Value comes in many forms but cash backing can be a humdinger. When we first started Under the Radar Report some seven years ago, one particular experience of our committee members Geoff Wilson and Karl Siegling made a big impression on us: their respective funds made as much as ten-fold on their initial investment in the re-named Rams Home Book, RHG.
CASH ASSET BACKING IS A GOOD START
They famously called an Extraordinary General Meeting in April 2011 to prevent the fund’s chairman John Kinghorn from privatizing the company at 88c a share. Even one year later RHG delivered that and much more in dividends alone.
As Geoff Wilson told us at the time: “You never pick the top or the bottom, but if you can find a company trading at a discount to its cash backing, what could be better than that? The next best thing is a stock trading at less than the value of its net assets, and only after this do you look at earnings.”
A GETSWIFT RICH SCHEME?
So it was logical for us to investigate the logistics software company GetSwift (GSW) in the wake of its spectacular share price demise. The company raised $75 million at $4 a share late last year, which included the “cornerstone investor” Fidelity International and then in mid-March when we looked at it, its stock was trading at 55c a share in mid-March, which is pretty much the valuation of its cash value per share. The last I looked it was trading at 48 cents, so ostensibly it’s at a 11 per cent discount to its cold hard cash asset backing. What could be better than that? I hear you ask.
Calling GetSwift’s rise spectacular, is something of an understatement. The company was founded by ex-AFL footballer Joel MacDonald in 2015 and listed in December 2016, raising money in a couple of tranches at 20c a share. Its shares famously spiked 83 per cent to $3.60 after it announced a deal with Amazon. Then it raised $75m, following which came the bombshell that some of its contracts weren’t actually contracts but simply pilot testing, and worse. The company is now in the midst of a class action from investors and there are obviously big concerns over governance.
The thing is, with its cash backing, if GetSwift has even a tenth of the prospects spruiked by MacDonald and his team prior to the fall, there could be big money to be made.
THE NEW BREED OF MOMENTUM STOCKS
We would classify GetSwift as one of the classic new breed of “momentum” stocks that are claiming that their “disruptive” business models are enabling them to achieve high powered earnings growth. There are Mark Zuckerberg types coming out of the woodworks everywhere! Another stock that comes to mind is the point of sale payments provider AfterpayTouch (APT), which we wrote about a couple of weeks ago in this blog, highlighting some of the risks which are now becoming apparent, and leading declines in its share price.
Surfing such stocks can indeed be very profitable. Having picked APT at $2.50 Under the Radar got out at $7.40. Its stock now trades at $5.77.
We haven’t always been so lucky and the point is that with momentum stocks after one piece of bad news, there are bound to be more. Take profits quickly at whatever price is available. And whatever you do, don’t average down! These are momentum stock. When the music stops, they normally don’t drop 20 per cent; it’s more like 70 per cent.
TAKING PROFITS TO REDUCE RISK
A good idea to pre-empt value destruction is to take profits when you’ve made a decent return. For example, if you’ve doubled your money it might be a good thing to sell half and then you are simply playing with house money, as Under the Radar’s portfolio manager likes to say.
Now that I’ve got that off my chest, back to GetSwift as a value play. To cut a long-story short, Under the Radar’s analyst Ravi Reddy thought that the negatives, such as poor governance, the ASIC investigation and the class action outweighed the positives (cash backing, commercialised technology, growth in online shopping). But what was most compelling in our decision not to invest was the improbability of the company generating positive cash flow any time soon (let alone being profitable).
RAVI REDDY’S VERDICT
“For the six months to December 31, 2017 GetSwift handled 2.2 million deliveries to generate trading revenue of $0.58m, or $0.26 per delivery. If we extrapolate the quarterly delivery growth of 20 per cent for the remaining two quarters of FY18 we get about 5.4 million deliveries for the year (up around 200 per cent on FY17) to generate about $1.4 million in annual revenues versus an estimated underlying cost base of $5.6 million. Using these back of the envelope numbers, we estimate that the company would have to grow delivery numbers at a compound annual growth rate in the vicinity of 90 per cent on FY17 deliveries of 1.8 million to reach 22.5 million deliveries in FY21 and generate $5.9m in revenues to become profitable.”
I’m sure Geoff Wilson would agree that if the numbers don’t stack up, whatever price you pay is like putting lipstick on a pig.