Small Simple Stocks

Private Investor, ex-COO. Simple stock pitches from an operator's perspective I No fancy strategy I EU caps I DMs open

[Small Simple Stocks @SmallSimplStoks]

1/ Simple, clear stories led by focused operators. That’s the set-up I look for. A thread on investing in small, simple stocks.

[Small Simple Stocks @SmallSimplStoks]

7/ That's it: a well-managed concession player with secured prime Greek assets for 25 years, at reasonable price, replicating a playbook proven many times abroad, but with a country risk you have to live with.

[Small Simple Stocks @SmallSimplStoks]

GEK Terna. A Greek concession player, executing the proven Vinci $DG/ Ferrovial $FER playbook in a rare tailwind (the Greek infrastructure super-cycle). With an inflation-linked concession annuity now as a core, a transformative Hellinikon kicker landing in 2028, led by a capital allocator who sold the top of renewables and redeployed into 35-year toll roads. ~€5B market cap, €4B of revenues, 8% operating margin. What we like, keeping it simple

[Small Simple Stocks @SmallSimplStoks]

6/ What you have to believe for this investment to work:
- Greek political and fiscal situation will sustain: a reversal of Greek cost of capital is likely to impair GEK valuation immediately.
- Anti-trust retaliation will be limited: GEK now controls 85% of every km driven on Greek toll roads.
- No strong evidence of bribery / collusion will arise. History of highways concession attribution is littered with such cases, but for all we know, the attributions of Attiki and Egnatia were done properly with competing tender offers from multiple consortiums (of which Vinci).

[Small Simple Stocks @SmallSimplStoks]

@AC__research Ahah yeah I figured the Australian listing trick, well done! Wish all the best for your colleague, seems you're a great team!

[Small Simple Stocks @SmallSimplStoks]

@AC__research Fascinating, thanks Jan for the detailed answer! I had just went from A to Z on Italian stocks a few months ago and missed that one, so was particularly interested. (ps: your colleague goes into Erasmus while minting money on stocks? man that's our kind of life ;-) )

[Small Simple Stocks @SmallSimplStoks]

@TimelessCpnd Thanks for engaging. I'd struggle to conclude on that as disclosure is limited (esp. Keystone, not sure this one was a bargain). Anyway Titan is a strong business, one that can survive a mediocre manager for years. The moment of truth will be when they hit a market trough.

[Small Simple Stocks @SmallSimplStoks]

This pains me. Perfectly fine company (Titan SA, cement producer), led by a family member for years. Then a CEO from a large peer takes his place, and this is what we get: the most generic strategy that could apply to any cement producer. What a way to show your experience!

[Small Simple Stocks @SmallSimplStoks]

Interesting to see that the right strategy in index investing (DCAing, buying the dip) might be the exact wrong strategy for stock picking.

Buying the index dip usually works: worst case it might take a few years, but the index always goes to new highs (at least if you buy America). They are sudden and quick to recover. You don't agonize on your losses for years. That's the reality we lived in for a couple of decades.

Buying a stock dip seldom works: first a stock has a much longer runway down the hill. In fact, per Mauboussin, the median stock drawdown is 85%. They are not sudden: they take 2.5 years to get there. Worse: on average, they never get back to previous highs. The median recovery is at 90% of the previous high, with another 2.5 years to get there.

In theory it can generate attractive returns. If you're able to accumulate a stock on the way down, you don't care if it never goes back to previous high. When your average cost base is 40% of the previous high, if you sell it at 80%, that's still a x2 in just a few years. But here you have to believe that:

1. You will accumulate late enough on the drawdown cycle. Buy it too soon and your TSR breaks completely. Personally I have no clue why some stocks fall -30% and others fall -70%. Was Novo a sound buy at -30%? Possibly. Yet it fell again to -70%.

2. You won't get shaken out by the market whilst the stock goes sideway. The market will tell you everyday that you're wrong for investing in that stock. Look at Nike today. It's hard to find anyone bullish on it right now, even though base rates on a 75% drawdown clearly are in your favor.

3. The management itself won't get shaken out. You often can see reflexivity at work in drawdowns. A fine company can panic looking at the price ticker, and start doing dumb things: buying a large competitor to smooth out earnings, firing a perfectly fine CEO and replacing him with a "turnaround" specialist, or just capitulating and selling to PE at a discount.

Those are 3 demanding assumptions. It can be done, but you need to have nerves of steel, and it needs to be a strategy on several positions, not just one. Contrast it to the index: here you just have to believe that the world will keep running as it has for the past 80 years. That's still an assumption, but an easier one to live by.

So, to my fellow index investors that dabble in stock picking: beware of your "index" muscles. They are likely not the ones you need to succeed in that arena.

[Small Simple Stocks @SmallSimplStoks]

Well that's not something you see everyday: Basicnet invests 3m€ into an obscure vehicle (I.E. 15% of their pro forma profit), only to lose it all barely 2 months later. That does't look fishy at all

[Small Simple Stocks @SmallSimplStoks]

@Quality_stocksA Arguable, but might put Safran/GE Aerospace above Airbus. Jet engine manufacturing > aircraft assembly in terms of barriers to entry

[Small Simple Stocks @SmallSimplStoks]

@global_smallcap Thanks for raising this! Close to an EV/EBITDA of x5 now, bargain levels. What do you think of the organic growth? We're clearly below double digits, and mgmt "expect revenue growth to moderate in the coming quarters"

[Small Simple Stocks @SmallSimplStoks]

7/ A small, simple stock at a slightly demanding valuation. If we get in, the reasoning would be simple and honest: we trust the management will deliver the same way they delivered for the past 20 years.

[Small Simple Stocks @SmallSimplStoks]

All right, next up, Sword Group, $SWP.PA. Simple story, with a valuation twist.

Key figures first: EU IT contractor, €280M market cap, founder-led, ~€360M€ sales, 9% op margin, 4 geos (BeLux, CH, UK, MEA), ~60% of sales generated from regulated entities (EU, government, international org), top 10 customers = 27% sales, sales/FTE ~100k, turnover 10%.

What we like, keeping it simple.

[Small Simple Stocks @SmallSimplStoks]

6/ What you have to believe for this investment to work:
- Operating margins can endure around 8-10% (Tier 1 IT contractors: 12-15%) – watch for wage inflation
- AI won’t disrupt the company position
- Founder’s eventual successor will apply the same strategy (CEO’s son recently promoted head of the CH BU)
- EU IT budgets remain on the rise