The Discounted Cash Flow model is one of the most useful and commonly used valuation methods for businesses. It gives the investor a Net Present Value (NPV) of all future free cash flows expected into a company.
But just how accurate is it? It models earnings growth as stable but in reality it is usually very volatile. I decided to test how volatile earnings can affect the values given by DCF models and whether crude estimates investors usually use to account for this are sufficient.
This is the first post of the AIM IT Project I announced last time. I’m starting off by reviewing Clear Leisure (AIM:CLP), I don’t intend to do an entire post for every Investment Trust in the list, but when one tops the list trading at apparently only 10% of Net Asset Value I can’t help but kick off the series with it.
This isn’t your typical Investment Trust which holds a portfolio of equities, it has a few concentrated majority stakes in a number of leisure businesses, which is why I feel it needs a whole post to explain it.
The Alternative Investment Market (AIM) of the London Stock Exchange (LSE) is a great place for investors to find bargains and mispriced securities. A lot of the companies have market caps too small for brokers or institutions to care about, which means small investors like us are left to competed with only each other. But it doesn’t come without its risks: stocks are illiquid with large bid/ask spreads, regulation is more relaxed than the main market and the stock prices are very volatile.
Games Workshop (LSE:GAW) is a company that I have had my eye on for a while. My brother is a big fan of their table top Warhammer fantasy games, and at one point I played the Warhammer Online game, so I am well aware of their products, and how loyal their fan base is. After a shock fall in sales for the first half of the year, and a failure to declare a dividend, the share price has plummeted 25% so the shares may offer good value.
Investors learn a lot of lessons from their mistakes, but that’s a pretty costly way to learn. One of my preferred methods of learning is from the mistakes of others, and that’s why I like to write case studies about investments that have been subject to interesting events.
One of these investments is Silverdell plc (LSE:SID). Investors in this company, including at least one professionally managed value investment fund, thought they were getting good value for their money, until they suddenly without warning lost their entire investment. Don’t think this can’t happen to you, learn from their mistakes and improve your chances.
I’ve made a couple of portfolio changes in the last couple of days. My holdings in JD Sports (LSE:JD) and Kentz (LSE:KENZ) are trading at around my estimate of fair value so I decided to significantly reduce the positions, by about 60%.
Barnes & Noble is making big losses on paper and looks pretty worthless at first glance, but headline numbers are masking two very profitable segments worth more than the current market cap. The company also has a 26% shareholder as its chairman and completely separate management teams for different segments, which suggests a separation of the businesses is a very real possibility.
In the second half the portfolio returned 29.8% beating both the S&P 500 at 15.4% and FTSE All share at 11% (both including dividends). I am pleased with the performance this year, which has totalled 49.4%. I wouldnt have expected to beat the market by such a margin in what has been quite a frothy year, with a lot of companies selling at full or over-valuations. I am also reluctant to give myself a pat on the back as there are many companies I didn’t pick that also did well, it was a good year to be a small cap investor.
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