Finance – Page 63

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.

Sensationalist headline

“Stocks Might Be 50% Lower Without Fed”

They posted the following chart:

Clearly, the S&P 500 would have gone to zero (as indicated in the chart) if the fed had not pumped as much liquidity in the system as they have.

The reality is that fed money pumping probably had some positive impact on equities, but how much remains a question that will be impossible to verifiably answer. My guess is that it goosed up the US treasury bond market more so than equities.

US Healthcare legislation

I took a brief summary review of the various players in the US Health insurance industry. Most of the companies had a shift in the stock price after the Supreme Court announcement, but otherwise traded in boring moderation as most insurance firms tend to do. I did manage to find one company intriguing enough (with sufficient insider ownership) that I plugged it on my watchlist for further review if the stock price went about 5% lower than its existing trading price. Insurance companies are not going to double on you overnight, but well-selected companies can provide a consistent return on investment over a lengthy period of time as they compound their book values. Examples of this (not necessarily related to healthcare) would include RLI (NYSE: RLI), Fairfax (TSX: FFH), etc., which have both provided 10% compounded annual returns to shareholders over the past 10 years, not even factoring in their dividend distributions.

I would note that these are not recommendations, but rather examples. Both of these companies, especially Fairfax, are going to be running into the law of large numbers where making high percentage gains becomes progressively more difficult as your equity base increases. RLI can probably continue its pace – you just have to be very judicious in terms of the market timing, similar to any other investment.

Research in Motion

RIMM (Nasdaq: RIMM) is down to lows not seen in a long, long time. They closed today at US$9.11/share.

The story is fairly well-known: they’re getting cleaned out by Apple and Google/Android. It is frighteningly similar to Nokia in nature, where a technology giant becomes obsolete in short order by failing to catch up. The one moat to their business, a secure email and messaging system, seems to be eroding. As a result, they are losing the game in the corporate world, and when this occurs, it is pretty much lights out for RIMM. Or is it?

I haven’t been tracking the technology and I believe somebody would intuitively have to be keeping their knowledge updated of the upcoming technology trends in order to make an informed call on that front. Since my cell phone is considered to be barely functional in today’s terms, I am not that person. All I can do is read their financial statements, but while they historically have been quite profitable, it appears that the market is indicating otherwise. For example, look no further than analyst estimates, as compiled by Yahoo Finance:

Without knowing anything, my advice to any potential investor in RIMM would be to hold back until that February 2014 estimate is deeply negative.

RIMM has about $1.8 billion in the bank without any debt, so they do have some maneuvering room for research and development. I have no idea whether Blackberry 10 will actually be a competitive product or not, but clearly the market is not thinking so. If you believe the market is wrong, wait until those estimates go even lower and overreach on the downside – then invest. Today’s analyst report from Morgan Stanley that downgraded the company to a sell and called for its break-up was one more piling onto the bad news sentiment. Will there be more?

A fairly interesting tidbit is that Prem Watsa, from Fairfax Financial (TSX: FFH) fame is recently on the board of RIMM and Fairfax has 26,848,500 shares of RIMM, a position that is now deeply underwater.