Tight Credit & Cross Currents

 

A recent news story surfaced, highlighting just how tight credit conditions still are in the U.S.

Former Federal Reserve Chairman - Ben Bernanke, the top dog at "America's Bank", the one who poured trillions into the economy after the 2008-2009 financial crisis, recently tried to refinance his $670K mortgage with little success. If America's top banker can't refi, than who can? The pendulum on lending standards have clearly swung too far. Tight credit might explain the slower than normal economic recovery south of the border. Housing, which also has recovered, albeit at a slower than normal pace, could benefit from less stringent lending. I'm sure that when the Bernanke news hit the wires he received several offers for a refi on his Washington home.

 

In other news, energy prices continue to slump dragging energy companies along with them. The fall of some energy names has been truly amazing - considering many are hedged and have solid or improving balance sheets. News recently surfaced that Oklahoma wildcatter - Harold Hamm, CEO/founder of Continental Resources proclaimed that there is no oil glut. Hamm is known as a outspoken risk taker, but this time he has put his money where is mouth is. He recently, cashed-out of some $4 Billion worth of oil hedges (@$98 hedges), netting a cool $470M. Hamm's case rests on his theory that there has not been much of a change in the global supply/demand picture. Continental, now un-hedged, will benefit significantly if oil prices rise. Hamm's recent move runs directly against the street's current outlook on oil and just might give him the last laugh.

 

We continue to pick away at our depressed energy holdings with a view to better days ahead. However, our overall energy exposure has fallen over the past 6 months, with our sale of Hess Corp (HES) at an average price of $89.



Drill Baby Drill!!! - YPF SA

News quietly emerged this week from Argentina that the federal government has agreed to amend a 1967 energy bill in the cash strapped South American country. The revisions will allow foreign and domestic oil companies, like YPF (which we've owned since 2012), to export some quantities of oil into international markets. Argentina, under the current leadership of Christina Fernandez de Kirchner, has been quite restrictive allowing only a few foreign players into the domestic oil patch - under onerous conditions. Kirchner, since expropriating YPF from Spanish oil giant Repsol in 2012, has realized they need foreign expertise to develop the massive Vaca Muerta shale oil/gas fields - as the country has been struggling with falling production and stubbornly high development and production costs. YPF has recently signed partnerships with U.S. based Chevron and Petronas - Malaysia's state oil company. Why all the fuss over oil/gas in Argentina? Well, the Vaca Muerta fields, the size of Belgium, hold the worlds fourth largest shale oil and the second largest shale gas deposits - some 27 billion barrels of oil equivalent and 800 Million TCF of nat gas. Despite the political and economic uncertainty (including 8 debt defaults since 1894) we think the value of YPF's oil in the ground will likely remain relatively constant - which is currently north of $50/share of YPF, well above the current stock price. We are also pleased to learn that legendary hedge fund manager George Soros's family office, is new owner of YPF, with a 3.5% stake valued at some $450 million. We would add to YPF on a meaningful pull-back in the low $30's.

 

Citi Settles & A New Stock

Regular readers will know we've been a fan of the U.S. Mega-banks for some time. Citigroup (C) is no exception, we've owned it since 2010. It's possibly the most hated bank in America now - right up our alley. Although C is out of favour with the street - there is still value - here at $49. The company has recently settled a court case with the Department of Justice (DOJ) - related to the bundling and selling of mortgages that went sour during the financial crisis. Many expected the settlement to reach $10 billion - Citi settled for $7 Billion. Citi also is recovering from a fraud case at a Mexican subsidiary - Banamex. Finally, Citi this past spring, failed a review conducted by the government on Citi's books. We didn't expect them to fail the review - nor did the street. I'd expected Citi will be extra cautious on the next review. Passing the government's review will allow C to raise the dividend and buy back stock. Both will be welcome by the markets. Citi still trades at a meaningful discount to it's tangible book value and at less than 10X next year's earnings - Citi is cheap. We're not adding, but will continue to hold for full value.




While the markets have steamed ahead the past few years, we are still able to find pockets of value.
We look in areas that are out-of-favour, un-loved and under stress. Our search reminds me of one of my favorite quotes from the famous investor John Templeton - "stocks are rarely popular and cheap at the same time".

Our search has led to an industry that boomed from 2002-2007, and is now un-popular and cheap.
Many companies in this industry are well capitalized, operate globally and pay healthy dividends.
Subscribers to the www.roi-report.com know that we have started a position in a mega-sized company in this industry.

If you are interested, you can check out www.roi-report.com

Enjoy the rest of your summer!

News

After much consideration and planning, I'm pleased to announce the launch of my investment newsletter - The ROI Report. You can check out the website here: www.roi-report.com

I haven't figured out yet, if I will continue to post on this blog - as it is only right that my subscribers have first access to my research and portfolio changes. I may continue to post interesting discussion on the market and other topics related to value investing. I'll keep you posted. If you have any questions about the newsletter, just drop me a line @ info@roi-report.com



Happy Investing!!!

Where are we?

Spring Pruning

I have recently done some pruning in my garden and my portfolio. I won't bore you with the details about my garden. In my portfolio I've done a little selling (reduced positions by 15% or so)  of the following names:

Manulife (MFC.TO) @ 20 1/8
Hess Corp. (HES) @ 88

While, these companies aren't quite fully valued, they have done well and I'd like to have a little more cash around. Many market participants are quite bullish these days, and that's a cause for concern. I have a growing list of ideas to put money to work, but will need lower prices to pull the trigger. Until then....we wait.

Small Add To Chippy

I recently added to long-time holding ChipMOS Technologies (IMOS), a semi-conductor test and assembly business. I added early on in Q1 at around $18 3/8's and also a very small add, this past week
@ 22 1/8.

IMOS has benefited from industry consolidation and the boom in smart phones and tablets. There is good chance that your phone or tablet’s chip sets have been tested and/or assembled by IMOS. The firm continues to land new business and transform itself from a debt laden firm just 5 years ago to a lean profit machine. IMOS is also currently undergoing a corporate re-shuffle, by way of a new stock issue on the Taiwan exchange, where IMOS is better known. I expect the U.S. traded shares to close the gap between their Taiwan listed shares.

The stock is up 23% YTD, and continues move closer to our intrinsic value estimate of $30


.

 

Magna

I recently sold the last of my position in Magna (MG.TO) @ $103. I will continue to follow the developments at MG, and look forward to being a shareholder again - at much lower prices. I still have exposure to the auto sector though GM (GM or GMM-U.TO) which remains good value, here at
$36. Good and cheap companies are getting harder to find. As a result, my level of cash is slowing rising. But there's always something to do - I've got a few ideas, but I'll move slow hoping for a sell-off.

A Little Shifting Around

I recently sold 2/3's of my shares of Magna International (MG.TO) @ 96 1/2. Business at MG is humming along quite nicely. Europe, which makes up 40% of their business is finally turning around. But the stock price is fast approaching my estimate of intrinsic value (raised from $50's to mid $90's), and it's time to scale this position back. I don't like holding fully valued stocks, when the market is frothy ( more downside risk ). I wrote about MG here.

I used some of the proceeds from the sale of MG to add to PWT.TO at 8 1/8. PWT is cheap and un-loved. I wrote about PWT here. This year will likely prove interesting for the Canadian oils, as several major pipeline initiatives are underway (pending approval), potentially paving the way for narrower oil differentials. Combined with a lower $CAD and reduced capital spending by the oils, the Canadian oils may finally attract some attention by the market.

I expect 2014 to be a positive year, but no where near the +41.5% (in CAD) return of the S&P 500 in 2013. Expect volatility - but with that comes opportunity, as the past 2 weeks have shown.