Continuing to deploy cash

July was a fairly active month in terms of deploying cash. In addition to the two names mentioned on this site previously, there were four other candidates that came into buying range. I have taken the liberty to accumulate and am sitting at around 37% cash at present.

The portfolio looks schizophrenic at present – there are a bunch of deep value plays (under book value with a low projected P/E) and the other half are clear growth picks – one undervalued gem has two business segments, one took a significant revenue reduction for legitimate reasons, while the other segment (which is most of the business) is growing significantly faster. The automated screens out there aren’t picking up the growth because you have to do a little homework to dredge out this information. Once the market figures it out (after some quarterly results) there should be a P/E expansion (not to mention the actual EPS will be increasing as well).

My YTD so far is roughly flat, but when I do my own valuations on what I am owning in my portfolio, I would expect to see some positive gains that will outdo the indicies. Just a matter of being patient.

One other side note is that I am increasing my US dollar exposure. Most of these companies trade in the USA.

Electronic trading perils

One aspect of trading electronically is that you better make sure your algorithms are correct, otherwise you are going to make stupid trades and suffer losses. Knight (NYSE: KCG) is the victim of their own electronic infrastructure, taking a 22% hit.

During the flash crash a bunch of trades were busted, but my personal opinion is that the only way to prevent these sorts of things happening is by depriving those that made the errant orders of their capital. Perhaps it will give a bit more incentive toward those that actually program their systems correctly, or heaven forbid, give it a little bit of human manual intervention before sending a billion-dollar order that has 10 minutes to get rammed through the markets.

Genworth MI Canada reports second quarter

Readers are likely aware of my position in Genworth MI Canada (TSX: MIC) and they reported their second quarter results today. The quarter was relatively boring, with losses on claims slightly lower and investment income slightly lower (due to lower rates). Loss ratio is 32% and expense ratio is 17% (total 49%) for the quarter, which is tracking roughly on-line the previous year. Delinquency rates continue to decline, with total portfolio down to 0.17% (from 0.25% year-previous).

Portfolio is at a 4.2% yield with a 3.5 year duration, approximately 3% in cash, 7% equities and 90% in fixed income (corporate and government).

Nobody said this company will be exciting. It isn’t.

Book value, excluding intangibles, is $26.30/share. With the market value being $16.97 as of today’s closing, even if the company exhibits mediocre performance, it is still likely undervalued. They key risk continues to be some sort of collapse or meltdown in the real estate market. Also, underwriting business will be slowing due to recent changes in the Government of Canada’s policies on mortgage insurance.

Apple running up against the law of large numbers

Apple’s 3rd quarter results: I find it funny when analysts report a company making $8.8 billion in net income from $35 billion in sales to be a “miss”, but indeed that is what they are reporting today. Sales figures on notebooks, desktops, iPods and iPhones appear to be flattening out. The iPad continues to exhibit significant growth and is probably in the midpoint of its growth trajectory before it finally starts to taper out.

Apple has grown so large that it will become more and more difficult to post high percentage growth figures. Before this release, the market is saying that the entity is worth about $560 billion (noting that at the end of June the company now has $117 billion in cash on its balance sheet). In after-hours trading, the stock is down 5%, so that shaves off about $30 billion off of its capitalization, to about $530 billion.

Extrapolating the last quarter’s results into a full year gives a P/E of 15, or if you subtract the cash stack, a P/E of 12. When you factor in that growth will not quite come as easily for the company, one can get a semblance of how this $530 billion capitalization is not going to become a trillion dollars anytime soon. Still, when you ask yourself if Apple is going to go the way of the dodo like Nokia and Research in Motion, the answer is instinctively no, but nobody thought those other companies would be surpassed so quickly either. Apple has one huge asset in its advantage that its competitors currently do not: it is a fashion icon.

Kevin Graham on Microsoft

Kevin Graham writes about why he is long on Microsoft (Nasdaq: MSFT) despite quoting reviewers’ ominous warnings about the usability of the new Windows 8 interface.

Certainly from historical financial measures, Microsoft is a cash machine and he does illustrate this.

Does anybody remember the release of Office 2007, with its new ribbon interface? Here is a reminder:

Almost everybody that I talk to said that this new interface required many, many painful hours of re-learning to find out where the functional equivalents were in the older pull-down menus from Office XP and before. It is one reason why I still run Office XP today – I find that the ribbon makes it about three times as difficult to remember where the function is that you are looking for and memory retention is significantly worse.

Windows 8 is going to be a similar analogy to the difference between Office 2003 to 2007. It is throwing away a lot of the “intuition” people have built up using the Windows interface, which will result in increased training time to acclimatize to the new operating system.

While the “Windows and Windows Live” division of Microsoft is responsible for about 40% of its profits, the office (business) division is just over 50%. Businesses have very little choice but to keep with office because of the fact that most staff you can hire will already know it (including the ribbon interface). Microsoft did not lose relevant business for the interface change, albeit, I do not think they were doing themselves any favours.

Windows 8 is probably going to be another incarnation of Windows Vista. With the “appletization” of computing being the new wave of software, the operating system is continuing to be less and less relevant. It is why you still have about a quarter of the population still using Windows XP, while Windows Vista users have gone below 1%. Basically people that had Vista went and upgraded to Windows 7 as soon as it was available, while those that have Windows XP machines are keeping them until they purchase new hardware with the newer version of Windows (and I am of that type – using my old and trusty Windows XP notebook that I purchased over 3 years ago).

This is the primary reason why Microsoft-centric hardware vendors like Dell (Nasdaq: DELL) are taking it in the chin.

This upgrade cycle – upgrading your software when you purchase a new computer system – is likely extending from an upgrade every two years to an upgrade every three, four, five or even more. The new features of the upgraded systems are becoming less and less relevant to actually getting work done and as a result, Microsoft’s business metrics should also slow down, albeit still gushing cash.

At a glance, if Microsoft gave out a $6 dividend tomorrow and promised not to blow money on stupid acquisitions (including their own stock, or buying out Yahoo), you still have a company that is generating roughly 15% of its value in cash a year, which is a fairly decent return when compared against the bond market. The remaining risk is how long companies and consumers will put up purchasing licenses of Windows and Office. Even if Windows 8 is a user interface disaster, I still don’t see people migrating from Office for a long time.

I do not see the stock itself, however, becoming a quick “double” or anything radical like that. If anything you will see some P/EV compression as the cash continues rolling into the bank account.