Dec 14, 20243 min read

Newsletter - December 14th, 2024

Dear Reader,

Attached is a recent list of stocks that passed value screens (e.g. below net current asset value, below tangible equity, etc.) but don’t meet our investment criteria - and our reasoning.

This may help you avoid some ‘value traps’, and stocks that aren’t sufficiently attractive compared to opportunities available today.

For reports of stocks that pass our quantitative and qualitative standards:

Join Here

Adrian Frost - Equity Income Strategies

Adrian Frost manages the Artemis Income Fund and has outperformed his peers over the last two decades. Notes from a September interview below:

4:30 Dividend is an outcome of cashflows

Focus on cashflows, which is the source of dividends - not dividends alone. Try to gauge cashflows over the next 3-5 years - as this will determine your results.

We focus on getting value in hand - and growth as a bonus.

At 28:45, Frost mentions his fund has an average free cash flow yield of 7.5-8% and dividend yields of 4% - providing a good margin of safety. These are generally minimums that we require in our investing.

7:30 Five years

Five years is a reasonable timeframe to judge the merits of an investment process. Individual investments may not work out - but the investor needs the patience to give value strategies the chance to prove themselves.

12:30 Topping Up

When rebalancing positions, consider asking if you feel "hotter or colder" about your investment rationale.

We tend to refer to our reports, and think about significant developments since then to make this decision.

13:00 Fully invested

If you think stocks (as a group) are going to do well over the next 20 years, it doesn't make sense to fool around with timing. As long as you can live off the dividends (or other income), it's probably best to stay fully invested with the ideas you have.

If you have a new idea, sell out your weakest position. This has the additional advantage of maintaining portfolio discipline, and ensuring only the best ideas remain.

13:30 Holding periods

On a related note, don't hold onto your losers indefinitely. Generally if it's underperforming after two or three years, and no longer qualifies as a fresh purchase - it's probably best to sell out. But you do need to give adequate time (the two to three years) for value stocks to play out.

22:15 Buybacks

Buybacks are at their highest levels in UK history. When shares trade below their intrinsic value, remaining shareholders get a bigger piece of an undervalued company i.e. more cash flows per share.

In many 'new economy' industries, capex is not a major factor. In these cases, most reinvestment goes through the income statement (marketing, data scientist salaries, etc.). This leaves more room for buybacks.

Another interesting observation is that if a company maintains the same nominal level of buybacks, it's buying back a bigger % of the company every subsequent year.

27:15 Getting seduced by valuations

Searching first for cheap valuations could lead to confirmation bias as an investor may presume it's cheap despite its problems - potentially leading to incorrect judgments.

We can be guilty of this and it's important to be aware that companies sell cheaply probably for good reasons - and evaluate the reasons carefully.

33:00 Don't retire; Continuous learning

Retiring from investing is probably a mistake as you lose the practice of thinking about new developments, and the network you've formed over a career.

Value investors also tend to live long lives on average (it's probably the lack of stress - if you're not managing other people's money).

For reports on the best investment values in stocks worldwide:

Join Here

Wish you an excellent week ahead.

Newsletter - December 14th, 2024

Dear Reader,

Attached is a recent list of stocks that passed value screens (e.g. below net current asset value, below tangible equity, etc.) but don’t meet our investment criteria - and our reasoning.

This may help you avoid some ‘value traps’, and stocks that aren’t sufficiently attractive compared to opportunities available today.

For reports of stocks that pass our quantitative and qualitative standards:

Adrian Frost - Equity Income Strategies

Adrian Frost manages the Artemis Income Fund and has outperformed his peers over the last two decades. Notes from a September interview below:

4:30 Dividend is an outcome of cashflows

Focus on cashflows, which is the source of dividends - not dividends alone. Try to gauge cashflows over the next 3-5 years - as this will determine your results.

We focus on getting value in hand - and growth as a bonus.

At 28:45, Frost mentions his fund has an average free cash flow yield of 7.5-8% and dividend yields of 4% - providing a good margin of safety. These are generally minimums that we require in our investing.

7:30 Five years

Five years is a reasonable timeframe to judge the merits of an investment process. Individual investments may not work out - but the investor needs the patience to give value strategies the chance to prove themselves.

12:30 Topping Up

When rebalancing positions, consider asking if you feel "hotter or colder" about your investment rationale.

We tend to refer to our reports, and think about significant developments since then to make this decision.

13:00 Fully invested

If you think stocks (as a group) are going to do well over the next 20 years, it doesn't make sense to fool around with timing. As long as you can live off the dividends (or other income), it's probably best to stay fully invested with the ideas you have.

If you have a new idea, sell out your weakest position. This has the additional advantage of maintaining portfolio discipline, and ensuring only the best ideas remain.

13:30 Holding periods

On a related note, don't hold onto your losers indefinitely. Generally if it's underperforming after two or three years, and no longer qualifies as a fresh purchase - it's probably best to sell out. But you do need to give adequate time (the two to three years) for value stocks to play out.

22:15 Buybacks

Buybacks are at their highest levels in UK history. When shares trade below their intrinsic value, remaining shareholders get a bigger piece of an undervalued company i.e. more cash flows per share.

In many 'new economy' industries, capex is not a major factor. In these cases, most reinvestment goes through the income statement (marketing, data scientist salaries, etc.). This leaves more room for buybacks.

Another interesting observation is that if a company maintains the same nominal level of buybacks, it's buying back a bigger % of the company every subsequent year.

27:15 Getting seduced by valuations

Searching first for cheap valuations could lead to confirmation bias as an investor may presume it's cheap despite its problems - potentially leading to incorrect judgments.

We can be guilty of this and it's important to be aware that companies sell cheaply probably for good reasons - and evaluate the reasons carefully.

33:00 Don't retire; Continuous learning

Retiring from investing is probably a mistake as you lose the practice of thinking about new developments, and the network you've formed over a career.

Value investors also tend to live long lives on average (it's probably the lack of stress - if you're not managing other people's money).

For reports on the best investment values in stocks worldwide:

Wish you an excellent week ahead.

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