How is an investor who makes his money from the "capitulation point" faring?
Today's featured investor specialises in capitulation point investing. In other words, he invests mainly when all seems lost, but he thinks a company has a fighting chance of turning things around.
When I took a look at a number of portfolios from people who make their living from investing late last year, one of the most interesting of the portfolios featured was that of "Jack" who buys at what he perceives to be the point of capitulation.
Jack is 50 with financial commitments to his ex-wife and their two children. He runs his own small business and isn't totally reliant on his investing returns for his living. Nevertheless, his portfolio would easily be big enough for most people to live on, if it was invested in relatively safe high-yielding investments.
A basket of basket cases
But it isn't. Instead, it's mainly invested in what many people would consider to be basket cases where dividends are often a memory.
Specifically, Jack invests when he believes the book value and/or trading prospects mean a company has a better than 50-50 chance of survival. He then sells when he perceives a reasonable value to have been reached. As his strategy concentrates principally on shares in their death throes, that "reasonable" value can often represent a multi-bagger from Jack's buy price. Consequently, he's enjoyed many multi-bagging successes and many 100% losses over the years.
This investor is content to stay mainly in cash for long periods of time, but severe downturns tend to awaken this hibernating bear and stir him into action, as we shall see later.
Home Retail Group
When we last visited Jack in early December, his largest holding was Homebase and Argos owner Home Retail Group (LSE: HOME). He's now out with a near 50% profit in a matter of a few months, and is weighing the prospect of getting back in after Home's recent sharp fall back to the level around which he first bought.
"I think Home is worth somewhere around £900m or 110p a share," he says. "The final results earlier this month were disappointing, but the balance sheet and continued profitable trading in lean times were encouraging. I need to look closer, but it's getting tempting again."
Lloyds Banking Group
Jack is still showing the patience of Job with the old black nag Lloyds Banking Group (LSE: LLOY), whose shares are little changed at 27p since he bought in last November at 25p. He sees the bank's shares as being worth "around three times as much during more normalised market conditions, if we ever get to see them again!" He sees this as a "buy and forget" investment.
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PV Crystalox Solar
Jack is delighted but not at all surprised with developments at PV Crystalox Solar (LSE: PVCS). Last week's announcement that PVCS would see approximately €90m realised as compensation for the termination of a long-term wafer supply contract caused the shares to double overnight.
Jack bought in at 5p late last year citing the solar power manufacturer's longer-term turnaround prospects and deep discount to book value. He sees absolutely no reason to sell at 8.8p as the company is still at a discount to its (effective…) cash.
"The company has been doing the right things to shore up the balance sheet. And further out, I'm sure the industry will settle down, so wafer prices should gradually begin to recover," he says.
At the other end of the scale, we have Game Group; a disaster for many investors including Jack. The company went into administration in late March.
But this is all part of the capitulation investor's game. "You simply have to accept situations like this," he says. "The fact is that Game was a very high-risk punt when I bought in at 9p. Things could have gone the other way, but suppliers lost confidence in its ability to pay up -- and Game's game was up. You can't be a retailer without suppliers."
Jack is pleased with developments at Inland Homes (LSE: INL) and happy to hold the shares he bought in the depths of the 2009 slump at 6p, having sold half when they doubled.
The shares are now 17.6p valuing the developer at £32.2m. Jack doesn't see a good reason for the shares to be valued any less than the net asset value of over 27p; a value which could see an increase thanks to the company's planning application for its development at Poole and its potential future share of profits from its Drayton Garden Village project in Middlesex.
Further down the Jackfolio capitulation list are Royal Bank of Scotland (LSE: RBS) and Thomas Cook (LSE: TCG), both of which are "still sitting there" not having moved a great deal since his buys.
Jack bought into Foolish favourite Aviva (LSE: AV) last week at 265p, which he admits isn't his usual basket case, "but the combination of a discount to book value, 10.5% yield and price-to-earnings ratio under five were just too tempting to miss".
He also bought into struggling accountancy firm RSM Tenon (LSE: TNO) at 5.3p this week which he would like to stress "is a complete punt on recovery and could easily go either way as there's no cash or asset backing to speak of".
So what do you think; will Jack's contrarian approach bear further fruit from here?
Let me finish by adding higher-risk shares such as the ones "Jack" bought into his portfolio can provide superb returns -- if things work out! If his investing style interests you, then I feel you'd also like this special report:"Ten Steps To Making A Million In The Market". The report is free and is for ambitious investors only!
Further investment opportunities:
> David owns shares in Lloyds Banking, PV Crystalox Solar, Inland Homes and Aviva. He doesn't own shares in any of the other companies mentioned.