stock investment journal: cash converters international (ccv) · 2019. 12. 31. · the monthly...

Copyright © Colin Nicholson

Stock investment journal: Cash Converters International (CCV) Important

The stock discussed in this journal may not be a suitable investment for you at this or any other time. I will only be discussing its suitability, or otherwise, for my investment plan.

You need to assess the relevance of anything in this journal to your investment plan, seeking advice from a licensed adviser if you are not able to make such an assessment for yourself.

I am using stock investment journals of stocks I own (or consider owning, but decide against doing so) only as examples to teach the way I think about investing. In doing so, I am neither making nor implying any recommendation for anyone to invest in this or any other stock.

How I found this stock I had previously owned this stock before being shaken out when it hit my stops. I had been monitoring it daily as part of my watch list.

Company profile In 1984, Cash Converters started as a single store in Perth, Western Australia. It was founded by Brian Cumins and a group of partners whose vision was to transform the humble second-hand store into a chain of professional retail outlets.

Today, there are more than 130 Cash Converters stores throughout Australia and over 600 worldwide. Cash Converters International (CCV) is a [company owned and] franchised retail network listed on the ASX and London Stock Exchange. It specialises in the sale of second-hand goods. The Cash Converters group employs modern retailing practices, professional management techniques and high ethical standards to the management of its stores throughout the chain which appeal to a wide cross section of the community. As a result, Cash Converters has been able to position its outlets as credible retail merchandise stores, resulting in a profitable market for the group.

The range of services offered by Cash Converters stores around the world varies with pawn-broking loans available in selected markets, as well as a personal finance business that operates, in various forms in the micro-lending category around the world. Cash Converters, is always looking for ways to improve the service … with recent innovations like Webshop, which allows you to bid on or buy a huge range of items online, we continue to lead the way.

Source: Company websites


Which model?

The monthly chart above shows the familiar pattern of a value model stock. The uptrend from 2009 was interrupted by proposed new government regulation of lending rates that threatened to wipe out that business. However, this threat has now abated. There was also a complication due to a failed partial takeover by EZCORP that was subsequently abandoned, but could be revived in some form in the future as the two companies have close relations and EZCORP is already a substantial shareholder, as well as there being financial arrangements around EZCORP use of the Cash Converters brand in north America.

Earnings and dividend quality

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M @ M 280297-290212 CCV - CASH CONVERTERS INTERNATIONAL LTD > -1.7% -0.01 to 0.585


Cash converters earnings were at best mixed until real growth started in 2007. 2010 saw the growth fall away, but it was resumed in 2011.

Cash Converters went through six years without paying a dividend. However, it has maintained a conservative dividend policy over the last seven years. This seems to be partly driven by reinvestment of retained earnings in buying back franchised stores and running them more profitably under company ownership.

Overall, this is not a great picture, but it seems sound enough and Cash Converters should do well during the post GFC household deleveraging in Australia and the UK.

Pre-purchase checklist

This picture shows a fairly solid margin of safety.

DateStock

ASX CodeModelStage

Mkt Av AssessmentPlan Req V Plan

Price Earnings Ratio 8.9 12.58 Excellent The only guidance was that year on year earnings were increasing.

Dividend Yield 5.98% 4.64% GoodFranking 100% Yes OK

Return on Equity 20-25% >15% OK

Debt/Equity Ratio 12.90% <60% OK

Mkt Capitalisation $222m >$100m Small but OKLiquidity (22-day Av) $165k Enough OK 2%

Guidance and commentsMargin of safety criteria Stock

9/02/2012

CCVValue

Bounce off support

Cash Converters International


Chart analysis

This was the weekly chart at the close of 8 February 2012. Cash Converters had sprung out of an accumulation pattern. However, I was wary of buying it at the time, so continued to monitor it. By 8 February, I had what I was waiting for: a decline followed by a bounce off support – one of my position building cues as outlined in Building Wealth in the stock Market.

Set sell stops This gave me an opportunity to position my sell stops quite close to my buying price. The low of the decline had been $0.055. So my soft stop was $0.50 and my hard stop 2% lower at $0.49 as shown with horizontal lines across the chart below.

It should be noted that this was not where Building Wealth in the Stock Market indicates the stops should be. However, there are two pertinent points here:

1. In the present difficult sideways market I am trying to buy stocks where I can minimise risk of loss by having close but reasonable stops.

2. If the price were to rise above the last rally (which it has done since – see below) the stops I had chosen would be where my stops should be on my investment plan.

So, as it happens it was short term deviation from plan. The other serious risk is that I may be shaken out on a correction that may not necessarily have hit my stops if they were below the lows of the 2011 accumulation pattern. This is a good reason not to do this too often, or it could perversely increase the risk of losses.

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Calculate position size

This was a quite straight-forward calculation. I could invest my minimum amount of capital (2%) and would only be risking 0.31% of capital back to my hard stop.

Managing the investment On 9 February 2012 I had no real trouble buying 65,500 shares at $.58.

Since then, to 17 February 2012, Cash Converters has made a new high, confirming the unfolding of a new upward trend has begun as shown on the chart below:






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1.00W @ D 020108-080212 CCV - CASH CONVERTERS INTERNATIONAL LTD > -1.7% -0.01 to 0.585

Position size 1st tranche 2nd tranche 3rd trancheTotal Capital 1,900,415

Buy Price 0.580Hard Sell-Stop 0.490Risk 0.090 0.000 0.000

% Capital to Invest 2 2 2Position it buys 65,532 0 0

Max % Capital to Risk 0.5 0.5 0.5Maximum Position 105,579 0 0

Position allowed 65,500 0 0

% capital at risk 0.31 0.00 0.00

% capital invested 2.0 0.0 0.0


My originally miss-placed stops are now in the correct place on my investment plan.

The next time that I needed to take any action on this stock was after the close on 20 July 2012, when the chart looked as shown below.

As this chart shows, I had sat through a mild correction before the price moved higher. I then found myself in a quite sharp and significant decline. It did not hit my stops though. Then the price moved up, traded sideways for six weeks and on Friday 20 July 2012 it made a clear new high.

The conservative placement of the stop on my investment plan would have been back near $0.50. However, I am being very cautious in these difficult markets and decided to move my stop up further than that to just under the last sideways pattern on the chart. The low for that pattern was $0.585, so my soft stop is now one minimum bid below that at $0.58 and my hard stop 2% lower at $0.57.

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As it happens, this will be close to a breakeven point for my investment.

By 4 October 2012, Cash Converters made a new high for the trend and I was able to raise my stops as shown on the chart below.

The low of the downward spike was similar to the small trough to the left of it and was now clearly a support level at $0.685. My soft stop has been moved to one minimum bid below that low at %0.68 and my soft stop has been set 2% below that at $0.665.

I am still cognizant that there is a severe challenge ahead to clear the 2011 high, where there is likely to be strong resistance.

Updated to 30November 2012 After I had raised my stops in early October, Cash Converters rose very strongly though October and well into November, reaching a high of $1.02 in the week to 16 November 2012. This was well above the expected resistance around 90c from the 2011 high.

Then, on Tuesday 27 November 2012, Cash Converters opened at 94c and fell to 85c, before the stock was put in a trading halt at the request of the company at 89.5c, having transacted over a million shares in the day.

The trading halt was at the request of the company and the key part of it was as follows:

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I thought that this was fairly clear. The market had obviously got wind of a capital raising before the company was able to announce it and as such a trading halt was appropriate.

More information on the capital raising was given in an article in The Australian Financial Review next morning.

So, we had to wait until Thursday 29 November 2012 for the company announcement, the relevant part of which was as follows:

So, Cash Converters would trade again from the open on Friday 30 November 2012.

My judgement was that this capital raising would increase earnings, so was an opportunity to try to increase my position. During the pre-open auction is seemed that Cash Converters may open in the mid-80 cents. I placed an order for a further 2% of capital at 85c. However, Cash Converters opened at 89.5c and traded higher, so I withdrew my order, the opportunity having not materialised.

Some readers may have made a different judgement and secured an additional holding around 95c, but I decided not to chase the price. During the day Cash Converters made an Investor presentation (see ASX website) that strangely did not mention the capital raising. Cash Converters closed the day at $1.02.

Updated to 21 December 2012 Since the last update, Cash Converters has traded higher as the market gave the capital raising a vote of approval. I decided to raise my stops under the low of the shakeout associated with the capital raising. That low was $0.85, so my soft stop is now at $0.845, which is one minimum bid below the low. My hard stop is 2% below that at $0.83. The chart now looks as shown below:


Updated to 2 January 2013 By 28 December 2012, Cash Converters’ price was close to double since I bought it:

I bought 65,500 shares for $38,028. They were now worth $75,904 (this amount allows for brokerage on the way out). This was a gain of 99.6%. This is how the chart looked after the close on 28 December 2012:

In my investment plan (Building Wealth in the Stock Market pages 214 – 216) I describe my guideline for taking profits. I now regret the way I worded it in the book, which was: each time a stock holding has grown to be 12% of my total capital, I reduce my holding in that stock back to 6% of my total capital. The problem with this wording is that it assumes that I have always built a position in a stock to 6% of capital. However, some stocks are too small to do that and Cash Converters is one of them. When I bought Cash Converters, its market capitalisation was only $222 million. I had judged that this only justified my investing 2% of capital at my total capital size of around $2 million.






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In hindsight, in order to take into account less than 6% of capital investments, my investment plan would be better worded if it simply said that I would reduce by half any position that had doubled in value. It should be noted that this is a guideline, not a rule. A rule I must follow. A guideline allows me discretion.

The market capitalisation of Cash Converters has now grown to $491 million (there has been a capital raising in the period – see above). This might justify me investing 4% of capital in Cash Converters, which is effectively what I have with the gain that has taken place in the price.

So, the question is, do I execute my guideline in Cash Converters? Recently a member asked me about this general decision (in the context of executing my guideline with respect to Flexigroup – see the stock investment journal for it). This is how I tried to explain my thinking:

The issues for consideration are:

1. Liquidity: I buy a stock, investing what I think is a safe exposure for my account size in the light of the liquidity (market Capitalisation) of the stock. If it doubles in size, I am then twice as exposed to the stock. If it is a big stock (eg Wesfarmers), there may be no issue of liquidity, but with smaller stocks it can be. If I thought that I could only safely invest 2% or 4% of capital in a stock, then it will likely be a liquidity issue. If things go badly, it can be hard to get out at a good price, so reducing my exposure is prudent.

2. Value: I buy a stock with a low PE ratio and a high DY. If it doubles in price, then the PE ratio may no longer be as low and the DY will be lower. Thus my margin of safety has been eroded. Hence, reducing my exposure to that stock progressively may be warranted.

3. Psychology: As a holding grows it starts to shift the portfolio around a lot. This can be hard to deal with and it is tempting (but very wrong) to sell it all. Thus, it is prudent to reduce my holing such that I restore my diversification and the position is more manageable.

However, each case is different. Maybe the stock is still cheap. Maybe it took a couple of years to double and earnings/dividends grew with it. Then again, Flexigroup doubled quite quickly and was not as cheap as it was. So, I decided to act on my guideline (as apart from a rule in my plan, where I have no choice).

I am very close to having to make a similar decision on another stock in my portfolio (nice problem to have). You may find it interesting to follow my thinking in its Stock Investment Journal when I make the decision.

The stock that I alluded to in the last paragraph was Cash Converters.

When I bought Cash Converters it had a PE ratio of 9. It is now 15. It had a dividend yield of 6%. Its dividend yield is now 3%. Clearly, Cash Converters is no longer as attractive as it was when I bought it. Of course, its EPS will rise, as will its dividend, but it is unlikely to become as attractive again in the short-term. I decided on 31 December 2012 to sell half of my position: 32,750 shares.

Not being in a huge hurry to sell, I put my order on to sell at $1.16 on 31 December 2012. Although some good volume was done at that price on New Year’s Eve, there was quite a bit of volume ahead of me and my order was not done before the close.

My sell order was done at $1.16 early in the day on 2 January 2013.


Updated to 18 February 2013

After taking profits late in December 2012, Cash Converters continued higher. Then in late January there was a downward spike. The spike took it to nowhere near my stops, so it was of only short term concern. By 18 February, Cash Converters had surged to a new high and I was able to raise my stops again. This is how the chart looks with the stops under the low of the January downward spike:

The low of the spike was $1.03, so my soft stop is one minimum bid below that at $1.025. My hard stop is 2% lower at $1.005.






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Updated to 3 April 2013 Through the remainder of February and March, Cash Converters continued to rise strongly. By the close of 3 April 2013, the chart looked like this:

There was now a new high after a correction to a low of $1.205. I decided to raise my stops under that low. My soft stop is now one minimum bid below that low at $1.20. My hard stop is 2% lower at $1.175. The chart now looks as shown below:






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Updated to 9 May 2013 I was at the Australian Shareholders Association conference Monday 6 through Wednesday 8 May 2013. My first opportunity to monitor my portfolio in this period was on the morning of 9 May 2013 (that is with data to the close of 8 May 2013). The chart that I saw was like this:

As can be seen, the price had violated my hard stop. I immediately sold my holding of Cash Converters at market at the open at $1.185.

A closer view would show that it had closed 8 May 2013 back above my hard stop:

Every time this happens someone emails me to ask why I executed my stop if it closed back above my stop. In fact, three days had elapsed since my last data point, so I will show how this situation unfolded. This is how the chart looked at the close on Monday 6 May 2013:






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Monday 6 May 2013 was in fact the day my hard stop had been violated. Had I not been at the conference, I would have sold at the open on Tuesday 7 May 2013 and been out at $1.185, as it happened, the same price that I was able to get out two days later.

This was the first day on which the price had violated my hard stop and it also closed above my stop. Why then would I have sold then? It is simply based on the logic of my investment plan:

1. When I buy a stock I am expecting an uptrend to unfold. 2. I define an uptrend as a series of higher peak and higher troughs. 3. From this definition, what I expect to happen is not happening if the price falls below the last

trough (with a 2% margin as explained in members newsletter 004). 4. If the price falls through my stop, the uptrend has failed and I am wrong about what I expect

to happen. If I am wrong I should execute my stop.

Of course, this is my investment plan and my definition of what I expect to happen. Members may have different investment plans and some might be based on the closing price rather than the low. This would need to be tested.

In general terms, once we are in an investment we should carry out our tested plan as it is written. It is my experience that trying to rethink an investment plan during an investment invariably leads to:

1. Larger losses. 2. Sets up bad behaviour that will punish us with more losses in the future.

Investment plans should be reviewed, amended and tested without money in the market. Once an investment is opened, we should follow our plan without hesitation through to the final exit strategy.

I have looked at what happened on Monday 6 May 2013, while I was at the ASA conference. This is what the chart would have looked like had I seen it at the close of Tuesday 7 May 2013:

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On that day, Cash Converters had traded even further below my hard stop, but again closed above it.

On Wednesday 8 May 2013, Cash Converters did not trade below my hard stop and as noted earlier, closed above it. However, had I been monitoring the market daily at that time, I would already have sold at the open of the day before, so this would have been water under the bridge, so to speak. No matter when I saw my stop had been violated, I would have sold without hesitation, or I would not have been following my investment plan.

There is one hypothetical exception to this statement. In my investment plan, I have a re-entry guideline that if I am stopped out and the price subsequently makes a new high for the trend, I can consider buying back into the stock. It follows that had the price of Cash Converters on Monday 6 May 2013 violated my stop during the day (and I had not seen it do so), then made a new high for the trend ($1.57 in this case) later in the day, I may not have executed my stop. This is purely hypothetical. I can never recall it happening in a stock I have owned in over 45 years!

Outcome of the investment

This was a most satisfactory investment, my second campaign in Cash Converters since the GFC.

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Total sale proceeds 76,721.95less Total purchase cost 38,027.99plus Dividends 2,947.50plus Imputed credits 1,263.21Net total return 42,904.67% of capital 2.26% of cost 112.82


Evaluation against investment plan

Model identification Correctly identified as a value model chart.

Capital invested 2%. Not big enough to invest more at the time.

Diversification I had some other retail and financial stocks, but the total holding was not great.

Max % capital risked At 0.31% it was less than my maximum allowed risk.

Liquidity I judged it had enough liquidity to invest 2% of capital. As it happened I had no trouble transacting on the way in or out.

Buy signal I had previously been stopped out. After a decline it resumed trending upward and I bought a bounce off support.

Margin of safety No problems – ticked all boxes.

Position building NA

Sell-stop and sell signal I sold when my trailing stop was violated.

Profit-taking I sold half when the price doubled.

Re-entry It remains on my watch list.

stock investment journal: cash converters international (ccv) · 2019. 12. 31. · the monthly...

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