Q2-2015 Performance Report

Portfolio Performance

My very unaudited portfolio performance in the second quarter of 2015, the three months ended June 30, 2015 is approximately +9.4%. The performance for the six months ended June 30, 2015 (year to date) is approximately +10%.

(An earlier version of this post had the 3-month performance at +9.6% and this minor calculation error has been subsequently corrected; this brought the year-to-date performance figure from 11% to 10% due to rounding).

Portfolio Percentages

At June 30, 2015:

22% common equities
2% preferred shares
1% equity options (net)
22% corporate debt
53% cash

USD exposure: 47%

Portfolio is valued in CAD;
Equities are valued at closing price;
Equity options valued at closing bid;
Corporate debt valued at last trade price;
Portfolio does not include accrued interest;
Cash balance adjusted for July 13, 2015 redemption of Pinetree Capital debentures (I did say this was “very unaudited”, did I not?).

Notification

I am still considering an e-mail subscription service for these updates. When I am in a position to do so, I may give an abbreviated summary of the report on the website, but send something more detailed through email.

Portfolio Commentary and Outlook

Mostly cash! This has to be the highlight of the portfolio. Cash earning zero yield. Instead of dumping the remainder in an index fund or long-term treasuries, I have opted to keep things as simple as possible and hold onto cash for better (or rather, worse!) times.

I am shocked that I am substantially outperforming the S&P 500 and TSX year-to-date. I have been running wildly dry for over a year now, so this quarter was a much appreciated break-out – albeit this breakout will strictly be temporary. I fully anticipate coasting over the year due to having a very high cash component to the portfolio.

The major action during this quarter was the liquidation of a substantial position in common shares as a result of a company’s dutch auction tender. I took the opportunity to liquidate most of the position during this time as the story in question (that I have been alluding to in the past couple years of these reports!) will have to wait for longer before it will turn into massive gains. This company will still be on my watchlist and I still hold a smaller position in it than I have in the past. Most of the shares were liquidated at a profit of about 40% from the cost basis that I acquired them at, but I was quite greedy on this position and thought it could go much, much higher (specifically I was looking for a low-risk double and with the help of some momentum, a triple).

Why not keep holding onto a large position if I still think they have potential? In an (hopefully not mistaken) attempt to time when the market will start to like them again, I do genuinely believe there are some technical matters within their ownership structure that need to be sorted out before they will appreciate. It is quite the piece of information for a tender offer to have all of your significant shareholders offer their shares. If they want to get out at a price that is relatively close to market, what makes one think it will go higher from this point until they’re all done liquidating?

I have probably given enough hints on this website for an astute person to figure out what stock this is.

I did pick up a minor equity position in a company that is now trading below a dollar per share. It used to be well above this and is primarily a perceived victim of the slump in the Canadian oil and gas sector. While I am not married to this position (nor am I married to any position in my portfolio!) the risk-reward scenario, especially when examining the financial statements and doing some basic calculations of what the industry should nominally look like in a normal financial state, seems to be quite favourable for a triple in share price over the next couple years. This is assuming some sort of moderation in the industry. Even if the common shares went 3x from present prices, it would still be well below its average trading price in history. Given the balance sheet leverage (which is not completely leveraged, but I would not call them conservative on debt either) this will likely be a binary situation where it will go to zero on a recapitalization, or stabilize and appreciate. If you get 2:1 odds flipping a fair coin, it is still wise to put some money on the outcome even though you may lose your wager. At present it is about 30% below my cost basis and thus it looks like a losing bet. I will not rebalance until I see Q2 financial statements.

My corporate debt positions have been pared down primarily through redemptions of Pinetree Capital debentures (TSX: PNP.DB). I’ve written enough about it in previous posts, but suffice to say, it is going to be very difficult to replace something with such an insanely high yield at a low-to-moderate risk level. Pinetree debt has been trading in the upper 90’s since the last redemption announcement, but it is far from an optimal vehicle to be parking cash (even though the coupon of 10% looks relatively attractive considering the debt is super-duper senior secured).

I have three other corporate debt holdings which are single-digit percentages. One is senior secured, the other two are senior unsecured and all of them are trading below par and are priced at a higher risk level than what I believe their financial statements warrant.

I’ve been desperately trying to find places to park cash to earn something beyond zero. Other than the obvious (GICs at 1%), I have not found any luck with the risk-reward parameters that I am looking for. There are a lot of creative institutions and securities out there that will tempt you into ways to locking your money, but removing liquidity must demand a higher price for the investment and I am refusing to sacrifice liquidity. In this instance, I am keeping very liquid.

My largest equity position is now Genworth MI (TSX: MIC) once again. Historically I took a large stake back in 2012 when it was trading below $20 and I see no reason why I should change my position at present. I did dump some shares in the high 30’s and low 40’s last year. From a fundamental perspective if it goes below $30/share I might start looking at repurchasing shares again if my perception of how the market is pricing in Canadian housing risk is more severe than my well-informed perception of what the reality is on the ground.

There is an omnipresent risk in the entire Canadian market that isn’t directly being talked about, and that is the upcoming October 19, 2015 federal election. Since the NDP (who have vowed to increase corporate income taxes, amongst other taxes) are in a position in the polls whereby they could conceivably be in government, the markets are going to continue be dicey for government-sensitive corporations out there. In particular this also does not bode well for domestic oil producers (which will likely be under further regulatory scrutiny). The election of an NDP government in Alberta has already resulted in their government promising in the throne speech higher taxes for corporations (the provincial corporate tax rate will go up from 10% to 12%), individuals earning $125,000 and above, and down the line, a probable implementation of a carbon tax.

As a result of the high cash balances, I do not seriously anticipate portfolio performance will be deviate much from -5% to +5% for the subsequent quarters unless if I can find a suitable place to deploy those cash balances.

I have quite a few targets on the watchlist, but they are at prices that are sub-optimal in terms of risk-reward. An example of this is Rogers Sugar (TSX: RSI) which at $4.70/share is not something I’d put in my portfolio, but if it goes below $4.00 I will look at it again.

As for now, at current prices, right now I am out of ideas. So I wait.