outlets.

Similarly for people running their own business: for each Roger Brown or Alan Wilson, there are thousands of business failures in which the owners - had they invested all of their wealth in their own companies - would be the opposite of wealthy today.

Holding up a few isolated examples to support your view masks the vastly greater number that disprove it.


"What I will not do now is to compromise quality and go down the ladder and dabble in the less desirable."

Does that mean that you are happy to add to your current holdings in ARB, BRG, ONT, NCK, REH or RWC today? If not, can I ask what do you do with surplus cash that your portfolio generates?