Closed Position in TFS Corporation

Today I sold down my position in TFS Corporation (ASX:TFC). 

My main reason for buying the company was for a company with very good long term prospects the share price had been hammered, and there were a lot of near term catalysts. I still believe in the long term prospects of the company (and continue to hold in my main portfolio), but the near term catalysts I listed when buying the company have largely played out.

New end market agreements have been announced, financial results have been announced, and all this years harvest has been forward sold meaning no substantial news post harvest.

The business has its risks which mainly relate to cashflow and debt now. In the long term I am happy with this. However, weighing up the near term catalysts and risks I have decided to lock in my 30% profit and look elsewhere. I held for a couple of weeks hoping for a short squeeze to play out, but have decided I've given it enough time.

All in all I look at this as a successful purchase and prudent sale given my one year horizon. 

I have a number of options I'm looking into and I'm close to purchasing a new company. I will write about these in due course. 

Prophecy International and TFS Corporation Limited release Half Year Report

Last week two companies I hold in the 20k portfolio released their half year reports. Both company's reports were very pleasing. The market's reaction however has been polar opposite.

TFS Corporation (ASX:TFC)

TFC's results were largely as expected, but there were a few crucial pieces of information that I think the market had flagged as key risks. Plantation sales are up 50%, cash EBITDA is up and royalties from Benzac sales has tripled. The market rewarded it with a 24% increase in the stock price.

The main highlight for me was that both this years and next years anticipated harvest volumes have been forward sold. This included new agreements with Chinese and Indian buyers for heartwood at comparable prices to USD4,500/kg of oil. I think this has reduced a key risk - the significant increase in sandalwood volume over the coming years will actually lead to cash generation. I have always thought this was a concern for the market, because otherwise the forward earnings can be relatively easily estimated and discounted (this isn't the only risk however).

Another thing I had mentioned previously was the amount of shorting of the stock that has been going on recently. This had reached almost 10% of the float. This equates to just over 30 million shares. That is a significant number of shares that need to be bought back at some stage. I think the rise on Friday was largely attributed to these shorters covering their position, leading to a potential short squeeze. There are still approximately 30m shares that need to be covered. I think this could lead to a significant rerate over coming weeks as shorters scramble to buy back shares. Very exciting times for the long shareholder after what has been some pain at the hands of these shorters.

Unfortunately, I decided not to complete my position in TFC for the 20k portfolio, but the 1,700 I picked up could produce a very good return. Especially if the short squeeze continues.

Prophecy International (ASX:PRO)

Prophecy's results were also relatively as expected, however, there was a key piece of information regarding already booked revenue that I assumed the market would reward. This was not the case though!

PRO's guidance for the year is $20m revenue. The half year produced 8m revenue. This was announced previously and some may have been concerned that this indicated they weren't on track to meet guidance. It should be noted guidance is 67% revenue increase for SNARE and eMite products, which even if missed will still represent very impressive growth.

The profit for the half year was subdued, but this was expected and management reiterated previous guidance. Guidance is for 8.8cps. At the current SP this is a forward PE of 16. That is for a company that will double earnings this year and likely continue at a significant growth rate going forward. PRO has the ability to leverage earnings without increasing the cost base. More sales staff have increased the cost base recently, but for a company growing at such a rate it is obvious why they went to do this. Growth funds more growth!

Interestingly, the commentary indicated that 3.8m of sales is already booked regardless of new sales in the half. That puts the revenue for the half at 11.8m. On top of this, a significant amount of existing revenue is reoccurring. Therefore, the new sales required to meet guidance aren't overly onerous. Remember when this report came out we were already two months into the second half. Management obviously like what they see from recent sales.

Management also updated the market on various initiatives such as product development and different sales avenues. This is positive and shows the company isn't resting on its laurels even with their tremendous recent success. To add to that a director has bought in the last few days (albeit a small amount relative to their 7.5m existing shares)!

Moving to the SP, the market has continued to hammer PRO. I put this down to a combination of profit taking (the SP was up around 600% in the past year) and PE contraction due to the global doom and gloom (I am of the opinion the world will not end and good companies will keep making money). PRO's trailing PE will all of a sudden be 16 come the end of June, and it has tremendous growth prospects ahead. I can't see the SP staying low for very long and one positive update could send it back up.

The long term investor in me unfortunately won out and I bought more during the sell off after the report came out. I figured the market would study up and realise it was a buy. This was not to be unfortunately! I will endure some short term pain, but the long term prospects have me licking my lips. I've missed out on this additional upside for the 20k portfolio (I don't want to be too overweight in any company), but I will add more to my personal portfolio if it keeps dropping. I should have used TA here, but the opportunity was too good to resist. I'd rather be in and not miss out on a significant rise given I am a happy purchaser at these levels.

All in all, a good report from both companies, and I'm confident there is significant upside to be had for my 20k portfolio timeframe and well into the future.

The Third Purchase

Yesterday I bought my first parcel in Prophecy International (ASX:PRO) for the 20K challenge portfolio. I've written previously about why I like the company, but yesterday's drop where the share price touched $1.50 after opening at $1.70 was an opportunity too good to pass up. The price could still drop further obviously, and I'll wait for a turn around in momentum before I complete the position.

At $1.50 the SP was 40% below its peak of $2.53. Based on guidance for this FY that's a a forward PE of 20. I made my purchase at the closing price of $1.58. The revenue growth target of 67% is on track, and this  growth momentum looks like it will continue. 

Recently, the company announced its revenue for the first half of $8m. This appears on track to achieve guidance of not exceed it slightly. Commentary was positive about the coming quarter.

Given current market conditions it is easily perceivable that the SP will drop further in the short term. However, removing this from our minds, the value on offer is very good for such a high growth, profitable, cash flow positive company. It is also relatively under the market radar. The current entry point looks like a very good one if we look a few years out. I believe due to the news stream in the next year it will also perform well for my 20K challenge portfolio.

The next few days of SP action will be interesting and if it continues to fall I will be grateful for the continued opportunity!

The $20,000 Stockmarket Project

I've set this blog up to document a challenge I have set myself. The challenge is simple: to see what I can turn $20,000 into in one year on the stock market.

A bit of background about my investing history

I have been investing in the stock market for just over three years. I invest primarily on the ASX and NZX, but also the US markets. I spend a considerable amount of time following the market and researching companies to invest in. My risk tolerance is high, and I primarily invest in small cap growth companies. I avoid investing in speculative companies that have no earnings. I focus on finding profitable companies that have the potential to grow their earnings considerably in the mid to long term and that are undervalued because the market has missed them. I live by a lot of Peter Lynch's investing principals. I have had no formal education in the stock market. I am an engineer by training. I believe this places me in good stead because I have no industry biases and use my background in analysing problems to uncover good opportunities.

The Plan

One year is not long for a long term investor. Therefore, I have to be very careful with the companies I choose. I will be choosing companies that have strong potential to increase their earnings in the next year and beyond. Picking companies that are undervalued is also crucial. I will need to be invested before the hype begins.

The combination of undervalued and good short term earnings growth potential (as well as long term) gives me the best chance of the market rerating the stock over the next year. Good earnings reports will awaken the market and most likely increase the stock price.

This obviously isn't as easy as it sounds. Companies with good growth potential are often overvalued. Therefore, finding these companies is not easy and takes a lot of time.

How I will break down the $20,000

In order to achieve a level of diversification, remove timing risk and not be too time consuming, I have decided to apply the following rules:

-the portfolio will consist of 4 companies

-I will buy 2 parcels of stock of each company separated by a week.

These two rules are baby steps in terms of diversification and eliminating timing risk. A diversified portfolio should have more than 4 stocks, and timing risk should be eliminated by buying over a number of weeks or months. In this challenge I do not have this luxury!

I hope by following this blog you will learn something. I will log my progress here for my own records and for others to get insight into how I am approaching this. Please feel free to comment!

Nothing on this blog should be taken as investment advice.