Value Investing

After what has been a fairly successful start on blogger we are moving to a new hosting service at www.buyingvalue.com I hope you will all follow us there and enjoy the new services and features available!

As readers of my blog know I have been looking for some time for a good Canadian screener, specifically a screener that allows for Graham style analysis. After finding one earlier this year that ran as an application I set my sights on trying to find one that runs as a web application. Well little did I realize but there was one right under my nose.

Zacks has been around for a while and has recently released a new beta of there free stock screener.
I am pleased to report that Zacks has the ability to create screeners that you can point at TSX.

For info on the graham criteria have a look at my earlier post.
The screener can be found here, enjoy: Zacks Screener


The author of this article did not receive any payment for this recommendation.

Every once in a while it is good to put things in perspective. Here is a bit of a laugh but there is a good point in there too.



http://www.youtube.com/watch?v=jETv3NURwLc

If you had $100 to invest in the DOW in 1928 you would have $3128.52 today- what a deal right? Wrong, let me tell you why.


I've been to several financial offices where they proudly display the graph of the DOW since 1928. The desired effect being that we are to think that the market always goes up, you just have to be patient. I, like many people, didn't appreciate just how patient one has to be though until I examined the returns in more detail.

Lets work through the numbers. If I had invested $100 in an DOW index fund in 1928 as the market was starting to fall apart (yes I know they didn't exist but it serves our purpose well and I think you understand the intent) and left it there I would have had $3128.52 Feb 2, 2009. But who can wait 80 years for a return- not me, that is more than a lifetime.

The mind naturally assumes though that if I waited half of that time I should have approximately (give or take 10%) half of that return so somewhere around $1562.76- that is a pretty good return for 40 years. So does that hold up?

Sadly no, you would have a paltry $339.26 40 years after the initial investment, nowhere near our goal. But, you might say, 300% return in 40 years is still a pretty good return, not as good as what we see at 80 but I still like it. In the big picture though a 300% return over 40 years is really not that great- that is a long time to wait for 300%. So we hack it down again, could I get 150% in 20 years, I am patient enough to wait 20 years for 150% so how about $300 in 1948? Well how would you feel about $69.31 instead?

The reality of it is compound interest can help you or really hurt you. 10% return one year and a 5% loss the next year is not the same as two 5% gains.

Investment	Y1 ROR	Y1 Net	Y2 ROR	Y2 Net(Compound)
$10	10%	$11.00	-5%	$10.45
$10	5%	$10.50	5%	$11.03

Interestingly enough if instead of investing our money in the market in 1928 we had found a stable bank that could return us a paltry .31% on our investment compounded monthly, or 3.72% per year we would have a higher return on our investment from the bank account than the DOW almost every month until February 1987, some 59 years after the initial investment.

The point I am trying to make is simply this, the bad months can do incredible damage to your portfolio in the long run. Be wary of investment systems that advertise an average made up of huge gains, and substantial losses. Those losses may hurt you more than you might first think. Stability and consistency of returns wins the race in the long run.

This article originally appeared on The Div-Net Feb8 2009
Much has been written about the success of Warren Buffett, but little on his failures. I think a great deal can be learned by analyzing the failures of successful people. By studying these failures hopefully we can avoid them ourselves.

The Deal

Buffett purchased preferred shares in US Airways in the early 1990's, and later remarked that this was one of his biggest mistakes. Now before getting to far into this it is worthwhile to comment that Buffett did in fact end up making a profit on his holdings of US Airways but Buffett certainly cannot claim credit for this. In his own words:

“Two changes at the company coincided with its remarkable rebound: 1) Charlie and I left the board of directors and 2) Stephen Wolf became CEO. Fortunately for our egos, the second event was the key...” Warren Buffett, Bershire Hathaway Letter 1997.

A few years after purchasing Buffett had pretty much written off the investment and had tried to sell out of the stock numerous times at a substantial discount. The investment had essentially become out of control and Buffett wanted out. Luckily he wasn't able to sell until sometime later when the company had started to rise again.

What Went Wrong?

So what did Buffett do so wrong? Lets look at the principals that Buffett uses for analyzing an investment:

“Charlie and I look for companies that have a) a business we understand; b)favorable long term economics c)able and trust worthy management d) a sensible price tag.” Berkshire Letter to Shareholders 2007

Understandable Business

Looking from the outside the airline business is fairly easy to understand. Money is made by moving customers and packages from one location to another. But behind the scenes the airline business is a huge gamble with 183 airlines having gone bankrupt since 1978. So much of the business is frozen in the assets in the business that any turn in the economy can destroy it over night.

Sustainable Competitive Advantage

Part of the reason that so many airlines have gone out of business is that consumer's are essentially unable to determine the difference between one airline and another. The planes are all the same make and model, you leave from the same airports, the pilots are all trained by the same schools and military, the food is very similar and they show the same movies. For the consumer in most cases it comes down to a question of price- who can get me there cheaper. Did US Airways have a way to keep their costs under any better control than their competition? No, unfortunately they shared several of the same unions as other airlines and were being charged the same airport fees as others also. It is difficult then to see the sustainable competitive advantage that US Airways had.

Able & Trustworthy Managers

Within a year of purchasing the preferred shares in United Airways the CEO Ed Colodny had been replaced and the stock price had gone into a deep dive. While Buffett still remarks that he has the utmost respect for Colodny he obviously could not get the job done and was on his way out as Buffett was coming in. In terms of Able then US Airways appears to fail this criteria.

Bargain Price

A bargain is only a bargain if you get something of value. While the preferred divided Buffett was to receive was an appealing 9.25% he was unable to collect that for 2 years. Several other ratios were also appealing; if the market teaches value investors anything its that sometimes things appear cheap because they, in fact, garbage.

Analysis Conclusion

Buffett failed to enforce his own rules of selection and got wrapped up in a bad decision. As he put it:

“I liked and admired Ed Colodny, the company's then-CEO, and I still do. But my analysis of USAir's business was both superficial and wrong. I was so beguiled by the company's long history of profitable operations, and by the protection that ownership of a senior security seemingly offered me, that I overlooked the crucial point: USAir's revenues would increasingly feel the effects of an unregulated, fiercely-competitive market whereas its cost structure was a holdover from the days when regulation protected profits. These costs, if left unchecked, portended disaster, however reassuring the airline's past record might be.” 1996 Letter to Shareholders, Warren Buffett

What Can We All Learn From This?

Buffett has a good system, when he settles on an investment choice he writes down the reasons that he feels it is a good investment. If he can't persuade himself to buy based entirely on what he writes down on the paper then he walks. This would have been one of those times he should have looked more carefully at the paper.

We can all learn from this mistake; do your homework and, most importantly, stick to your principals. If you have rules for investments make sure you are sticking to them. What went wrong here then is that Buffett stopped using his rules and veered off the track- don't make the same mistake in your investing.

Before starting I should say that I am not a fan of market timing, I think trying to plot an irrational event rationally is next to impossible. However, having said that, if you have the choice between two options both with equal merit why not pick the option with a track record of previous success? In my case the question is, should I get my tax forms prepared early and wait for the final forms to arrive next month and then send in, or wait until the final forms arrive before I start putting everything together.

I thought it would be interesting to see what month has historically had the highest average rate of return for a one year investment in the DOW.

This Chart can be read then to say that if you took a sum of money and only ever invested it on every May 1st (from 1928-2008) into a DOW index fund and then withdrew it May 1 of the following year you would see an average rate of return of 7.4%. Whereas if you had done the same but invested on August 1st you would have seen a 6.2% average rate of return.

On a quarter by quarter analysis then Q2 has the highest average rate of return. Followed by Q1, then Q3, and finally Q4.

Being a value investor I wondered, does the picture change at all if the investment changes from a one year to a five year investment?

While the grouping is much tighter, the results are similar. So again, if you invested every June 1st and then sold out 5 years later on June 1st you would have an average rate of return of 28%.

On a quarter by quarter analysis you would achieve the following.
What does this all mean? Well there is no motivation for procrastination here it appears. if I hurry up and get organized I will be able to put my tax return in and have it processed before the end of Q2 which historically speaking would give me the opportunity at a higher rate of return. Food for thought.

On Friday February 7th Puget Power announced the closing of the sale of its core business at $30 per share. Regular readers of my blog will recall that I recommended a purchase of PSD in November of last year at $18. If one includes the $.25 dividend payment from Jan 16th, and the pro rata dividend of $.04 this transaction returns $30.29, or a profit of an impressive 68%.

While I am very happy to have a 68% win on a 3 month investment (and hope several of you are also counting your fortunes this weekend) I think this is a good time to turn around and look at the trade again to see if it was a wise trade or a bit of wisdom and a bit of luck.

Pretrade Activity

Prior to the trade I listed off my thoughts here. In reviewing them I have the following thoughts:

• Insider confidence was high so I am glad to see that this metric proved accurate. Regular readers know that I spend a fair bit of time looking at insider buying to find the next potential company to purchase stock in.
  
  
• The dividend was appealing. Even if the deal failed I think it is highly likely the dividend would continue to be paid.
  
  
• Puget Power failed to meet the majority of my criteria for a normal purchase, I think it was a mistake to have discredited this so quickly in my earlier assessment. As I will make note of in a coming post when we stop following the rules of our own systems we are well on the road to disaster.
  
  
• I think my assessment of $20 intrinsic value may have been a bit rushed. In assessing comparable companies it is reasonable to conclude that if the deal had not gone through the stock would have plummeted to somewhere in the area of $13. Its intrinsic value is higher but the reality of the situation is that the company had restructured itself for the merger and if the merger had failed to go through the company would likely have needed to restructure again- something the market would have surely punished it for.

Post Trade Activity:

• I had no sense of when the deal would close. All I had was speculation from other investors like myself and the few clippings that made the newspapers and investment papers.
  
  
• This last point leads into my next point. I had no real connection with the facts of the case, I did not go to any of the meetings in Washington to understand the situation. I simply read and researched from a distance. In short I did not do my due diligence to stay connected to the facts.
  
  
• There were a number of good exit points, a number of times shortly after the purchase that the stock touched $25. There is an old expression in investing, "leave a dollar on the counter for the other guy." What it basically translates to is when you make a big win don't chase the pennies if it means you are risking the dollars.
  
  
• After the announcement of the final merger date we can see in the volume that a number of investors sold off the stock. I am glad to see that in the final week and a bit I did not make the same mistake, once the risk is removed there is really no reason not to ride the trip out and collect.
  

Final Conclusions:

I think greed may have played too much of a role in my initial selection criteria. Puget Power had a reasonable dividend but on the other criteria to which I normally base decisions on it falls short of the mark. I realized this shortly after the purchase in November and should have taken the early exit points and been happy with the substantial return I would have received.

The basis of Graham style value investing is all about reducing your risk of loss to 0%. By skipping several of the criteria of assessment, being distant from the story itself, and not selling when I had the opportunity- I let greed play too much of a role. Don't get me wrong I am happy with the profit from the trade, but there is always something to learn even when you win.

I haven't had a broker for a few years now but every once in a while someone asks me how to pick a good one and I dig out this story from my own experiences.


In the early days of the turn of the century I had a broker who managed 100% of my portfolio- Stocks, Mutuals, Investment Portfolio- everything. I like to be involved with my money so would have regular meetings to review the status of my portfolio. As many of you know this was about the same time when then market soured and tech stocks fell apart completely. I had seen a substantial down turn in my portfolio and had come to him to get some answers as to why I had been beat up so much, and to understand where we should go to from here. In reviewing my latest holding before the meeting I could see that most of my portfolio was in tech stock that were all purchased at or very near 52 week highs.

When I left the meeting I was more frustrated than when I went in, and it took me a car drive home to figure out why that was the case. I went over our conversation in my head and realized that my broker had done a lovely job of being completely Teflon to the responsibility for the impact to my portfolio. This was not surprising as surely there are forces in the market beyond his control, but even more than that, he had learned absolutely nothing from the lessons the market had taught him. I was reminded of what Albert Einstein once said of insanity:


And this was exactly what my broker was electing to do. Instead of taking a step back and evaluating his trading technique and taking some personal responsibility for the mistakes he had made and how he could learn from them he instead elected to shirk responsibility and continue to smash his head against the wall.

I fired him shortly after.

The lesson here is that as investors we can learn more from our mistakes than our successes. Don't be afraid to say I made a mistake and here is what I learned from it. This is the true way to guarantee that you won't ever do it again. Fear of calling something you did a mistake only means that you are doomed to repeat the same mistakes again.

When picking a broker then ask them this very question. What is the worst trade you have made and what did you learn from it? They will likely never have heard this question so you may actually get an honest answer, listen hard to the answer and use it in concert with other criteria to help guide you in picking the best broker.

Vancouver is currently preparing for the 2010 Winter Olympics. As part of the Olympics Vancouver is constructing a residences for athletes. The city had planned to see the residence sold off as condos after the Olympics for a healthy profit. With the credit crunch and the downturn in housing in Vancouver though the story is changing. To boil it down, basically Fortress Investment Group was loaning the money to complete the work on the site and has now stepped back and stopped funding the project, leaving the city of Vancouver in the lurch.
Wherever there is money it is worthwhile to ask; is there a opportunity here for investors?

Lets examine this further. Why would Fortress back away from the current deal, is it a ploy to refinance a better deal with the city and therein create an interesting buy opportunity on its stock?

What possible reasons would Fortress back out:

• Unhappy with the interest payment? Unlikely, the deal had a strike price set before the interest rates really began unwinding so they are receiving fair dollar value- rumors are that it was somewhere in the neighborhood of 8%.
  
  
• Better Opportunities for Fortress to spend on? Unlikely,with the current economic condition there does not appear to be high number of viable options available.
  
  
• Belief that the construction will not finish? Impossible, the City of Vancouver signed a deal promising to see the project through to completion.
  
  
• Fortress does not have the capital and is using a loophole to escape. Now we are getting somewhere.
  

The last year has been tough on Fortress, it has posted massive losses over the last two quarters and its stock price (which in this case can be thought of as a thermometer of investor sentiment) is under $2 after having traded as high as $30 a year ago, it has also faced several recent downgrades. It is highly unlikely that Fortress is finding it easy to come up with the millions of dollars in funding to finance the rest of the construction.

Is there a buy opportunity here, unlikely. I see the likely results of this being any of the following:

• The city/province will finance the project to its completion.
• The city will sell the site at a deep discount to another developer with the promise that they will complete the site on time.
• The city will find one of the few fiance companies left out there to carry the project through to completion.

All in all I don't see much of a future for Fortress in this situation, and therein no real buy opportunity.

Originally published on: Div-Net
After much searching I found a stock screener for Canadian stocks (more on this in another post). I was able to assemble a Graham style screener with the following criteria:

• Exchange TSX
• P/E less than 15
  
• Dividend Yield > 3.5
• Average EPS > 33%
• Revenue > $550M
• Current Ratio > 2
• Price/Book Ratio less than 1.5
  

Up popped two companies one of which is Methanex (MX-T). Showing up on the screener is not sufficient to merit my investment. So here is the abridged version of my analysis. Before diving in though I am compelled to say that I never analyze a company with the intent of buying and selling it within a few months. Also please, please this is my analysis any investment you make should supplement what I present here and possibly involve consulting your own investment consultant.

Company Intro

Methanex is in the business of extracting and shipping methane (surprise). Methane is the central component in natural gas (about 87% by volume). Its principal use therefore is in heating and energy production in addition to a number of industrial uses.

Company Fundamentals

• P/E ratio 3.12
• Yield 5.69%
• Average EPS Growth Rate 650%- only 6 yrs available here are the exact numbers:
• EPS 3.63 (2007), 4.4(2006), 1.39(2005), 1.95(2004), 0.06(2003), 0.18(2002)
• Growth Rate -17.5%(2007), 216.55%(2006), -28.72%(2005), 3150%(2004), -66.67%(2003)
  
• Avg EPS 5yr growth rate 86.3%
• Revenue $2250.99M (2007)
• Current Ratio 2.79 ($988.59M / $354.42M) See here for how this was calculated.
  
• Price/Book =.76
• Return on assets 12.92
• Return on Capital 2007 1.47 ($2266521 /($2869899 - $1335354))
  

Analysis of General Market

As Methanex essentially trades in a commodity it is worthwhile to look at the overall health of the industry:

Understanding How the Company Came to be Cheap

• Working with Argentina: Reading the company's financial statements one can see that a large part of the business in based in Chile. Chile has, in the past, been refining Argentinian gas. Argentina though has for the past few years blocked the export of gas due to concerns over a possible shortage within its own borders. As a result Methanex claims that its plants in Chile ran at around 60% of max production. Reading some more on this it appears Chile has made great efforts to make itself fully independent of Argentinian resources over the last few years and should continue to do so in the future. One news story quoted a senior Chilean government representative as saying they would be gas independent of Argentina by the end of 2008. As such we should expect that this 60% should grow steadily in the future closer to the company average of 87.1% it has been running over the last 10 yrs.
  
• Refinery in New Zealand: Methanex has a refinery in New Zealand after having fired it up earlier this year they appear to have shut it down again this quarter. This news appear to have scared off some investors but in my opinion this appears to be just a prudent business decision based on market conditions. In reviewing Methanex's financial statements starting and stopping facilities appears to be a regular activity with a plant in Canada currently offline.
  
• Softening in the Price: As we can see from the chart above the price of methanol has dropped off substantially for January of 2009.
  
• Global Downturn: Every area has seen a downturn over the last few months.
• Possible End of Year Capital Gains Losses: As we are at the end of the tax year investors tend to sell more than they buy so as to assume the necessary tax losses.

Other Opinions on Methanex

President Lincoln believed in surrounding himself with people who did not necessarily agree with his opinion. I believe this is one of the best ways to test your research. I would encourage you to read the following, please keep in mind that some of these links refer to the American stock, not the Canadian so prices targets will differ:

• http://news.moneycentral.msn.com/provider/providerarticle.aspx?feed=AP&date=20081218&id=9463271
• http://www.tradingmarkets.com/.site/news/Stock%20News/2062742/
• http://www.newratings.com/en/main/company_headline.m?id=1843509
• http://www.businesswire.com/portal/site/google/?ndmViewId=news_view&newsId=20081204005130&newsLang=en
  

Summary Comments

Negative

• Methanex was incorporated in 1992- traditionally I like to see a company with a longer history.
• Methanex started paying a dividend in 2003 so the history of a long consistent dividend is not there.
• The Methane market has gone soft-like everything else.
• Methanex is likely to report negative results for the year.

Positive

• Methanex has never decreased or canceled a dividend it has also raised its dividend each year since inception by an average of 21.2% (usually in the second quarter of the year).
• Methanex has been buying back its own stock since 2004.
• The issues in Argentina appear to be coming to a conclusion with the Chilean government stating it would not be dependent upon Argentinian gas by the end of 2008.
• While industry is the largest consumer of electricity and a global downturn will decrease residential energy needs will most certainly be a constant.

Disclosure

At the time of writing the author is in the process of purchasing MX.

Have an opinion on this stock, please leave a comment would love to hear from you.