FYI | Sep 13 2017
By Peter Switzer, Switzer Super Report
A risky tip — buy retailers and passionate people's companies
This is the riskiest story I’ve ever written and I don’t like risk — that’s why I started the Switzer Dividend Growth Fund. But following my now quite controversial interview with Gerry Harvey last week, I have two issues I want to explore that could make us some money.
The first is: are we overestimating the impact of Amazon in the short term and even the medium term? And secondly: is there a case for investing in good companies that have particularly passionate CEOs or chairmen?
Harvey Norman’s share price is down over 12% since it reported a record profit of $449 million — a 29% jump. Some of the fall was because the dividend was cut from 30 cents a share to 26 cents for the full year. At the current share price, HVN has a dividend yield of 6.7%, provided the dividend is retained. And it’s fully franked, which makes it attractive but it’s heavily shorted by the smarties or “criminals” as Gerry calls them, to the tune of 10.83% of its stock.
Also there are fund managers who tell me that they like CEOs retaining dividends to build their businesses. This rule for growth companies doesn’t seem to apply to Gerry and HVN.
Gerry is accused of having franchisee problems, accounts problems and dinosaur retail problems, but he’s hopping mad that his credentials as a formidable retailer are being questioned by people who have never run a retail business in their lives.
This is how he answered my last question in my second interview (when it aired on Sky). It shows his passion and how determined he is to make sure he’s not seen in business history as a dopey dinosaur: “If you want to hurt me, tell me I’m a dinosaur, tell me I’ve lost it, tell me I don’t work hard, tell me that I’m not looking after my company, if that’s want you want to do, if you want to hurt me, that’s the way you do it, because that’s all I care about — building this company. And if you as a shareholder out there, if you are a shareholder in Harvey Norman, we will look after you but if you are an institution, right, I couldn’t give a stuff, right, I wouldn’t trust you as far as I could kick you, OK?”
Passionate stuff and I have to say I do like passionate business leaders heading up quality businesses. These are often the businesses whose leaders show up on my TV show to talk to their shareholders. There’s a good correlation with their willingness to get out there and communicate and good company performance.
Wesfarmers’ Richard Goyder always showed up. The same can be said of Christine Holgate when she was at Blackmores, Don Meij (Domino’s), John Gusic (Webjet), Peter Birtles (Super Retail Group), Richard Murray (JB Hi-Fi), Anthony Scali (Nick Scali) and Graham Turner (Flight Centre).
Let’s take a five-year view on these companies to see what passion counts for:
- Harvey Norman (HVN): $1.92 to $3.85.
- Blackmores (BKL): $30 to $112.
- Domino’s (DMP): $9.87 to $42.84.
- Webjet (WEB): $3.87 to $11.94.
- Super Retail Group (SUL): $8.01 to $7.99.
- JB Hi-Fi (JBH): $8.65 to $22.87.
- Nick Scali (NCK): $1.34 to $6.55.
- Flight Centre (FLT): $25 to $47.80.
- Wesfarmers (WES): $35.81 to $42.03.
As you can see, the capital growth story of companies being run by passionate and committed CEOs and chairmen who show up, has a habit of proving analysts and other sideline experts wrong. Of course, you have to be careful of spruikers and false prophets, but when a quality company has someone who believes in the operation, the people and the brand, it goes a lot to make a good company great.
And you have to be careful about betting on one quality company led by a passionate performer, but when you collect a group together in a portfolio the results can be astounding.
For example, who would’ve thought the excessively passionate Andrew Forrest could have done what he did at Fortescue?
OK, let’s accept that our retailers run by Harvey, Murray and Birtles are good companies and the leaders are worth punting on. But what about Amazon?
Gerry says, “Amazon has only 3% of the fridge market in the USA after all of these years, so why should I be so worried?”
In fact, a CNBC story recently said Amazon only has 5% of total retail sales, excluding food, in the whole of the USA but analysts think this share will soon rapidly increase. However, after a lot of years building in the US, why wouldn’t it be prudent to assume it will take Amazon at least a year or two to have any real impact on our local retailers? And it could be dumb to assume that HVN and JBH will lay down and let Amazon take customers and eat their lunch.
They could boost their online offerings, offer lower prices, cut costs, market better, close some stores and still end up with a better profit and then a higher share price.
MKM Partners’ analyst, Rob Sanderson, in the US, says this chart shows Amazon in the categories that the company serves, growing its market share, as brick-and-mortar retail sales are on the decline. He says Amazon is “eating retailers” but it still has been slow. The growth is fast but the actual consumption of its rivals is measured and maybe our market is getting ahead of itself.
Amazon will be a threat to our retailers but no one knows what kind of a threat and how big it will be. The market is guessing and could be overestimating how fast Amazon grows here, how well our retailers respond and how long it will be before they really are hurting or eating the locals.
At least on a one-year basis, with economists tipping that the second-half of 2017 will be stronger than the first half, there could be a good reason to invest in our best retailers, even if only for a year or two.
Certainly, if Gerry can make the doubters eat their words when reporting season comes around next year, then short-sellers could be squeezed so badly that the HVN share price could soar as high as Gerry’s determination to beat up on his critics.
This is a speculative play but could prove rewarding in the short term and even the medium term.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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