Evolution of a “Value Investor”

This post will not involve in depth company analysis, instead I wanted to catalog some things that have changed with my philosophy when it comes to picking stocks to invest in.  Recently, some good news was released on one of my top holdings that clearly displays my change.

I started purchasing Pivot Technology Solutions (PTG.v) in the summer of 2014.  The idea behind the investment was a cheap company with decent ROIC (though admittedly low margin), capable management and a large overhang in the capital structure.  There was a large amount of preferred shares outstanding that I felt were preventing the company from being properly valued by the market. The common shares are illiquid and well under $1, making it something that many institutions would ignore. Given who owned the common and preferred shares, it would make sense to do some sort of conversion of the preferred to common to clean up the capital structure. Management had mentioned several times that they had intended to do so.

I continued to purchase shares throughout the fall of 2014 as the company executed on operational promises to investors. There was still mention of some sort of conversion in the future. I was happy with management running the business and the focus on operations. I figured the conversion eventually happened whether organically or being forced by some sort of activist once the value of the business was made apparent.

At the beginning of March 2015, the company announced some good news:

  • company officially initiated a process to convert the preferred shares to common shares
  • announced a normal course issuer bid to repurchase. though many company’s announce this and don’t follow through
  • initiated a quarterly dividend starting in Q3 2015, annual yield at today’s price is around 10%

Old vs. New

The previous version of myself would have simply sold the shares on the good news and likely plowed the winnings into something that was “cheap” (likely one of my losers). I would put money into something the market doesn’t understand and likely a dinky little company that abuses the share price and struggles to execute. I would expand the numbers of company’s I own, which has two effects on the portfolio.

  1. Another company for me to keep tabs on, therefore increasing the demand on my time to maintain an understanding of yet another business with yet another management team.
  2. Increasing the number of company’s in the portfolio reduces the effect that the winners have on the portfolio as a whole.

The new version of me took a few days to reflect and reassess. I reviewed the business, the management team and what I see as the market’s expectation going forward. I have concluded that shares are still cheap, and I have recently increased my position.

Why would I sell a cheap company that is growing and shouldn’t need to dilute shareholders in the future?

Dean

Disclosure: The author is long PTG.v

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