2015 And Beyond

With 2015 wrapped up, we have our sights set on what we expect will be a better year in the markets.
The S&P 500 has returned 0.6% (CAD) while the S&P TSX TR  has returned -8.3% (CAD) for the year ending December 31st, 2015. For the same period the our portfolio has declined 8.1% – dividends included.   We suffered mightily, under the weight of weak commodity prices. I've been my reducing energy exposure for sometime, all the way back to August of 2014, with the outright sale of Hess Corp. (HES) at prices between $83-$100. Little did I know that was the top for energy....like the old saying - "nobody rings a bell at the top or the bottom". With prices across the energy board at near historic levels, now is not the time to turn our back on energy - warts and all. There's still value in the well run operators and the service businesses that support them. If I didn't have energy exposure already, then HES, YPF, AR, BXE.TO, would be good places to commit some capital.




On the bright side, we continue to enjoy the tailwind of a strong USD, which has been in place for several years. We are significantly overweight USD assets...but change is in the air.
While no one knows if the CAD is done going down, but odds are we are close to the bottom. The USD against a basket other currencies, measured by the "Dixie" - DXY, seems to be getting toppy. We will look closer to home for undervalued securities, and trim our USD exposure.







Here's a look at our top five holding as of the end of 2015:


Berkshire Hathaway (BRK.B)………..    11%

Bank of America (BAC)……………..      9%

ChipMos Technologies (IMOS)……...     7%

American Intl Group (AIG)….……...      6%

Posco Steel (PKX)…………………...      6%

All the best for 2106! Happy investing!





www.roi-report.com

Activist In Gear - AIG

News broke this past Wednesday that famed activist investor Carl Icahn has built a position in insurance giant AIG - our 3rd largest holding - thanks Carl! Icahn, in a letter  to AIG, is suggesting the company break its self up into 3 smaller firms. He thinks that AIG is too big to succeed, and would be able to improve their competitiveness against their better run rivals. We find it hard to disagree... Is it worth $100/share? We will see. We will continue to sit on our hands and watch the developments with interest at AIG.











www.roi-report.com

Yellen Yell'In

Federal Reserve Chairwoman, Janet Yellen's recent remarks about "quite high" equity prices in the U.S. and the risk that poses to the broader economy. In Fed speak, she is saying; as prices rise, so too does the tendency of market participants to take on ever greater risk. She is right on - remember 2008?  Risks are present, however they always are...so just how expensive is the market and what do we do?

Note: This chart excludes the 2008/09 meltdown, where earnings dropped significantly and P/E's went through the roof. Normally you would see a spike on this chart in late 2008 and early 2009.

It's not hard to tell from this chart that the market is not dirt cheap or priced wildly high. You can see that from 1935, we have basically seen a trough of 10X and a peak of 22X. It should be noted that interests rates were much higher at almost any point prior to 2008. With record low interest rates, it appears that their is still room for the averages to move higher. However, any move higher will likely be in a choppy fashion, as the market continues to worry about interest rate hikes, GDP growth, and unemployment.  Bargains are harder to find, but as the famed Canadian investor Peter Cundill once said - "there's always something to do". There are still pockets of value. Sectors including U.S. money center banks, industrials (auto's, engineering firms), large cap technology and energy offer value. But remember, always have a margin of safety! A black swan can appear at anytime. If indices move higher, we will continue to harvest our holdings and raise cash. Bull markets generally mature on optimism and die on euphoria - we don't see any euphoria.
 




www.roi-report.com

Citi Streamlines

Citigroup (C), one of our long-time bank holdings, has recently offloaded sub-prime lender One Main. Citi will sell One Main to Springleaf for $4.25B. Citi expects to book a pre-tax gain of $1.0B on the deal. While One Main is a profitable business for Citi, it's also a risky business for the bank. Citi seems to be stepping back from consumer banking and focusing on corporate and commercial banking. This transaction should free up capital backing One Main - allowing Citi to increase dividends or share repurchase or deploy the capital elsewhere. The bank can also use some of it's $50B in deferred tax assets against the transaction. In a similar move, the bank just today, announced another sale of non-core assets. Citi sold it's 9.9% stake in Akbank ( Turkish retail bank ) for $1.15B. The bank will continue to operate in Turkey through it's security clearing and settlement transaction business.

 

Citi continues to move in the right direction and remains undervalued at <10X next year's earnings and 0.8X book value. We think Citi is good value <$50.

 

 

 

2014

With 2014 behind us, it's time for my usual post-mortem review on my portfolio. With a return of 3.4%, I trailed the TSX return of 10.8% and the S&P 500 return of 13.8%. I don't fret about any 1 year's return, it's the five year returns I'm interested in. I'm still well inside my comfort range on the 5yr (mid-teens %) returns.

Figuring out what worked and what didn't this year was easy. Here's a look at several of the S&P 500 sub-sectors:

Winners                                   Losers

Financials    +13.5%               Energy      -10.3%

Technology +21.1%                Industrials +7%

Utilities        +26.7%               Basic Mat. +2.7%

Healthcare   +25.3%               Telecom    -0.1%

Exposure to financials and technology was a huge contributor to my 2014 return. Without that exposure, 2014 would have been a down year. Energy and materials were a major headwind in 2014.

I under estimated the floor on oil, thinking we would not see less than $65-$70/barrel. As you know oil is currently under $50. Some energy companies may become financially unstable if oil continues to languish. If you owned U.S. stocks in 2014, then the falling Canadian dollar (CAD) also provided a tailwind. Weak commodity prices will likely continue to weigh on the CAD going forward. The Canadian economy will also suffer.

Looking ahead to 2015, there's still value in the financials. The large money center banks like Bank of America and Citigroup are finally moving past the huge legal challenges ( and monetary settlements ) they have endured over the past few years. As recently as last week, investors dumped bank stocks as they continue to worry about NIM's ( net interest margins ) thanks to falling bond yields. While lower NIM's may hurt BAC and C, in the short-run, we think these banks have tremendous earnings power going forward. We'd add to both BAC and C now.

Other areas of value include technology, where I continue to add to the mega-cap tech companies that have improving fundamentals - Oracle (ORCL) to name one. Industrials also offer value, as they were poor performers in 2014. Specifically, there's value in the auto makers and steel companies.

 

While we don't know what's in store for the markets in 2015, it's sure to be full of surprises. There are still cheap stocks - we are cautiously optimistic. All the best for 2015!

 

 

 

 

If you are interested in more detail on our portfolio - check out www.roi-report.com

 

 

 

Tight Credit & Cross Currents

 

A recent news story surfaced, highlighting just how tight credit conditions still are in the U.S.

Former Federal Reserve Chairman - Ben Bernanke, the top dog at "America's Bank", the one who poured trillions into the economy after the 2008-2009 financial crisis, recently tried to refinance his $670K mortgage with little success. If America's top banker can't refi, than who can? The pendulum on lending standards have clearly swung too far. Tight credit might explain the slower than normal economic recovery south of the border. Housing, which also has recovered, albeit at a slower than normal pace, could benefit from less stringent lending. I'm sure that when the Bernanke news hit the wires he received several offers for a refi on his Washington home.

 

In other news, energy prices continue to slump dragging energy companies along with them. The fall of some energy names has been truly amazing - considering many are hedged and have solid or improving balance sheets. News recently surfaced that Oklahoma wildcatter - Harold Hamm, CEO/founder of Continental Resources proclaimed that there is no oil glut. Hamm is known as a outspoken risk taker, but this time he has put his money where is mouth is. He recently, cashed-out of some $4 Billion worth of oil hedges (@$98 hedges), netting a cool $470M. Hamm's case rests on his theory that there has not been much of a change in the global supply/demand picture. Continental, now un-hedged, will benefit significantly if oil prices rise. Hamm's recent move runs directly against the street's current outlook on oil and just might give him the last laugh.

 

We continue to pick away at our depressed energy holdings with a view to better days ahead. However, our overall energy exposure has fallen over the past 6 months, with our sale of Hess Corp (HES) at an average price of $89.



Drill Baby Drill!!! - YPF SA

News quietly emerged this week from Argentina that the federal government has agreed to amend a 1967 energy bill in the cash strapped South American country. The revisions will allow foreign and domestic oil companies, like YPF (which we've owned since 2012), to export some quantities of oil into international markets. Argentina, under the current leadership of Christina Fernandez de Kirchner, has been quite restrictive allowing only a few foreign players into the domestic oil patch - under onerous conditions. Kirchner, since expropriating YPF from Spanish oil giant Repsol in 2012, has realized they need foreign expertise to develop the massive Vaca Muerta shale oil/gas fields - as the country has been struggling with falling production and stubbornly high development and production costs. YPF has recently signed partnerships with U.S. based Chevron and Petronas - Malaysia's state oil company. Why all the fuss over oil/gas in Argentina? Well, the Vaca Muerta fields, the size of Belgium, hold the worlds fourth largest shale oil and the second largest shale gas deposits - some 27 billion barrels of oil equivalent and 800 Million TCF of nat gas. Despite the political and economic uncertainty (including 8 debt defaults since 1894) we think the value of YPF's oil in the ground will likely remain relatively constant - which is currently north of $50/share of YPF, well above the current stock price. We are also pleased to learn that legendary hedge fund manager George Soros's family office, is new owner of YPF, with a 3.5% stake valued at some $450 million. We would add to YPF on a meaningful pull-back in the low $30's.

 

Citi Settles & A New Stock

Regular readers will know we've been a fan of the U.S. Mega-banks for some time. Citigroup (C) is no exception, we've owned it since 2010. It's possibly the most hated bank in America now - right up our alley. Although C is out of favour with the street - there is still value - here at $49. The company has recently settled a court case with the Department of Justice (DOJ) - related to the bundling and selling of mortgages that went sour during the financial crisis. Many expected the settlement to reach $10 billion - Citi settled for $7 Billion. Citi also is recovering from a fraud case at a Mexican subsidiary - Banamex. Finally, Citi this past spring, failed a review conducted by the government on Citi's books. We didn't expect them to fail the review - nor did the street. I'd expected Citi will be extra cautious on the next review. Passing the government's review will allow C to raise the dividend and buy back stock. Both will be welcome by the markets. Citi still trades at a meaningful discount to it's tangible book value and at less than 10X next year's earnings - Citi is cheap. We're not adding, but will continue to hold for full value.




While the markets have steamed ahead the past few years, we are still able to find pockets of value.
We look in areas that are out-of-favour, un-loved and under stress. Our search reminds me of one of my favorite quotes from the famous investor John Templeton - "stocks are rarely popular and cheap at the same time".

Our search has led to an industry that boomed from 2002-2007, and is now un-popular and cheap.
Many companies in this industry are well capitalized, operate globally and pay healthy dividends.
Subscribers to the www.roi-report.com know that we have started a position in a mega-sized company in this industry.

If you are interested, you can check out www.roi-report.com

Enjoy the rest of your summer!

News

After much consideration and planning, I'm pleased to announce the launch of my investment newsletter - The ROI Report. You can check out the website here: www.roi-report.com

I haven't figured out yet, if I will continue to post on this blog - as it is only right that my subscribers have first access to my research and portfolio changes. I may continue to post interesting discussion on the market and other topics related to value investing. I'll keep you posted. If you have any questions about the newsletter, just drop me a line @ info@roi-report.com



Happy Investing!!!

Where are we?

Spring Pruning

I have recently done some pruning in my garden and my portfolio. I won't bore you with the details about my garden. In my portfolio I've done a little selling (reduced positions by 15% or so)  of the following names:

Manulife (MFC.TO) @ 20 1/8
Hess Corp. (HES) @ 88

While, these companies aren't quite fully valued, they have done well and I'd like to have a little more cash around. Many market participants are quite bullish these days, and that's a cause for concern. I have a growing list of ideas to put money to work, but will need lower prices to pull the trigger. Until then....we wait.

Small Add To Chippy

I recently added to long-time holding ChipMOS Technologies (IMOS), a semi-conductor test and assembly business. I added early on in Q1 at around $18 3/8's and also a very small add, this past week
@ 22 1/8.

IMOS has benefited from industry consolidation and the boom in smart phones and tablets. There is good chance that your phone or tablet’s chip sets have been tested and/or assembled by IMOS. The firm continues to land new business and transform itself from a debt laden firm just 5 years ago to a lean profit machine. IMOS is also currently undergoing a corporate re-shuffle, by way of a new stock issue on the Taiwan exchange, where IMOS is better known. I expect the U.S. traded shares to close the gap between their Taiwan listed shares.

The stock is up 23% YTD, and continues move closer to our intrinsic value estimate of $30


.

 

Magna

I recently sold the last of my position in Magna (MG.TO) @ $103. I will continue to follow the developments at MG, and look forward to being a shareholder again - at much lower prices. I still have exposure to the auto sector though GM (GM or GMM-U.TO) which remains good value, here at
$36. Good and cheap companies are getting harder to find. As a result, my level of cash is slowing rising. But there's always something to do - I've got a few ideas, but I'll move slow hoping for a sell-off.

A Little Shifting Around

I recently sold 2/3's of my shares of Magna International (MG.TO) @ 96 1/2. Business at MG is humming along quite nicely. Europe, which makes up 40% of their business is finally turning around. But the stock price is fast approaching my estimate of intrinsic value (raised from $50's to mid $90's), and it's time to scale this position back. I don't like holding fully valued stocks, when the market is frothy ( more downside risk ). I wrote about MG here.

I used some of the proceeds from the sale of MG to add to PWT.TO at 8 1/8. PWT is cheap and un-loved. I wrote about PWT here. This year will likely prove interesting for the Canadian oils, as several major pipeline initiatives are underway (pending approval), potentially paving the way for narrower oil differentials. Combined with a lower $CAD and reduced capital spending by the oils, the Canadian oils may finally attract some attention by the market.

I expect 2014 to be a positive year, but no where near the +41.5% (in CAD) return of the S&P 500 in 2013. Expect volatility - but with that comes opportunity, as the past 2 weeks have shown.

Can They Both Be Right?

You've probably heard the news that famed value investor Warren Buffett, has bought $3.7 billion of stock in Exxon Mobil (XOM). Some view this purchase as a classic Buffett buy - buying a good/great company in an industry that's been out of favour.  Oil and gas has certainly been out of favour for some time ( particularly -low gas prices in North America ) since the depths of the 2008/2009 recession. What makes is this transaction interesting is, recently famed short seller Jim Chanos,  founder of Kynikos Associates has been pounding the table, suggesting that big oil is value trap. He is suggesting production and development costs are high and moving higher, hurting the hefty cash flow that oil companies generally produce. Maybe, both investors are right? In the short run, absent major inflation, these higher costs may hurt the majors - 1 point for Chanos.  However, Buffett usually buys for years and not quarters. Looking out 5+ years, this might prove to be another Buffett score. If/when inflation picks up - XOM will be a good hedge (as are other oil/gas companies). In the meantime, XOM will continue to grow slowly, benefit from higher nat gas prices going forward, and return capital to shareholders. I will continue to watch oil majors with interest.

Along the same lines, the Canadian oil patch continues to be cheap. Suffering from wide differentials ( Western Canadian Select oil price vs. West Texas prices), high costs and a sluggish economy, many Canadian producers have been hurting. The prices of many of these companies has come way down from the boom days of 2003-2007 (PWT traded at $50). I have recently started a position in one such company - Penn West Petroleum (PWT.TO) @8.55. PWT is undergoing a transformation, including, a new CEO and Chairman, asset sales, staff reductions and a hefty dividend cut (50% cut). The company has recently sold $485 million in non-core assets, with $1.0 billion scheduled for 2014. Recently, the market clobbered PWT on news of the assets sales and weak guidance for 2014. You'd think the market would have liked the changes afoot. Not so - many stock owners of PWT, have given up. It's down from the mid $20's (2011-2012). Tax loss selling combined with recent news has provided a good entry point, with PWT selling well below NAV along with a 6.6% dividend yield. See chart below.



Wide oil differentials won't last forever....

AIG

Today, I added to my position in AIG @ 48.50. AIG reported Q3 results today, which were solid, except for the poor results in the P&C division. The market is cantankerous and has sold off AIG. Improved earnings, growing book value and continue share buy-backs will serve as a tailwind for AIG going forward. The company expects a decision in the coming months regarding the ILFC division ( aircraft leasing business ), which is deemed a non-core asset. The additional capital from the sale/IPO of ILFC should benefit long-term shareholders in the form of increase dividends and/or share buy-backs.

Bits and Bytes

 

It's been a busy fall. I apologize for the few number of posts over the past few months. One area I haven't written too much about, but where value still exists, is large cap technology companies. Cisco (CSCO) is a company I've owned since the summer of 2011. I mentioned it here . While CSCO has since run +50% from $16 to $24, it still has steam. CSCO, is the industry's 700 pound gorilla. They dominate many of their markets in networking, processing and data storage. Data storage has been a huge growth area for the company, along with wireless and video technology. You probably use a Cisco router and/or cable box in your home. Your online files, might be sitting on a CSCO server farm. The industry is seeing huge growth in data moving across networks. Industry sources, indicate that network traffic will increase 17X over the next 7 years. The explosion of smart devices, networking and data, will provide steady demand for CSCO and it's competitors. CSCO has been chalking up better earnings in 2012 and 2013. They are on track to earn $2.05 this year, and $2.25 next year, combined with continued share buybacks and a hefty dividend, I expect double digit total returns going forward. The current dividend yield is 2.8% and growing. CSCO is good value right here around $24.

Here is a clip of CSCO CEO John Chambers and Google Chairman Eric Schmidt ( a big user of CSCO gear ), discussing the industry and rapid growth in data.

click here

Gone Fish'in

 

Taking a break from Mr. Market 'till mid-August. 

 

 

 

 

Thank Ben!

I recently wrote ( early June ) about hoping for a summer swoon in the markets to deploy some cash. Well, it seems the swoon has started. Ben Bernanke, the Chairman of the Federal Reserve, recently announced that the Fed, may start to taper their bond buying from the current $85 Billion/month. The market, in it's typical manic depressive fashion, has taken this as bad news. The markets have been hammered the last couple of weeks ( S&P 500 down 5.1% from recent highs ), as the Fed takes away the punch bowl ( a gusher of cash/liquidity) from the equity party. Stocks have done well the past 12 - 24 months, and have out-run the underlying economy. This pull-back is much needed to recalibrate people's expectations of future profits - corrections are healthy. All of this selling of bonds ( when bond prices fall, yields go up ) and stocks forced people to the safety of the USD. If you own U.S. equities, you will benefit, particularily if you are Canadian. The CAD is headed lower. You will also benefit if you own insurance companies that make more $$$ from higher bond yields. Manulife ( I own MFC), Industrial Alliance and Sunlife all touched 52 week highs, this week during the sell-off. It's a good place to hide. The bond market is telling us that the economy is getting better and rising rates are confirming that. It's a good time to add to existing holdings, that are still undervalued - or start new a position. Just don't buy all at once, buy slowly.

I have recently added to CHK@ $20 and started a new small position in a un-loved U.S. based mortgage insurer.

Bye Bye Big Lots

I recently closed out my position in Big Lots (BIG) the U.S. based discount retailer at $33 and change. After 2 years of owning BIG, it's seems they can't find their mojo. Management issues, inventory back-ups and weak merchandising have all hurt BIG. I've decided to move on and continue to build cash, hoping for a summer swoon to add to other more favourable positions that I currently own. I was able to exit with a razor thin profit. That's our kind of mistake - when an idea doesn't work-out we want our money back. I don't like losing money. Retail is a tough business, when you're competing against the Costco's, Walmart's and Amazon's of the world. Just look at this:



On another note - not related to retail.

If you didn't read my post in March on yield - click here

You may have noticed that interest rates ( not the short-term rates set by the Fed ) have been backing up ( going up - so bond prices have been going down ) over the past month and half. The U.S. 10 year bond has risen from 1.7% to 2.1%, which may not sound like much, but it's enough to make people skittish on the interest sensitive stocks like the pipelines, telco's and Reits. They have been selling off - they are STILL QUITE OVER VALUED. They are vulnerable to the downside if rates continue to go up. Here's a look at a few Canadian household names over the past few months. The sell-off in these names has already wiped out your divy for the year - caution - turbulence ahead:

Firing On All Cylinders

Back in December of 2011, I wrote about a new holding ( read here ) Magna International ( MG.TO), a Canadian based auto parts company. Having just finished reading the 2012 Annual Report and the Q1, 2013 results, I'm raising the intrinsic value of MG. My original work suggested MG was worth $55/share, but business at MG is booming, even beyond management's expectations. Over the past year MG has worked to improve their struggling European operations and continue to build-out South American and Asian plant capacity. MG is now running 313 manufacturing/assembly and engineering facilities. MG is truly a great Canadian multi-national. They are seeing strength in Eastern Europe, ( which they now fold into the "Europe" category, as opposed to East and Western Europe ) Asia and North America. MG has raised their outlook for North America to 15.9 million units ( way up from close to 12 million at the end of 2010 ) and Europe to 18.4 million units ( up from 13 million ). Management has also indicated that they will back away, a little, from having so much cash on the balance sheet. They have indicated that returns to shareholders will increase, via dividends ( just raised to $1.28/share ) and share buy backs. In fact, if MG does take on a little debt to grow, the market might even give MG a higher multiple. What's clear is: MG is enjoying tailwinds that will likely persist through 2014.

I'm usually hesitant to re-value a cyclical company like MG much higher than my initial work. However, in this case I'm comfortable ( and was too conservative ) with a new intrinsic value for MG of $78-82. I'll take comfort in that MG is still trading cheaper than almost any of it's competitors. The average North American parts supplier ( BWA, JCI, TRW, LEA, DLPH) is trading at 13X. MG trades at 10X.

So now what? I will continue to hold MG. If you want to own MG, don't dive right in, MG has been performing very well lately. Wait for a pullback - there is sure to be one. But don't ask me when - I have no idea.