The market is going through its usual manic cycles, with Greece voters purportedly saving the EU by voting in a pro-austerity government (which will kick the can further down 6 months), today’s downturn revolved around the release of not-so-good economic data and Moody’s downgrading various major financial institutions. I also note that the EU’s problems are nowhere close to being solved, with Spain and eventually Italy should be on the debt crosshairs unless if they can get their fiscal act together (quickly).
I note that the S&P 500 volatility index is still hovering around 20%, which is not exactly a big sign of panic.
My focus has been far away from the broad markets and on lesser capitalized issues (anything less than $1 billion and preferably under $500 million). I have also been purposefully avoiding anything commodity-related since it is fairly evident that most of the sentiment out there is still relatively bullish even though the charts have been indicating otherwise. I’m not too heavily into technical analysis, but clearly something is going on with WTIC crude oil being pushed below US$80. Measuring sentiment and expectation is about as good as reading tea leaves or the horoscope, but the tea leaves that I read still indicate that sentiment for oil is still high. When I start seeing analysts and news commentators shunning oil because of huge supply gluts and expanded production, that’s when I will start getting interested again.
Ironically this is what natural gas producers have had to face and I would be more inclined toward natural gas than crude oil at present. Encana (TSX: ECA) would be the prototypical large cap stock that a buy-and-hold-and-forget type investor would probably do okay with, but again, it depends on whether there will be this purported recovery in gas prices since Encana has been living off of its hedges.
I’ve taken the opportunity to put more capital to work and am hoping for more funds liquidating these smaller capitalized companies since the underlying companies will make for a better risk/reward ratio.
Finally, I’ve been trying to look over companies with high insider purchasing or high management ownership of shares (but not companies with dual-class voting shares where they maintain voting control but not economic control) and have been trying to sort through a stack of them, both in the USA and Canadian markets. I quickly scanned the Canadian debenture market and really didn’t like anything there – most of the energy-related companies continue to trade as if there is nothing wrong. As a result, I am not that interested in that asset class at present.
I do have one company that is outside my normal screens (is larger than $1 billion market cap, gives out a healthy dividend, is majority-owned by another entity) that I have been accumulating a stake, but there is a fairly good reason why I believe the market is significantly mispricing the company (i.e. factoring in more risk than actually exists) and why I think the market is materially incorrect. I am purchasing shares at a level that I think is about 30% under what my fair value is for the firm. My estimated “floor price” for the company, however, is quite close to current trading levels, so the risk/reward ratio is fairly handsome at present – risking around 10-15% for a potential gain of 50% is a decent ratio, especially since the probability of the positive side occurring is better than 50/50.
This post is still relatively abstract since I don’t really want to give away too much of my research.
I find much to like in the debenture market. Lakeview REIT in particular. The market is lagging their balance sheet improvements by 6 mos to 1 year. The Levit’s consolidated control by buying out Armoyan. I also like Perpetual Energy, Tree Island Wire, and Pinetree Capital in that market. You can reverse engineer major insider intention behind all of them.
Thank you for your comments. I know you took a well-timed stab at PMT debentures and hope the trade works out in light of the decline in energy commodity prices.
My own comment is on Pinetree, I looked at them a couple years ago and I was appalled at what I considered to be the most grotesque CEO compensation scheme I have seen in almost all of my publicly traded company research. Although buying the debentures technically doesn’t enrich its management, the CEO has taken enough money out of the company that the market value of those 8 million shares (out of 130M outstanding) is a mere pittance. On paper the book value vs. amount payable is a favourable ratio, but this is assuming the company can actually liquidate those assets on its balance sheet, some of which I would guess are illiquid at the amount desired.
I do like your line of thinking, however. These are all thin, obscure plays that have circumstances behind them that you can’t research using an automated screen, and that’s the criterion where an individual investor can gain advantage.
I call this approach crack-in-the-universe investing. The Canadian convertible debenture market is full of these opportunities but they require much original work.
That original work is usually paid off by being able to be in a better position than most to exploit those inefficiencies.
A good proxy for this (i.e. that you’re onto something that is undervalued) is also a gross amount of inactivity on public internet forums.