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02/01/17

12:28

Post #: 21635783
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Originally posted by Anton Chigurh ↑

2016 Review (spec portfolio only)
Like everyone who pinged tips on to the forum in 16, I got some right and some wrong. It’s also possible to “like” and mention a stock but not hold it until it reaches your buy criteria (e.g. ATC) or until the sector overcomes headwinds (e.g. any gold tip made in H2). Nailing the entry is important. And waiting.

It’s the biggest cliché in investing but the key with getting some right and some wrong is to let the losers go if you’re research isn’t vindicated and let the winning positions run. I think I’ve got to the point where the first part above is mechanical and easy to implement. The second part, I’m always trying to improve on and still haven’t mastered it (see profit taking on EMC). Most of the losers I had in 2016 were purely from trying to go beyond my niche and make some lazy money; taking very short-term trades with minimal research; trading, based largely on charting patterns etc. Stick to what you know and have a track record with! Avoid trading, simply because the cash is sitting there in your account.

The concentrated portfolio approach continues to deliver and as I’ve mentioned in the past, has been by far the most important modification to my investing over the years. High conviction, larger positions, in fewer stocks. Then sit and let the companies you’ve invested time and money into do their thing. For me, sitting comfortably is only possible if, 1) I’ve done substantial research into the company and am comfortable that its fundamentals will justify a sizable re-rate in the 3-9 months ahead (my optimal investment timeframe for spec FA re-rates) and 2) my entry is aligned with directors and instos/brokers, as this lowers your risk considerably, without being a guarantee on its own. Running a concentrated portfolio has meant getting fewer stocks “wrong”; probably due to greater time and research going into each investment. More importantly, it’s meant making far fewer medium-conviction investments, where you’re investing simply because you have available capital, it seems “pretty good” and the money that’s about to be invested is a very small % of your overall capital anyway. And for pre-revenue specs, all of the above still needs the original disclaimer that you cut your losers off (even the ones you’ve done massive research on and nailed the entry with) if the market confirms you’re wrong. For less speculative micro/smallcaps – ones with a proven biz model and earnings (FID, NCK etc) - I would always caution against letting short-term market trends and charts influence your investments too much but that’s just my approach.

I was interested reading the BT discussion the other week on Warren Buffett. I’m sure it’s not lost on many who have studied him that his early investment days involved highly concentrated investments with very large sums, relative to his total capital. It was only later, when his wealth grew substantially, making nimbleness difficult, that he was almost forced to diversify to some degree. To quote the man, “very few people have gotten rich on their seventh best idea.”

2017 Ideas
I’m coming into 2017 quite cashed-up in the spec portfolio, having taken profits on most of my tech/bio/resource positions in H2. It may be that some of them push-on substantially and make my “let winners run” motif look compromised, but having got in early with most of the entries in these stocks, I’m comfortable that most of the cream has been enjoyed. I’ll leave nailing tops to other, much more gifted traders and stick to trying to take the 60-70% in between.

I don’t like guessing trends too much for the year ahead, as I think, in the short-term, the micro/smallcap market is heavily influenced by what the broker and investment community promotes, as opposed to what the macros would suggest “should be”in the here and now. Watch the flow of funds, where they’re heading and what IPO/RTOs are in the pipeline, as this will give you the best idea of what sector is going to be promoted the most heavily, find it easiest to raise capital and see the most investor interest. Also, no matter how hot a sector is, it’s always about picking the right stocks. If you buy a sector (index), you’ll get index-like returns, relative to the sector leaders. Pure guesswork as to timing but if I had to spit-out a couple of names for 2017, it’d be cobalt and medtech. Could easily be wrong with both the sectors and timing.

Holding…

ATC
- New age materials sector.
- High purity alumina (HPA) product will see growing demand from LED, semiconductor and lithium ion battery separator markets.
- Offtake agreement with Mitsubishi for first 10 years of production (@ 4,000 tpa)
- Low capital cost, high margin, pre-tax NPV of +$350M on a base case production scenario, IRR of 33%.
- Innovative export credit facility currently being negotiated with German bank, KwF IPEX bank.
- Last CR, $10m @ 14c
- Risks
* Credit rejection from German bank: this would definitely cause a ST drop in sp but by no means be terminal to the company, as the project has an attractive 3.7 years payback period, modest finance requirements and can operate with high profitability, even under conservative HPA price assumptions (unlike, say, many gold and base metals projects). This would however delay production and possibly change the D/E mix. If the D/E mix tilts further towards E, while the sp is suppressed, this would result in greater dilution to the register.
* Sovereign risk: Malaysia is not Australia or Canada, however the approval process has been relatively expedient so far and there is nothing to suggest the company won’t be producing HPA by its earmarked timeline. Malaysian publicly listed giant, MAA Group Berhad (MAAG) have gone cornerstone investor for ATC. MAAG is an insurance, investment, credit and finance group.
* Lead time: it could be argued that 2019 is a relatively long lead time to production for the company. I would argue that many of the leading names in lithium and gold have similar lead times to production, or had so at the beginning of 2016, when their epic runs began. A lot of the money is made on miners prior to production, as financial, operational, sovereign, legal and environmental boxes are checked off. ATC are well advanced on some of these fronts. The remaining boxes to check-off are why we have an opportunity to invest at this price and not considerably higher.
* Execution risk: attracting and keeping the right personnel to construct and operate the plant, along with relationships with end users and developing new markets.
http://www.altechchemicals.com/sites/altechchemicals.com/files/presentation/Ann ATC ASX Spotlight Series Asia (Lodged) 25 Oct 16.pdf

BGD (ZNT)
- Allied healthcare roll-up play.
- A sector with significant tailwinds
- Proven mgmt, with experience executing similar businesses from startup to successful SME
- Latest $30M recompliance funding round attracted significant fund interest from local and overseas instos.
- The risk here is the same as with any roll-up and that is execution risk; bringing together disparate businesses in the same sector and exploiting synergies and economies of scale, market share. Roll-ups who get this right can end up like ONT. NVL has been another recent success story. Management plus the sector being operated in suggests they at least have a decent chance and in my view, are worth a hold in the spec portfolio. It will take at least 6 months and possibly longer, to see if the board’s strategy is taking-shape. I may hold strong or if I think potential returns are higher elsewhere on a R/R basis, I might sell, if things are progressing slowly.

https://hotcopper.com.au/threads/an...ual-general-meeting.3115391/?post_id=21352691

LPI
- My only lithium hold atm and continues to tick all the boxes, after a poorly managed $12m placement that has seen big overhang on the stock and weighed on price (38c CR; traded as low as 25c)
- If the lead time to production was a little shorter, I think LPI would have a much higher mc, however uncertainty over peak lithium pricing and where price will settle, once greater supply kicks-in, is possibly providing headwinds to some lithium hopefuls. I still feel its value is well above the current $25-30m EV. Will re-assess investment, either after, 1) previous highs are tested and gap filled at 46.5c, 2) company releases JORC upgrade in H1.
https://hotcopper.com.au/threads/sh...038588/page-134?post_id=20605511#.WGhkRRt942x

TMT
While this recent IPO has a vanadium project (along strike from AVL) about to be drilled in Feb, just as attractive in my view is the shell type structure of the company, extremely low EV and clear intention to be a tech-mineral company. The Cicero guys have nailed some big returns for investors over the last 18 months and they own a fair chunk of the register, with some other savvy investors in the T20. Only 25m SOI, $3.5m cash, so EV only ~$1.5m @ 21c. I suspect TMT will be trading at closer to 30c into Feb vanadium drilling, which would still only be an EV of $4m. Also confident that we’ll see some further attractive acquisitions to boost the sp: cobalt, graphite, lithium et.al. 2c -> 6c always seems “cheaper” and easier than 20c -> 60c but at 60c, the EV would be ~$12m (assuming ~$1m on vanadium expenditure and a decent second acquisition)
https://hotcopper.com.au/threads/ann-investor-presentation.3129188/?post_id=21486332#.WGhpBRt942w

Shells
SPI, CDT, IHS, ENB, BMG/OA, TMX

All of these shells, at a minimum, have directors with good skin in the game, a register with attractive names in the T20 and most have proven DMs running the show. I’ve taken all positions at or close-to directors/brokers, which is something to consider for anyone researching but not yet holding. Some can still be picked-up around the same price, others have moved a little. I wouldn’t regard any as currently expensive on a R/R basis. Remember.

Watchlist
Plenty of other stocks I track but these are on the starting watchlist for near-term price moves in Q1; or in some cases, taking opening positions for MT/LT holds, if the price is right.
Explorers with upcoming drilling/activity: AVL AYR RIR PNX AEE BOE APC MHC
Medtech: (either outright cheap, or cheap, based on H1 runway): MEB NTI ADR DVL IDT ITD
Life science: Pivotal 2017 results, either H1, or H2, with the expectation of frontrunning, leading-in:
LCT PTX FTT BD1
1AD (more a 2018 stock but watching, due to p’ship potential, fully-funded and Robert Peach connection)
Gold recovery: AWV GMD + all the leading majors
Tech: DUB HZR DTZ VRI WRR XTD SE1

Remember. All of the above are more speculative plays, where we need to be open to the idea of changing our mind quickly, as information is released and the market makes its judgement. The bulk of investment profits shouldn't be coming from these sorts of stocks imo

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Hi Anton. Love seeing this type of considered insightful post on the BT forum, great kick off to 2017.

I'm still in my holiday slumber, but surprised at LPI being your only Lithium hold, meaning you're out of PLH. Although some management changes concerned me, otherwise the PLH story is still unfolding as expected with technically price putting in a good base and ready to reward in 2017 and reasonable newsflow to come. You were well researched on this, so what have I missed? I'd appreciate your thoughts?

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