Author Archives: Reperio Capital Research

Fortnightly Review February 18, 2018


Fortnightly Review February 18, 2018


Interesting Articles


The Psy-Fi Blog focuses on behavioral finance. The latest post looks at the recent stock market crash and action bias. (link)


This is a transcript of Warren Buffett’s interview with Financial Crisis Inquiry Commission. (Buffett_FCIC_transcript) A few key ideas came from the interview.


Warren Buffett’s (WB) ultimate indicator of the quality of a business is whether it has pricing power or not. “And basically the single most important decision in evaluating a business is pricing power. You’ve got the power to raise prices without losing business to a competitor, and you’ve got a very good business. And if you have to have a prayer session before raising the price by a tenth of a cent, then you got a terrible business.”


He also mentioned that he did not interview management prior to the investment. “I’ve also said many times in annual reports and elsewhere that one of the many, but with reputation of for brilliance in him gets hooked up with a business with a reputation of bad economics, it’s the reputation of the business that remains intact.”


The Bank of International Settlement studied the structure of China’s shadow banking system. (link)


The Economic Times profiles Piramal Enterprise and its pharma division. (link)


Chuck Akre’s Talk at Google (link), he is an insightful value investor. You can also view his discussion with Consuelo Mack on Wealthtrack (link). Mr. Akre’s investment approach is also in a Gurufocus article. (link) His three legged investment approach focuses on business quality, management quality, and opportunity for reinvestment.


The first leg has to do with the quality of the business enterprise, and we’re looking for businesses that earn high returns in the owner’s capital. We spent a lot of time trying to focus on what’s causing that better-than-average result, return on capital, to occur, and is it getting better or worse.


The second leg of the stool goes to the issue of the people who manage the business. And not only are they terrific managers, but are they honest and do they have high integrity? Do they see that what’s happening at the company level is happening identically at the per share level?

And then lastly, the third leg is the issue of reinvestment. We call it sometimes the glue that holds these together. That is, is there an opportunity that exists because of the skill of the manager, the nature of the business to reinvest what we presume is excess cash. To reinvest that in a way to continue to earn these above-average rates of return. And then to that, we apply our valuation overlay, which is our quantitative way of saying we’re just not willing to pay very much for it.


India stock exchanges pulled offshore data in an attempt to bring trading to India. (link)


McKinsey’s recent article Strategy to Beat the Odds (link) analyzes the people side of setting strategy. The article also contained some interesting insights on Economic Profit.


  1. Companies in the top quintile capture nearly 90% of economic profit created.
  2. Industry matters a lot with the industry driving 50% of your position on the economic profit curve.
  3. Mobility is possible but rare.


Investment Wisdom on Twitter posted a great quote from Warren Buffett “Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results.”


Baidu plans a US IPO of its video streaming unit. (link)


FT believes many Chinese companies owned by regional governments may be on the brink of default. (link)


The Heilbrunn Center for Graham & Dodd Investing has an excellent resources page on deep value investor Walter Schloss. (link)


Boston Consulting Group issues their finding from a recent study of CPG Supply Chains. (link)


GMT Research’s latest newsletter investigates window dressing in Asian markets. (link)


Value Venture accesses the true TAM of search engines. (link) It also posted its investment case for (link).


Deep Throat is bearish on Alibaba and believes it is a fraud. (link) The blog has been writing about Alibaba related concerns for some time.


Unfortunately, Punjab National Bank in India is facing losses from fraud. (link) The alleged perpetrators are related to the promoter of Gitanjali Gems. (link) Within India, the vast majority of bad loans are at state banks. (link) Bloomberg wrote an article on how the Reserve Bank of India is trying to fix the problem. (link) In 2013, another alleged fraud occurred in the jewelry sector. Winsome Diamonds defaulted causing losses at banks. (link)


The FT discusses changing consumer habits are posing to large food companies. (link)


McKinsey provides its view of the future of airfreight forwarders. (link)


SageOne Investments latest newsletter looks at recent performance in the Indian market. (link)

Fortnightly Review February 4, 2018

Fortnightly Review February 4, 2018


Interesting Articles


McKinsey wrote an article discussing their perspective on M&A in the Chemical industry. It includes an evolution of transaction multiples over the past few years. (link) The average deal multiple increased from 6.0 time EBITDA in 2012 to 10.0 times EBITDA in 2016.


McKinsey details the recent history of performance in the Chemical industry. (link) It mentioned superior performance came from industry concentration along with Chinese growth making it difficult for Chinese supply to keep up with demand. Since 2015, the industry underperformed due to fragmentation and slowing growth in China.


In my view, it is a commodity business with no barriers to entry where two things determine profitability operational efficiency and supply and demand. When China was growing rapidly supply could not keep up with demand allowing existing supply to earn abnormal returns. As soon as China started slowing and supply caught up with demand those abnormal returns were eliminated. Often abnormal returns lead to returns below the cost of capital as there is lead-time to bring new supply on stream. As demand slows new supply is still being built, therefore, supply can outstrip demand for some time as all the new supply is being finished. There are many variables but the lead-time for an oil refinery is estimated at 5-7 years.


McKinsey shares their perspective on how Chemicals companies can avoid the commodization trap. (link)


An older post by Tren Griffin at 25IQ on Buffett and Munger’s view of the discount rate (link) Credit Suisse wrote a report on modeling mean reversion in 2013. (link) The graphic below illustrates the average cash flow return on investment (CFROI).


The thought behind illustrating the graphic is the company must generate at least the average return in the industry therefore the discount rate should match the average CFROI of the industry. Other value investors use various rates.

  • In the Graham and Doddsville Fall 2014 issue (link), Wally Weitz uses a 12% discount rate.
  • Bares Capital mentioned in his interview with the Manuel of Ideas that he uses a 10% discount rate (link).
  • Akre Capital also mentioned in his interview in the value investing podcast that he uses a 10% discount rate (link) at that has been the historical return on investment of the US stock market.
  • Southeastern Asset Management uses a 9% discount rate (link).
  • Professor Bruce Greenwald of Columbia recommends a variable discount rate depending on the quality of the business; 7-8% for high quality businesses, 10-12% for average quality businesses, and 15% for low quality companies.
  • Bill Miller discounts at 6% due to low treasury yields.
  • Bill Nygren uses treasury yield + 450 basis points with a 300 basis point floor on the treasury yield.
  • Joel Greenblatt uses a 6% discount rate.


Using a historical returns on the US stock market the discount rate would be between 9-10%.


In Emerging Markets, stock markets have a much shorter history therefore a historical return approach may not be appropriate. An alternative approach would be to use a AAA bond yield as a hurdle rate. A long-term investment process should be focused on returns generated by the business rather than changes in valuation. If a normalized FCF yield plus a long-term FCF growth cannot beat a AAA corporate bond yield, it does not make sense to invest in an inherently riskier security.


Sophie Bakalar of the Collaborative Fund shares her thoughts on how to beat Amazon. (link)


REDEF wrote a great article on the potential evolution of Disney’s business model. (link)


Columbia Business School issued their latest Graham and Doddsville newsletter. (link)


Broyhill Asset Management’s last blog post is about certainty and uncertainty and the importance of understanding the limits of our knowledge. (link)


Saber Capital’s presentation for its Investing Talk at Google (link). I was unable to find any video related to the presentation. Included is an investment thesis for


@MineSafety10K created a repository for a number of investor letters. (link)


River Park’s Q4 letter includes a short thesis on CPG companies. (link)


Sage One Investments produces a thorough analysis of current valuations within the India. (link)


A well laid out bearish presentation on the US auto sector and Consumer Staples (link)


EM Growth is a historical premium to EM Value. (link)


Harding Loevner provides two examples of Japanese disruptors. (link)


A 4-minute video from McKinsey discussing The Power Curve of Economic Profit (link)


Bloomberg profiles the top performing Norwegian fund over the past five years and their investment thesis on Oil Services companies. (link)


Morgan Stanley’s 2017 primer on the Property & Casualty Insurance Industry (MS P&C Primer 2017)


Bloomberg highlights that there are less cheap stocks now than during the Dot Com Boom. (link)


Jana Vembunarayanan looks at Bajaj Finance. (link)


A GMT research report from 2014 investigates accounting fraud and red flags. (link)


An essay in American Affairs by Dan Rasmussen analyzes bad theories in modern finance. (link)


An article written by Graham Duncan explaining the investment game and the five different levels of the game (link)


Schroders’ 2017 Investment Study (June 2017 survey, link) The global average is a very high annual return of 10.2% over the next five years. Research Affiliates puts the All Country expected return (equity) at 2.4% per annum and Global Aggregate expected return (debt) at 0.5% per annum. (link)


AQR reviews the Shiller PE and expected returns. (link)


How Alibaba’s “new retail” disrupts JD’s World. Part 1 of 4 (link)


Interesting presentation by Hayden Capital on Incremental ROIC (link)



Recent Transactions


Keurig buys Dr Pepper Snapple. (link) The deal implies an EV/EBITDA multiple of 16.4 times.


Nestle backs away from Merck’s Consumer Health Unit (link).  Merck is seeking at least €4 billion or 20 times core earnings.

Fortnightly Review January 21 2018

Fortnightly Review Jan 21 2018


Bruce Greenwald and Judy Kahn’s HBR article “All Strategy is Local” (link)  In my opinion, Bruce Greenwald and Judy Kahn’s book “Competition Demystified” is a must read for investors. (link) I am a big fan of all of Professor’s Greenwald’s work on strategy and value investing. Some of his lectures at Columbia University are on Youtube. (link) You can also see an outline of his investment process. (link) Professor Greenwald’s approach to investing is unique and any investor should gain some knowledge from his resources.


Research Affiliates updated their expected return expectations with year-end data. (link) Research Affiliates has two different 10-year expected return models. The first is based on current yield and growth expectations and the second uses mean valuation to determine an expected return. The yield and growth model expected annualized nominal return is 6.2% with a 5% chance of 0.3% annualized nominal return and a 5% chance of 12.1% annualized nominal return. The 25% to 75% range is 3.8% to 8.6% annualized nominal return. The valuation dependent model adds another 2.0% annualized expected return from mean reversion of valuations. In both models, inflation accounts for another 2.2% of annualized expected return.


I am a big believer in a hurdle rate for any investment as it creates discipline in times of elevated valuations. Given the need to outperform the benchmark to add value, an understanding of the expected returns of that benchmark is a good place to start. The top 5% expected annualized nominal return is 14.1%. Given the low probability of the 14.1% return, the 15% hurdle rate used in my process provides a sufficient margin of safety over benchmark returns. It could be argued that the 75% nominal expected return of 10.6% under the valuation dependent scenario should provide a sufficient buffer especially if you are buying businesses that are much better quality than the benchmark.


Going forward, I will continue to use a 15% hurdle rate for deep value scenarios. For higher quality companies, my hurdle rate for a full position will be 12.5% and 10.0% hurdle rate for a smaller position size.


Fred Wilson on why network effects are crucial to software companies. (link)


The Waiter’s Pad delves into Michael Mauboussin’s framework for better decision making. (link) Mr. Mauboussin and his team put out a Base Rate Book to help with decision making. (link)


Guggenheim outlines their ROIC curve framework and the benefits of focusing on ROIC as a key input into valuations. (link)


Ensemble Capital wrote a blog post on the biggest threats to each type of competitive advantage. (link)


The Financial Times investigated Chinese civil servants lending to municipalities. (link)


Indian Value and Contrarian Investor provides Prof. Bakshi’s thoughts on position sizing. (link) The blog post includes Warren Buffett’s Principle of Underwriting in his 2001 letter and how it relates to investing.


A short article by McKinsey illustrates how companies with organic growth generate better returns. (link)


Kinsale Compass Fund Owners’ Manual is a good overview of many key tenets of value investing. (link) H/T Terminal Value


Fiat Chrysler’s Marchionne gives his view of the future of the automobile industry. (link)


Acquirer’s Multiple talks about Charlie Munger’s thoughts on why a high conviction best ideas fund underperformed and the problem with deep dive research. (link) It was a anecdote from Monish Pabrai’s talk at Google titled “ Intensive Stock Research Can Be Injurious to Financial Health”. (link)


India banned PWC from performing audits in the country for two years after failing to identify the fraud at Satyam. (link)


Nike is using reverse auctions with its digital agencies, which could lead to fee pressure. (link)


The asks why the bear case on China has not worked out? (link)



Recent Transactions


KKR sold a minority stake in Valinge, a Swedish click-floor specialist, for roughly 14 times EBITDA. (link)


Founded in 1993, the Swedish company pioneered the concept of floating click floors, which can be installed without glue. It also profits from selling the rights to its patents to licensees, mainly in Europe and the US but it is also expanding in China.


The Kristiansen family, the Danish owners of Lego, was the buyer. The family buys minority stakes in companies in Northern Europe with strong growth. It expects to hold Valinge indefinitely at a lower returns than a typical private equity fund. Thomas Lau Schleicher, the chief investment officer at Kirkbi expects to own a company for 10 or 15 years but does not expect to generate the returns that you can generate in private through a business transformation over a very short period.


US-based Boardriders, the parent of Quiksilver, agreed to a takeover of Billabong, the Australian surfwear company. (link) Boardriders will purchase those it does not own at AUD1.00 a share, a 28 per cent premium to the closing price of AUD0.78 on November 30 when the deal was first disclosed. Billabong, which had net debt of AUD148 million on June 30 2017 leading to an enterprise value of AUD380 million. The company has negative EBITDA and operating profit on sales of AUD979 million in FY2017 and averaged sales of AUD1,049 million over the last five years placing the EV/Sales multiple just under 0.4 times.


Nestle sold its US Confectionary business to Ferrero for USD2.8 billion valuing the business at roughly 3.0 times sales. (link)



Fortnightly Review January 7, 2018

Fornightly Review January 7, 2018

I hope you all had a wonderful holiday season.  Going forward this review will be every two weeks.


Interesting Links & Tweet

In September 2016, Michael Mauboussin and his team at Credit Suisse put out a base rate book with base rates aggregated on a number of levels. The book is a useful tool as the inability to forecast the future means investing is probabilistic. Understanding what the market is pricing in through reverse engineering a DCF with a focus on a key value drivers (sales growth, operating margin, investment requirements) will allow you compare to base rates.  If the market is pricing in high growth rate, persistence of margins, and low capital requirements, the stock is likely to be overvalued.  There are always a few outliers that beat the odds but placing money on a company with the hope it is an outlier is probably more speculation than investing. (link)


Aswath Damodaran released his annual data. A number of variables are aggregated at a number of levels including at the Emerging Market level. (link) The table below illustrates some key metrics for EM.


JAB Holdings recently offered RM3.18 per share. Oldtown (OTB:MK) manufactures and sells coffee in stores and through a 232 strong chain of cafes, mostly based in Malaysia with outlets also in Indonesia and Singapore. The key stats associated with the acquisition are below.


The transaction multiple provides a benchmark for valuation of similar companies. The main assumption is the private market acquirers are knowledgeable industry insiders that have done extensive analysis and wouldn’t have completed the acquisition without the acquirer achieving an acceptable return. What is an acceptable return is another discussion and different for everyone. Private market valuations also take into account a control premium. The table below illustrates the transaction multiples over the past five years for food and beverage mergers and acquisitions from Peakstone Group. (link)


Stout Advisory has an excellent overview of F&B M&A transaction multiples broken down by sector within the industry. (link)


German firm Star Capital produced a very well research article discussing the pitfalls of Short-term forecasts, market timing and EPS estimations often used by investors, particularly institutional investors. (link) H/T Hurricane Capital


In March 2016, Stalwart Advisors provided insight into its 3 Wave Framework to determine long term sales growth potential of a industry/company, which is well worth the time. (link)


“When management owns stock, then rewarding the shareholders becomes a first priority, whereas when management simply collects a paycheck, then increasing salaries becomes a first priority.” Peter Lynch H/T @MikeDDKing
Fritz Capital wrote a blog post discussing what to look for in a CEO and what to avoid. (link) A summary of the blog post is below. Fritz Capital’s twitter handle is @Fritz844 and is well worth a follow.


The best CEOs:

  • Have a strong customer focus
  • Identify strongly with the company they run
  • Are motivated by a deeper meaning rather than making money
  • Are patient
  • Are frugal
  • Think individual responsibility is more important than processes.



The worst CEOs:

  • Trust expert advice rather than think for themselves
  • Focus on size and profitability
  • Want to win against competitors rather than do what’s best for customers
  • Feel appearance is important
  • Impatient
  • Well-connected
  • Feel misunderstood and want to prove sceptics wrong
  • Driven by making money



This analysis is relevant for stock picking. The quality of the CEO can have a huge impact on R&D-intensive businesses such as in the technology and pharmaceutical industries, but also for commoditised businesses that typically operate on razor-thin margins. At any rate, good CEOs tend to have a strong focus on adding value to customers rather than on beating competitors. They also seem to identify strongly with the company – to have an emotional connection to the ups-and-downs of the business. They seem to be driven by a long-term mission rather than just trying to make a quick buck. And lastly, they seem to have patience to invest for long-term results.


Successful CEOs appear to be optimistic and believe that their work can have a major impact on the company and the lives of others. In contrast, worse-quality CEOs appear to feel that they are victims of circumstances out of their control, feel that they are entitled to fame and fortune regardless of their performance and are quick to blame others for outcomes relating to the business.



The short selling checklist of Feshbach brothers circulated around twitter sometime ago. (link) H/T @Wexboy_Value


Wall Street Converstations put together some links on the Feshbach brothers, which provides some background. (link)


The Cut recently profiled Oscar Olsson, an executive at H&M. (link) After a 50% fall, H&M looks interesting. We may do some research and write something on the name even though it is outside our typical universe due to the quality of the company and the general lack of opportunities.


The Intrinsic Investing blog of Ensemble Capital discusses pricing power. (link) The Intrinsic Investing blog is one of the best around and is a must read. I suggest going back through previous posts if you have not followed the blog. My favorite posts include The Death of (Many) Brands and How Moats Make a Difference.


FT wrote an article on the increase in Chinese share pledging. (link)


Columbia Business School put out its quarterly investment newsletter Graham & Doddsville (link).


Stratechery posted an annual review (link). The author Ben Thompson always has interesting ideas on business models and themes in tech and media that often transfers to other industries. wrote a good description of Dairy Farm (link), an Asian Retailer with four divisions:


  • Food (Hypermarkets and Supermarkets, 36% of 2016 net profit),
  • Health and Beauty (27% of 2016 net profit).
  • Home Furnishings (Ikea, 11% of 2016 net profit) and
  • Restaurants (14% of 2016 net profit)
  • The majority of the company’s locations are in Hong Kong and China.


H/T value and opportunity


Michael Mauboussin’s latest on How Well Do You Compare? (link)


Stalwart Advisors shares their insight on the importance of management. (link)


Bill Nygren discusses his investment approach during a recent talk at Google. (link)


The Federal Reserve Bank of San Francisco released a working paper titled The Rate of Return on Everything, 1870–2015. (link) H/T Hurricane Capital


Morningstar provided their best ideas in each sector. The focus is primarily the US. (link)


Todd Wenning joined Ensemble Capital and wrote about his investment process. (link)


Research Affiliates discuss the effectiveness of the CAPE ratio in the US and International markets. (link)


Jim Chanos and Kyle Bass discuss China in October 2016. (link)


JD’s CEO Richard Liu discusses the Chinese consumer and e-commerce. (link) H/T Craig Bujnowski


South Korean cosmetics company Amorepacific aims to expand in Europe. (link)


December 2017 issue of Value Investor Insight includes a few Emerging Market ideas. (link)


Jeremy Grantham of GMO shares his view of the market. (link)


Tom Fahy tweeted an interesting chart of Offshore Drilling Utilization (link).



Weekly Update December 10 2017

Weekly Update December 10 2017

Over the past year, I have been busy with various projects and a move back to the US from India. Starting in the new year, I will have more time to produce weekly updates on a consistent basis. Hopefully, the weekly updates add a bit of value. Feel free to let me know your thoughts.


Johannesburg Stock Exchange Pass


The Johannesburg Stock Exchange (JSE) was reviewed as a potential recommendation but it was a pass. I was attracted to JSE due to potential network effects combined with a business with all fixed costs leading to potential economies of scale and significant operating leverage. The company is currently trading on a FCF yield of 8.0%. A company with a very strong moat in the form of network effects and economies of scale along with top line growth at GDP and profit growth at a higher rate due to operating leverage should be trading at a higher valuation. If the concerns were solely macroeconomic, I would have recommended the company.


In 2017, ZAR X and A2X were awarded licenses to operate equity exchanges. In 2016, equity markets accounted for at least 60% of the company’s revenue. Operating financial exchanges are a technology business. The biggest risk is new entrants can replicate JSE’s technology at a much lower cost, as JSE technology platform has been slowly built over years and therefore is a patchwork legacy system. The ability to operate a technology platform at a much lower cost allows new entrants to undercut JSE’s pricing. In other markets new entrants have been able to gain share in what was once thought to be an almost rock solid competitive position. The BATS platform has achieved a 19% market share in US equities since entering the market in 2005 and 20% market share in European equities since entering the market in 2008. New entrants in South Africa should at the very least force JSE to cut prices and/or to upgrade its technology platform.  Given the fixed nature of the company’s expenses, any loss of revenue will flow directly to a decrease in the company’s operating profit.


Looking at valuation, assuming market share gains by competitors and/or price cuts in the equity division, revenues related to equity markets would decrease by 20% leading to a free cash flow yield and expected return close to 5.0%. Assuming competition has some effect and cancels out any growth, the company’s free cash flow yield and expected return is roughly 8.0%. Assuming competition is unable to enter to gain a foothold in the market and the company is able to continue to grow at 5.0%, the expected return is 13.0% per annum (free cash flow yield + growth).  The potential ranges for expected return are only estimates as it is difficult to forecast with any accuracy. Assuming, the highest return scenario has a 60% probability and the other two scenarios each have a 20% probability then the expected return per year is 10.4%. KfW is a German government owned development has a rand denominated bond expiring in October 2022 with a AAA rating, which offers a 8.272% yield. Given the potential risk a 2.0% additional annual return over a AAA rated bond is probably not sufficient to warrant an investment in JSE.




Given my focus on high quality companies, I often read Morningstar’s research and insights. Morningstar put out an article discussing company profitability and changing nature of moats (link)


Alpha Vulture, another value investing blog posted an investment thesis on Stalexport Autostrady, a company I wrote about earlier this year. My post on Stalexport Autostrady can be read here while Alpha Vulture’s post can be read here.


Francis Richon of Giverny Capital talked at Google. The talk is well worth the hour (link).  Giverny Capital’s letters can be view here. HT Value Investing World


Giverny Capital process is summarized below.


Financial Strength

  • ROE > 15%
  • EPS growth > 10%
  • Debt/profit > 4x


Business Model

  • Market leader
  • Competitive advantages
  • Low cyclicality


Management Team

  • High level of ownership
  • Constructive acquisitions
  • Good capital allocation



  • 5 year valuation model
  • Try to purchase at half of the estimated valuation in 5 years = IRR of 15%



The Council of Institutional Investors discusses variable interest entities (VIE) used by Chinese companies when listing in the US. (link) Chinese companies also use VIEs when listing in Hong Kong. Below is one of the most interest aspects of VIEs.


“The VIE structure could be deemed to contravene Chinese laws that restrict foreign investment in strategically sensitive industries. VIEs operate using contractual arrangements rather than direct ownership, leaving foreign investors without the rights to residual profits or control over the company’s management that they would otherwise enjoy through equity ownership. While VIEs have established themselves as common practice among U.S.-listed Chinese companies and have won some validation from market actors, the structure puts public shareholders in a perilous position. VIEs depend heavily on executives who are Chinese nationals and own the underlying business licenses to operate in China, introducing unusually significant “key person” succession risk. Aside from dual-class structures with limited shareholder rights in the Cayman Islands and other jurisdictions in which these companies are often incorporated, the VIE structures themselves create significant management conflicts of interest, complicating, if not foreclosing, the ability of outside shareholders to challenge executives for poor decision making, weak management, or equity-eroding actions. VIEs lead foreign investors to believe that they can meaningfully participate in China’s emerging companies, but such participation is precarious and may ultimately prove illusory.”


Due to the high frequency of financial statements being completely wrong, I no longer look at Chinese companies. Through the end of Sept 2017, our average recommendation is up 7.9% in relative terms on a USD basis. Taking China out of the picture, our average recommendation is up 30.8% in relative terms on a USD basis. The reliance on financial statements within my research process means it is best just to stay away when financial statements cannot be trusted. When the outcome is poor the result is clear but when the investment goes right, there can never be conviction so the benefit of a good outcome cannot be realized.  The combination means time is better spent elsewhere. If you are looking at China and concerned with fraud, GMT Research ( does a good job discussing Chinese companies and potential concerns. There is a wealth of free information on their site. One particular video Faking Cash Flows and How to Spot It is a must watch. A key point from the video is outside of China only 1% of companies above USD500 million meet GMT’s four indicators for cash flow fraud while in China and Hong Kong that rises above 6%. Another blog discusses the risks of investing in Chinese companies (link).


Peters MacGregor discusses its investment in Fairfax India (link). Peters MacGregor is an Australian investment firm that invests in undervalued portfolio of world-class businesses with dominant market shares and good growth prospects. It looks very interesting at first glance.


Kellogg Insights interviews Lou Simpson (link)


An interesting tweet by @ValueStockGeek illustrating the number of position in a value portfolio and standard deviation of monthly returns (link). As the number of position in a value portfolio passes 10 the benefits of diversification decreases. Joel Greenblatt did a similar study in his book You Can be a Stock Market Genius. Validea discussed his finding here.


Fundsmith Equity Fund published an Owner’s Manual, which is well worth a read (link). HT @ToddWenning


This following link is to Amazon’s Shareholder Letters from 1997 to 2016. Amazon Shareholder Letters Jeff Bezos 1997-2016


Clear Eye Investing put together a list of 15 questions to ask management (link). HT @HurriCap



Turk Tuborg & GMA Holding Position Sizes 11/6/2017

Turk Tuborg & GMA Holding Position Size 11/6/2017


Turk Tuborg’s position decreased 5.1% on May 12, 2017 when there was the first sales with a goal of reaching 2.0%.  The share price has increased and the stock is illiquid. The current position is 3.2%. There will be no further selling.

There is a similar liquidity issue with GMA Holding.  There will be no more buying and the GMA Holding position.  It is a 6.4% position.

Both are high quality companies that can be held for five years regardless of stock market liquidity.

The latest recommendation size of 6.0% was completed over 7 days.

Future recommendations will be in more liquid stocks. The lower limit for 6 month average daily volume will be USD100,000 in the most attractive of situations but more likely it will be above USD250,000 average daily volume.




New Research Report October 19, 2017

I have produced a new research report on a very liquid high quality retailer with seems to have a few competitive advantages and offers a 16.3% expected return using conservative assumptions. It will start with a 6% position size in our model portfolio.  If you are interested in the report please contact me at

GMA Holdings Position Size 10/2/17

GMA Holdings Position Size 10/2/17

GMA Holdings position size is increasing to 10.0% with Reperio Capital’s model portfolio as the company is an industry that has strong barriers to entry in the form of economies of scale from content creation costs. Profit growth and free cash flow growth within the industry should mirror GDP growth due to barriers to entry and a mature industry.  Currently, revenues, operating profit, and free cash flow are showing negative growth year on year due to one-off political advertisements last year.

The market currently values the company on a EBIT yield and FCF yield of 18.4%.  Assuming the company grows below expected GDP growth (6.5%) at 5%, the expected return is over 23%.

PC Jeweller & Anscor Position Size 10/2/17

PC Jeweller & Anscor Position Size 10/2/17

The company continues to execute with strong growth in showrooms leading to good growth in sales and profitability. PC Jeweller’s share price increased by 33% over the past four months leading to an increase in valuations. The company now trades on an NOPAT yield of 4.4%.


The fragmentation in the market points to a lack of barriers to entry. PC Jeweller’s gross margin similar to its competitors indicates its products are undifferentiated and customer are not willing to pay a premium. The company’s capital efficiency is also on par with competitors meaning capital efficiency is not the source of excess returns. Gross margin return on inventory tells a similar story. Meaning, operational efficiencies are the driver of the PC Jeweller’s excess returns. Its operating expenses averaged 4.1% of sales over the last five years lower than any other jewelry company analyzed.


Operational efficiency is replicable but it is very difficult as processes and values within an organization are difficult to change, therefore, PC Jeweller’s excess profitability should persist for some time. This is backed up by the ability of the company to maintain strong profitability during the latest industry downturn. Further, the organized portion of the segment accounts for only 30% of the industry so competition is currently primarily against weaker peers. Despite the likely persistence of excess profitability, a NOPAT yield of 4.4% requires a persistence growth over 10% into perpetuity with no working capital or fixed capital investment for an investment in PC Jeweller to meet the required rate of return of 15%. The PC Jeweller position is being sold.


A Soriano Corporation is also very illiquid. Reperio’s model portfolio has been purchasing shares since inception and it has only reached 0.5% of the portfolio.  There will be no futher purchases or posts until the position size changes. All recommendations will meet minimum liquidity requirements.

PC Jeweller FY2017 Results 6/1/17

PC Jeweller FY2017 Results Review June 1, 2017


PC Jeweller reported FQ4 2017 & FY2017 results. The company continues to perform well in a difficult operating environment due to regulatory measures. FY2017 saw demonetization and a stricter regulatory environment including high value purchases require a pan card, and imposition of an excise duty. The company also issued preferred shares to DVI Mauritus and Fidelity investments with a guaranteed dividend yield of 13.0% along with a conversion option. Despite, the regulatory environment PC Jeweller grew by 15.7%. Gross profit grew by 0.3% while operating profit increased by 12.1%.


The company’s gross margin declined as exports were a larger portion of sales. The table below illustrates management’s estimates of gross margin by geography and product within the domestic market. Based on the midpoint of the assumptions below gross margin should be roughly 13.37%.

The company improved capital efficiency with inventory only growing by 8.3% in the year. The slight decline in the company’s NOPAT margin combined with the improved capital efficiency saw ROIC increase to 24.7% from 20.9%.  A measure used commonly used in the retail industry is gross margin on inventory. Given the biggest investment within the Indian Jewelry industry is inventory, 57% of PC Jeweller’s 2017 assets was inventory. Since 2008, inventory has accounted for 58% of assets. The typical formula is gross profit divided by average inventory. We modify it slightly by subtracting interest expense from gross profit as the company purchases inventory using gold leases that comes with an interest component.


Unfortunately, the GMROI continues to decline. Compared to its peers, PC Jeweller is at the lower end of GMROI. This is particularly concerning when compared to Titan Company, whose GMROI is almost three times higher than PC Jeweller’s as the company generates a higher gross margin and pays less on interest.


The company’s declining and poor gross margin return on inventory points to a lack of pricing power.


PC Jeweller increased its showroom count to 75 from 60 in FY2017, while the square footage grew by 10% from 352,313 square feet to 386,923 square feet. The company’s average store size decreased to 5,159 square feet.


In FY2017, domestic sales per store and square foot decreased by 15.8% and 4.2%, respectively.


Since, the government took drastic measures in 2013 to stunt the growth of the gold industry, the primary growth driver for PC Jeweller is new showrooms.


The company trialed its first franchise operations and will continue to add additional franchises fueling growth with little additional investment requirements.


Overall, PC Jeweller continues to execute and is one of the most profitable and fastest growing companies in the Indian jewelry industry due to the strength of the company’s management and focus on efficiency. Management is one of the most innovative in the industry with many initiatives not seen in the industry. The company is trying to double its showroom footprint over the next five years. Despite the strengths of the company and management, government is continually bringing new regulation to the detriment of the industry. Additionally, the industry is fiercely competitive with evidence pointing to no barriers to entry. As discussed in a weekly commentary, the jewelry industry evolution in more developed countries points to no barriers to entry and a compression of profitability towards the cost of capital.


Given our research on industry evolution, our base case involves elimination of excess profits by the end of the terminal year as competition intensifies. PC Jeweller is able to grow by 10% over the next five years before fading to 0% terminal growth leading to an estimated annualized return of 2.6%.


The optimistic scenario assumes the company to grow its sales by 15.0% over the next five years inline with PC Jeweller’s target of doubling its store count over the same period. In the terminal assumptions, there is assumed to be continued grow of 2.5%. Also, the company is not impacted by competitive forces allowing the company to maintain its profitability leading to an estimated annualized return of 25.4%.


The pessimistic scenario assumes no growth and immediate decline in profitability as well as no excess profits in the terminal assumption as competition impacts the company.  The estimated annualized return under the pessimistic scenario is -4.0%.


At current valuation levels, the risk rewards is no longer drastically in our favor and a sustained continuation of the company’s excess profits is needed to justify much higher valuations. We will cut our position size to 2.0% as long as the share price is above INR450.