REVIEW OF MY INVESTING YEAR, ARE THERE UNDERVALUED ASX SHARES FOR 2021?

Like many in 2020, it has been a year I would prefer to forget. Hence I am reviewing things a bit earlier before the year has even finished.

When wanting to forget the year, I am speaking more in terms of my social life in lockdown Melbourne for the most part. A trip to the letterbox was an exciting day out there for a while, or the supermarket for those into adventure tourism. As far as investing goes, I am probably happier with the year compared to prior years. I can’t believe I am writing this given all the economic damage that has occurred, it doesn’t seem to make much sense at times. But here we are, with the S&P500 comfortably ahead for 2020, and closing in on the peak of early September.

I almost completely took a break from blogging for the year, perhaps freeing up my time helped me. After years of low volatility in markets there was plenty to digest this year. I wanted to make my first blog post for a while now to focus more on my stuff ups.

One thing I noticed from reading the Livewire markets site this year is that it seemed every investor nailed everything! When markets were in free fall in mid-March there were loads of articles on those that apparently  cashed out at the top. In the second part of the year every article has been discussing their bargain buys they made at the bottom! Sir Harry Hindsight was out in full force in the investing media in 2020. As a rule of thumb I think we learn more about investing by looking back at losers compared with patting ourselves on the back for the winners.

Sometimes your winners can be dumb luck by the way (but investors usually assume it was skill!). On the other hand maybe a stock has shown a big loss, but you look back at your decision and would not have done anything differently. For example if you were offered odds of $3 in a coin toss and you took this up and selected incorrectly, it was still likely a smart bet. Assuming position size wasn’t ridiculously too large. It all depends sometimes.

My stuff ups!

Kangaroo Island Plantation Timbers Ltd (ASX:KPT)–For those that don’t know the company well you are probably aware of the bushfires on the island. As the name here suggests the company was very much affected.

I could say I was hit by an unusual event here.  Yet I can’t hide from the fact they had already just a year earlier been affected by some fires, a lot smaller that time. My regret here is not so much having a position, it is more about making it a bit larger than I probably should have. I got sucked into participating in some extra SPP shares because in the back of my mind I was confident in the short term I could flick them at a profit. I had the opportunity to flick those at a profit and didn’t go through with doing that.

I also wasn’t a big fan on management’s communications in dealing with trying to get the approval for the wharf. I thought it sounded a bit arrogant at times but I lazily brushed this aside and feel I wasn’t sceptical enough in general on the stock. Looking back management seem to paint overly optimistic presentations on timelines and how their future funding requirements look at times gone by.

At this point in time I would guess there is at least a $1 of very conservative asset backing value in the stock. I am holding for now as from those levels it has a bit of upside optionality and is uncorrelated to a large extent to general share market movements. My losses on this stock right now would be about 40% from my entry levels.

Aims Property Securities Fund (ASX:APW)  – Yes I hear everyone saying, why did you invest in such a value trap! Well I was always well aware that should other shareholders fail to pressure management into more action to address the discount to NTA, it would be a sluggish investment. That has been the case since a failed wind up vote, one which I have discussed previously on this blog. This stock hasn’t been as bad as KPT for me. I look at it in two halves. I actually got it very cheaply around 2013/14 from memory initially. In 2016 I decided to make it a bigger position by adding at around 1.25, and from there it has been average at best. From the highs though in late 2018 (where I didn’t sell any) it has been very poor.

I am not as disappointed with myself with this one. Whilst I had my doubts on management, I feel it wasn’t easy to predict the level of games that would go on in terms of ignoring the shareholders. Waiving the RE fee and simply reclassifying it in another area, calling an unnecessary meeting that duplicated another which added confusion to voting, and transferring a big stake a day before the meeting to a mystery party are extreme games indeed.

I reduced my position perhaps by about a third around late Feb / early March in the 1.40s when markets looked a little complacent re COVID-19 but still hold the rest of my shares. It is mainly exposed to office / industrial properties in Melbourne and Brisbane. The largest exposure is an office property with suggested flexibility for residential conversion. A tough sector but units trade at a huge discount and the activists haven’t left the stock.

Thorn Group Ltd (ASX:TGA)  – TGA what a wild ride. My cost was initially around 25c here in late 2019. This stock hit 3 cents on March 23rd! In my experience stocks that fall that far (remembering it was close to $3 in 2014), can be expected to continue to zero!

I actually sold half my TGA shares at 12 cents at the start of March. It was amidst a lot of sales I made late Feb and early March when I thought markets were complacent. Even though the shares quickly went to 3 cents, and the loss was used to offset some tax, I consider this an error. I also wasn’t brave enough to buy them back at such low levels. I don’t think I stopped to ponder what our government response might be. In hindsight the huge government stimulus measures helped TGA out of a bit of a mess to a large extent. For those unfamiliar with the stock a big part of it is the Radio Rentals brand. They are now closing stores and moving to a fully online digital business which saves a lot on costs. The substantial government benefits announced in March has assisted their customer base.

Clear signs that things may not be as bad as feared came when they released their June quarterly. It didn’t take long after that for the shares to double from 10 to 20 cents. After staring at my screen thinking I probably should be buying back those shares I sold at 16 cents for a while, I ended up paying 21 cents. (yes this has been frustrating!). That buy at 21 has at least been good thus far after also getting a 7.5 fully franked div.

I am still a holder and optimistic from this point it may end up that this stock in fact could be an outperformer when it is all done and dusted. Those are just words though and the facts are at the moment this is still probably a loser for me and I haven’t traded it well at all.

As I was speaking of shareholder games before, TGA has had some strange things going on lately. Thorn declared a request by shareholders for an extraordinary general meeting as “invalid”. Seriously, well the Supreme Court thought otherwise. I am not a great fan of a board dismissing the concerns of a group of investors who have put their hard earned at stake to own more than 5% of the company. Also the board’s decision to do a DRP on the special dividend hardly seemed like the natural thing to do.

I have voted FOR all resolutions for the upcoming EGM, i.e. to change the current board of directors. It is for Dec 3d, but proxy votes need to be in by December 1st.

NOT BUYING MORE MICROCAPS AS LATE AS IN MAY (Shaver Shop Group Ltd (ASX:SSG) and Redbubble Ltd (ASX:RBL) to name a couple) This still haunts me a little (OK a lot) so I might write about this in a future blog post! I regularly wear Redbubble t-shirts and facemasks and all that I think about now is the money I should have made on the stock but didn’t!

UNDERVALUED STOCKS ASX 2021?

Ok that’s enough discussion on my losers. In the spirit of trying to put 2020 behind us let’s try and finish on a more optimistic note.

Around this time of year in the past I have discussed a lazy portfolio. It has an “all weather” type diversified bias and also a bias of ASX LICs. I noticed a lot of readers of this blog do tend to sit on LICs for the longer term so thought it might be of interest.

The idea is I wondered what such an approach might turn out like if I only ever thought about the portfolio once a year and generally did nothing or perhaps one or two minor changes. Maybe one day I will get sick of looking at the stock market so this might be the way to go!

A couple of months ago I wasn’t really sure if I would keep blogging much so I did make one change in the comments section. I still wanted to see how the portfolio tracked and at the time I noticed it was getting forced to effectively cash up too much. This was due to past wind ups and also given Australian Leaders Fund Limited (ASX:ALF) was being pressured to return NTA back to shareholders.

So here I will quickly note the comments at the time of adding the Contrarian Value Fund Ltd (ASX:CVF). This LIC has fairly good risk / reward characteristics from this level going into 2021 in my opinion. It is pretty defensive at the moment holding plenty of USD cash. It is at a large discount, some tax losses to utilise and plenty of franking credits to continue a strong dividend stream. The board seems to be acting fairly in conducting a strategic review to address the discount. I have noticed GVF have been accumulating this one and expect them to work to get a good solution. One possibility might be a scrip takeover by GVF which would likely be a reasonably good outcome.

ASX LICs have seen some discounts tighten quite a bit in recent months. Perhaps the good bargains have passed but in general I think the discount tightening can continue from here. Lack of supply of new LICs and further pressure from activist shareholders are factors.

Here is how the lazy portfolio looks at the moment.

Please note with the above this is not financial advice and is not something to copy. Although I do hold many of these stocks it doesn’t represent how I invest anyway and is just a fun experiment to satisfy my curiosity.

For what it is worth (probably not much), the returns have been a bit better than the ASX300 benchmark, and much less volatile. It is hardly anything to get excited about though.

Personally I am still a bit too obsessed by the stock market to go down the more lazier passive approach. So far it still seems to be a worthwhile endeavor in terms of getting a bit more of a return out of the market. For those that are more interested in some of the flavour or “vibe” of the style of my trades I sometimes post on the Strawman site. I do occasionally invest on global exchanges so the site currently is just ASX focused. I do try and put a fair chunk of my ASX ideas when I can there and hopefully will keep it up. I also hope to do a bit more on the blog next year after being a bit quiet in 2020. All the market moves in 2020 were so wild such that there was plenty of stuff just in that to keep me busy.

In terms of the Strawman site I do warn though my profile might be a tad boring. It might put you to sleep if you compare it to others there shooting the lights out with concentrated portfolios of some of the glamour stocks.

It can feel a bit uneasy piling into stocks right now, but likewise also uneasy holding too much cash that earns next to nothing. I have tried a lot in 2020 to hold more than normal “cash equivalents” such as wind ups, takeovers etc instead of holding too much cash. I am still in that mindset now.

Sometimes it has been surprising some of the returns that can be picked up  relatively safely even after ASX LICs for example announce plans to address the discount. Market risk could be hedged to some extent if needed. I am not saying these are buys now, but some that spring to mind as examples of this in 2020 included Monash Absolute Investment Company Ltd (ASX:MA1), Australian Leaders Fund Limited (ASX:ALF), Ellerston Global Investments Limited (ASX:EGI).

Another point in terms of the drag of holding big piles of cash, you could look at gold just in terms of an alternative type of cash. I am not a “gold bug” and I get that equities are preferable in the long term.

One big argument against gold though used to be that it doesn’t produce an income. Yet if you favour bonds or cash over gold now, the income you get from that is hardly worth a lot. Who is confident down the track cash and bonds will revert back to giving you much yield even if rates do climb a little?

I remember though Mr T doing a lengthy interview on Bloomberg towards the end of the last bull market in gold. If this happens again soon please let me know in the comments section, things might be getting frothy in precious metals if that happens again.

Sharesight Discount

I calculated the returns in this blog post with the help of Sharesight. Readers of this site can save the equivalent of four months worth of fees when they pay for a yearly subscription for the first time if they use the following link you see below.

https://www.sharesight.com/au/valueinvesting/

Please note this is an affiliate relationship between this site and Sharesight so I will receive a small commission.

In 2020 I donated 30% of such commissions to the following charity, https://www.childsdream.org/. I shall do the same in 2021 and thank readers for your support.

7 thoughts on “REVIEW OF MY INVESTING YEAR, ARE THERE UNDERVALUED ASX SHARES FOR 2021?”

  1. Thanks Steve, always enjoy reading your blog posts.
    With the spare cash I too seem to be gravitating towards discount capture opportunities including EGI and MA1. Set up with a reasonable sized position in EAI on the expectation that they’ll announce some sort of solution to their discount in the not too distant future.

    Wondering what your thoughts are on the Evans & Partners stable – EGD and EAF have done well. The biggest lesson I’ve had to learn recently was counterparty risk and who your other fellow shareholders are (*cough* CD1).

    1. Hi Ben,

      I hold EAI, and yes it is possible they might copy the EGI solution to the discount but I am not so sure. EAI has a little bit more scale with larger AUMs and also I think an Asian equities LIC has a place for many portfolios. There isn’t a whole lot of them on the ASX, so maybe this will stay around. I did trim some EAI a few weeks back but they keep going up, the Asian tech stocks have been very strong this financial year.

      I don’t mind still holding quite a bit though even if the discount doesn’t narrow with this LIC, which is a bit rare for me to say. Their fees and track record are reasonable (although from here there is performance fees, a few years ago they were below the watermark). They have done accretive buybacks at reasonable volumes in the past which I like so long as the LIC isn’t too small to be begin with. There is also an argument that most investors should retain at least a bit of exposure to the region’s growth names as they are hugely successful companies now. Often it seems you pay a bit less for the growth compared to the US.

      Normally the problem with a LIC like this is as soon as it gets close to NTA after a good run, the manager can’t resist the temptation to issue more stock, often with dilutive raisings, to get on the locked in AUM gravy train of revenues. In this case I am confident this won’t happen anymore (they diluted holders in the past with underwriting options). That is because major shareholders City of London & 1607 Capital Partners have come on the scene. GVF also had about $3million in this at year end. I think they would oppose any such dilutive raisings.

      If they do go down the EGI route I don’t mind though.

      To be honest the Evans & Partners ones I have never followed that closely so maybe I am not the best person to ask. I thought I had a quick look last week at EGD and EAF but at a glance they didn’t stand out that much as an arbitrage with fund restructures, i.e. not that much in it compared with some seen this year? What do you think? Or are they worth taking a closer look?

      The CD1 ones I was going to have a close look but kind of gave me a headache so put it in the too hard basket. Volume is very thin though and I think it might be hard to get much colour on the underlying investments so I doubt I will ever bother looking at this. My gut feel though is they might work out ok from here because the discount is so massive, but would be hard to make these a big weight in a portfolio.

      Cheers
      Steve.

    2. Since you mentioned EAI here I shall just place a link here of a podcast with Mary Manning, it was from Sep 23.

      https://medicalmoney.com/

      I only just stumbled across the blog and podcast on the weekend and was listening to a few episodes. Have almost finished the Mary Manning one now as I write and I thought the interviewer does a good job and might be worth a listen if you own EAI.

  2. I hope you continue to blog – I enjoy your views.
    Wild ride in 2020? – absolutely! I have a few regrets re the portfolio this year, but have decided to hold – FLT anyone? Also been ‘tweaking’ the portfolio to better reflect where I want it to be through 2021.

    1. Hi Erica,

      Thanks and I am sure you are not alone with having the odd regret with the portfolio. I don’t have any views on FLT. Many years ago I found that my direct investments into larger well known stocks weren’t doing all that great in general. I started to feel those on the other side of the trade probably knew much more about them than me given so many analysts try to cover them. It is quite a contrarian one to punt on here. Another big company I was getting a little tempted recently on from a contrarian punt was URW. Was hearing a handful of investors I have followed making a case for it. In the end I have left it alone, but have tiny exposure indirectly I think with some LICs.

      Having said that I really hope that FLT do fantastically well from here. If that is the case it is probably a sign that things have gone well with a vaccine and international travel is opening up quicker than expected in 2021. That would make me happier so from that perspective I am probably already emotionally invested in the stock, no need for me to also buy the stock.

      Cheers
      Steve.

  3. It was a really good read and its cool to see you back Steve !
    it is very interesting about your book, also , I hope you are enjoying the end of lockdowns.
    CVF look pretty good to me , and i notice JYC have had a great run.

    1. Hi Peter good to hear from you, hope things have gone well for you also. Regarding end of lockdowns in Melbourne I just got back today from my first pub visit in a long time, first tap beer very nice indeed!

      CVF in hindsight has held too much of their portfolio in cash, but the concentrated little bunch of holdings they have had were perfect ones to own for the vaccine news the other night. JYC I think the AGM is on Nov 30 assume we will have a lot more colour on the recent trading period for them then. Recent divvy announcement was reassuring though and should hit the bank account soon.

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