Wolseley’s template for recovery

Multiple investment personality syndrome

The difficulty of operating two or three investment styles simultaneously, in my case net-net style bargains, thrifty looking turnarounds and nifty looking hidden champions, is that its easy to conflate them, rejecting companies that don’t possess the desirable qualities of all three categories.

The problem with that is you end up rejecting all companies. Nifty companies don’t make big mistakes. They go on earning high returns relentlessly. Bargains, and thrifty companies are cheap because of their mistakes. As I said, while resolving the value investor’s conundrum, it’s very important to distinguish these situations.

These is how I proposed to identify a recovering (thrifty) company:

1. New management, especially if they’re buying shares
2. Restructuring, asset sales, write offs
3. Talk of cost control and organic growth
4. An improvement in business performance (indicated by the F_Score).

Andrew Lyddon of Schroder makes the case for builders and plumbing merchant Wolseley, showing how  a company that four years ago was £2.5bn in debt, whose management had only ever known expansion but faced oblivion as the construction boom ended and profits halved, can look like a good investment four years later.

Wolseley has changed management (item 1), halved its workforce, closed branches, and sold businesses (item 2), reduced working capital and capital expenditure (item 3), reduced debt by raising new capital from investors, and lifted profits (item 4).

Lyddon says:

The company is just one example of how, for investors now putting new money today into companies that have undergone this degree of significant change, the risks are considerably lower to where they were three years ago.

Unsurprisingly, I agree with this line of thinking,.

I rejected Wolseley two years ago, and it doesn’t feature in my current screens, but I am on the look out for companies like it.