North American Value Investing

Sunday, 17 February 2013

A Summary of Investing in Worldly Wisdom, by Robert Hagstrom

Robert Hagstrom, the chief investment strategist and managing director of Legg Mason Investment Counsel, recently wrote an article about the value of a multi-disciplinary approach to business and investing. The author of several excellent investing books - including The Warren Buffett Way and Investing: The Last Liberal Art - Hagstrom discusses Charlie Munger's "latticework" of mental models that he faithfully uses to solve problems, investing and otherwise.

Hagstrom not only convincingly makes the case that business schools are too isolated from the valuable concepts and ideas from other disciplines, he offers some evidence that things may be starting to improve. One example is a consortium put on by the Aspen Institute entitled, "Rethinking Undergraduate Business Education: Liberal Learning for the Profession." It's surely not a coincidence that the CEO of the Aspen Institute is Walter Isaacson, the highly-regarded author of Steve Jobs' biography. After all, one of the enduring themes of Isaacson's book is that Jobs' resounding success was made possible by borrowing and employing ideas from a range of fields.

Despite the fact that investors needn't become an expert in every topic, the ideal of the renaissance man/investor exists more in theory than in practice. Articles like Hagstrom's may help to change that.

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Friday, 15 February 2013

Home Capital Group - 2012 Fourth Quarter Update

Home Capital Group posted a strong fourth quarter, to cap off yet another strong year. Earnings per share were $1.70 for the quarter, up 17.2% from the prior year period. For 2012, earnings were $6.40, 16.8% higher than in 2011. Just as important, return on equity remained high, at 25.5% for the year. With HCG, growth never comes at the cost of a weakened balance sheet or significant risks. Indeed, its tier one capital ratio stands at a formidable 17.01%, and the total capital ratio stands at 20.68%. Non-performing loans amounted to just 0.33% of gross loans, a superb figure. In addition, Home Capital Group increased its savings and fixed-term deposits, which are cheap, safe forms of funding.

The company has a long and commendable record of delivering on its promises, and this year was no different. Shareholders ought to be excited about the year to come, too: the company is forecasting earnings growth of 13-18% in 2013, and return on equity exceeding 20%. Importantly, these expectations are not based on starry-eyed assumptions about the Canadian economy or housing market. Management foresees slow but steady economic growth, and a moderate decline in housing starts, resales and prices. While it remains early, the first six weeks of the year were strong, management noted on the conference call.

The mid-point of the 2013 EPS estimate is about $7.35, meaning that even after a 20% or so increase in the stock over the past year, Home Capital Group currently trades at just 8x earnings. This offers a large margin of safety on the downside, and a tremendous opportunity on the upside. The dividend now stands at $1.04 per year, offering a 1.7% yield, slightly less than the market average, though there's a good chance it will rise before the year concludes.

Disclosure: At the time this article was published, the writer was long HCG stock

My investment analysis of Home Capital Group is here.

Sunday, 10 February 2013

Comment on Glacier Media: A media stock that's worth buying. Really., by Norman Rothery

Glacier Media gets no press. This is of course ironic, since it produces a lot of it, and in multiple channels. Recently, however, the off-the-grid company was the subject of a piece by Norman Rothery on the Globe and Mail's website. The article has a number of strengths. The writer points out that Glacier Media now sports an attractive 4.3% dividend yield; he explains the lack of interest in the stock by noting how thinly traded it is, which precludes many large investors from forging a position; and he offers an interesting and telling anecdote about Tim McElavine, who I've recently commented on here.

The article has two weaknesses, though. First, in making a case that the company is undervalued, Rothery cites Glacier's earnings per share, and notes that it compares favorably to the stock price. However, because of large amortization expenses from past acquisitions, free cash flow is a more accurate estimation of earning power, and is significantly higher than EPS. Secondly, he fails to emphasize the basic difference between Glacier's community newspapers, which largely enjoy natural monopolies in local markets, and larger newspapers, which have weaker competitive positions.

Glacier's shareholders will be happy that the company's story may finally be starting to spread; however, it's a better tale even than some fellow shareholders know.

Source: http://www.theglobeandmail.com/globe-investor/investment-ideas/strategy-lab/value-investing/glacier-media-a-media-stock-thats-worth-buying-really/article8397256/

Here is my investment analysis of Glacier Media.

Saturday, 9 February 2013

The US Government Sues Standard & Poor's

The US government recently announced plans to sue Standard and Poor’s for the company's role in the recent financial crisis, specifically the way it assigned investment grade ratings to products that turned out to be junk - or worse. Reports suggest that McGraw-Hill, Standard and Poor's parent company, rejected a deal that would have involved paying $1 billion, along with an admission of wrongdoing. Refusing the deal may have been a mistake: after all, $1 billion is about what the company earns in a single year, and officials and experts alike have citied a far higher figure if the government prevails in a court case. The market's early verdict seems to be that the government will prevail, as the prospect of a trial has lopped about $4 billion from McGraw-Hill's market value. Moody's, the other member of what Warren Buffett (Berkshire Hathaway is the single largest shareholder of Moody's) calls a "duopoly" in the ratings industry, has suffered a similar percentage decline in its stock, on the fears that it behaved in the same way as Standard and Poor's, and thus faces a similar fate.

This may yet become an excellent buying opportunity for investors. After all, Buffett was right that the two firms enjoy an entrenched duopoly. Regulatory changes in the post-2008 years have not increased competition in practice, and may not have even encouraged it in theory. Far higher costs in the areas of compliance have the effect of insulating the "Big Two" from smaller upstart competitors. And while both companies clearly assigned unjustifiably high ratings to many risky securities, it's not clear that increased competition would be a remedy. In fact, it could make it worse: more competition could prompt a race to the bottom, where agencies would be tempted - or almost forced - to gain market share by offering generous ratings.

At present, there are too many uncertainties, in the writer's opinion, to invest with confidence. For one, even the sharp decline in the companies' share prices are not fully accounting for the costs of an extended trial that could end in costly defeat. Though both companies have the financial strength to withstand penalties of $1-3 billion; the real question is what happens to their competitive position. If a duopoly - or an oligopoly with just 4 or 5 big players, where Standard and Poor's and Moody's lead the pack - remains intact, the future earnings power of both businesses will remain strong. The fact that the US government was willing to strike a deal suggests little interest in dismantling the status quo in the ratings industry. In fact, both companies are so deeply entrenched in the financial system that it may not even be possible to make radical changes. No government, corporation or any other large entity can issue debt without a rating, however ill-considered that rating may be. As the case proceeds, investors will be watching with great interest, for there may be an opportunity to buy one or both of the ratings powerhouses at a bargain-bin price.

Friday, 1 February 2013

Potash Corp - 2012 Fourth Quarter Update

Potash Corp recently reported disappointing Q4 and full-year results for 2012, and offered restrained guidance for 2013. Earnings per share are expected be $2.75-3.25 for 2013, compared to adjusted EPS of $2.76 in 2012. Demand is forecast to be strong in the Americas and most of Asia, with India being the wild card. While Potash Corp is often considered the industry's swing producer, India has stumbled its way into the position of swing buyer. While management wisely assumed little change in India when offering guidance for 2013, they expressed guarded optimism that the Indian government will eventually put agronomics ahead of politics and revisit a flawed subsidy regime. It's difficult to predict exactly when, however.

CEO Bill Doyle addressed the all-important issue of future potash supply. He firmly reiterated his long-held position that fears of oversupply are overblown. Brownfield expansions are likely to go forward, but at a slower pace, he predicted, while greenfield expansions will face significant delays.

The status of Potash Corp's interest in Israel Chemicals was not addressed in the quarterly conference call, either in management's prepared remarks or in the question and answer session with analysts that followed. The political jockeying that will take place after the recent Israeli election is likely to put any big decisions on hold for months. This is good news for Potash Corp shareholders, who should fear a purchase of Israel Chemicals, given that it would almost certainly be paid for using underpriced POT stock, in exchange for rather expensive ICL shares. Warren Buffett has pithily explained that investing is simply "buying dimes for nickels"; Potash Corp management should bear this in mind, because at present any deal looks like it would be just the reverse.

On a happier note, the company significantly increased its dividend, to $0.28 per quarter, and the stock now yields better than 2.5%.

Here is my original investment analysis of Potash Corp.

Wednesday, 30 January 2013

A Value Investing World Interview With Tim McElvaine

In an October, 2012 interview, Tim McElvaine discusses his approach to investing in Japan. Since the country’s famous bubble and bust, few investors have been tempted to commit capital there. Macroeconomic challenges that include a radically high level of debt-to-GDP and the chronic threat of deflation have been enough to scare most stock pickers away. The simple fact that few other North American (or European) investors are interested in the Japanese market, however, may open up opportunities. It is not impossible, after all, for individual companies to thrive despite economic troubles in their home nation.

The interview offers ground-level insights into the obstacles in Japan that include long-standing corporate governance issues, entrenched management that ignore the best interests of shareholders, poor capital allocation, questionable stewardship of the capital structure, and a range of cultural differences.

The blog is christened North American Value Investing for these very reasons. This is not to romanticize US and Canadian markets, which have suffered from many of the same troubles. However, the problems are not as entrenched in North America, and cultural discrepancies only affect people unfamiliar with foreign customs. However, brave investors may find opportunities in Japan despite all of the drawbacks.

Here is a Profile of Tim McElvaine

Source: http://www.valueinvestingworld.com/2012/10/peter-cundill-protege-tim-mcelvaine.html