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.

Oracle

I recently added to ORCL @ 32.80.

Full Of Gas!!!

Natural gas (NG) has more than doubled to around $4.10/MCF, from the 2012 lows of $2.00./MCF. The market has been very bearish on nat gas, for some time. Some even speculated ( last spring ) that since America is so full of gas, thanks to fracking and shale revolution, the price could go to zero! Huh !! zero article. As many know, I'm generally not a fan of commodities, but I do like to buy them when they sell for less than their marginal cost of production. At that point, producers must act, cutting supply and looking for new demand opportunities. Nat gas, over the past year has fit that bill. Recently, the UK's largest utility, Centrica PLC, has signed a 20 year deal to import liquefied natural gas (LNG) from the U.S. Other similar deals are likely to occur as NG trades significantly higher in other parts of the world as compared to North America ( $15/mcf in Japan). The good news for us as investors is the market has been slow to react to the shift in the winds of NG. The stock of many NG producers have lagged, particularly the larger cap firms. I prefer the U.S. producers, due to scale and distribution advantages ( Ecana excluded ) over many of the smaller Canadian producers. Several U.S. producers are also under fire from activist shareholders which could help unlock value going forward. I like the basket approach to NG, owning several cheap names in the space. If your heart is set on owning only Canadian stocks, then Ecana (ECA) is a buy here @ 19.

I like and own Sandridge Energy (SD), Exco Resources (XCO) and Chesapeake Energy (CHK). These are longer-term plays and will require patience - like most value investments.

Be Careful Reaching For Yield - You Could Get Burned

Over the past few years, "thanks" to record low interest rates, some investors have been starving for yield. Many have bought "investment" instruments with high dividend yields ( 5%-6%+) in search of income, with little regard to quality or price paid. Over the past few years the prices of many utility, telco's and pipeline companies have been bid up to very lofty levels ( I usually get a nose bleed around 20X earnings). Here's a quick look at 2 pipelines and 1 telco. Granted, some of these companies have had excellent financial performance and deserve a good multiple. The 3 companies listed below are good companies, just really pricey. However, as a whole, these utility type investments are well above traditional prices for low-growth, high capital expenditure, regulated businesses.

                                        P/E        P/B      P/CF   Div Yield*
TransCanada Pipelines      20X      2X       10X     3.8%   
Enbridge                           22X      3.5X     11X    2.7%
BCE ( Ma Bell )                15X      3X        6X     5.0%

* These yield may look low, but that's due to the rapid rise in the underlying stock price lately.

To be clear, owning a utility with consistently rising dividends is a good thing. As long as the price you pay is not excessive. If you overpay for the yield and the company-in-turn has a problem or encounters poor industry conditions, then the price can get hammered. Then, you're dreams of stable income forever are interrupted by a dividend cut and possibly a big capital loss.

Case in point: This past week investors were surprised when a Canadian power and infrastructure company, Atlantic Power Corp ( ATP.TO) reported results for 2012 along with a dividend cut. As little as 4 months ago, ATP was cruzing along with a market cap of 1.67Billion ( around $14/share ) and paying out a nice $1.15/share/year in dividends, for a yield of 8.2%. Paid monthly - starving income investors love that.
What people didn't realize is that ATP has been paying out virtually all of it's earnings as a dividend, leaving little to re-invest in a capital intensive industry like power generation. ATP has regularly raised both debt and equity to fund the business ( never good when you keep doing that long-term ). Management, all the while, inferring that the dividend was stable.

When the dividend was cut on February 28th to $0.40/share/year, a whopping 65%, the stock tanked some 50%. As I write, ATP is trading at $5.50. Had you been an owner at the $14 level you'd be sitting on a 60% capital loss and 2/3's less dividend income then you had expected. Not fun.

The message: it's OK to look for yield in the market, in fact it's the best place right now to get yield. But, you have to look under the hood before you invest - or risk getting burned. I too, have reached for yield, and was burned - anyone remember Amisco Industries??? Fortunately, it was many years ago and a very small amount of $$$ - but it still hurt.




If you're wondering if it's a good buy now? For me, I might get interested under $3. I'm not a fan of management's capital allocation practices and the shaky balance sheet.

More Proof Stock Prices Are Lofty

Maybe it's time I sign over my account to her...

16-Year-Old Actress Turns Into Stock Day Trader

Rachel Fox isn’t an ordinary 16-year-old. She's already graduated from High School and has been a working Hollywood actress for years, appearing in shows like Desperate Housewives as evil Kayla Scavo and in the film Dream House with Daniel Craig and Naomi Watts. When she’s not on set she can often be found on stage, singing and playing guitar in an indie rock band.

That would be a packed schedule for most of us, but Rachel has another activity that’s a real passion. For the last year-and-a-half she’s been actively day-trading stocks with her own money. She says she's been racking up stellar returns, claiming a 30.4% gain in 2012, versus the benchmark S&P 500 which gained 13% for last year.
While she’s doing it all, she’s also helping teach people about investing via her website FoxOnStocks.com. On the site she updates her thoughts on the markets and posts videos for those new to the game; teaching them how to do the basics like finding quotes and understanding what a stock option is. For now, the blog is just for fun, she has no plans to monetize; just teach others how to invest, the way her Mom taught her.

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