Trading value for exceptional Value (Group)

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My last post was about my new model, the Berkshire model, whereby I find great companies managed by great people, and hold them. This lets them do the hard work, while I just need to keep tabs on them, monitor developments, and then if all is well, hopefully receive the dividend.

This was going quite well. The only mistake and issue still lingering in my portfolio is my substantial stake in food retailer Choppies. The share is still suspended so there is nothing I can do, although they have now released all the outstanding financial statements, and I am hoping that the share will trade again soon. The business itself seems to be intact.

Pandemic strikes

Then however came a pandemic. The world changed. Fortunately, I was well positioned in that I have generally avoided companies with high debt, and had no exposure to the gaming/hospitality/travel/restaurant sector. My biggest holding by far is a boring plastics and packaging business with no debt, lots of cash, and that continued grinding out containers for sanitizers/cleaning products and a myriad of other essentail products even while most of the businesses in the country were under a hard lockdown. It was a good feeling with all the stress related to lockdowns/pandemics/economic devastation etc. to wake up in the middle of the night knowing that you at least have a stake in a business that even at 2am on a stormy Cape Town winters night is carrying on 24hrs a day/5.5 days a week, producing things everybody needs, in contrast to the thousands of businesses that could not even open their doors and subsequently and tragically had no income.

The trade

The pandemic made me again reassess my portfolio, and I decided to make one fairly substantial change. I want businesses that can operate under fairly extreme conditions, including a pandemic. A business that I have owned before and have continued to follow, Value Group, was available at a very cheap price (a price earnings ratio of about 4 at time of purchase). This business is in logistics and so moves among other things, essential goods, around the country. It is a very good operator, generates a lot of cash,  has been consistently profitable and  paid dividends in good and bad times. It has even been buying back its own shares. Unfortunately, if I bought something, I had to sell something. I took advantage of a spike in the value of a property developer’s shares I held. This company is also very cheap, perhaps even slightly cheaper, but to me the risk was much higher. In a recession/depression people will be less likely to buy apartments than the need for goods to be transported and warehoused, they also rely on debt to build the apartments before selling them. Value Group’s results which came out after my purchase were excellent and the business continued through lockdown, and declared a dividend. The property business was closed for two months and had to skip the dividend.

I have a lot of respect for the property company, and may buy back some shares sold, but for now I want safety, and need dividends.

It has not been an easy time for investors, especially those exposed to South African shares, which unlike their foreign counterparts, have not recovered. I do though believe that their is fantastic Value (excuse the pun) available, and together with these stocks I now have in my portfolio, hope to ride out the storm.

Reducing risk

A side benefit of my experience with Choppies has been to be extra vigilant to risk and to reduce it where possible. This portfolio change has so far worked well on a comparative performance basis, but even if it does not, the risk has definitely reduced. Has your appetite for risk changed? Let me know if this pandemic made you reassess your portfolio? Thank you for reading and stay safe

Disclaimer: As usual, please do your own homework on any shares I write about. Not everybody would agree that this share is a safe bet.