Stada, Buffett and Trump (3 parts)

1. Stada and the Masochists

Last week, at Stada’s AGM, I claimed that Stada shareholders who support the current board must be masochists – a quote that promptly made it into media (e.g. Handelsblatt or Spiegel). You can find the full text (German) of my speech here. But lets start from the beginning:

Stada is a German generics company with horrible corporate governance and an activist investor (“AOC”) who wants to change the board. In many 100% free float companies, management and supervisory board don’t act as stewards of the shareholders money, but make decisions that only serve themselves. This is why I typically avoid investing in them. Stada is the epitome of a poorly run 100% freefloat company. The Former Manager Mr. Retzlaff, who built up the company, turned it into a vehicle to enrich him and his friends. He made millions in bonuses in years Stada didn’t perform; Retzlaff’s pension promises were in the tens of millions – among the highest in corporate Germany; his son entered the company straight out of university, was promoted to the board, earned millions and held responsibilities he shouldn’t have had within only 4 years working for the company. The list goes on an on.

Stada-AGM

Last Friday was the company’s AGM. The media coverage around the AGM was huge as everybody expected the final showdown between the current supervisory board and AOC. In my speech I criticized the corporate governance and urged shareholders to vote against the current board. It seems very obvious that Stada will create more value for shareholders if AOC takes full control, than it would if the previous system of poor corporate governance stays in place. Thus, shareholders were in a sense voting directly for the performance of the Stada stock over the next years. That lead me to make the masochist quote.

So how many massochists were among Stada’s shareholders? Here are the results of the AGM:

stada-ergebnisse

Unfortunately too many. Shareholders voted for 6 members of the board (all shareholder representatives, but not the employee representatives). The only big success was the dismissal of Dr. Abend (dismissing a chairman rarely happens in a German company and feels like a victory for good corporate governance). Mr. Oetker stayed on the board. The main reason is that many funds (even AOC supporters) did not want to exchange the entire board as they wanted some continuity. AOC lost with their two other candidates. This was in large part due to a technicality (proxy voters were not able to vote for AOCs candidates because of the way the vote was designed). So Dr. Abend is out, but AOC was only able to take one place on the board.

So what do we make of these mixed results, where AOC gained more control, but not full control? I assume one of the following will happen: Either AOC and its supporters will gain more control over time and lead the company into a long term restructuring / buildup. AOC talked about 1bn in EBITDA as a 5 year target – this would likely result in a tripling of the stock. I am a bit skeptical about this targets but do agree that there is a lot of potential in the company. Another option is a takeover offer. I believe there are many interested buyers for Stada and hope the new board will allow a due diligence. In this case I think the upside is 20 to 30% within the next year. I prefer the latter to happen, but am fine with both results and keep my long position in the stock.

 

2. Yefei Lu on Buffett’s Investments

My friend and former workmate Yefei Lu just released a book called “Inside the Investments of Warren Buffett – Twenty Cases“.

Yefei Lu - Inside the Investments of Warren BuffettIt was published by Columbia Business School and is available in bookstores now. The book takes 20 of Buffett’s most significant investments and analyses them from the perspective of an analyst, looking at the information available back at the time Buffett invested. While most books about Buffett are rather shallow and written for retail investors, this book goes deeper and offers some true value added. It took Yefei considerable time and effort to dig up all the letters, Moody’s manuals and Annual reports from 40+ years ago. I just started the book, but can already say it is a valuable addition for every serious investor who is interested in Buffett. On Amazon, you can have a quite extensive look into the book before purchasing it.

 

3. Trump Exposes Trump

Watch this. These 6 minutes are all you’ll ever need to form an opinion about Trump:

Trump is openly lying. He displays his ignorance with pride and shows again and again that he basically knows nothing about the world. Yet the more he contradicts himself and the more absurd it gets, the more he is celebrated by his supporters.

The United States is a country of 320m people. It has some of the greatest universities in the world and no shortage of brilliant scientists, business men, thinkers, philosophers and philanthropists. Besides all of this, the best two candidates to run the entire country are apparently Hillary Clinton and Donald Trump. Let that sink in for a second: 320 mio people and the best they can come up with are those two.

Why is it that a somewhat dishonest, populistic person and a complete lunatic who you can’t trust with anything he says were selected to run for president? The sad truth is that the average voter simply does not value intellectual honesty and integrity very highly. People simply digest what mainstream media serves them, and mainstream media is not interested in intelligent disagreements and nuanced points. What sells are black or white thinking, shallow populism and scandals. I aggree with Ray Dalio that society’s inability to have an honest, thoughtful disaggreement is one of the biggest problems in the world, and it somehow seems to get worse.

Update on Judges Scientific

Yesterday Judges Scientific held its AGM and warned the market about weak order intake. The stock tanked 25% but recovered to close at -15%. I had a call with the CEO yesterday evening and want to give you a quick update. Since I learned that critizism or negative information is best presented with the sandwich method, I will wrap the “meat of negativity” between two slices of “positive bread”:

 

“The bread on top”: M&A machine still working

Since posting my presentation in January, Judges made two and a half seemingly good deals:

  • CoolLED (acquired Feb 18th) – a manufacturer of LEDs for fluorescence microscop. This is a growing niche market as LEDs replace the tradictional mercury lamps. CoolLED adds ca. 10% to group EBIT and the price paid was ca. 4,5x EBIT.
  • DiaStron (acquired April 1st) – a manufacturer of test equipment for testing the properties of fibres, mainly hair (for the haircare industry). DiaStron adds ca. 6% to group EBIT and the price paid was ca. 4,6x EBIT.
  • In a bolt on acquisition FTT (Fire Testing Technology Ltd.) bought its competitor FIRE, which further increases FTT’s already high market share. The price was not disclosed.

The combined additional EBIT of those acquisitions is > 16% of current EBIT, so projected growth from cheap M&A is well on track.

 

“The Meat”: Weak order intake

Judges yesterday stated that it’s order intake after 20 weeks is still weak. As a result H1 results will most likely be negatively impacted – maybe the full year as well. This was pretty much all the statement said.

Last year, FY2015, also started weak but picked up after 10 weeks, so we are “10 weeks late” now. So should we panic? It is not a secret that Judges’ order intake can be erratic and we can always see a bad quarter or two. 2014 also saw weak order intake for several months until finally, in September order intake picked up. Judges ended FY2014 with a 3% organic decline. Maybe this year orders will pick up sooner, maybe later, maybe not at all. Neither me nor the company has any visibility.

Is there a company specific problem?
I dont think so. Competitor Spectris released a similar statement on the day of their AGM (last Friday) stating that sales in the first 4 months were down 4%, so they are also experiencing a weak market (Peers like Oxford Instruments or Halma have not yet reported anything for the start of this year). In addition have no reason to assume that anything is wrong with Judges’ businesses.

Is it structural, or just noise?
The answer is I don’t know, but assume it is a mix of both. On one hand I am not aware of any major negative change in government spending on a broader level in the last year. On the other hand we cannot ignore that organic sales growth has slowed down over the last years and we have now seen the third year in a row with a weak start.

I assume growth rates will be significantly lower than in the past, but have no reason to assume they are structurally negative – so I don’t see a reason to panic. However, I do take the risk of proplonged weak government spending very seriously and want to do another round of research on the development of university spending in Judges’ biggest markets. Unfortunately there is not too much good data available.

 

“The bottom bread”: Still high confidence in the management

David, CEO of Judges, was also in Omaha this year (together with his son and son in law – see picture below) so we had a chance to discuss the business while checking out the Berkshire exhibition. My confidence in the management is still high and Warren’s and Charlie’s example likely convinced David to go on for another 20 – 25 years ;-).

Omaha 2016: David Cicurel and Family

(I left out the picture where we were dressed as Heinz ketchup and mustard bottles, in order to not endanger anyone’s career)

 

Summary

If organic growth was gone for good and Judges would only grow by doing M&A, it would still not be expensive – but not a bargain either. However, for the moment I don’t have a reason to assume that. I’ll do some more research on government spending as soon as time permits.

Omaha 2016: More than a Gloriously Capitalistic Weekend

For the fourth year in a row I visited Omaha Nebraska to attend Buffett’s shareholder meeting. When the meeting started, a deep voice welcomed the crowd to a “gloriously capitalistic weekend” – and indeed it was.

Omaha-2016-Tai-and-Frank

But Omaha is more than just the woodstock of capitalism. It is a place where you can exchange ideas about investing, life and the world with hundrets of thougthful people. You can meet with fantastic small money managers, but also with big names who run tens of billions, such as Tom Russo, Mario Gabelli or Bill Ackman. Those guys are often surprisingly down to earth and open for a talk at the bar. Even a random encounter with Buffett, Munger or Bill Gates happens from time to time. If you are interested in investing, I can only encourage you to visit the Berkshire AGM at least once in your lifetime (or Buffett and Munger’s lifetime).

Anyway, lets get to the highlights:

 

The Brain – Use it or Lose it

I feel many people reach their peak intellectual capacity somewhen in their twenties, when they study or start out in their professions. Once they are settled in their career and know “how things work” they seem to be grateful that the painful brain work is finally over and happily go down a path of deteriorating brain power and mental  flexibility. To me this is a horrifying outlook.

For this reason my personal highlight was seeing Buffett (85 years old) and Munger (92 years old) once again defying the seemingly immutable “law of brain deterioration”. The clarity and depth of Buffett’s thoughts, the breadth of Munger’s wisdom (I hightly recommend his Almanac), and the humor they present it with , is incredible. This shows that a brain that is constantly challenged can stay remarkably fit well into its 90s – an outlook I find way more appealing than the one mentioned above.

 

Fighting Confirmation Bias

Munger made a comment about how seeing only one side of an argument is “immature and stupid”. This touches the topic of confirmation bias, which I feel is one of the most prevalent among people in general as well as among the value investing community.

We seem to have a very strong tendency to interpret data in a way that fits our world view. The list goes from investors “reading” investment books but only underlining the parts that confirm their beliefs, to atheists who can retell every speech of Dawkins or Hitchens about the evils of religion – without acknowledging any positive effects religion may provide but also religious people who rather cover their ears instead of allowing an open discussion about the basis of their beliefs, to vegan doctors who wrote books about nutrition, citing several hundred studies supporting a vegan diet, but don’t even mention the existence of studies indicating something else [No offense, Dr. Greger, I still think your book and website are some of the best sources of scientifically backed information on nutrition. For everyone interested: nutritionfacts.org] etc. Everybody loves to have a strong opinion, but nobody wants to put in the work to understand the other side of the argument.

The really great thinkers (Munger, Darwin…) seem to actively seek evidence that goes against their beliefs. This is true on a broader level discussed above, but also on an investment level (try making a short case for every investment in your own long portfolio). Only if you know your opponents arguments better than him or her, you really mastered a topic.

To say it with the words of Charlie Munger: “I still have a lot of ignorance left to work on.”

 

More and More Disruption

As we were discussing investment ideas, one question appeared way more frequent than in previous years: “What if the industry gets disrupted by … ?”

Whether it is electric cars, solar power, e-commerce, an increased accessability to supply chains in Asia or artificial intelligence (which, as we know from Elon Musk, may eventually kill everything).

I think these are legitimate concerns that investors have to take seriously. Innovation happens exponentially and the world is indeed moving faster and faster. So how to invest in a world that seems to provide less and less certainty?

A solution for investors looking for long term compounders may be to not avoid technology altogether but to seek companies that manage innovation well. I got this thought from a befriended investor who has a great track record. As an example he mentioned the seemingly stable business of parking lots – which may still get disrupted by self-driving cars / car sharing and on the other side Google, which seems to have a culture that helps the company to stay ahead of the curve.

Another option would be to move towards an investment style that doesn’t require very long term projections about the future (e.g. “deep value” or restructuring plays, that usually play out over a 3 year horizon).Even though I prefer hunting for great businesses and meeting great managers, I’m also happy to invest in the occasional restructuring play.

On a sidenote my current favourite stock in the latter category is Stada, a German generics company that was undermanaged for decades. Change was impossible as Stada’s shares have restricted transferability which allows management to reject any strong shareholders who want to take control of Stada. Now Active Ownership Capital, an activist fund from Frankfurt took on the case and is already making progress in changing the board. I know the founders of AOC and think there is a very high chance they will be successful. If they are, the upside will be more than satisfying; with very limited downside – even pre activists, the company was stable, profitable and trading at an undemanding valuation. AOC presents its case here.

 

Other Thoughts and Ideas

  • Australia seems like an interesting hunting ground – apparently some good companies got thrown out with the mining-bathwater. One of the most interesting ideas presented was Silverchef – an Australian leasing company for kitchen equipment – It was presented by my friend from Valueandopportunity who just released a blog post about it. It looks like a potentially great owner-run compounder – I encourage you to check it out: Valueandopportunity on Silverchef
  • Buffett stated that Reinsurance will be a worse business in the mid-term. Besides the low interest environment additional competition from hedge-funds that entered the field hurts the business.
  • Glassdoor was mentioned to me several times. It is a website on which employees can rate their employer. I haven’t really used it in my research so far but I think it makes sense to include glassdoor checks in my investment process – especially when researching peoples-business.
  • 3 Day Value Investing Program at Columbia: A friend just signed up to a 3 day value investing program at Columbia University in June (USD 7,000). I’m very curious to see how that goes.

 

To be continued… Part 2 will contain some investment wisdom from Tom Russo, Pat Dorsey and others.

Presenting Judges Scientific at Best Ideas 2016

The Best Ideas 2016 conference is today and I will be the first speaker in line (11:30 CET), presenting one of my most favourite ideas: Judges Scientific.

 

judges-scientific-slides

 

About the Conference:logo-best-ideas

ValueConferences are the biggest fully online value investing conferences. They are organized by John Mihaljevic who is a friend from VALUEx. He also writes the “manual of ideas” in which he presents stock ideas and profiles managers. For investors who are looking for new ideas these online conferences are ideal as:

  • they offer a wide range of high quality speakers presenting their ideas. Speakers range from very well-known guys like Howard Marks, Tom Russo or Guy Spier to often quite good younger portfolio managers who run smaller investment partnerships. The ideas presented go across all investment styles, market caps and regions.
  • are affordable and environmentally friendly, as one doesn’t have to travel, book hotels etc.
  • you typically get more out of it. At real life conferences I often find it hard to keep concentrated after a couple of hours of pitching. I typically end up just writing down very rough points and looking up the idea myself when I am back home.
    The only drawback is obviously the networking component. In this regard, live conferences obviously have more to offer. My personal favorites are VALUEx, Trani and our group of German speaking value investors who meet in Omaha before the Berkshire AGM.

 

About Judges Scientific:judges-logo
Judges Scientific is a London based acquirer of small niche market players that manufacture scientific instruments. The company fits into my “owner-run compounder” bucket and scores extremely well in both categories.

  • It has an excellent founder manager who is not only a good operator and capital allocator, but also a person I fully trust.
  • It has excellent compounding abilities: Over the last 10 years the company grew revenue by > 30% (> 20% per share) through a mix of organic growth at a very high return on tangible capital and M&A at cheap multiples.

For details please watch the video.