Sold Thinksmart

Yesterday I exited my Thinksmart Limited (TSM) position after analysing the chairman's address at the AGM, 364 days after purchasing TSM and at a 25.4% gain after all costs.

The initial investment case was that Thinksmart was a fundamentally cheap stock that had been sold down disproportionately by the market - if you are unfamiliar with TSM, they provide financing solutions through services such as RentSmart for consumers to rent products rather than purchase them outright. At the time I viewed TSM's earnings downgrade as a temporary setback, caused largely by a switch to lease accounting which delayed the recognition of profits but was supposed to increase total profits over the life of the contract. TSM also suffered from poor consumer confidence, price discounting by retailers, the high Australian dollar and the closure of many Dick Smith stores, all of which I believed (mistakenly in hindsight) would improve eventually.

Management had given guidance of $5.6 million for 2012, compared to a profit of $6.8 million in 2010 and 2011, although downgraded the 2012 guidance to a cryptic 'full year profit, albeit at a level materially lower than our earlier guidance'. I was prepared to accept perhaps a 50% decline in earnings followed by what they called 'record annual profits in 2013' but it turns out Thinksmart would produce a loss of $1.4 million in 2012. This was clearly a sign that management were either overoptimistic or just plain tricksters but nevertheless I hung on, anticipating a sharp recovery. Until yesterday that is, which was the last straw.

Although the market seemed to like their announcement, I was less than impressed with their forecast of a $0.5 million profit for the first 6 months of 2013. For a business valued at $45 million, Thinksmart no longer seems cheap, unless earnings can magically reach the predicted record annual profits of a year ago. However, I no longer have faith in the management in either their forecasts or handling of the company, so selling is the rational decision. Furthermore, it seems consumer confidence in Australia isn't rebounding any time soon, falling 2% in March, 5% in April, and 7% this month. I may well be proven overly pessimistic but I think there are many better businesses to be in than Thinksmart.

So to sum up, I misjudged the quality of management and the state of the retail industry, but nonetheless managed to make a decent profit out of Thinksmart. This leaves me holding four stocks and 36% cash, which is hardly desirable, but I'd rather sit on the sidelines for a while than make a dumb purchase. Despite the recent stock market decline, value is still difficult for me to find. To the right is my updated portfolio.