How the ides of March has delivered big returns for Under the Radar Report

With the end of the quarter coming up, the team at Under the Radar Report is spending its time hunting for the next TPG, APN Media, Mayne Pharma, Elders or Tassal Group. These are all stocks that have delivered returns in the multiples for us because we purchased them when they were unloved by all but the most fervent shareholder believers.

These are all stocks that have delivered returns in the multiples for us because we purchased them when they were unloved by all but the most fervent shareholder believers. Then, for differing reasons, management subsequently exceeded expectations and the groups were able to shrug off massive liabilities and deliver what investors all want – big cash flow growth, matched by (in most cases) big dividends.

Why is the lead up to 31 March relevant, you might ask? Because it is during this time that fund managers, big and small, are throwing out the positions they hold in stocks that are in trouble. The companies above all got into trouble in one way or another and fund managers found themselves with a much smaller position in a company that needed to do a lot to turn its operations around.

Instead of having to explain an incredibly complicated, loss making, turnaround story to their investors at the end of the quarter, the fund manager reasoned that it was better to dump the stock, and live to fight another day.

Who could blame them? The problems were long and complicated and included a convoluted capital structure (Elders), huge debt and diminishing demand (Boart Longyear) structural change and dud acquisitions (APN Media), massive capital expenditure with little return forecast any time soon (Tassal).

Under the Radar’s portfolio manager The Idle Speculator has been a shareholder in TPG Telecom (TPM) since the company had a market cap nearer to its $65 million low when it traded at 9 cents a share in mid-2008.

This month the internet service provider announced a $1.4 billion all cash bid for fellow ISP iiNet (IIN), to which the market has given a big tick of approval by marking TPG’s shares up. At the time of writing its shares traded at $8.84, delivering it a market capitalisation of $6.9 billion. They talk about 10 baggers. This is a 105 bagger for the Idle Speculator! Not only that, but TPG’s 9 cents in dividends is equivalent to its share price back in 2008.

“The idea that you get back each year what you put in is pretty sexy,” he says.
“Although, you have to remember that nobody buys at the bottom and sells at the top, but if you’re not looking, you’ll never know.”

You have to remember that back in 2008 when TPG’s market cap was below $65 million, it was the aftermath of the collapse of Lehman Brothers.

The appetite for a stock with unproven management and an opaque business model was essentially zero back then. Sometimes as an investor in small caps you have to embrace uncertainty.

Subsequently, the Malaysian born David Teoh and his wife Vicki embraced the strategy of becoming the low-cost player in the broadband and ISP market, which remains the case. This enables TPG to charge lower prices and gain market share.

Their secret has been harnessing strong cash flow to expand TPG, by making one acquisition after another.

This worked for TPG, but the other companies listed above all contained considerable uncertainty when we tipped them, and came through it in different ways applicable to their industries.

There are stocks that we are looking at now that fit into the problem category. Some of these companies are being heavily sold because fund managers have lost patience with them.

It is a fact though, that most small caps have one problem or another, otherwise they wouldn’t be small, right? As an investor, initially at any rate, you need to look through the problems and realise whether the potential is worth your while. If it is, you need to look further, and dig deeper. And then, maybe invest.