The panic about Anglo American in 2015 offered a classic value investing opportunity. We explain why.
The best performing FTSE 100 stock of 2016 – up some 290% – was miner Anglo American.
There is perhaps no better stock to highlight the fool’s errand of looking for catalysts or timing the market.
When we started building a position in this miner in the first quarter of 2015 it raised a few eyebrows. As the share price fell throughout the year we maintained the size of our position, buying more shares at lower prices in order to “average down” decreasing of the average price at which we purchased the stock).
In the latter half of 2015 Anglo’s share price fell 67%. Buying the shares was a very lonely place to be.
Such was the capitulation in the market that the business traded at 0.25x tangible book value (bear in mind that it hadn’t fallen below 1x tangible book in any recession in the last 40 years until this one). Tangible book value is a telling measure. It compares the value of a company’s real assets with the share price. A figure below one suggests the company is worth less than the sum of its parts.
With Anglo American, we felt the market was overly concerned about the amount of debt on the balance sheet. Our analysis found gearing (the level of borrowing) was only around 60% of the company’s value and there were no repayments of note for several years. Whilst this amount of debt isn’t low, to put it into perspective, most home owners would feel relatively comfortable having a 60% LTV (loan to value) on their mortgage.
While this didn’t make us feel relaxed, it wasn’t clear the market’s state of panic was justified.
Before we look at what happened next, it’s worth revisiting our comment from our 2015 end-of-year letter:
Finally, we do not have a crystal ball and there is always the possibility that our investment thesis doesn’t play out. Anglo American forms part of a diversified basket of stocks and we are confident that, on average, over the medium term, we will make money for our clients by buying companies like Anglo American. The risks for the company are real, which explains its current position size and why it is not the largest position in your portfolio despite being among the very cheapest stocks. As and when fear subsidies, the potential share price upside is significant for this company.
We continued to add to our holding as the share price declined and were purchasing shares as late as mid-January 2016.
Just one month later, we were reducing our position as a significant share price rally caused the position size to double.
Anglo American’s share price moved up from a low of 221p on 20 January to 480p on 29 February – a 117% rise in five weeks.
For illustrative purposes only and not a recommendation to buy or sell shares.
Source: Schroders, Thomson Reuters DataStream, FactSet, 1 January 2015 to 31 December 2016. Portfolio weight as at 31 December 2016. Past performance is not a guide to future performance and may not be repeated.
Even with the benefit of hindsight, it is impossible to pinpoint a catalyst for the turnaround in Anglo’s fortunes. All we can say is that its rapid rise highlights the extent of the market’s prior panic. It certainly didn’t reflect a recovery in the fundamentals of the business, as at that point none were evident.
The lesson? Don’t look for catalysts – low valuation is a catalyst in itself.