A review of stocks profiled, but not bought

As an investor you spend most of the time researching and evaluating the stocks you own or want to buy. Less time, or even no time, is spent analyzing the stocks you didn’t buy, or the stocks you have sold. This is also for me the case. To rectify the situation a bit I decided to look back at the stocks I researched and wrote up on this blog, but didn’t buy for various reasons. I haven’t included returns from dividends in the table below because I’m lazy, but I don’t think that would materially alter the picture. Only the stocks profiled in 2012 and earlier are included to the give market some time to deliver a judgement.

Overview of the return of the stocks profiled but not bought

Undecided

Most of the stocks in this list got on my research list because they looked cheap so it shouldn’t be a surprise that the performance of the group is on average pretty good. But results are just one part of the equation, what really matters are the reasons why I didn’t buy. Not buying a stock because it’s just to complicated to understand the value is in my opinion always a good reason no matter how it performs afterwards. GKK falls in this category: I thought it looked cheap, but I simply didn’t understand the CDO assets.

Some other names on this list, IMOS for example, were also put in my “too hard” basket, although I feel like I maybe should have been able to see the value. RSE was my first encounter with a commercial property company. Knowing what I know now I think I would have bought it, but if you are for example unsure about how much leverage is prudent I don’t think it’s a bad decision to walk away. But maybe I should have worked harder at figuring out how much it’s worth.

For some stocks it’s even with hindsight hard to know if you made a mistake by not buying it. CMMCY was a sketchy Chinese stock, but also one with a lot of hints that it could be real. I knew that if it would be real the return would be great and I even anticipated how likely it was that the CEO would take it private. I honestly have no idea if this was a mistake or not. It could have gone to zero in an alternative universe, but I might also have been a pussy. 

More sketchy companies

I’m very glad that every single stock that performed terrible is in this list, and not in my portfolio. DSM.V and AAB.TO are resource companies, and I didn’t buy these because I thought management couldn’t be trusted despite the big discount to NAV. Obviously the decline in precious metal prices didn’t help these businesses, but it seems that some sketchy transactions didn’t help either. SND.V is another name in the resource sector were I saw at best and average company with a very promotional management while others thought it could be the next big thing.

LFI.L has done pretty well to my surprise. Didn’t really think this was a viable company, but I was probably wrong. Haven’t followed it, so not sure if anything has changed the past year, but it’s certainly up a decent amount. CTLE was never a serious idea. It is/was an obvious pump-and-dump and predicting that it would go to zero didn’t take much, if any, skill.

Biggest mistake

I think my biggest mistake was probably not buying AAA.AS. This was a private equity fund trading at a big discount that was liquidating and buying back large amounts of cheap shares. I thought I would be able to pick it up at a 50% discount because it often had traded in that range in the past, but it never became that cheap again. I guess that in a sense it’s positive that one of the stocks on this list that I wanted to own the most is also one of the best performers, but that’s not going to buy me anything… It would have been a great deal at a 40% discount too, but I was anchored too much at the higher historical discount.

Conclusion

This list is obviously a very limited sample, but I do think it’s encouraging that the average performance of these stocks is lower than my portfolio while the variance in the results is a lot higher. A lot of names on this list didn’t make it in my portfolio because of concerns about leverage or the quality of the business, and that’s reflected in the results. And the big question is how this group would have performed if we would have had another 2008 instead of gradually rising markets: that would have been the real test.

It also shows that sometimes the best returns can be found when the stock is so ugly that even for me it’s too hard to buy, and that’s a though balancing act. As a value investor you often buy ugly companies, but you also have to be able to sleep at night. I know there has been some research in net-nets that suggest that buying companies that are actually losing money generates higher long-term results than buying profitable net-nets. MEAD might be a good example. I thought it was a melting ice-cube, and it seemed that this was true, until multiple bidders emerged to take it over. It would have been a roller-coaster ride though.

I think that one of the most important things in investing is having the conviction to stay with your strategy when things go bad, and that’s why having a certain level of quality in your portfolio is a good idea. I know that things will probably turn out alright if I buy something cheap with a long track record of profitability, and I don’t know if I will be able to do that if I’m basically just buying the biggest pile of crap I can find.

Disclosure

Not long anything mentioned in this post

9 thoughts on “A review of stocks profiled, but not bought

    1. Alpha Vulture Post author

      I let other people find them :D. I follow a lot of blogs, follow people on twitter, I read what (some) fund managers are doing, I discuss stocks with readers and just occasionally I stumble on something myself when I look at sec filings or run a screen.

      Reply
  1. Anonymous

    This is not meant as an insult though it may come off as such, but does this list (showing that two-thirds of the ideas you rejected ultimately performed superbly) make you wonder if your excellent returns over the past 1.5-2 years are just artifacts of a market that has essentially gone straight up during this period, with cheap credit making sure that M&A deals close (your arb ideas with extremely positive total IRR)?

    How is your performance compared to the S&P?

    I’m asking this in part because I started trading in 1997, earned absurd returns for a time, and then learned the hard way that my supposed alpha was actually beta.

    Reply
    1. Alpha Vulture Post author

      Absolutely a fair question, and the answer: time will tell. I obviously think that I’m following a strategy that will lead to out performance, but I’m to first the realize that a huge amount of luck is involved in short-term results and I’m absolutely not convinced that I’m adding alpha! But the only way to know if you can generate it is to try, and create a long track-record (that imo should include both a bear and bull market).

      I don’t really track my performance against the S&P because I invest globally, but against the MSCI World Index I’m doing pretty good since starting the blog. You can find some performance numbers in my latest half yearly portfolio review (post can be found in the July archives). I should also add that the merger arbs that I have participated in don’t have a huge impact on the positive performance. The positions are almost never big, and while the IRR’s are high the absolute returns are often not that big. Haven’t really calculated how big the impact of these deals is on my performance though, but don’t think it’s more that a couple of percentage points.

      Reply
    2. krullebol

      I think it will be interesting to see if the fraction of stocks that really suck (1/3 in the rejected list) is much lower in the accepted list. It might be worth it to reject a lot of good stocks, if that same process also rejects the junk.

      Reply
      1. Alpha Vulture Post author

        Yeah, going to take a long time before we get a sample size that’s big enough to observe if that’s really what’s happening. Just a matter of time of course before something in my accepted list goes down the drain.

        Reply
  2. Michael

    I looked through your posting history, and the biggest loser on the list, CTLE, you posted as an example of a stock that you thought was terrible, so you should probably take that huge loss out of your number, imo.

    Regards,
    Michael

    Reply

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