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