Meet Patrick: This commodities contrarian digs in the market's bottom drawer

Patrick's investing began when volatility and uncertainty stalked the global economic landscape (sound familiar?) in the wake of the global financial crisis. Since then, he's refined his approach – which is informed by his dogged research into the mining sector and the commodities space. But don't try suggesting Patrick's a commodities bull – he shuns such labels and emphasises his methodical, measured process of weighing companies before buying. 

As you'll read in the following Q&A, Patrick doesn't just kick the tyres of companies before adding them to his portfolio. He removes them and strips the vehicle to the chassis prior to making a decision.

In the interview below, Patrick delves into his approach to investing in ASX penny stocks, which includes some unusual but effective due diligence. You'll also read why he's got an AI bone to pick with Marcus Padley and hear which company Patrick believes is poised to reap the potential of "the right commodity, in the right place, and at the right time" (and it's not a battery metal miner).

• Name: Patrick
• Employment status: Full-time
• Number of years investing: 13
• Products used: Australian shares
• Biggest portfolio holding: Allkem (ASX: AKE), but only by a whisker.

How old are you and how long have you been investing?

I recently turned 40, having first started investing in the middle of 2009, in the aftermath of the GFC. My initial approach was extremely cautious, but as time progressed, I steadily became bolder, and markedly so in 2011.

The catalyst for this change of approach came from a serendipitous encounter with an old Australian Financial Review article that featured the noted US investor David Ryan, who detailed his stock-picking technique. It was a tiny scrap of information but had a significant impact on my approach to investing.

What is your investment objective?

My objective has been to grow an alternate asset base, to ensure that I did not become reliant on the often-capricious job market. As the saying goes, necessity is the mother of invention.

I began my career at an inauspicious time, just as a downturn hit. I gradually realised that I would need to chart an unconventional path, one in which I would have to leverage my money effectively. The stock market seemed to be the key.

Having been a research bug prior to venturing into equities, studying the share market felt intuitive. It was almost like an addendum to what I had already been doing for years.

What products do you use to execute your strategy?

I focus solely on Australian stocks. With more than 2,000 homegrown stocks to choose from, a small-fish investor has an abundance of home-grown options. In the past, I have researched certain international stocks but in my experience, it's often harder to eke out crucial information. It seems to me the local bourse is more transparent than most of those overseas.

Apart from that, I feel that if you truly want to understand a stock, it's important to get a grip on the management. It is often difficult to engage with the management of companies based in other jurisdictions. I believe that knowing what makes the management tick is of more advantage to an investor than delving into technical or fundamental analysis.

How would you describe your strategy?

I tend to think of myself as a ‘360 degree’ investor, in the sense that I try to evaluate a stock from all angles, from top-level macro thematics down to balance-sheet fundamentals. I guess my approach would broadly be described as "contrarian". I’m basically looking for small, often tiny stocks, whose potential is underappreciated by the market.

I use several filters to identify rare finds but one of the most important filters that I employ is influenced by a system developed by David Ryan, who I mentioned above. I have long found the system to be a pretty efficient and reliable method of separating the wheat from the chaff. By the end of this culling process, I’m left with dozens of stocks at play – this is where I go fishing.

In this final step, I send an email to each of the companies that are left on my list, introducing myself as a prospective investor, and asking some carefully prepared questions pertaining to the company or the industry in which it operates. This last stage is perhaps the most painful stage of the process. To some extent, this is simply because, strangely, most companies will just ignore emails from prospective investors. But I regard this last step is an essential component of my filtering process, as it can provide important clues about the management.

What are a few of your top five stock holdings (in percentage terms)?

Most of the value of my portfolio is bound up in three stocks. There was no real deliberation in this, my plan was to buy stocks that grow over the long run, and these were the ones that just happened to grow the most.

Allkem (ASX: AKE): Currently the largest weighting in my portfolio, I became a shareholder in Allkem via my holding in Galaxy resources, which I first invested in more than 10 years ago.

Vmoto (ASX: VMT): My second-largest stock is an odd duck, one that has been the subject of contentious debate for over a decade. Essentially, the question boils down to whether or not Vmoto should be designated as a ‘China stock’. (The latter term, by the way, is by no means intended as a term of endearment.)

Vmoto sells a range of electric motorcycles and scooters, although most of their sales are derived from just one of their models, the Super Soco TC, and variants thereof.

Based on past observations, the oil price seems to have a significant bearing on the sales results of the company. When the oil price is high, the share price seems to fly, but when the oil price is low, as at current, their sales seem to struggle. So, there might be some merit in seeing Vmoto as a kind of ‘green’ oil play.

The one obvious caveat with Vmoto is that you need to keep your eyes peeled on the geopolitical situation. So, not one for the “Gone Fishin’” portfolio.

Blue Star Helium (ASX: BNL): In a recent wire on this platform, an interesting argument was posited by Marcus Padley. The crux of it is that if investors are looking for exposure to the capital-intensive Artificial Intelligence theme, they should be looking to go big, and go abroad, focusing on the Silicon Valley behemoths of the industry.

I respectfully disagree with this assessment. I would argue that some of the most compelling AI plays are local listees, and interestingly, almost all are relatively small.

The building blocks of Artificial Intelligence are semiconductors, and the semiconductor fabs that make the chips have an insatiable appetite for one scarce and valuable commodity: Helium. Of the very small number of locally listed helium plays, Blue Star is one of the only explorers focused on the United States.

In these few paragraphs, I simply can’t do justice to the intricacies of the helium market, not to mention the broader dynamics of the US oil and gas industry. But when all things are considered, Blue Star looks to be in the right commodity, in the right place, and at the right time.

What was your worst investment? What did you learn from this?

Besides my interest in bite-sized stocks, I consider myself a cautious investor, and to date, I’ve been pretty good at protecting my capital. Some investors have a knack for picking star stocks, I can’t claim to be one of those, but I have skirted wealth-destroying torpedoes.

However, one important quality that I probably didn’t appreciate sufficiently when I started on my investing journey was time. The ‘penny drop’ moment occurred several years ago and harks back to an experience I had with one specific stock.

A decade ago, the tide had well and truly receded on the China-fuelled mining boom. Scores of mining companies were being valued at just a few million dollars, and I was convinced that there had to be some value among the smashed-up small-cap mining juniors.

But how to pick the needles from the haystack? After careful consideration, I determined that I would need to undertake some marathon research into the sector.

After months of research, trawling through hundreds of penny stocks, I zeroed in on one explorer that seemed to stand out: Global Geoscience. I didn’t manage to accumulate enough funds to take up a decent position until the new year, but by that point, the share price hit absolute rock bottom. In the end, I was picking up shares in the company for 0.005, even as little as 0.004 cents a pop.

But, as they say, "the best-laid plans…." Just a few months after I had invested in Global Geoscience, and much to my chagrin, the company suddenly announced they were moving away from mining, and into logistics, acquiring a logistics platform called Getswift.

As a mining-focused investor, I wasn’t overly keen on this switcheroo, but I felt I needed to keep an open mind. To find out more about the new company, I decided to email a senior executive of Getswift, an ex-AFL footballer. He responded by saying he didn’t have time to respond to individual shareholder enquires, on account of the ‘overwhelming’ interest.

I wasn’t impressed by this non-response, and resolved to sell down most of my position.

The share price languished after a few weeks, suggesting the management had made a bad call. There didn’t seem to be much evidence of the previously touted ‘overwhelming’ interest.

Less than two months later, there was a sudden about-turn by the company: The management announced that they were ditching GetSwift, and shortly afterwards, disclosed they were set to ‘acquire’ a Nevada lithium project: most likely just one of their old tenements repackaged. At any cost, it had the desired effect: The share price surged immediately. Lithium had become a hot commodity, and with Tesla's (NASDAQ: TSLA) gigafactory just a few hours' drive from the project, there was no dearth of interest.

I sold off my remaining shares in the company at a decent price a few months later. But the share price continued to rise.

Eventually, in early 2018, it peaked at 0.500 cents. If you do the numbers, you’ll notice that that share price peak represented a 100-fold increase from my original purchase price, and this was in less than two years after I had decided to liquidate most of my position. And that 2018 high wasn’t even the top for the company, as it had another run in 2021.

In financial terms, my investment in Global Geoscience didn’t turn out too badly. However, it came at a cost: an opportunity cost. Over 2014, I had dedicated my time researching every single penny-dreadful miner listed on the local bourse, in search of an elusive hidden gem. Frustratingly, I found what I had been looking for, only to watch it fly away.

Global Geoscience is still listed, though it trades under the name Ioneer these days.

Getswift also made a reappearance on the local stock exchange, relisting at the end of 2016. The company took its shareholders on a wild ride, surging upon relisting, then delisting, only to relist again in Canada, where it would eventually collapse.

In the end, the company did make a mark, although probably not quite in the manner the management would have liked.

Earlier this year, Getswift was ordered to pay a record $15 million fine for corporate misconduct. The ex-footballer also copped a fine and was banned from managing corporations for 12 years.

This experience resonates with me, because it illustrates how often on the stock market, there often no clear right or wrong answers.

By selling Global Geoscience after they announced the Getswift acquisition, I missed out on a potential windfall. On the other hand, Getswift proved to be a decidedly dicey company. So my instincts weren’t entirely wrong.

Do you have a favourite Livewire contributor?

Anthony Kavanagh. He seems to have a remarkable knack for thinking the same things I am thinking, at much the same time. One other contributor who I pay close attention to is Jerome Lander.I find he tends to have a fresh and interesting take on the macro context.

Is there a lesson you’ve learned as an investor that could potentially help others?

I think there is a common perception today that investing in stocks is akin to gambling in a casino, abstract and remote from the real world. It is easy to lose sight of the fact that listed companies operate in the real world and are run by real people.

It pays to remember that the leaders of even the biggest companies are human and as such, they’re often keen to engage with “outsiders”, especially if you have something interesting or insightful to say. Investors can, and I think should, engage with industry and corporate stakeholders. I think that is part of the stock investor’s job.

As mentioned above, I wind up my stock-picking process by sending an email to each company that has made it onto my shortlist. A few months ago, I kicked off this final step of the process, shooting off emails to several different ASX companies that had made it to the list. Three of them responded to my queries.

What caught my attention was that one of the three responses I received was from the largest of the companies I had contacted, one with a market cap sitting well above the $100 million mark. Even more intriguingly, the response was from the MD, who also extended an invitation to give him a call at some stage to further discuss the dynamics of the industry in which the company operated.

Think about that for a moment: some random non-holder sends an email expressing an interest in investing in the company, and the MD not only responds, but is also keen to have a chat about the business? That speaks to passion.

I’m confident that that particular company will do well. It illustrates how engaging with a company can offer up important clues about the mindset of the management.

After making contact with the management of a company, I make a conscious effort to periodically stay in touch with them if possible. Maintaining open lines of communication brings mutual benefits: the shareholder learns about the stock, and probably gains more insights than they would from simply poring over the financial statements. 

At the same time, the company management gets a better sense of the expectations of the shareholder. From where I stand, that's a win-win. 

Are you interested in being profiled in our Meet the Investor series?

Meet the Investor is one of Livewire's most popular series, helping us draw on the insights of our incredibly knowledgeable readership.

We are looking for more readers to profile in 2023. If you would like to share your story (and get a free limited edition Livewire cap) please send us an email at content@livewiremarkets.com