Rolling the Dice on GE - March 19, 2009

Having spent the previous four months as a slack-jawed gawker as the stock market was shoved face first into the meat grinder by the global economic crisis, temptation finally got the better of me and I picked up some shares of General Electric for about $7.60 on March 2, a particularly rough day for the stock. Moths flying towards bug zappers might wonder why I was attracted to such a bellwether American stock when the US economy is teetering on the verge of a depression.

My purchase of GE is simply a less cowardly version of the strategy I have taken since the market collapsed, which to this point had been to buy index funds with the assumption that, while some companies will go bankrupt, at some point the market will turn around and this period in history will be looked upon as a good buying opportunity, as have most bear markets. GE has long been one of the best managed companies in the world, so I am reasonably confident that they will find a way to weather this storm.

GE is a stock, similar to ICICI, that I have followed for years but for one reason or another was never able bring myself to pull the trigger on it. It is involved in a number of growth industries, such as water, nuclear, and wind power, and unlike Nortel, it remains one of the market leaders in these industries. During bull markets, investors often make the mistake of falling in love with well managed companies and driving up the valuations to unwarranted levels. GE itself became an example of this at the end of the 90s when Jack Welch was being hailed as the world’s greatest CEO. Mr. Welch may well have put together the best managed company in the world, but investors simply had unrealistic expectations on the growth that one of the world’s largest companies could deliver. It seems to me though that in tough times investors put too little stock in management.

When times are booming, it is important to pay attention to the numbers to make sure you don’t get carried away and overpay for a stock. When times are both tough and volatile like we are currently facing, I believe it is equally important to focus on the quality of management. When every company is losing money, numbers alone will not tell you who will survive. It is the quality of management that will often determine which companies can best ride out the storm. A classic example of this would be Citibank. The company has long been considered one of the worst managed banks in the world, and it has lost almost all of its value during the crisis while better managed banks like JP Morgan may emerge even stronger than before. I am making a bet that GE’s management will help the company survive this crisis and deliver a solid long term return on my investment.

ICICI BANK - July 9, 2008

I came close to buying ICICI Bank several years ago. I had been watching it for months and was about to place an order at a little over $21 but I hesitated and the stock ran away from me, eventually peaking at over $60. As I watched it go up I couldn’t help but think that my patience had backfired on me as I missed out on a triple in less than two years. Throughout that time, I checked the price of the stock almost as often as the stocks I own, but it never got to the point where I felt the risk return was favourable enough for me.

If there has been one silver lining of the global credit crunch, it is that stocks like ICICI are starting to look like bargains for the first time in years. With the stock recently trading below $27, I may finally be time to pull the trigger on this one. The reason why I am still a little hesitant to start loading up on ICICI is that I do not fully understand the fine details of the bank’s business or all of the associated risks. Moreover, I have not, and will not, spend any time trying to figure it out. I simply don’t have the time or the mental bandwidth to become an expert on the Indian banking system.

My thinking is not particularly complex on this stock. ICICI is the second largest bank in India, which is the world’s largest democracy and is one of the fastest growing economies in the world. If this growth were to continue even at more modest levels and the country were to at least approach 1st world status, it would stand to reason that ICICI would grow exponentially as the majority of the country’s billion people began taking out mortgages and car loans. I am betting that in the next few years the second largest bank in India, which has one billion people, will have about the same value as the second largest bank in Canada, which has a little over 30 million people. I do not think that is a particularly bold bet, but if it were to happen I would be looking at a healthy return on current prices.

It is also worth keeping in mind that this is not purely an Indian bank, but has a presence throughout the world and is capitalizing on the vast, and often well paid, Indian expatriate communities. I even have an online account with the bank. Its global growth should hopefully smooth out some of the turbulence that goes along with being an Indian based bank.

Investing in any financial stock at this time is risky, let alone one based in India, but if you have the stomach to weather some volatility, this may be a good buying opportunity. While I realize that there is a chance ICICI could go bankrupt, I believe there is a greater chance that the stock will triple than go to zero.

BCE - Profile, June 9, 2008

A few months ago I compared the advantages of investing in BCE versus Webtech wireless. At the time I argued that the market was trying to tell you that there was a strong chance that the deal was not going to go through, at least not at $41.50. One of the cardinal rules of investing is to not gloat about a stock pick until after you’ve sold it, so I will merely point out that the stocks have been going in opposite directions as of late due to some new contracts for Webtech and some new hurdles for takeover of BCE. The crux of my argument was that the potential upside versus potential downside was much more favourable with Webtech. Now that the market has apparently settled on the fact that the deal will not get done at the original price, and perhaps not at all, investors are focusing on what the price of this stock would be without a takeover. The conventional wisdom seems to be that it is somewhere in the low thirties. Depending on the mood of the market, that may be true in the short term, but I can’t help but think that both the stock and the company are likely in for a slow but steady decline.

With the recent auction of wireless spectrum, BCE is going to be facing increasing competition, which could cause it lose customers and lower prices for existing ones.
Unfortunately, instead of focusing on preparing for these challenges, Bell’s management has been distracted for the past year with its attempt to sell itself. Even if management did have the time to focus on developing a successful business strategy, I do not have faith in their ability to do so. The CEO of BCE was a civil servant, and BCE has been run much like an inefficient, lumbering bureaucracy, not the dynamic, innovative company it needs to be if it wants to survive. Its most comparable company and biggest rival, Telus, has for many years been three steps ahead of BCE. Bell’s advertising, which involves cartoon beavers, look embarrassing when compared to Telus’s stylish and understated.

If you would like to see a small but emblematic example of BCE’s business performance, you should go to their website and check out the Russian television stations that they have to offer. One of the stations is NTV, a formerly controversial station whose owner was later driven out of the country. If you click on NTV in the Russian programming section on the website, you see a description of the NTV from Newfoundland. I’m sure this has been pointed out to them every time someone subscribes to one of these stations. I know for a fact that it has been pointed out at least once because I am a subscriber and I mentioned it to them when I ordered the station. This is admittedly a very small issue but it does give some hint at the kind of pride in work and attention to detail that exists at the company. Either the front line staff didn’t bother to report the issue or management just doesn’t care. This is the type of thing that is common in government departments but not in successful businesses.

One thing I took from a Random Walk Down Wall Street is the importance of earnings growth. Earnings growth will eventually force an undervalued stock to go up. On the other hand, declining earnings can cause a cheap stock to stay cheap forever. If this takeover does not happen, I can see BCE becoming at best dead money for years.

Nortel Networks - profile, March 17, 2008

The topic of my latest stock profile is Nortel Networks, one of the all time great destroyers of value in the history of securities trading. Nortel caught my attention again recently when they announced yet another round of layoffs as part of their latest restructuring attempts. I also think that Nortel offers a valuable lesson for contrarian value investors like myself who have trouble resisting stocks that have been hammered by the market. I have read and heard a mountain of research and opinion on investing strategies, but one of the most reliable rules in Canadian stock market investing in the past decade has been to not own Nortel. This is second only to always sell Nortel short.

Like most value investors I like to focus on P/E multiples when evaluating stocks, but Nortel is in a situation where these types of measures have become less relevant, and not just because it does not have any earnings. In order to thrive in the long term and create lasting value for shareholders, businesses need to do something better than anyone else. Google has the most successful search engine, Microsoft has its operating system and office software, RIM has its push e-mail, etc. In all the BNN programs, financial articles, and even conversations with computer nerds (I work in an IT company), I have never found anyone who could offer a clear explanation of what it is that Nortel does better than anyone else. There may very well be something, but I have not heard of it. If any Nortel employees ever come across this article, I would invite them to enlighten me. You can’t blame a layman like me for getting the impression that Nortel has somehow been following the inverse of General Electric’s strategy and is aiming to be last or second last in all its segments.

One of the biggest traps that value investors can fall into is to look at a stock that is down 50% and think that it can’t go down much more. The only valuable thing that Nortel has done for investors is to illustrate the danger of this assumption. Since it’s high of around $1,250 per share in 2000 (taking into account the reverse split), Nortel has fallen by 50% an incredible 18 times. You can be sure that after each 50% drop there were self-described value investors who bought in thinking that it couldn’t possibly go much lower. The long term stock chart for Nortel is so bad that it could easily be mistaken for an illustration of the mathematical concept of a limit. In calculus, if an equation has a limit of zero, it will continue to approach zero into infinity without ever exactly reaching it. While I sincerely hope that Nortel does manage to turn its business around, in theory, this stock could continue approaching zero and reverse splitting its shares for another decade.

Mike Zafirovsky had a great reputation when he came to Nortel, but I have not seen any evidence that he has a solid long term plan for the company. What I have seen is a lot of layoffs. With some other companies in the past, this has been a short sighted strategy to achieve bottom line profits in the short term. The thinking behind this is not particularly profound; cut costs faster than revenues are declining. While this can produce profits, it often does not lead to a stronger company in the long run. Unfortunately, the only argument I can make for buying Nortel here is that it has come down so much that it can’t possibly go much lower…

BCE vs. WEW. Which is the Better Gamble? - February 4, 2008.

In an earlier post I posed the question “is the market out to lunch or is it me?” While I believed then, as I still believe now, that the market was wrong about Talisman Energy, investors should be very careful not to completely ignore what the market is saying.

In the case of BCE, the market is telling you that the deal is not going to go through, at least not at the previously agreed-upon price. I had been toying with the idea of buying some shares and cashing in on what appears to be free money that the market is giving away. I have listened to some smart people on both sides of the argument, and I have come to the conclusion that it is best to avoid the stock at this time. This is a highly liquid stock in which many large institutional investors hold significant stakes. These groups are highly sophisticated, and more importantly, are very well connected with Ontario Teachers Pension Plan and the other members of the consortium. If these institutional investors, who at the very least have access to inside rumours if not inside information, thought that this was a done deal at $42.75, they would be aggressively buying this stock in the $35 range. One analyst on BNN pointed out that there would be serious consequences in terms of reputation and credibility on the street for the members of the consortium if they were to pull out of the deal, but I would argue that these people are much more concerned about the hit their reputation would take from their investors if they were to overpay for the company by several billion dollars.

At this point, buying into BCE is not investing; it is speculating, which is just a more respectable sounding word for gambling. I am not above doing a little gambling on the stock market from time to time, but right now I am placing my bet Webtech Wireless. With BCE, the absolute best case scenario would be that the stock goes to from $35.70 to $42.70, whereas the worse case scenario in this market would likely be a drop to under $28. With Webtech, however, the stock appears to be trading at only a little more than worse case scenario levels. When this company ran into major difficulties with some contracts in Brazil, the market lost faith in the company and the price fell from $7 to as low as $2 during the peak of the fall panic. It is well known that the company has been in negotiations on a major deal with Fedex for some time, and it recently gave guidance that a major potential customer has given financial approval on a large contract. While they have not stated that this is FedEx, their website states that they are currently looking for a Program Manager to work in Memphis, Tennessee, which just happens to be where FedEx’s head office is located.

I originally bought into this stock around $2.80 after it bottomed in the summer and recently doubled my position in it at around $2.90 after the announcement came out. I do not deny that this is a gamble on my part, but when gambling you need to weigh the potential upside against the potential downside. By my estimation, if luck is on my side and the FedEx deal goes through, this stock could go to five or six dollars (which would still be below its 2007 highs), whereas the tough luck scenario would likely see the stock languishing in the mid $2s.

January 1, 2008

Brookfield Properties

This Christmas I purchased some shares in Brookfield Properties on what looked to me like a great tax-loss selling Boxing Week sale. This decision was influenced somewhat by my lingering bitterness from the waterboarding the market gave Cinram this past fall. Cinram was never intended to be a long term hold and I should have sold it some time ago for a 50% gain. Instead, being distracted with other matters, I let it slowly deteriorate and then suddenly crumble. Going into 2008 I want to expand my core holdings of stocks that I can buy and hold for the long run without having to watch them every day.

Brookfield is one of the premier real estate companies in the world, with some of the most valuable properties in North America. While it is certainly understandable how a CD/DVD manufacturer like Cinram can find itself in dire circumstances, it is difficult to imagine how Class A commercial properties in the heart of major cities can be made obsolete. My thought process on this stock is not particularly complex. Smarter investors than me were paying over $38 a share for this stock earlier in 2007, so I felt that the risk reward was very much in my favour at a little over $19.

From my research on the stock, there are two primary reasons why the stock has fallen as it has; one market specific and one company specific. The first, most obvious reason, relates to the difficulties in the US markets in general and the real estate market in particular. The other reason for the fall in stock price has to do with the possibility that its largest tenant in New York, Merrill Lynch, may move from its current location. To the best of my knowledge, this decision has not been made, but they have given strong indications that they are considering relocating to a new skyscraper in mid-town. This would certainly not be a positive for the stock in the short term, even though a move appears to be priced in, but in the long term the company will find other tenants. In Brookfield’s favour is the strong political will in New York to ensure the resurgence of downtown Manhattan and the ground zero area. City officials are likely help keep Merrill Lynch where they are and to help attract other potential tenants to the area should they leave. It is also important to bear in mind that if Merry Lynch were to make a decision tomorrow to relocate, it will likely be years before the move is completed.

I bought this stock with the assumption that Merrill Lynch will move and I still feel that it offers good long term value. They have locations in the right places and they have a talented, experienced management team that should be able to steer them though whatever trouble spots may arise.

November 10, 2007

Altius Minerals

Today’s profile is a little different from my normal profiles, where I highlight a few publicly available facts and offer my own personal opinions on the company. This profile of Altius Minerals actually contains some information that is not necessarily public knowledge and is rather light on my own personal opinions of the company as an investment.

Altius has been one of the best investments I have ever made, having bought in at $3.62 a few years ago. The stock has performed far better than I had hoped and I have taken profits on two occasions, yet it remains one of my larger holdings. I should point out that I have not added to my position recently and am not planning to in the near future, so this is not meant to be interpreted as a recommendation.

Anyone who has followed Altius will not need me to tell them that these people are geniuses when it comes to creating wealth for shareholders. Unfortunately, the investing world is littered with examples of people who, while brilliant managers and business people, have led investors to ruin through their own greed. For some entrepreneurs, newfound wealth only serves to create a lust for even greater wealth, which causes their interests to diverge from those of the company and its investors.

Some investors, like Brian Acker, believe there is no value in meeting with management and that you should focus entirely on the numbers. I would partly agree insofar as you should not be biased by a smooth talking, charismatic CEO, but interaction with managers, particularly in informal settings, can help alert you to danger signals before they start showing up in the numbers. For example if a company’s earnings have been strong but the CEO is having multimillion dollar birthday parties and driving 200,000 cars, you may want to sell out before the greed starts causing problems as it did for companies like Hollinger and WorldCom.

I actually had a chance to meet with Brian Daulton, the president of Altius, in an informal setting last year at a gathering following an annual meeting for another much smaller resource company. There were a number of people at the gathering who were there primarily to network and fill up on free drinks and hors d'oeuvres yet gave the impression that they were multi-millionaires. An outsider would never have guessed that the richest and most successful person in the room was not wearing a suit and offering unsolicited opinions on resource investing, but a quiet, unassuming guy in jeans. While others worked the crowd, Mr. Daulton spent most of the evening downstairs smoking cigarillos and talking about fly fishing with an oil rig driller. I had the chance to have a few drinks with him that night and he seemed to be one of the more modest and intelligent company presidents I have ever met.

This was around the time that Altius had passed an important hurdle for their proposed oil refinery and he could have been forgiven for being a little boastful, at least while he was drinking, but while he clearly had a lot of pride in his company, he didn’t show any sign of boastfulness or pomposity.

There are a lot of disreputable people in the resource sector who are prone to self-promotion and whose primary interest is in finding investors, not minerals. I can’t say for sure whether Altius is a great investment at its current price, but from my brief experience with the company’s president, I see no reason to doubt the commitment of the company’s management team.

July 29, 2007

Wal-Mart

While many financial advisors are telling their clients to avoid buying US equities because of the strength of the Canadian dollar, my most recent stock purchase was an American company by the name of Wal-Mart. The reason I will buy bought Wal-Mart is partly because I like the company, and partly because of the strength of the Canadian dollar that financial advisors seem to be so worried about.

Analysts and financial advisors seem to be very adept at warning investors about things that have already happened. The time to warn investors about a fall in the US dollar would have been in the late 1990s when the Looney was down to 63 cents. The question you should ask yourself is how you would have fared over the past century had you bought the US dollar when it was at a 30-year low. If you step back it will seem obvious that these were great buying opportunities, but when you are in the middle of one of the highs or lows the safest bet can often appear to be the most risky.

While the United States has its share of problems right now, investors may be overreacting somewhat, particularly when you consider some of the currencies that have risen against the dollar. Does anyone really believe that inflation and political stability are better in Brazil than in the United States? Whatever your opinion on the scope and significance of the large budgetary deficit, you would have to be remarkably pessimistic to assume that future governments will be as fiscally irresponsible as the one currently running the country. On the other hand, will Canada, with its minority government, simpleton finance minister, and tree hugging hippy leader of the opposition, never do anything to hurt the economy or scare foreigners away from the dollar? I would hesitate to make that bet.

Aside from currency gains in the long term, I believe that Wal-Mart is a very sound investment at around the $47 level. At a time when the markets are beginning to look frothy and interest rates are climbing, Wal-Mart appears to be an excellent defensive investment. If you look at Wal-Mart’s stock chart, you will see that it has been essentially flat since 2000, but its earnings per share, and almost as importantly, its dividends, have been rising steadily throughout that time.

Wal-Mart can hardly be considered a turnaround story, but it is as out of favour as it has ever been right now as its growth rate has slowed and it has had some major failures in foreign markets like Germany, where they were recently forced to close up shop. The company actually made the curious decision to put someone who could not speak German as the head of its German operations. This was a costly failure for the company but I have to think that they have learned some lessons from that episode and it is unlikely to make the same sort of mistakes again. While Germany was a failure, they have been tremendously successful in Mexico, and there is no reason to believe that they won’t replicate that success in other Latin American countries. I am not factoring in any kind of significant success in China in the short term, but if I am wrong the stock only becomes more attractive.

One area where I feel Wal-Mart can significantly increase its revenues is in financial services. It was recently turned down for a banking license, mainly due to the almost hysterical fear that certain segments of the population have for Wal-Mart, but I do not believe that fear and pettiness can prevent them from opening a bank in the long term. For the time being, the company is forging ahead with limited financial services for its customers, primarily recent immigrants and migrant workers who are unable to open a proper bank account with mainstream banks. This in itself should provide a boost to earnings in the short to medium term. If it ever is successful, Wal-Mart, with its immense resources and ubiquitous presence could turn the banking industry on its head. The share price is not factoring in any revenue from financial services at the moment.

On top of everything I mentioned above, Wal-Mart is one of Warren Buffet’s largest holdings and he did not pay much less for the stock than it is trading at right now. Mr. Buffet has made billions over the years by buying into major brand names at discounted prices. I paid $46.60 for the stock and view it as a long term holding.

March 18, 2007

Talisman Energy

If there are any investors out there who are considering putting some money into the oil and gas sector, I would advise them to take a close look at Talisman Energy. Talisman has a number of things going for it.

I have been very impressed with the management of this company for many years now. While other companies are piling into the oil sands in Alberta, where the oil boom is causing massive cost overruns, Talisman has gone against the herd by selling off much of its oil sands interests. The company has instead pursued a strategy of maintaining a diversified portfolio of international production and exploration assets. Talisman has a long track record of being able to operate successfully in a many different locations, including even Sudan, which it exited years ago after much public pressure.

Perhaps the best reason for investors to give Talisman a second look is that renowned investor, and one of America’s richest men, Carl Icahn, purchased 4.8 million shares of the company in February. Mr. Icahn has been one of the most successful investors over the past 30 years, so investors will make money more often then they will lose money by following in his footsteps, particularly when you have the opportunity to buy into the stock at the same price range as he did.

Talisman has been a takeover candidate for years now, and its recent decision to spin off some non-core assets has been taken by some as evidence that it is putting itself on the auction block (perhaps Mr. Icahn is of that opinion). While I would not recommend that investors purchase a stock merely on takeover speculation, such speculation can often help put a floor under the stock, which limits the potential downside. When you add in Mr. Icahn’s well publicized stake in the company and the fact that it has been building a good base from $18 to $20CAD, I think that there is very limited downside on the stock provided that there isn’t a complete collapse in the price of oil.

Finally, Talisman recently announced a promising discovery in Northeastern British Columbia, and the stock went down on the day of the announcement. While this was not an earth shaking discovery, it seems to me that company is not worth less after the discovery than before. To me, this was a sign that company is not getting the proper respect from the market and so I bought some shares at around $19. I am betting that for the reasons mentioned above that the stock can get to $25 in the not too distant future without needing a spike in oil prices.

January 4, 2007

Circa Systems

The first stock I have chosen for the website’s inaugural stock profile is Circa Systems (CTO on the Toronto exchange). Circa is a small company that is primarily involved in the design, manufacture and sale of surge protection and other products to the telecommunications company in Canada and the United States. The company also produces some other products for the Canadian electrical industry.

There are a number of compelling reasons to give Circa a closer look. The first is that the stock, which is trading at $1.48, is extremely cheap at less than 9 times earnings. When a stock is trading at a multiple like that, the market is pricing in virtually no growth, so if the company can deliver any kind of growth at all there can be some significant upside in the stock. As of the publication of its 2005 annual report, the company had grown its revenue by 85% since 2003.

Another reason to look at this stock is that Jerry Zucker owns 46.1% of the company. There are two reasons why I like to tag along with highly regarded, high profile investors: first, they may buy out the company, as Mr. Zucker did with The Bay, and secondly, these investors are, quite honestly, more likely to be smarter than you or I. For an individual, retail investor, you will be better off in the long run by mimicking legendary investors than with a third rate mutual fund or investment advisor.

The market capitalization of Circa is extremely small at less than 15 million and highly illiquid. While stocks like this can often be inefficiently priced because they are too small for large mutual funds to own and do not have analyst coverage, Circa so illiquid that even small individual investors can move the price of the stock. With that in mind if you want to purchase Circa, it is essential that you use limit orders. I would put a limit order for no more than 5 or 10 cents less than the current price and wait for the stock to come to you, as you could easily bid the stock up on a slow trading day. There are days when less than $1,000 of the stock actually changes hands.

Please bear in mind that this profile is intended to generate ideas for the website readers, but should not take the place of personalized advice from a qualified investment advisor.