Category: Equity

First stock purchase in some time

For the first time in about half a year, I’ve purchased a straight stock (not preferred or ex-income trust) for my portfolio. Current position is 1% but I am targeting a 5-7% position, so I am currently in accumulation mode. I’d be a little miffed if it moved up to my fair value tomorrow, which is about double-to-triple the current stock price.

Some metrics include roughly a $50M enterprise value (i.e. market cap minus cash plus debt), revenues of a quarter billion, negative profitability in the past 12 months and a brand name moat that some, but not most should recognize. In terms of expenses, over 60% goes to sales and marketing expenses. No dividends.

The “over 60% goes to sales and marketing expenses” should give the reader a hint that I am not talking about a company that is related to commodities!

The general thesis is that while revenues have appeared to be flattening, this company is generally regarded as the best of breed in its product category, and they should be able to reduce expenses to restore profitability.

If the world economy goes into a 2008-style meltdown, there is some downside protection in the stock, mainly embedded in the huge cash position it has relative to its market cap.

Using my not-patented risk-reward measure, I would say this is a low risk, medium reward type situation.

Rogers Sugar

The last little bit of my longest-term holding, Rogers Sugar (TSX: RSI) I have unloaded today. The company is very well run, but substantially all of its free cash flow is sent out the window in dividends – at a yield of roughly 6-6.1%, historically this is expensive and by virtue of being in the sugar refining industry, isn’t exactly in a position to dramatically expand revenues and earnings.

Investors are paying bond-like premiums for equity-like returns. At the rate that yield-chasing is going, investors might even bid up the company to 5.5% or even 5%, but I won’t have any part of it. The golden moment was when in early 2009 it was trading at $3/unit and I did load up during this time since the stable 15% pre-tax returns made much more sense in terms of valuation. The only problem was that most other equities at that time were also exhibiting high risk-reward potential!

Apple and the winner-take-all market

Every media outlet is reporting the blowout quarter that Apple had – the financials are just something to be salivated at. With $46.3 billion in sales, $25.6 billion in cost of sales, you are left with $20.7 billion of gross profit. Subtract $3.4 billion in operating expenses and you are left with $17.3 billion in operating income.

This was in a single quarter. A lot of people must have wanted their iPhones and iPads for Christmas.

Subtracting taxes and other matters still left shareholders with $13 billion net at the end of the day.

When you add up the cash and marketable securities, they still have $98 billion to splash around.

Normally in technology, companies face incredible price pressure as competition is very fierce. Apple behaves as if it has a monopoly on its market, and in the minds of many consumers, they might as well.

There is erosion potential with the iPhones (specifically with Google’s encroachment with Android), and the iPads are starting to face some functional competition. However, this will not dissuade people from the name brand, as Apple has turned into somewhat of a status icon – this in itself will make it more difficult for competition to break.

The question for Apple – can they keep it up?

The question more relevant for investors would be – what technology upstart ten years from now will be doing the same thing?

Natural gas continues its trek down

A fairly mundane day in the market, but there is one item that has been flashing red on my screen for the past week, and that is the spot price for natural gas:

The March contract is trading at $2.50/mmBtu and this is very close to the lows that were reached during the 2008-2009 financial crisis. At present prices, it becomes very uneconomical to develop produce natural gas and it makes you wonder how long it will be before you start seeing insolvencies in natural gas companies. Those that have over-leveraged themselves will be facing the consequences soon.

I look at companies like Encana (TSX: ECA) – their operating and transport costs is approximately $1.60-$1.70/Mcf, which is still well below spot price. It explains the $12 billion market capitalization, but it makes you wonder when the bottom will be for it and also the spot price.

Unloading illiquid shares

Just a side note in the portfolio, I unloaded the last 100 shares of a company that was relatively illiquid (market cap under $20 million). The algorithmic order I set was placed in early October and the execution finished today.

The whole trade (in and out) ended up losing the portfolio less than 2%, but obviously the story after the investment was made changed which triggered my exit order. Getting in and out of illiquid stocks is a real pain, and unless if the potential risk-reward ratio is disproportionate, such transactions should be valued explicitly with a discount acknowledging the lack of liquidity.

Throughout my history my dabbling in illiquid stocks has been less than spectacular – my sweet spot of investing has tended to be small cap stocks ($100M-$1B capitalization) instead of microcaps.