Allan Mecham's Rule-Breaker's Rules

This week I draw to your attention two different but related investment themes. The first concerns a US fund manager, Allan Mecham, who takes a long term view and ignores the conventional tools used by most of the fund management industry. An article about his approach can be accessed by clicking here. I particularly liked the Rule-Breaker's Rules, namely:

• Ignore the economy. Where is the economy going next quarter? Where is the S&P headed? Mecham says he ignores those issues; instead, he looks for stable, defensive businesses that can thrive whenever bad times come.

• Don't diversify. Most mutual funds own dozens or even hundreds of stocks (regulations usually require them to own at least 15). But to outperform with a big portfolio, a manager has to outsmart the market simultaneously on a raft of securities. Smaller funds and private-investment funds, which are not under the same requirements, can rely on just six or eight stocks.

• Don't sweat the spreadsheets. Many Wall Street analysts build elaborate financial analyses to calculate a company's earnings growth and other patterns. But some say it's more productive to use that time trying to understand a company and its industry -- the management, the competition, the customers and so on.

• Think decades, not quarters. Shareholders and managers tend to focus on companies' announcements of quarterly or annual earnings, and whether they beat or miss analysts' estimates. But some managers -- including one Warren Buffett -- say it's more useful to try to figure out where a company will be in a decade or more.

• Don't just do something. Stand there! One of the toughest things for investors to do is to sit still and do nothing -- especially when nervous clients demand that they respond to short-term fluctuations in the market. But most of the time, say a few contrarians, inactivity is the right longer-term move. It's about "keeping emotions from corroding the decision process," says Mecham.

The second theme concerns UK manufacturing. Last week I referred to Sir Philip Green and this week saw Sir Anthony Bamford submitting a report to 10 Downing Street on the need for the UK to boost its manufacturing base. With the growing number of luminaries advocating this strategy, I am optimistic that the government will seek both to attract investors to invest more in manufacturing and also to make the development of such companies easier.

Two companies reporting last week illustrate both the benefits of long term investing and also the patience required. These are Albemarle & Bond and Lo-Q. A&B was founded in 1983 by Phil Murphy (a former employee of H&T) who saw the opportunity to develop the shops as retail outlets (combining pawnbroking, retail jewellery and cheque cashing) which were pleasant to visit rather than dingy premises to be avoided. His timing was facilitated by the arrival of inexpensive and powerful computing which made running a sizable estate practicable, whereas previously running an estate of more than eight shops was impractical due to employee theft. Lo-Q was created as a result of the founder, Leonard Sim, having a bad queuing experience at a US theme park in 1995. His wife suggested that with his background in electronic engineering, he should develop a solution. Both companies have grown to be established businesses, and in the last two years have installed new top management to enable their full potential to be realised.

News on LCF Research Covered Stocks

Albemarle & Bond (LON:ABM), the UK based pawnbroker and financial services company, released interim results to December 2011 showing revenues of £62.7 million (2010: £48.8 million), pre-tax profit of £12.1 million (2010: £10.7 million), EPS of 16.04p (2010: 13.89p) and DPS of 3.0p (2010: 2.75p).

The company reported that the pledge book has grown from £26.5 million to £38.3 million over the first two years of the five year plan. Market leading pawn lending practices resulted in unredeemed rates approaching record low levels. Gold Buying has halved the time to break even for new stores, with some stores achieving breakeven on the first anniversary of opening. Period end stores totalled 215 (2010: 186).

The key drivers underlying pre-tax profit growth were Pawnbroking gross profit £17.2 million (2010: £15.1 million), Gold Buying gross profit of £12.0 million (2010: £6.4 million), Retail gross profit of £2.7 million (2010: £4.1 million) and overheads of £23.7 million (2010: £18.7 million). The increase in overheads is associated with new store openings and investing in the central infrastructure, with a substantial reduction in the rate of overhead growth expected from hereon. Period end net debt was £31.9 million (2010: £27.8 million net debt) vs. a facility of £65 million.

The ABM share price has increased by 10% over the last year.

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Albemarle & Bond Holdings Plc is currently graded A by LCF Research.  To learn more, follow the link.

Lo-Q (LON:LOQ), the company that supplies “virtual queue” management systems for the amusement and water park industries, announced that the final results to October 2011 showed sales of £24.5 million (2010: £20.3 million), pre-tax profit of £2.7 million (2010: £2.3 million) and EPS of 11.04p (2010: 10.0p).

Lo-Q reported that despite the challenge of global economic conditions and with theme park attendances being slightly lower than in 2010, revenues, profit and cash have exceeded both their own and the market’s expectations. Like for like sales increased by 17% and there was a 9 percent rise in park attendees using Lo-Q systems.

The company has had a strong start to FY 2011/12 with their main customer, the US theme park operator Six Flags, extending its contract for a further six years.  They have signed a global agreement with MasterCard to develop a new contactless payment solution and have won a contract for Q-bot at LEGOLAND Deutschland.

The LOQ share price has increased by 74% over the last year.

Lo-Q Plc is currently graded b by LCF Research. To learn more, follow the link.