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....