In a recent interview with the Financial Review, David Prescott of Lanyon Asset Management discusses three stocks that the fund holds. Prescott is a deep value investor who focuses on investments with a large margin of safety and often buys shares that are unloved by the broader market. The strategy has worked so far as Lanyon has generated annualised returns of 14.1% after fees since his fund's inception in 2010.
Newcrest Mining Limited (ASX: NCM) is Australia's biggest gold miner and the fifth largest in the world. Although the stock has performed well in the last year, Prescott believes it could double again from here.
Newcrest is a very low cost producer and has decades' worth of reserves. However, the stock has an enterprise value of $22.4 billion which looks quite expensive based on the current gold price and production rates of the company.
Whilst it might be possible for Newcrest to continue to eke out further productivity gains, it has no control over the gold price which is the key driver of profitability. If you believe that the price of gold is going up for a sustained period of time, then perhaps an investment in Newcrest makes sense.
Out-of-favour printing company PMP Limited (ASX: PMP) faces structural headwinds as companies increasingly turn to online channels for marketing.
Lanyon became a substantial holder of the stock back in early 2013 when it was trading at around 20 cents compared to a price of 58.5 cents today. However, Prescott says that industry consolidation could cause the share price to rise further.
PMP records a high annual non-cash depreciation charge in its accounts of over $30 million relating to old plant and equipment. The company is not spending anywhere near this amount of money replacing these assets each year and therefore there is a large discrepancy between reported profits and true cash flows.
At 20 cents the stock was (incorrectly) valued on its reported profits but the price is now almost three times higher and so the valuation gap has largely closed. Given the tough industry conditions facing PMP, it seems unlikely that shareholders will continue to experience the robust returns of recent years.
BSA Limited (ASX: BSA) provides services to the telecommunications industry and installs and maintains heating and ventilation systems in large buildings. Prescott believes that the market is yet to cotton on to the company's NBN revenue opportunity and that a share price re-rating is on the cards.
Lanyon accumulated stock in BSA at well below today's price of 30 cents including participating in a capital raising in 2014 at a price of 11 cents. The company issued an earnings downgrade as recently as July and so it is far from certain whether the stock will continue to rise from here.
