Just a few comments and observations regarding the businesses and their associated stocks. The majority have been reviewed in detail earlier in this blog. I have a penchant for wide moat stocks in unloved sectors so you will see an over-representation of insurance companies, holding companies, asset managers, consumer discretionary niche businesses and wide moat financials. I am a physician so pharmaceutical and medical device companies are somewhat in my "circle of competence", so you'll see some of them listed here as well.
If you're interested, use the search function in the upper left corner of the screen to find these posts.
Equities currently held:
MCO Moody's: much hated and blamed for the credit crisis (with some merit). Lawsuits and red tape type legislation are inevitable but Moody's has been through this before and will likely thrive when the debt markets recover. Extra-US revenue is increasing and likely to accelerate with financial markets eventual recovery. I'm holding on this one long term (3 years +) unless it drops into the 20's/share without a material change in the business plan and I'll buy more. I'm a bit more cautious with this investment as I find this business to be very complex and the reports tough to follow which raises red flags for me. Buffett is holding on to his stake which offers some reassurance. Hold for now. Target price $70/share.
COLM Columbia Sportswear: good valuation, high insider ownership (66% of outstanding float), no debt whatsoever (!) and a global footprint have me holding on to my stake for another 18-24 months. Shaky inventory management, lack of any moat whatsoever and lack of a tangible business plan to take market share from the prodigious competition (i.e. North Face, Underarmour) may undermine margins and downstream profits. If emerging markets (i.e. NOT Europe) take to the brand, it may do better than I expect. I believe that there is an excellent margin of safety on the downside; however, my expectation is a maximum 50% upside over the next 1-2 years. Hold for now. Target price $60
SPLS Staples : superior management demonstrated by increasing ROE and a competition-crushing increase in market share wrested from OfficeMax and Office Depot. SPLS has double the net margins of its weakened competitors. The company's delivery business is thriving, particularly outside North America. International exposure improved by the well timed and executed Corporate Express acquisition. Minimal debt, modest dividend (1.8% yield), a newly developing moat, and moderate growth make this holding an intermediate to long term one: 3-10 years. Target price $40+
CMH.TO Carmanah Technologies: A locally based, globally represented solar LED manufacturer/distributor. I bought this early in my investing career--- when it was the bright and rising star of the TSX Venture exchange and trading between $3.60 and $4.20/share. However, with time the inexperienced management fumbled, CMH's earnings vaporized and predictably, the balance sheet bled red ink. Carmanah rapidly became a penny stock. A new CEO, CFO and then a new board was brought in last fall to turn things around. CEO Ted Lattimore, a Vodafone turn-around specialist veteran, has sold off all the low margin product lines and concentrated on the LED biz. They've pared back the head count, out sourced the manufacturing component and cleaned up the balance sheet: no bank debt and a current ratio > 3.1. Last 2 quarters EBIDTA has turned positive and would have been (the dreaded "pro-forma" statement) profitable discounting the restructuring charges. Management expects to turn a profit by early 2009 and 10% top line growth thereafter. I think this is a reasonable entry point for a speculative investment, keeping in mind that there is absolutely no moat protection whatsoever and it may never become profitable. It is not a value stock now and may never be.
CKI.TO Clarke Inc. this activist catalyst holding company is trading at approximately 30% discount to its NAV. Recent aggressive investments in various income trusts including Granby IT, Art In Motion (which CKI plans to take private this fall), Avenir Diversified IT, Supremex IT and others along with recent NCI bids for share/debenture buy-backs have depleted cash from 44 M to 1.5 M and reduced the current ratio from 5.5 to 4.4. Although the balance sheet remains strong, I'm closely monitoring Clarke's liquidity risk. It's still paying a very modest dividend (1.1% yield). Mr. Armoyan's investments are holding up better than I expected considering the current economic environment: only 1 M writedown and 17 M non-realized loss in a 266 M portfolio. I intend to hold as long as the balance sheet remains reassuring. I think that the downside (further national/global economic weakness, strong loonie etc) is priced into the shares currently and that the upside will be rewarding. I find that Clarke's financial reports extremely easy to understand, even the notes section which is usually designed to confuse you. If I get a report that I can't understand down the line, I'll follow my usual sell displine and dump the stock.
COP Conocophillips: I sold 66% of my stake for a nice profit a few months ago despite very compelling valuations. Political risks (even in the USA!) along with an expected multi-segment margin squeeze make me leary. I'm finding this area too difficult to gauge as it is exposed to too many external forces to get an "edge". I prefer lower profile, boring businesses.
AEO American Eagle Outfitters: update recently posted on this well managed, no-moat company in a rapidly changing business with very fickle (read: not loyal) customer base. Great balance sheet, no debt and will likely appreciate rapidly with the turnaround in the retail sector, whenever that happens. I would buy more at $13/share and sell in the high $20's with a horizon of 1-2 years.
CX Cemex ADR: another extremely well managed narrow moat company in a hated industry, as it is tied in with housing/construction markets. It is also a major player in the infrastructure refurbishment worldwide which most analysts feel will be a multi-trillion dollar industry over the next few decades. Extremely compelling fundamentals==> trading at book value and P/E (both trailing and projected) about 7, PEG 0.85. Although the 20 Billion long term debt obligation is concerning post the Rinker acquisition, management is committed to debt reduction, aided by a 20% operating cash flow yield. Buying below $20 and intend to hold for 5 years+. Short term target is $30/share. This is one of my favourite investment ideas currently.
LYG Lloyds TSB Bank ADR: UK financial institutions are amongst the most despised in the world these days. This is the most conservatively managed and boring bank in the UK (and perhaps the world) with the stated goal of paying out 75% of earnings to shareholders in the form of dividends. The company's staunch conservatism is serving it well, propping up its reputation for safety. LYG has recently sold off its foreign operations and due to its strong brand in the UK it has a wide moat. Dividend yield of about 9% and ROE historically in the mid 20's. P/B 1.6 P/E 5.6 PEG
SEB Seaboard: shipping/food processing company with high insider ownership (70%) and great valuations. Margins being nailed by commodity prices, particularly grain for the hogs in their pork segment. A recent pull back in share price to a 52 week low presents a good entry opportunity for the long term. This was prompted by a 50% reduction in EPS yoy despite higher revenue (higher costs). Management communication with shareholders is opaque (no conference calls and minimal/no guidance) and analyst/Wall St. coverage is nominal---this can be both an advantage and disadvantage to the long term investor. P/E 9 P/S .43 trading around book value. It grows revenues 15%/yr over the past 5 years and increased it's tangible book value 23%/yr each year over the same period. Great balance sheet and liquidity with current ratio 2.7. Dividend negligible at 0.2% yield. Buy at <$1200/share and hold for the very long term or >$3000/share.
COV Covidien: "crown jewel" medical device manufacturer spin off from the old Tyco monster conglomerate. Although I think that it has excellent long term potential, the share price has appreciated 50% over the last year, within shooting distance of its Morningstar FMV of $65/share. Insider buying is impressive (one officer bought $1 M worth of stock at $51/share so he obviously still thinks it's undervalued) as is the product pipeline. I'd be interested in buying more shares in the low 40's and holding for the long term (3 years +) or until the shares hit the mid 80's. Hold for now.
NYX Euronext-NYSE: despite the inevitable emergence of competition on the horizon (narrowing the competitive moat), this global leader stock exchange is trading at 9% cash flow yield. Sellers have overlooked the fact that only 10% of revenue comes from domestically traded equity fees. I will buy below $40/share with an intermediate holding horizon of 18 months to 3 years and/or a target price of $90-100/share.
HOG Harley Davidson: undeniably wide moat niche manufacturer/retailer overly punished of late for its troubled loans division. Current ratio > 2.5 and strong overseas growth. 15% cash flow yield, 33% ROE, 3.2% dividend yield. Well managed and very strong brand with excellent overseas growth in revenues . Inventory management widely praised. Recent bump up in debt from virtually nil to $3 Billion for the Italian motorcycle maker MV Augusta acquisition has raised eyebrows. Margin compression (increased costs, decreased US revenues) recently and concern re: demographic shift in customer base continues to hammer at the share price. I intend to buy at prices in the low 30's and sell in the 70's as a long term hold (3+ years).
BMY Bristol-Myers Squibb: has been a disappointing long term holding for me, despite the generous dividend. The intermediate term drug pipeline thins out markedly between 2011 and 2014 although looks promising beyond. The reasonably leveraged balance sheet is be endangered by overpaying for the in-progress Imclone acquisition. The company is also joing its peers by being bogged down with lawsuits including the Apotex suit. Some of my favourite gurus have sold their stake in BMY in June as well including Bruce Berkowitz. Some large scale insider buys in May have followed by serial dispositions. I think that Bristol will turn itself around over the next 3-5 years for brighter days and that the pessimism I express is priced into the stock price. It may not be a bad entry for a very long term investor-- after all, BMY has been around almost 1.5 centuries and the nearly 6% dividend more than offsets inflation. I suspect there are better opportunies in this sector (like SNY). I am considering selling on any short term strength for a capital loss but I'm not in any rush.
BBSI Barrett Business Services: I've written frequently about this favourite small cap of mine. Short term uncertainty in the sector coupled with a superb balance sheet, superb management and high insider ownership and insider buying if late, plus a dividend (2-3%) makes this a long term hold. I would add to my position (and have several times over the past 6 months) as the share price moves towards $12 and below. I would pare down my stake in the mid $20's unless the great valuations are also maintained. The share price ramped up 40% after the last conference call. I will hold my shares for now and intend to do so for 3+ years.
BPOP Banco Popular: the last 12 months have been tough for Popular-- the share price dropped to $5 from $16 after 3 consecutive quarters of writedowns for bad loans. Management has responded appropriately by selling off their US mainland operations and focusing on their virtual stranglehold monopoly in Puerto Rico. They managed to pull in half a billion dollars of operating free cash flow despite reporting negative income for that period which bodes well for 2009 or 2010. Dividend is about 4% yield. Shares have rebounded to about $9 on a recent sale to Goldman-Sachs of more dodgy domestic mainland mortgages. It is over capitalized at 10.5%, providing a margin of safety in such tough times. I plan to hold with my stake for up to 3 years or a target price of about $20/share. I don't intend to acquire more shares because I have a large stake and find wider moat financials such as AXP more attractive as well has less risky.
PHG Royal Phillips Electronics: I was originally attracted to PHG because of its global footprint and very strong balance sheet (primarily due to the big cash reward from the Taiwan Semicondunctor divesture). I liked the way management was selling off the low margin, cyclical businesses (like flat screen TVs) and instead concentrating on the more profitable health care/medical device, "green" LED and personal care products. It has become a simpler company and easier to understand how they make money. Great fundamentals with P/E of 8 EV/EBIDTA of 9, PEG 1.06 P/S 0.79. ROE double digits. The downside I've come to appreciate is the expensive acquisition driven strategy (i.e. Respironics) focus instead of emphasizing organic growth. The share prices is slowly dwindling away from $41 down to $31/share. Certain gurus with large positions are selling as of June 08. I intend to hold for another 18 months as I'm not convinced that this is a great company worth sticking with through thick and thin. I would sell in the mid 50's.
Over time I've become more of a fan of the spin-off spawn (i.e. COV) of these big, bloated conglomerates rather than their parents. Recent legislation mandating LED use may be the near term catalyst to push up the share price.
MKL Markel Corp: an extremely well managed specialty insurance company that I've admired for a long time and has only recently become cheap enough to interest me. Pricing pressure on underwriting profits has squeezed the share price to 2005 levels. One of the most respected gurus, Tom Gayner (a potential replacement for Warren Buffet, according to rumour) is the chief investment officer. Short term outlook is weak, long term is excellent as its competition is crushed in the current adverse environment and its long term investments pay off. This is a long term RRSP type hold for me (3 years +++) that I intend to add to if the shares drop in the low 300's and consider selling some if they hit double that (and maybe not even then). The nice thing about insurance companies is that: 1. they are in a slowly changing industry with predictable cash flows (mostly) 2. product obsolescence doesn't affect them much 3. inventory management is moot. When they are cheap and well run, they are amongst the safest long term investments. This is why there are so many insurance companies that hang around for > 100 years.
Y Alleghany Corp: Another favourite of mine- an investment holding company with insurance subsidiaries and a very long term focus, currently trading at levels just above 2006 prices. High (35%) insider ownership but not so high that shareholders can be ignored. Debt = 0 and good fundamentals. This is a safe investment for very long term investors as most of the investments the company makes is in distressed companies---- an endeavour for the most patient. They bought Burlington North before Buffett did. I hold in my RRSP and will add at $300 and below, hold for 3 years++ and consider selling some at $550 and up.
Dell Computer DELL: over the last 5 months, Michael Dell has personally bought 200 Million dollars worth of common stock on the open market, half purchased last week after the stock plunged 18% due to a disappointing quarter. HP has been eclipsing Dell on the international stage, narrowing Dell's moat markedly. Dell hasn't brought its expenses into line fast enough to impress investors. This includes many long term value guru investors like Dodge and Cox, Bill Miller and Bill Nygren. It's true that top line growth was impressive in this hostile economic environment but this has been achieved at the expense of slimmer margins. The thrust of its business plan is to focus on the higher margin server, storage and peripherals segment of their revenue mix and they have executed in that regard. There is concern about conflicting efforts from their direct and indirect sales forces. One also wonders why they are delving so aggressively in the poorly rewarding area of low end notebooks. Despite all these worries, as the revenue mix improves and cost cutting measures finally show up in the bottom line, there is good potential for margins to turn around over the next 3 or so years. The other facts that should not be easily discounted is that Dell is a cash generating monster: virtually no debt, 10 billion dollars of cash in the bank and it generates $3 billion dollars of annual free cash flow (!). I would be happier if a dividend was being paid by this more slowly growing company during the protracted turn around and I think Dell should pay one. I have arbitrarily decided to wait another 4-6 quarters or until the share price hits the high 30's-- whichever comes first.
LM Legg Mason: a best of breed asset manager having hit hard times. SIV vehicles held in their income funds had to be supported by cash from the company's balance sheet in order to prevent LM from having to sell them under duress at pennies on the dollar. Certain managers have badly underperformed the market, particularly value guru Bill Miller and this has lead to prodigious outlows of the giant pile of AUM (assets under management). Few doubt that LM will survive though, with more than sufficient liquidity (current ratio > 2) 3.5 Billion dollars of unrestricted cash in the bank and considerable FCF generation and 3.4 B in long term debt. Management is seasoned and there is considerable insider buying. It is the most widely held security of the value gurus who have been aggressively adding to their stake of late. (One exception is Richard Perry who sold his stake in June). The stock has appreciated from about $28/share to about $44/share and I'm currently holding for the long term (3+ years). A 2% dividend helps offset the inflationary bite of the wait. I would add more shares to my portfolio if it dropped into the low 30's again. I would be tempted to sell some > $100/share.
AXP American Express: another badly wounded "Best of Breed", wide moat, minimal Capex, slowly changing and highly profitable (historical average ROE > 30%) business. Wall St. sold it off because of concerns regarding increasing default rates, even among prime cardholders. With 20 Billion in cash and a current ratio of 3.5, liquidity isn't an issue-- yet. 6.1 Billion dollars of annual free cash flow doesn't hurt either. AXP has not traded at such favourable valuations since that dark day on September 11, 2001. Berkshire is the largest shareholder. 15 value oriented gurus hold this stock in their portfolio, most of whom have added to their stake in the past 6 months. Some largeish insider purchases in February but not much since. The securitization used to fund the credit card business is a source of worry as well to analysts: dislocation in similar markets may impact earnings. Decreased prime and super-prime consumer spending will cause the discount rate charged to merchants to be squeezed and adversely affect margins. I think that these are short term concerns and I would happily buy more AXP in the mid 30's and hold for the very long term (3++ years) as it is a great company. Depending on the fundamentals at the time, I might be tempted to sell some at >$85/share. A modest dividend yield of 1.8% helps offset the effect of inflation.
UNH United Health: hated HMO (with good reason) with recent change in governance (a good one). Black clouds hanging over the whole managed care sector due to political risk (new president coming.... will there finally be reform down South--- doubt it), deteriorating medical cost ratios and the stink of the backdated options scandal lead by the former CEO. Wide moat with economy of scale. Knocked down by the market to unrealistically low valuations (<50% style="FONT-WEIGHT: bold">BAM.A Brookfield Asset Management (TSX version): a great company that I have blogged abundantly about; however, it hasn't been cheap lately. Worth holding for the long term or indefinitely. I would buy in the mid-20's and sell portions (possibly) in the 40's.
AIG American International Group: another famed Warren Buffet quote:
"I have three boxes on my desk: In, Out, and Too Hard."
this is an example of an investment assessment that has become "too hard". AIG had potential to become a great company but it has become too big and too complex. The corporate governance has reflected this fact and it seems clear to me that they are just as baffled as I am about the liquidity status of the whole as well as the risk assessment of the credit default swap portfolio and subprime mortgages they hold, particularly in Europe. I can't make heads or tails of their reports-- this should have been a red flag for me. I was (and still am) to their excellent reputation and footprint in emerging markets; however, it appears the horse is out of the barn in Europe and North America. Morningstar has laid out 5 different recovery scenarios and 4/5 aren't great for shareholders. The market is anticipating that AIG will need to do a secondary dilutive offering of stock to shore up their balance sheet and that's why the share price is in free fall recently. My plan is to wait until the Lehman panic boils off and then sell half of my stake on any strength and hold the other half for the intermediate term or until the share price (or if it does) increases into the 30's and beyond.
KMX Carmax: best of breed used auto retailer with an excellent business plan (described in a previous post) and superb management. Will likely take even more market share during the sector recovery. Good liquidity current ratio 2.8-- it's not going anywhere, unlike a lot of competition. Downside is slim net margins and competition may replicate their business plan (although they've failed so far). Lots of short interest (23% of outstanding shares are short!)-- subject to "short squeeze" when the shorts rush to cover during a turn around. I plan to hold my stake unless tempted to buy more at $12/share or less and sell if it hits the 30's+. Intermediate term hold due to narrow moat and tight margins-- 18 months-3 years.
NVS Novartis SGP Schering-Plough SNY Sanofi-Aventis: these are my "best of breed" favourite big pharma basket of companies. NVS is a leader in the vaccine market and has no debt. SNY is a Buffet stock with a great pipeline. SGP is well managed and overly punished for the Vytorin surrogate outcome studies and a data dredging phenomenon that suggests an increased cancer risk-- the significance of the findings that has been exaggerated by some silly academic doctors who still don't realize that a LOT of people will never tolerate statins and still need to be on a cholesterol drug for their entire lives. All are wide moat companies with excellent long term potential suitable for an RRSP.
Shopping List with entry target prices.
Note: I don't intend to buy all of these or even most of them-- being on this list means that I'm actively researching the companies and closely monitoring the share prices for a possible entry position
POW.TO Power Corp: < $30/share. One of the best of breed holding companies with high insider ownership, astutely managed by the Desmarais family.
IVSBF.PK Investor AB: <$19/share. One of the best of breed holding companies with high insider ownership, astutely managed by the Wallenberg family.
TYIDF.PK Toyota Industries Corp.: <$25/share-- a Marty Whitman favourite holding company to buy Toyota Motors on the cheap.
PKX Posco: arguably the best managed steel company in the world and may well have the best balance sheet. Buffet stock. I couldn't resist if it fell below $75/share.
DEO Diageo: This article summarizes the bull case better than I could. This is also one of my favourite investment ideas currently. Another excellent analysis here. Wide moat stock with growth and a dividend to boot. Definite RRSP material. Buy at <$70/share
ZMH Zimmer Corp: wide moat orthopedic device company. Great balance sheet and free cash flow. An excellent long term holding if you can get it cheap enough-- <$65/share
ATD.B.TO Alimentation-Couchetard: undervalued and a buy at <$11/share
HHULF.PK HAMBURGER HAFEN UND LOGISTIK: This virtual monopoly was reviewed earlier this year under post "Hamburger, anyone?", the first 1/2 2008 results are summarized in this investor presentation here. Strong results across the board with increasing ROE, gross margins, net profit (up 43%) and decreasing capex. The slowdown in emerging market's trade with the European hinterlands due to moderating global economic conditions is partially offset by anticipated further cost controls and the anticipated corporate tax cut for German corps. The stock took a huge hit this week-- dropping from about 55 Euros a month ago to hovering around it's all time low of 40 euros today. I assume that global recession concerns are the main driver of the sell off but I'll keep hunting. My entry point will be in the mid to high 30's. This is also one of my favourite investment ideas currently.
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