Thursday, October 29, 2015

Activist In Gear - AIG

News broke this past Wednesday that famed activist investor Carl Icahn has built a position in insurance giant AIG - our 3rd largest holding - thanks Carl! Icahn, in a letter  to AIG, is suggesting the company break its self up into 3 smaller firms. He thinks that AIG is too big to succeed, and would be able to improve their competitiveness against their better run rivals. We find it hard to disagree... Is it worth $100/share? We will see. We will continue to sit on our hands and watch the developments with interest at AIG.

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Thursday, May 7, 2015

Yellen Yell'In

Federal Reserve Chairwoman, Janet Yellen's recent remarks about "quite high" equity prices in the U.S. and the risk that poses to the broader economy. In Fed speak, she is saying; as prices rise, so too does the tendency of market participants to take on ever greater risk. She is right on - remember 2008?  Risks are present, however they always are...so just how expensive is the market and what do we do?


Note: This chart excludes the 2008/09 meltdown, where earnings dropped significantly and P/E's went through the roof. Normally you would see a spike on this chart in late 2008 and early 2009.

It's not hard to tell from this chart that the market is not dirt cheap or priced wildly high. You can see that from 1935, we have basically seen a trough of 10X and a peak of 22X. It should be noted that interests rates were much higher at almost any point prior to 2008. With record low interest rates, it appears that their is still room for the averages to move higher. However, any move higher will likely be in a choppy fashion, as the market continues to worry about interest rate hikes, GDP growth, and unemployment.  Bargains are harder to find, but as the famed Canadian investor Peter Cundill once said - "there's always something to do". There are still pockets of value. Sectors including U.S. money center banks, industrials (auto's, engineering firms), large cap technology and energy offer value. But remember, always have a margin of safety! A black swan can appear at anytime. If indices move higher, we will continue to harvest our holdings and raise cash. Bull markets generally mature on optimism and die on euphoria - we don't see any euphoria.
 




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Thursday, March 5, 2015

Citi Streamlines

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Citigroup (C), one of our long-time bank holdings, has recently offloaded sub-prime lender One Main. Citi will sell One Main to Springleaf for $4.25B. Citi expects to book a pre-tax gain of $1.0B on the deal. While One Main is a profitable business for Citi, it's also a risky business for the bank. Citi seems to be stepping back from consumer banking and focusing on corporate and commercial banking. This transaction should free up capital backing One Main - allowing Citi to increase dividends or share repurchase or deploy the capital elsewhere. The bank can also use some of it's $50B in deferred tax assets against the transaction. In a similar move, the bank just today, announced another sale of non-core assets. Citi sold it's 9.9% stake in Akbank ( Turkish retail bank ) for $1.15B. The bank will continue to operate in Turkey through it's security clearing and settlement transaction business.
 
Citi continues to move in the right direction and remains undervalued at <10X next year's earnings and 0.8X book value. We think Citi is good value <$50.
 
 
 

Thursday, January 22, 2015

2014

With 2014 behind us, it's time for my usual post-mortem review on my portfolio. With a return of 3.4%, I trailed the TSX return of 10.8% and the S&P 500 return of 13.8%. I don't fret about any 1 year's return, it's the five year returns I'm interested in. I'm still well inside my comfort range on the 5yr (mid-teens %) returns.

Figuring out what worked and what didn't this year was easy. Here's a look at several of the S&P 500 sub-sectors:

Winners                                   Losers

Financials    +13.5%               Energy      -10.3%

Technology +21.1%                Industrials +7%

Utilities        +26.7%               Basic Mat. +2.7%

Healthcare   +25.3%               Telecom    -0.1%

Exposure to financials and technology was a huge contributor to my 2014 return. Without that exposure, 2014 would have been a down year. Energy and materials were a major headwind in 2014.
I under estimated the floor on oil, thinking we would not see less than $65-$70/barrel. As you know oil is currently under $50. Some energy companies may become financially unstable if oil continues to languish. If you owned U.S. stocks in 2014, then the falling Canadian dollar (CAD) also provided a tailwind. Weak commodity prices will likely continue to weigh on the CAD going forward. The Canadian economy will also suffer.

Looking ahead to 2015, there's still value in the financials. The large money center banks like Bank of America and Citigroup are finally moving past the huge legal challenges ( and monetary settlements ) they have endured over the past few years. As recently as last week, investors dumped bank stocks as they continue to worry about NIM's ( net interest margins ) thanks to falling bond yields. While lower NIM's may hurt BAC and C, in the short-run, we think these banks have tremendous earnings power going forward. We'd add to both BAC and C now.



Other areas of value include technology, where I continue to add to the mega-cap tech companies that have improving fundamentals - Oracle (ORCL) to name one. Industrials also offer value, as they were poor performers in 2014. Specifically, there's value in the auto makers and steel companies.
 
While we don't know what's in store for the markets in 2015, it's sure to be full of surprises. There are still cheap stocks - we are cautiously optimistic. All the best for 2015!
 
 
 
 
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