Now What???

As the markets take a turn off of Greed Street on to Fear Avenue (which started in April ), it's time to pull-over to the slow lane and watch the traffic jam. People are running for the exits. The S&P downgrade has spooked the market. It's important to note that the other rating agencies like - Fitch and Moody's don't feel the same as S&P. The CBO ( Congressional Budget Office ) has commented that S&P has made a 2 Trillion dollar "mistake" in their 10 year calculations. But S&P's downgrade/outlook is for the next 2-3 years -what gives? You would expect the rating agencies to have a longer-term outlook for a sovereign like the U.S.  At the end of the day, you have to ask yourself if the companies in your portfolio are really worth 15%-20% less now, then a couple of months ago. In most cases they are not. It's also interesting to note that Carlos Slim ( currently the richest guy in the world ), made his mark by buying  businesses AFTER the 1982 Mexico debt default (not downgrade, but actual default). Businesses still have value that on the whole, will increase over time. As I wrote recently, it's good to have cash. There are now many high quality companies available at discount prices. But, you have to move slowly, as not to get run over. So now is not the time to go "all in" but just pick away. With the current market conditions, it is also a good reminder why it's important to have an unlevered ( little or no borrowings against your portfolio ) account. It's time to sit tight, with no bothersome calls from your broker's credit department, and pay close attention to the price your paying for stocks. There is no hurry - move slowly.

Remember Buffett's quote: " the market is there to serve you, not instruct you"

Mid-Summer Gyrations



uncle sam



You have no doubt heard by now that the U.S. debt ceiling deal has been passed. For interest sake, the debt ceiling has been raised 78 times over the past 50 years. Many of those previous deals never made the front page news. This time, it hit the front page of every news paper around the world as the U.S. struggles with chronic deficits. As a bottoms up ( looking at individual companies ) investor, I don't spend much time trying to figure out what's happening in the overall economy. I just look for good cheap stocks. It reminds me of the famous investor Peter Lynch's quote:

  

 "Predicting the economy is kind of like trying to predict the weather.  Yes, you can get close
      but very rarely are you completely right."



After all, how many people accurately predicted the 2008 financial collapse? Not me.
However, the pessimism that has gripped the markets for the last while, has created opportunity.
I recently wrote, that it's a good time to have cash. Well, now it's a good time to start deploying that cash - but slowly. But remember, we are only 5-7% off of all-time highs, so you have to be very price sensitive as not to overpay. But there's value for long-term buyers of equities. I've recently added to CSCO, BAC and BIG.

There's also value in FFH.TO, WFC, MFC

Disclosure: I own FFH.TO, WFC, MFC, CSCO, BAC, BIG

Say What?

Famed value investor - Bruce Berkowitz has been under fire lately for the "poor" performance of  his flagship Fairholme fund. The fund has experienced $2.5 Billion in redemptions (still has $14 Billion under management)  in the last 3 months alone. Retail investors, in their short-sightedness, have run for the exits. This behaviour proves why markets are not perfectly rational - as some think. The market as a whole is impatient and cycles back and forth from optimism to pessimism and back again. I have been an avid reader over the years of anything Berkowitz related - he is a great teacher. His is truly one of the great investors of our time. Since inception of the fund in 1999, he has returned 13.90% compounded annually, while the S&P 500 has returned approximately -1% over the same time period (see chart below - WOW!- sorry for the small chart). He was named manager of the decade (last year) by Morningstar, for good reason - he has clobbered the indexes. The herd/short-term mentality will continue to hurt mutual fund investors as they try to move in and out of funds with precision. They usually end-up selling or buying at precisely the wrong time.  If you own mutual funds, study the manager's track record, style and investing framework. Then, if it suits your style and temperament, buy for the long-haul. Berkowitz is a BUY.

 

Click here for Fairholme Fund Chart -stretch out time frame to 10 years.

Just About Time

Here is the cover of this week's Time magazine. This reminds me, although to a lesser extent, of the famous Business Week cover from 1979 - published just before the start of the greatest bull market in history - 1979 to 1999.






It's important to note that these publication are not wrong in the data they present. In fact they are basically right on, with respect to the problems the economy faces both then and now. The problem is their timing - they are out of sync with the market. They are reporting on issues and events that are already discounted in the market. The current soft patch is baked into the cake. So, anyone reading this cover would get the idea that it's time to sell. Remember the market looks out 6 to 12 months. The recovery is happening, just not at the brisk pace that everyone expects or wants. The S&P 500 is down 7.1% over the past 6 weeks. The TSX is down 9.1%. Prices are more reasonable now then 6 weeks ago - but you still have to be selective. My crystal ball is no clearer than yours, but lower prices are good - for buyers. It's good to have cash now, for those down days when you can pick away at good & cheap stocks. There's value in BIG, CSCO, BAC (bought some today @ 10.61) and BRK-B. It's just about time - to buy.

Move Over Costco

As a follow-up to my last post about the retailers - I failed to mention that I also closely follow Costco (COST) as they are one of North America's best retailers. Jim Senegal is one of the best CEO's out there. It's a company I'd love to have in my portfolio, but it never seems to get cheap enough for me to pull the trigger and buy. My wife is personally responsible for the steady same store sales increases at select stores throughout Ontario - she loves a deal.

The retailers continue to be under pressure. I have taken an opening position in Big Lots (BIG) earlier this week with an average cost of $32/share. This is not a deep value asset play, but a discount to earnings power play. BIG is a good business with a good future and good management - worthy of hitching my wagon to. BIG has sold off over the past 3 months as several potential private equity buyers failed to offer enough to take BIG private and worries about a softer economy ahead. CEO, Steven Fishman is well aligned with shareholders and has made the right decision by staying public - for now. It's nice to see a CEO who is so focused and will publicly speak about areas of the business that need improvement, (see page 5 of the 2010 AR) not just tell shareholders about what has gone well. The crew at BIG are very good capital allocators. Just look at some of these statistics:

EPS growth 10 yr:           11%
Cash flow Growth 10 yr:   8%
Long-Term Debt: NIL
Share buybacks: bought back 1/3 of the company in the last 5 years.
ROE: consistently >20% - even more impressive as they have no debt.
Rising op. margins over the last 5 years. 5.7% ------> 8.8%
Free cash flow: a little over $200 million, for a FCF yield of 10%

BIG recently lowered guidance for the year - which for me doesn't matter - but the "street" has become a little pessimistic. I'm looking out a few years - if Fishman and his team just continue to do what they have done in the past BIG shareholders will do well. On a conservative ( little or no growth) basis, the company is worth somewhere around $45/share and maybe as much as $55 if they just grow at modest rates going forward. If another buyer does emerge - and is willing to pay $55 - I'll tender.

I will continue to add to BIG over the next few months if the market moves lower.

Retailers Getting Whacked

The market seems appears to be moving from a period of greed to a period of fear. World markets are pricing in re-newed problems in Europe, particularily in Greece, where Government bonds yields recently reached 17%. The market is also fretting about higher energy and material costs, combined with slower growth ahead. Finally, investors are pricing in the end of QE2 ( the US government's program of adding liquidity and capital to the economy - boosting asset prices) in June. Some of the first casualties of this downward repricing has been the retailers. Several retailers over the last month or so have been whacked -for the reasons above. Most of these retailers depend on discretionary spending to survive and prosper. Investors are clearly worried about the future of consumer spending and the economy.

I would expect the sell off in commodities and cyclicals to continue as the market grinds lower over the summer. This pull back in retailers will - at some point - present a buying opportunity. But it's early, so I'll wait for lower prices. My short list of retailers includes Rona, Big Lots and Best Buy.

Now is a good time to have cash.

The Golden Arch - Buyout Not Burgers

In a recent post I suggested it's time to re-evaluate my metal and mining stocks. I suggested that many resource stocks (excluding forestry and ag companies) are fully priced, with little upside left and more risk on the downside. On May 2nd, a company in which I hold shares was bought out - at a significant premium. International Coal Group (ICO) has been purchased by Arch Coal (ACI) in an all cash deal valued at $3.4 Billion or $14.60/share. The deal is expected to close in Q2, so I won't sell into the market, and I will wait for the commission free capital from ACI. In the meantime, I'll pray the Canadian dollar weakens.This event was a pleasant suprise as I didn't expect ICO to be bought out. I first purchased ICO in January of 2010 with the intent on holding for many years. So, with two buy-outs ( ICO, LUN.TO) my resource exposure will fall dramatically.

 I do expect another corporate event to occur with another miner I own - Hudbay (HBM) - but that's no reason to buy HBM now. I'll wait patiently for developments at HBM.