Where’s the Value?

The summer of 2009 is drawing to a close and as a number of us return from holidays and vacations our attention can once again be directed towards the stock market, our investment portfolios and the prospects of investing over the remainder of the year.

The problem so far in 2009 is that despite a huge amount of volatility earlier in the year the rest has been...well...pretty dry. Stocks, corporate bonds and mutual funds have all appreciated off their lows and a lot of investors are scratching their heads wondering where the value is in this current environment.

When you look at most measures of quantitative value such as price to earnings (P/E), price to book (P/B) or dividend yield there are a lot of stocks that don’t appear cheap and the ones that are cheap are inexpensive for a very good reason; a poor investment.

It’s at times like this that I look towards my discipline of investing in Enduring Value for guidance of where to allocate my investment capital. As a value investor I am always conscious of the price I pay for any investment (the quantitative value) but Enduring Value focuses as much, and at times more, on the qualitative factors of a company. As I update my situational analyses on various companies as earnings are released I’m finding a number of companies I own are doing very well in key areas of value that I like to concentrate on.

The Spread

There’s a lot of focus right now on earnings and what companies are beating or missing their respective targets. Earnings are certainly important, but the EPS we’re seeing posted by many companies is of poor quality considering the economic landscape we’re in. Right now I’m not as concerned with earnings as I am with companies that are fiercely protecting their margins in the face of lower consumer demand and rising costs. Two companies, Costco (COST) and Coca-Cola (KO), have shown a longstanding commitment to not competing on price and they don’t sacrifice their margins in order to spur demand. Competing on price will rarely, if ever, move a company into a better position over the long-term and when the economy (domestically or globally) turns around a company wants strong margins to take advantage of. Cutting margins now is not the right move at this time and companies that have maintained or grown their gross margins and profit margins are maintaining their profitability in a very tough environment.


A Bigger Piece of the Pie

If margins are to be fiercely protected at this time then market share is the other side of the coin that companies must fight to protect and grow coming out of this recession. Enduring Value is a belief that in a recession the strong get stronger. With so much attention focused on the troubles in the US financial system our Canadian banks are taking their global competition to the cleaners; literally. Loan growth (consumer, business & government) has exploded over the past 8-12 months as businesses, investors and governments move their deposits, investments and activities to stronger financial institutions. Banks such as Bank of Nova Scotia (BNS), Royal Bank (RY) and TD Bank (TD) despite lower earnings have pulled massive amounts of business from their global competitors in anticipation of eventual increases in net interest margins. Taking additional loan loss provisions now is a small price to pay for the eventual reward of higher earnings as interest rates rise and traditional business growth booms.


How Can We Help You Today?

The core products and services that companies can offer their customers in this current environment help to determine the winners from the losers as the economy improves. When incomes are squeezed (corporate or consumer) customers will become increasingly targeted in their spending on products and services they want or require. This is not an environment where a company can be over diversified in the product portfolio or be offering services that aren’t in demand. Companies that can differentiate and focus their product/service portfolios to attract an increased amount of business from existing and new customers will benefit greatly. Companies such as Saputo (SAP), Becton Dickinson (BDX) and Thomson-Reuters (TRI) that focus on the essentials and necessities of their customers stand to grow their market share while maintaining attractive margins.


Click here to see how future posts can be delivered directly to you

July Update, 2009

To say that I’ve been busy over the past month would be an understatement.

Markets:

Between hectic shifts at work, days off filled with landscaping/getting our new home in order and enjoying the first bit of good weather we’ve had here in South-western Ontario this summer I’m glad that the markets have been uneventful because to be quite honest, “this market stinks.”

The incredible buying opportunities that had me salivating from September to March seemed to have completely disappeared and the market appears to possess a split personality. I’m no technical analysis guru, but from my point of view we’ve hit a bit of a rut in the markets. The numbers of bulls and bears appears to have drawn even and everyone has an opinion on where the market will go next. I’ll add one more to the growing number of investors speculating on where we head next: nowhere.

The bottom line is this: stocks are no longer “cheap” by the standards I use when I examine the economic landscape and with unemployment (even as a lagging indicator) rising closer to 10% I don’t see a whole lot of reason for optimism going into 2010. I think the rest of this year and next will provide a range bound market until a more precise economic picture becomes clear.

The reason is pretty simple from my perspective. De-leveraging takes time and no amount of money thrown by governments will solve the problem in a hurry. Stimulus is one thing when there is obvious economic contraction but this contraction has been bigger than others and we need to put reality into perspective. I believe Canada is one of a few (if any) remaining countries who has not experienced a considerable decline in housing prices (and I’m not talking about 4-5%). Consumer debt levels remain high, incomes will not be rising to meet the higher demands of borrowing rates and high unemployment just paint a simple picture of grey for the optimistic economic guidance being given for 2010. That’s not to say that I don’t expect opportunities of value to present themselves; but the rosy economic picture being painted at this time doesn’t jive with the economic reality of a massive bubble of credit that burst when everyone knew for years that it simply wasn’t sustainable.


SAML:

I’ve decided to make a few changes to the Stock Analysis Mailing List (SAML) on the site for a few reasons. I still plan to offer the service to all existing free members, but I will no longer be offering a yearly subscription for a fee. I’ve had much more success selling individual analyses to date and holding myself to a minimum number of stocks to analyze didn’t make much sense if the demand wasn’t there. I still plan on publishing Taking Stock in Bank of Nova Scotia (BNS) before the end of September so I thank readers for being patient.


Vacation:

As many long time readers know August is a month of importance for me as I usually spend the majority of the month at the family cottage with my parents, siblings and our significant others. This year is no different and I will be away for likely the remainder of the month starting August 8th. I haven’t scheduled in any new or guest posts so feel free to email questions or comments and I will reply when I return.

I’ve promised Claire no Blackberry this year or internet although I will have my laptop with me as I plan to start writing the qualitative component of Taking Stock in Bank of Nova Scotia (BNS) and read/review a book by Sramana Mitra's titled, Bootstrapping: Weapon of Mass Reconstruction.


Portfolios:

Although July didn’t provide a lot of excitement in the equity markets I did do some rebalancing to my main portfolios to adjust for some aggressive buying I did earlier in the year. Taking profits at this point in the markets and re-investing those gains into lagging positions seems like a prudent and effective use of resources.

In my Dividend Growth Portfolio (DivG) I sold a portion of my holdings in Manulife Financial (MFC) and Royal Bank (RY) after they each grew to over 5.25% of the portfolio. 5.25% is the threshold I have for how large any individual position can grow to before I consider trimming it down. Ideally I like to keep all position within the portfolio between 3-5%. With the proceeds and numerous dividends I received from existing positions I added in small amounts to Canadian Pacific (CP), Shaw Communications (SJR.B), Thomson-Reuters (TRI), Metro (MRU.A) and Rogers Communications (RCI.B) to bring their weightings above 3%. Financials now only comprise 32% of the portfolio overall including all common equity and preferred shares I have in various banks, insurance and wealth management companies. Moving forward into August and September I’m looking to add to my positions in Empire (EMP.A) and Atco (ACO.X) and one other preferred share series to bring their allocations above 3.25%.

In my RSP I bought shares in Heinz (HNZ) and Kraft (KFT) and I’m currently waiting to add to my positions in TEVA Pharmaceuticals (TEVA), Proctor & Gamble (PG) and two ETF’s I hold (ADRE & VGK).


Click here to see how future posts can be delivered directly to you