Chris Lee says
https://www.chrislee.co.nz/taking-stock
He doesn’t like us using his stuff but this is pretty good so I pasted the relevant parts anyhow
THE stark difference between the bloated self-serving Fonterra board and executive, and the energy of Synlait Milk’s founder, key shareholders and executive needs minimal discussion from me.
Fonterra, as a disproven business model, has made bleak investment decisions, been slow to spot market change, and displayed little vision when it declined to take up holdings in Synlait Milk and A2Milk, in their formative days.
By contrast the progress and value-add at SML and ATM has been astonishing.
Both companies would appear near the beginning of any book entitled ‘’Great NZ Corporate Successes’’.
If the Otago opportunist, risk-taker and entrepreneur Howard Paterson had not suffocated as a result of mis-swallowing a potato crisp, he would surely be touted today as a key figure in ATM’s beginning and would be forgiven for those of his ventures that failed.
John Penno’s modest aspirations to build Synlait Milk have been vastly surpassed in just seven years, in part because he has made the right connections with capital markets, enabling his business model to be nurtured through a period of great debt.
Today SML’s relative debt has been normalised. I have little doubt it will be a dividend-payer within the next three years.
It does face one problem. So few of its shares are now accessible, its ‘’free float’’ of shares must restrict its appeal to investors who focus on a fair price with any new investment. At $13, Synlait’s price can be justified only with the help of imagination.
When ATM lifted its holding to 17%, SML then had permanent shareholders sitting on the majority of its shares.
ATM’s buying spree pushed SML to prices that no model could explain but also pushed SML into a global index, triggering the brainless buying by the robots that control index funds. That led to even further upward pressure on the share price.
The only motive to sell SML has been the excessive price available.
NZ’s award-winning researchers believe the share price today is nearly double its current underlying worth.
But index funds have no algorithm to assess value.
Buying continues, so buying pressure further inflates the price. The index funds will report ‘’profits’’ from this process, if the price is pushed ever higher.
Our clients were quick to spot the potential of SML and might return to buy more, if an event or a trend or an algorithm led to the index fund robots being required to sell at any price.
But my expectation is that the buyers would look for the shares at the price indicated by qualitative research. That might indicate fair value at half of the current figure being paid by index funds.
Of course that ‘’event’’ may not occur.
But what SML and ATM do highlight is the absence of a value test in index buying.
It also highlights the risks taken by short sellers – those who borrow shares, sell them, and gamble that they can repurchase the shares in the future at a lower price, to enable the return of the borrowed shares.
Their qualitative research can be made to look silly by unthinking index purchasers.
There will have been much short selling of ATM and SML.
So far, the index buying will have lightened the pockets of the short selling gamblers.
Short selling is not a game for the faint-hearted, or for those with limited access to funds.
Originally Posted by Beagle
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