About a month ago I wrote this article in which I estimated that I would have to buy shares in Codan at $1.81 in order for the investment to meet my required return on investment, assuming that results largely reflected my predictions in this update to subscribers. I also examined some of the risks facing the company.
Subsequently, shares traded well above $2.10. At a premium of over to 15% to my estimate of a good buying price, I sold part of my holding.
When the results came out, they confirmed that sales in Africa would be lower in FY2014, and that the company expected results in the range I had predicted. Shares continued to trade above my personal buying price (as often the case with the companies I cover).
As a result, I have sold my remaining shares at slightly below current prices ($1.98, as I write). The market seems broadly rational, and it would also have been a reasonable decision to hold my shares. Should panic return, I would consider buying again.
I think the trade was a good one, because at $1.60 there wasn't a very big chance of permanent capital loss. The fact that the share price recovered so quickly is down to luck. Either way, the market panic that led shares to be sold down to $1.50 is an instructive experience in herd mentality, and demonstrates what can happen when an over-hyped company (as Codan was) runs into trouble.
Given that management has a proven track record, it is a difficult call. I expect, over the long term, Codan will generate satisfactory returns to shareholders. It would probably make sense to hold the shares. However, my understanding of the company is simply not as sophisticated as it should be, so until I have a better understanding of the mining services and radio communications businesses, I will sit on the sidelines.
The Author has no financial interest in Codan. Nothing on this website is advice, ever. This post is for entertainment (and for my own reference!)
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Codan has plunged below $1.50 this week. Has your view on the company changed? Seems like a good entry point if the thesis is still intact.
LinkThe only problem with the original buy thesis for Codan (at $1.50) is that that valuation did not take into account the likely breach of security by Chinese hackers. If I was a military organisation, I wouldn't be so happy about buying radio comms from a company that had been potentially infiltrated. I didn't take this into account in my original analysis because I hadn't found that info (if you recall, it was a fairly opportunistic play on my behalf).
LinkHowever, I have no idea how to value that risk, so we won't know until we see the figures from the radio division. If they start to pick up, then that breaks the argument "the Chinese breach will make the radio division unable to sell its product."
I do think Codan looks like good value, and I wouldn't sell at these prices. However, I have precisely $0 cash as I have been buying a little micro cap that I'm about to publish a <a href="http://ethicalequities.com.au/keep-in-touch/" title="Keep in Touch!" rel="nofollow">hidden report</a> about.