Wednesday, 15 August 2012

Glacier Media - 2012 Second Quarter Update

As usual, Glacier Media recently reported strong results for the second quarter of 2012.  Quarter-over-quarter sales were up 27.4%, though EBITDA increased at a more modest 12.1%, and cash flows increased by 10.8%.  These latter two figures are more important than the robust increase in revenues, and are largely explained by lingering weakness in the assets acquired from Postmedia late last year. 

However, these same properties offer an opportunity to grow over time simply by making much-needed operational improvements, which can be achieved with only modest incremental investments.  Because of a substantial debt load, the previous owner cut costs to the point that the product was weakened.  Glacier, while always conscious of costs, carefully avoids diminishing the editorial product that readers and advertisers expect, and it doesn't it allow sales capacity to wane.  There are straightforward steps that can and are being taken, with some encouraging early results.

Consolidated net debt fell to $137 million in the quarter, and now stands at about 2.5x trailing twelve months EBITDA, a significant but manageable amount of obligations.  At $6.9 million, capital spending was significantly higher than usual in the quarter, though the vast majority of outlays were for investment, rather than maintenance, mostly for a new printing press.  Management expects these heightened expenditures, which should fall by the first quarter of 2013, to generate both sales growth and cost savings.  Unfortunately, the company was not able to repurchase any shares, which remain dirt-cheap, though management correctly prioritizes debt repayment above buybacks.
One of the most important tasks for management over the next few years is to wring enhanced profits from the Postmedia assets.  Given their consistent past success in doing so, and encouraging early results, shareholders can be confident that Glacier's leadership team will do just that.  Here's looking forward to the third quarter.

My original write-up on Glacier Media is here.

Disclaimer: The host of this blog shall not be held responsible or liable for, and indeed expressly disclaims any responsibility or liability for any losses, financial or otherwise, or damages of any nature whatsoever, that may result from or relate to the use of this blog. This disclaimer applies to all material that is posted or published anywhere on this blog.

Saturday, 11 August 2012

ATP Oil and Gas - Imminent Bankruptcy

It appears that ATP Oil and Gas will be forced to restructure via a bankruptcy filing in the coming weeks, the Wall Street Journal is reporting.  Shares are trading well into penny-stock territory, at just $0.36.  Negotiations are said to be ongoing with senior creditors, and the company delayed its second quarter filing until matters become more clear.  The company will obtain a $600 million loan to remain liquid during legal proceedings.

At this point it’s unclear what, if anything, might be left over for the disheartened – and now impoverished – owners of the common stock.  The stock once traded at well above $50, and it’s a harsh reminder that “debt” can be the cruelest four-letter word in the English language.

My original write-up on ATP Oil and Gas is here.
Disclosure: At the time this article was published, the author was long ATP Oil and Gas options.

Disclaimer: The host of this blog shall not be held responsible or liable for, and indeed expressly disclaims any responsibility or liability for any losses, financial or otherwise, or damages of any nature whatsoever, that may result from or relate to the use of this blog. This disclaimer applies to all material that is posted or published anywhere on this blog.

Thursday, 9 August 2012

Profile - Tom Stanley

From 1993 to 2006 Tom Stanley's Resolute Growth Fund returned a staggering 29.63% per annum.  The lucky and grateful investors who were carried along for the entire ride enjoyed a total return of better than 25-to-1.  Over the same span, the TSX returned a touch above 10% per year, or about 3.5-to-1.  Importantly, only about half that timeframe straddled the long bull run that lasted from the early 1980s to the late 1990s.  Between the Dot Com bubble and the current crisis, stock market performance overall was distinctly mediocre, while Stanley's performance was outstanding.  Indeed, over the eight-year period from 1999 through 2006, he returned 46.25% per year (1).  To be sure, his performance since has been more pedestrian, but whose hasn't?  Such impressive returns put Stanley among North America's finest investors. 

Despite such impressive performance, few students of investing are likely to have heard of him, particularly if they reside outside of Canada.  Stanley doesn't do much media, and will not be found revealing his top picks on BNN Market Call or similar forums, so his ideas, alas, aren't readily available to copycat investors.  Even investors situated within the corridors of Canada's financial power might not know him.  Instead of operating out of a glitzy Bay Street high-rise, Stanley's shop is in a nondescript office far from the heart of Toronto's financial district.  However, there's much to learn from his experience and philosophy.  Though Stanley is justifiably tight-lipped about the specific stocks that he's invested in, he openly shares his principles of investing, and has posted them on his website.
It's not just his performance that distinguishes Stanley from most other investors.  He has conviction.  Everyone talks a big game about their undying commitment to clients; Stanley backs up his words with honorable actions.  He charges a paltry 2% management fee (which includes all expenses), an anachronism in the era of 2-and-20 hedge fund managers, most of whom charge fees of 2% of assets per year, regardless of performance, plus 20% of any gains.  He launched a fund that catered not to rich investors, but to ordinary ones, and held Town Hall-style meetings once per year to engage with them face-to-face, not all that different from one of his major influences, Warren Buffett (Stanley cites Charlie Munger, Peter Lynch and John Templeton as his other role models).  Most notably, when interest in his fund soared, he made the self-uninterested decision to close it to new investors.  The bigger a fund is, the harder it is to grow at above average rates, after all.  Stanley preferred to give clients the chance to gain outsized returns, even if it meant earning less himself. 

Buffett's influence is apparent elsewhere, too.  Stanley has a knack for catching trends before most other market actors know there's a pattern at all.  For example, he understood more than a decade ago that oil was likely to rise significantly, and outlined his reasoning in a letter to clients dated October 11, 2000.  His case was straightforward: inflation-adjusted oil prices were low, which depressed industry profits, and spare capacity was limited, meaning that new supply was unlikely to both replace depleting wells and meet growing demand unless prices rose (2).  He was able to find small-cap energy producers that were trading for just two or three times cash flows (3).  During the same period, many investors were wild about high-tech stocks, and some of Stanley's own clients encouraged him to add Dot Coms to his portfolio.  He refused.  However, contrarianism sometimes masquerades as independence, and Stanley understands the difference.  Indeed, one of his principles is: "You don't have to win by being original, you win by being right" (4).
Stanley concentrated heavily in a few ideas - sometimes his entire fund is invested in less than 10 stocks - and ignores the conventional advice to rebalance his portfolio constantly, so that positions are evenly weighted.  In fact, in 1996 one name - and not a household name, either - accounted for 36% of his fund's assets.  Predictably enough given such concentration, his fund has dropped by 25% or more on several occasions.  However, he credits much of his success to just a few ideas.  On the other hand, he's one of the rare money managers who's admitted that he would liquidate his entire portfolio and sit on 100% cash if market conditions warranted it (5).

Citing Buffett's notion of staying within one's "circle of competence," Stanley rarely strays outside of Canada when making investments.  Though he doesn't have a firm rule against investing elsewhere, he believes that he has access to better information about local businesses, and a more in-depth understanding of political and economic issues, in Canada.  His sterling record is all the more impressive, given Canada's more limited pool of public companies than there are in, say, the US.
One surprising area where Stanley appears to differ from Buffett is in the quality of the businesses he invests in.  Many of the names that Stanley has invested do not appear to be of the highest caliber.  The Oracle of Omaha insists on buying only the best businesses, ones that enjoy a durable competitive advantage; Stanley has little to say on the matter, but many of the names that he's invested in that are public knowledge would be unlikely candidates for Morningstar's "Wide Moat" index.  At least, the last time I checked, UTX, International Uranium and Cangene weren't on that rarified list.  Most of them were bought on the cheap, however, rather like the companies Ben Graham - and the pre-Munger Buffett - preferred to buy, though they don't seem to be as dismal as the "cigar butts" that Graham scavenged for.  Stanley finds undervalued stocks largely by searching for ignored small cap stocks that have fallen under the institutional radar.

Like many formidable investors, Stanley doesn't fit in any conventional mold.  For example, he proves (again) that it's a myth that investors must have an accounting background, or a formal education in business, to have success.  Charlie Munger studied Law (he didn't receive an undergraduate degree at all, but was admitted into Harvard's law school thanks to the intervention of a family friend); Bill Miller studied Philosophy at the graduate level; and the late Barton Biggs majored in English Literature.  Stanley, for his part, focused on Psychology as an undergraduate, though he later supplemented his studies with an MBA.  He's of the view that most people's brains are not wired to invest well, and he pays close attention to the research that explores the psychology of investing (6).  The insights from behavioral finance, combined with what he has gleaned from investors both prominent and private, with a lot of independent thinking, too, have produced a rare and special investor in Tom Stanley.

Sources: (1) (2) (4):
(3) Thompson, Bob. Stock Market Superstars: Secrets of Canada's Top Stock Pickers. Toronto: Insomniac Press, 2008, p305
(5) Thompson, p319-20
(6) Thompson, p293

Disclaimer: The host of this blog shall not be held responsible or liable for, and indeed expressly disclaims any responsibility or liability for any losses, financial or otherwise, or damages of any nature whatsoever, that may result from or relate to the use of this blog. This disclaimer applies to all material that is posted or published anywhere on this blog.

Thursday, 2 August 2012

Profile - James Surowiecki

Surprisingly, considering how consistently brilliant, insightful and original James Surowiecki is, it's almost possible to overlook him.  Perhaps this paradox is because of style.  He writes a regular financial article for the New Yorker, and despite the five-star quality of that magazine's contributors, its prose tends to be a tad homogenous, with the exception of its fiction.  His writing is difficult to distinguish from his colleagues, too.  But consistency isn't a bad thing, not if it means a reliably lively and fine product.  But enough about style; it's the content of Surowiecki's thoughts that makes him worth reading. 

Surowiecki is strong not only in traditionally-defined areas of study, such as investing, economics, finance, and politics, but also in cross-disciplinary areas, including behavioral finance and neuroeconomics.  He brings a fact-based and analytical perspective to the topic of investing, an emotionally-charged field ever in need of cool-headed counsel.  In an article called, "All Together Now" (June 9 & 16, 2008) he briskly sums up the grim history of mergers and acquisitions (most fail, at least for the acquiring companies, in large part because take-over premiums are too high), he points to factors most likely to make a purchase work out (cost-cutting pledges are easier to deliver on than promises of growth) and he suggests alternatives (joint ventures and partnerships can be very worthwhile for both sides of an alliance).

Investing and economics are intimately intertwined with politics, another discipline that Surowiecki is well-informed on.  He has a deep understanding of America's government, constitutional issues and political history, but he's also alert to the humdrum workings of day-to-day US politics.  He shows his command of several of these areas in "Greedy Geezers?" (November 22, 2010) where he explores the "I've got mine - good luck getting yours" ethos that prevailed among seniors when they overwhelmingly voted for Republicans in the 2010 Congressional election, in part over Obamacare.  After all, older voters wanted to keep Medicare, but deny it to newcomers, despite having enjoyed financial benefits far greater than their earlier contributions.  Citing work by Benjamin Freidman, Surowiecki explains the mid-term result as a recent example in a long-running pattern: economic stagnation often prompts people to become protective of their own interests, hostile to outsiders and dismissive of social welfare.  Surowiecki is also very familiar with foreign political economy.

Surowiecki remains up-to-the-minute on cutting-edge research.  For example, in "Smash the Ceiling," (August 1, 2011), when there was some doubt about whether Congress would vote to increase the debt ceiling, he warns that recent work from the field of psychology has shown that the pressure of a deadline closes minds, rather than opens them, and typically has the effect of reinforcing stereotypes.  He also alludes to work from economics suggesting that it's often effective to make the other side in a negotiation believe that you're a little crazy, in order to bluff them into accepting better terms - as he puts it, "recklessness does equal power."  It's hardly surprising, then, that no authentic progress has been made since, though the leverage limit was eventually increased. 
Drawing on his deep knowledge, he routinely mounts convincing challenges to conventional wisdom.  For example, he points out in "The More the Merrier" (March 26, 2012) that cutting costs doesn't automatically lead to increased profits, despite the "leaner-is-better" mentality that has become dominant among CEOs.  In the retail sector in particular, customer service is of paramount importance: shoppers want knowledgeable employees and short lineups, for instance, and will pay for them in the form of more purchases, a lesson that Home Depot and Circuit City failed to grasp in their ax-wielding days.  He argues convincingly elsewhere that the NFL is operates rather like trusts did in the nineteenth century before they were banned: they enjoy "a socialist paradise for themselves that happens to bring with it capitalist-size profits" ("Scrimmage," March 21, 2011).

He also has a knack for adding a well-placed detail to spice up an article.  For example, in "Dodger Mania" (July 11 & 18, 2011), which addresses the rampant tax evasion and general corruption in Greece, he reports that authorities have begun to fly overhead in helicopters looking for swimming pools, a dependable sign of wealth.  In response, well-to-do Greeks entered the market en masse looking for camouflage pool covers.  In an even more troubled part of the world, the young Tunisian man who set himself ablaze - and set history into motion - had recently had his fruit cart confiscated for violating some rule or regulation, a sign of broader economic dysfunction in the Middle East ("The Tyrant Tax," March 7, 2011).
Surowiecki's column is only a single page long, 1000 or so words, but he's able to cover an amazing amount of material.  Though he regularly comments on topical and "trending" issues, his useful references to slowly-evolving history and theory mean that his work has enduring value, even if some of the examples he cites may fall from memory with the ever-changing news cycle.  In short, an effort to collect a number of his articles in a book-length edition would be a valuable undertaking.  Until then, wisdom-seeking readers should reach for a copy of the New Yorker, or visit, themselves.

Disclaimer: The host of this blog shall not be held responsible or liable for, and indeed expressly disclaims any responsibility or liability for any losses, financial or otherwise, or damages of any nature whatsoever, that may result from or relate to the use of this blog. This disclaimer applies to all material that is posted or published anywhere on this blog.